How does one understand and play the stock market game? ~ 9startech

Are you tired of working hard for monthly salary or wages? OR Would
you like to start your own business but you don’t have any money to do it? OR Would you like a passive income to cover all the monthly expenses even if you didn’t work for months? OR Would you like to free yourself from your soul stealing job? OR Have you ever wondered what should you do with the money you
earned working hard?

If not, then start thinking now. Many may have also started thinking about how they can use their money in a well optimized manner in order to cultivate maximum return from their existing capital but the most crucial part where most of the people lose their momentum is deciding Where and How to lock their money in best possible manner.

If you had not planned anything yet then don't worry because that’s exactly what I’m going to demonstrate now. So, spare some of your time and read it fully.
In this answer you’ll came over some interesting facts about stock market investing in four section (with many lucrative examples)

First section deals with deciding the best investment vehicle where one can invest to get best out of his efforts.

Second section deals with perfect way to drive profit from your investmentvehicle with an example of cattle and dairy farming

Third section deals with – why long run is the best run. Always be the lambirace ka ghoda.

Forth section deals with Coin flipping and Chimpanzee. What chimpanzee……..!! Oh damn it! I opened the surprise. No no no…. don’t directly switch to the last section.

If you think that you are super intelligent then you can skip sections as per your wish but I’ll recommend you to read it fully. At the end you’ll came to know the usefulness of sparing 15 min of your life reading it. This answer is somehow 5000 words so grab a coffee and start reading.

Section - #1) Best Investment Vehicle

You can lock your money in many income sources like:

Equity (20%)
Mutual Funds (15%)
Debentures (12%)
Public Provident Funds (9%)
Real Estate (9%)
Fixed Deposits (7%)
Unit Trust of Funds (6%)
Precious Metals (5%)
Saving A/c (4%) or
Inside your locker (0%)
So on..........

Above, you can also observe % of returns pertaining to respective sources above. This % are the base quorum for detecting the best source of income. With no further ado, let us try to understand it.

As a rational being, you’ll always grab the opportunity where you can avail maximum benefit. Equity is the best return giver. Then why most of the people falter to invest in stock market? Simple, because they knows many bullshit stories about people who turned from lakhs to zero and even many had committed suicide -Financial crisis caused 5,000 suicides. Is investing in stock market is like risking your life and money?

Don’t get confused between Investing and Speculating. Latter simply means putting your money in an unknown deal and then praying. Those who speculate, lose and those who invest, win. Let me directly hit to the nail.

How much return do you expect every month? 5K, 20K, 50K or so on….. Lets say 10K.

In order to earn 10K bucks every month, you’ll need following amount pertaining to different sources. (only 4 popular sources are taken for better understanding)

If you totally rely on equity, then 50K bucks.
If MF, then around 65K
If Debts, then around 85K
If FD, then around 150K

You can note one thing that more are the returns, less are the funds requirement and vise versa. So, it is now quite clear that equity is the best source of return and also equities are a good hedge against inflation whereas other sources are not.

If above formula is applied then hardly 5K bucks can be earned from 25K and that too yearly. And the first question is demanding 3000% p.a. return from 10K bucks and second, next to impossible. Is it possible to earn 150 times more return than the above stated 20% return on Equity? Don’t worry, everything is possible in stock market. But HOW?

All the sources except equity have fixed return, not subject to any fluctuation. Whereas equity are volatile but the fact remained unnoticed by readers is that the 20% return of equity reflects the average not actual rate of individual stocks. Some stock may give you a return of +200% and some may not even 5% or even in negative. Whereas the 12%, 10% and 8% of other sources shows individual return. Lets me make it easy with an example.

Assume, you invested in 2 different stocks X & Y. X gave you the return of 5% p.a. and Y gave you the return of 35% p.a. At an average you get 20% return {(5+35)/2} but individually you get 5% and 35% return.

Again assume, you invested your money in FDs of two different banks (normally all banks have same interest rates), Individual ROR of both the banks are around 7%. So, individually you get 7% from both and averagely, you get 7% {(7+7)/2}.

