Within a week span, I encountered these individuals:
- A well known healthcare practitioner was earning INR 6 million a year from his business and profession. He lost INR 40 million by trading in F&O markets.
- A mechanical engineer in late twenties earning INR 0.3 million a year lost INR 5 million in F&O market. With families support these losses were covered. Within couple of years he fell prey to the seduction of markets. He lost another INR 8 million in F&O trades and his annual salary was INR 0.9 million.
- a engineer working in learning and development domain quit well paying corporate job. He thought that he possessed an exclusive mantra of making money through options trading strategy. He was reticent to share about exact losses but did indicate the losses in millions.
I have heard many stories on second person level (known to friends and family) who lost money in the Futures & Options segment of capital markets in India. Its been very difficult for me to find an iota of rationality in these individuals.
I had been introduced to the idea of Financial Derivatives way back in 2000. Indian financial markets were coming of age and the India regulators (RBI and SEBI) had introduced regulations with respect to broadening access of financial derivatives to larger Indian Businesses & Investor class. Both foreign exchange laws and securities law were amended to facilitate investing through and trading financial derivatives. Primarily, Futures and Options segment (F&O) of Indian capital markets has been promoted as a mechanism to help in:
a. risk management - protecting businesses and investors from fluctuating prices.
b. improve market depth resulting in better price discovery - as more participants would mean more data and transparency and thus more efficient market operations.
Regulator did introduce few checks and balances to ensure that these products are not used / abused by certain class of market participants to the detriment of others.
In early to mid 2000's, we did see corporates were fleeced / miss-sold financial derivatives by bankers. Some of these corporates initiated legal proceedings against the bankers and got some restitution. the checks and balances however seemed to work well to protect the retail investors.
From mid 2015, FINTECH started becoming buzzword. accessibility to financial markets from handheld devices through mobile apps started making individual investors feel important and empowered. The age of social media fed vanity and irrationality took over. Seemingly high powered individuals portrayed themselves as messiah who could teach making quick money from markets. Few common things which lures an average retail investor:
the messiahs posturing as if markets are always rationale and one can through proper study predict / model future price movements;
based on these posturing, they postulate that some trading strategies will work and always yield profits;
there are possibilities of these strategies loosing money once in a while but in the longer term, such strategies cannot loose money; and last but not the least
each individual has control in tip of his / her fingers through trading and information providing apps.
I have the following submissions for a retail investor to consider alongside these messiah's pronouncements above:
markets comprise primarily of humans, humans are abound with irrationality, studying irrationality is futile. an alternative pronouncements by Messiah on this is - algorithm based trading. Algorithms are also designed by humans to study human irrationality and thus suffer from the same fallacy.
Modelling based on market data requires understanding of different domains like Statistics (for understand relationships between seemingly related variables), psychology (behaviour of traders individually and group too), Corporate finance (for fundamental business analysis and valuation) and Strategy. The idea is that using these domain knowledge you would develop trading strategies which are better than others. Indian capital markets comprise of 4 crores registered investors (based on information provided by NSE). The anecdotal question you could post to yourself is - in your school cohort of about 200 were you in top 1%? if not, how do you think would you be able to beat the wider market comprising of 4 crore investors with your strategy?
in the longer term everyone is dead, so don't think you would recoup your short terms losses by staying and trading more in the market. If you make losses in the first few months in derivative markets, you would be set back financially by a decade or more. i.e. to recoup losses from derivatives and then start afresh would surely take that much time. you should surely ask these 3 individuals I referred to above as to how many years would it take for them to come back to their own feet. There are all looking at selling family assets and just remain afloat (that is not even getting out of problem).
you might be one in a billion but for markets you are inconsequential. Market Messiah's require greedy and stupid retail investor like you to be able to execute their strategies and make money. They are controlling you and they are in turn controlled by larger institutional traders. Getting information through technology seems empowering, but power is in knowing one's own strength and being true to it.
We see these same irrational cycles being repeated in different garbs - Dot.com, Cryptocurrency, financial derivatives, modern art, Metaverse......... and many more to come. I pray #letsanityprevail.
KEY MESSAGE: PLEASE DON'T THINK ONLY YOU ARE THE ONLY SMART PERSON AND WOULD MAKE MONEY FROM FINANCIAL MARKET INVESTMENTS / STRATEGIES. INDIA HAS 140 CRORES SMART PEOPLE. Getting information through technology seems empowering, but power is in knowing one's own strength and being true to it.