Trading: An Imitation of Life and Jiu-Jitsu
I was only 18 years old when I first heard of "derivatives trading" when my late father tried to explain the concept to me after having had a discussion with one of his friends. Quite honestly, I had absolutely no idea what it entailed but a part of me just knew that I wanted to do it for a living though there was no clear cut way or indication of how I would go about it.
It wasn't until roughly 10 years later that I managed to get my first break into the industry when I started working at a broking firm run by traders. They taught me many useful things and gave me a lot of insights into how things work and what to look out for etc. After almost 4 years of doing this professionally, I have come to realize how. in spite of what I've learned and experienced in trading ranging from incredible highs to incredible lows, pure elation and utter frustration, it dawned upon me that trading is just like life in so many ways.
As a practitioner of Brazilian Jiu-Jitsu (BJJ) I thought I'd draw some parallels between BJJ and Trading:
• BJJ: You need to have a good, solid base set of skills in order to understand the game and also manage your breathing. Trading: If you don't understand how markets work and what drives them, you won't know how to progress going forward and will end up making decisions based purely on emotion.
• BJJ: Being bigger and stronger doesn't guarantee victory at all against a more skilled opponent. Trading: You may have the biggest account on the market but if you blindly charge in you will lose it all a lot quicker than you think.
• BJJ: When rolling with skilled opponents, you need to take your time to set up your attacks/submissions and know how to defend against theirs. Trading: You need to set up your trades very carefully by picking your levels where you want to get in, whether going long or short, and then hedge yourself against any potential downside by going long using put or call options or buying/selling a strongly correlated asset.
• BJJ: Always respect your opponent, even if they're a lower ranked belt than you are because you never know what they are capable of. Trading: No matter how good you may think you are, nobody is bigger than the market and it will beat you to your knees if you don't treat it with the respect it deserves.
Getting back to trading we can say what we want about numbers and fundamentals ruling this game, but the truth is that 80-90% of success in trading is psychological/behavioural management with the rest being knowledge and skill. Given that markets are primarily driven by sentiment based on a set of fundamentals, it is reasonably safe to say that a stock/index/currency chart is a rough representation of how traders "feel" about a given asset or asset pair at that point in time based on what is happening in the world.
Now I know that I will obviously receive a lot of criticism for my statement given that value investing has been the benchmark for successful portfolio management and wealth creation for as long as we can remember. Plus, most people in this industry, present company included, admire or at least respect Warren Buffet for his value investing approach that has made him the multi billionaire investor that he is today. However, there are arguments in favour of buying into growth stocks with high P/E ratios and low cash flows provided that the company is poised for serious cash generation in the future.
I often come into contact with people who genuinely are interested in investing on the stock market, but don't fully understand why stocks are priced the way they are or how the value of a stock is calculated. It wasn't until roughly a year ago where I began to fully grasp that a stock's value is the sum of all projected future cash flows discounted to today's price. In corporate finance terms that would be known as the Net Present Value (NPV).
Therefore, it goes without saying that value investing isn't the only way to profit from the stock market and also proves that conventionally solid fundamentals aren't the only thing driving the price of a stock. If it had been the case then all stocks in this category would be flying sky high at all times and yet this isn't the case. Hence bringing me back to my point that trading is like life.