What I want to point out is that there’s no difference between smart and fool peoples, if they invested in FD. Even a fool will earn the same amount of return that a sound minded person earns from FD but in stock market a fool will lose and wise people will win. You can show your talent on stock market but if you are wise enough to cultivate a decent return otherwise you can also lose your whole amount.

Have you ever heard that – “xyz become millionaire by investing in FD or PPF……” instead – “How Warren Buffett made wealth by investing in stock market”. That’s what make the difference in fixed return source and fluctuating return source. Equity can make a person and break a person. So, if you are smart enough and want to create a vast wealth then you should chose equity as source. Here a definition of smart investors, If you can earn more than average i.e. >20% then you are a wise investor and <20%, fool.

Hence, if you are smart enough to predict market nerves than you can earn 1000 times more than you have but be cautious one mistake can also break you in thousand pieces. So, be wise while investing.

However, if you are not capable enough to detect the best stocks from market then choose fixed return, but remember even a fool can earn some amount as you can. Decide weather you are a fool or not?

Section #2) Best way to drive profit from stock market.

There are two ways to drive profits:

Cashflow gain (Dividend income)
Capital gain (Notional income)

Be attentive, it is the most crucial part to have a deep insight into stock market investing.

As I promised to give you a example earlier. So, lets start with an interesting example.

There are two ways to earn money from farming associated with animals; cattle farming and dairy farming. I read this example in a book named “Stocks to Riches” by “Late Sir Parag Parikh”. Found it valuable, so illustrated here.

In cattle farming, the only asset is Cattle are bred, reared to yield good value when they are sold to slaughter house. This is what known as speculation. You bought a stock, waited till the price hiked, then sold it off in the market for a profit. This
is how capital gain investing works.

On the other hand, In dairy farming, the only asset is also cattle. And even here too cattle are bred and reared but what made the difference is that they are not sold to slaughter house. Here the cattle are used for long term purpose, they are used to obtain a regular supply of milk. So, ultimately here you earn from selling dairy products. This is what known as investment. You bought a stock at cheap rates, then price hiked and dropped but you didn’t sold it to other investors. You retain it for long term purpose. They are used to obtain regular supply of dividends (cashflow/bonus shares/rights issue). Read How a chap turned 10,000 Rs into 704 crores in long run but first read the whole answer. I’ll remind it to you at the end.

What I want to point out is – there’s no shortcut or perfect way to earn huge wealth in short run. You’ve to wait for years.

I started my investment at a legal age of 18 and I can predict that how much wealth will I have by the age of 30 so that their will be no need to work for other half of my life. Other half fully devoted to me. This is what known as financial literacy. Always remember a secret of growing wealth. Never let any penny out of your portfolio which you invested instead grow up your portfolio. Every penny in your portfolio will invent an another new penny for you.

Think of it this way; Once a penny goes into your portfolio, it becomes your employee. The best thing about money is that it works 24 hours a day and can work for generation, for my son, grandson, so on, until someone destroy it.

Don’t get confuse between rich and wealthy. I also have my own definition for wealth. Actually, I borrowed it from a man named R. Buckminster Fuller. It was pretty confusing at first, but after reading it, it began to make some sense:

"Wealth is a person’s ability to survive so many number of days – or, if I stopped working today, how long could I survive"

So, while I’m not rich but I’m wealthy. Now, I’ve income generating investment vehicles that fully cover my monthly expenses. If I want to increase my expenses, I must increase employees in my portfolio. And also note that at this point, I’m no longer dependent on my salary.

Read my another writings regarding how to create a sustainable portfolio Charlie: My Portfolio but first continue read this answer, I’ll remind it to you at the end.

Section #3) Always be lambi race ka ghoda.

“Someone is sitting in the shade today because someone planted a seed a long time ago”

Thousands of people write answers on Quora daily and all of them (even did I) love to receive feedbacks from readers in the form of views, upvotes or comments. But if you are expecting these feedbacks in short run then Quora is not your cup of tea. It is mostly not possible that you wrote a charming answer and next day your answer was surrounded by many readers or thousands of upvotes. It’s a long term process. I read many 5 line answer with great views and upvotes like this one, Ian Peters-Campbell's answer to What are the best possible jobs for someone who is extremely intelligent but extremely lazy? What made him so successful is patience regardless of the fact that his answer has any quality. when I asked him - What's the matter? He replied - "I wrote this answer in 2010, time and patience valued it the most. I didn't got anything in short run"

Same as millions of people invests in stock market daily and all of them (even did I) love to receive excellent return in form of capital gain, bonus issue, dividends etc. But if you are expecting that return in short run then stock market is not your cup of tea. It is mostly not possible that you invested and next day many newsreporter surrounded you asking "how you turned 1K into 1 millions...……..?"
It’s a long term process. Patience is main profit driving force to fetch money from stock market. I have read many rags to riches stories and what I found common in them is patience, not selling a single stock he bought for many years. That's how time value money in stock market.

No doubt, there are many answers which gone trending in short run like this one; "What would a modern-day evil genius have to do in order to take over the world?" delivered by Oliver Emberton. Within 3 days, after writing this answer, he got half a million views and within days, Oliver was approached by multiple publishers about book, movie, and TV rights. And the most astonishing fact was that he had written that answer on his phone, in between helping his girlfriend move home. May be you're also dreaming that you invested your money in some bullshit stocks. Within days you earned half a million bucks and within days many reporters approached you to ask about your success story. Stop day dreaming. It is possible on Quora but not in stock market. Writing answers is somewhat related to your writing skills and imagination power but investing in stock is all about peculiar vision and perfect prediction to detect market behavior. It is not easy to perfectly predict market nerve in short run. Within couple of minutes market get up and down.

(See more at: How Oliver Emberton Used Quora to Build a Popular Blog in Less Than One Year but first read out full answer. I'll remind you at the end)

Many maybe thinking – “I’ve seen many peoples who earned huge wealth from short term trading, so it is not a yardstick rule that nobody can earn from short term”.

Yes, you’re right. There are many investors who earned millions of money in just a month or so because it's a common rule of market that money is not created while trading it is just transferred from one person to another. So, there are 50-50 chances that you’ll win or lose. Whenever a trade is executed, it is pre-planned that one will gain and one will lose. Money goes from one hand to another. Therefore you may had saw many people gaining as the proportion of losing is equal to winning side. Even I saw many people earning huge amount from Poker but there is no perfect way to play a poker game. It’s all depends on luck. Same applies here in stock market, only lucky people gains from short term trading. If you find yourself lucky, then start speculating.

(Image read - "One of the funny things about the stock market is that every time one person buys another seeks and both think they are astute" by William Feather)

Always remember, you may have always be on winning side, even your luck may work for long time. But whenever a pharaoh curse will appear, your whole capital will erode making you unable to invest in market again. It'll take years to recover your capital. My eyeball witnessed many peoples who are crying for their act and will be regretful rest of their life. It is better to gain from the experience of others, not yours.What more to say? Once I was asked – “How can we become a day trading millionaire?” I replied – “Easy, just start out as a day trading billionaire”

Section #4) Exploit the discrepancies of price and value

I can bet that after reading this section you’ll become a great follower of value investing philosophy. You’ll worship Mr. Buffet and follow his preaching. Be prepared.

The common intellectual value investing is that find the discrepancies between thevalue of a business and the price of small pieces of that business (also known as share) in the market. It doesn’t matter whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. What matter is price and value. (Currently I’m writing an blogpost on “How to value a stock”. So, stay in touch with my blog via subscription)

When value investors buy stocks, they see it as a medium of buying a business, not a product which goes up and down. They are just purchasing a business through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Many professionals talk about beta factor and some other factors. In fact, most of them would have difficulty defining those terms. The value investors simply focus on two variables: price and value.

I always find it extraordinary that so many studies are made of price and volume behavior, the stuff of chartists. Can you imagine buying an entire business simply because the price of the business had been marked up substantially last week and the week before? Of course, the reason a lot of studies are made of these price and volume variables is that now, in the age of computers, there are almost endless data available about them. It isn't necessarily because such studies have any utility; it's simply that the data are there and academicians have [worked] hard to learn the mathematical skills needed to manipulate them. Once these skills are acquired, it seems sinful not to use them, even if the usage has no utility or negative utility. As a friend said, to a man with a hammer, everything looks like a nail.

Let me make it easy with a lucrative example of Coin flipping and Chimpanzees.

Actually its not mine corpus. I took it from a sarcastic speech of Mr. Buffett at Columbia University back in 1984. You’ll find it interesting. I've edited some parts to make it reader friendly.

“……….Before we begin this examination, I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successful called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.

By then, this group will really lose their heads. They will probably write books on"How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country
attending seminars on efficient coin-flipping and tackling skeptical professors
with, " If it can't be done, why are there 215 of us?"

By then some business school professor will probably be rude enough to bring up the fact that if 225 million chimpanzees had engaged in a similar exercise, the results would be much the same - 215 egotistical chimpanzees with 20 straight winning flips.

I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he's feeding them, whether they had special exercises, what books they read, and who knows what else. That is, if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.

Scientific inquiry naturally follows such a pattern. If you were trying to analyze possible causes of a rare type of cancer -- with, say, 1,500 cases a year in the United States -- and you found that 400 of them occurred in some little mining town in Montana, you would get very interested in the water there, or the occupation of those afflicted, or other variables. You know it's not random chance that 400 come from a small area. You would not necessarily know the causal factors, but you would know where to search.

I submit to you that there are ways of defining an origin other than geography. In addition to geographical origins, there can be what I call an intellectual origin. I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village. A concentration of winners that simply cannot be explained by chance can be traced to this particular
intellectual village.

Conditions could exist that would make even that concentration unimportant. Perhaps 100 people were simply imitating the coin-flipping call of some terribly persuasive personality. When he called heads, 100 followers automatically called that coin the same way. If the leader was part of the 215 left at the end, the fact that 100 came from the same intellectual origin would mean nothing. You would simply be identifying one case as a hundred cases.

Similarly, let's assume that you lived in a strongly patriarchal society and every family in the United States conveniently consisted of ten members. Further assume that the patriarchal culture was so strong that, when the 225 million people went out the first day, every member of the family identified with the father's call. Now, at the end of the 20-day period, you would have 215 winners, and you would find that they came from only 21.5 families. Some naive types might say that this indicates an enormous hereditary factor as an explanation of successful coin-flipping. But, of course, it would have no significance at all because it would simply mean that you didn't have 215 individual winners, but rather 21.5 randomly distributed families who were winners.

In this group of successful investors that I want to consider, there has been a common intellectual patriarch, Ben Graham. But the children who left the house of this intellectual patriarch have called their "flips" in very different ways. They have gone to different places and bought and sold different stocks and companies, yet they have had a combined record that simply cannot be explained by the fact that they are all calling flips identically because a leader is signaling the calls for them to make. The patriarch has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of
applying the theory………..

……….. The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is.

One quick example: The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post,Newsweek, plus several television stations in major markets. Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.

Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it's riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles of $8 million each. Since you don't have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that's not a difficult job.

You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing………..”

Further Mr. Buffett demonstrated the portfolios of all value investors of his time. You can read it here, superinvestors but first read this answer full.

He also gave a good insights of risk and reward further in his speech, “I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. If someone were to say to me, "I have here a six-shooter and I have slipped one cartridge into it. Why don't you just spin it and pull it once? If you survive, I will give you $1 million." I would decline -- perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice -- now that would be a positive correlation between risk and reward!...........”

And now the most important part,

“…………I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper…………”

Maybe you got my point, value investing is not a luck by chance game you’ll absolutely win the game whereas speculation is just putting your money in some deal and then praying.

While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same. Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value.

Now about it - Is the "look for values with a significant margin of safety relative to prices" approach to stock analysis, out of date?

Let me end my answer with an thought expressed by Walter Schloss,

“I doesn't worry about whether it is January or December, I doesn't worry about whether it's Monday or Friday, I doesn't worry about whether it's an election year. I simply thinks, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And I does it over and over and over again”

As a beginner, I suffered many opposition and problems while digging out concepts regarding investment. So, I like to share it for free and that’s how I like it. If you ever stuck anywhere, feel free to contact me at jain_sowmay@yahoo.com

Even if you want to share any experience regarding investment then just send‘Hey’ and initiate a conversation but don’t hesitate to get in contact. I've also checked many portfolios, if you me to locate flaws your portfolio, send me yours. Check out my profile to get in contact through social media for quick interaction.