"Know thyself' was written over the portal of the antique world. Over the portal of the new world, 'Be thyself' shall be written. — Oscar Wilde

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What an anthropologist, a geologist, a historian and a VLSI architect have in common?

I guess it’s the ‘Time’.

Time is a critical element of study and works in all these four specialised fields. Of course, the unit and scale of time used by these people are completely different. The VLSI architects break the time in units of nanoseconds and even smaller. The historians prefer to deal in centuries; the geologists take delight in talking about millenniums; while the anthologists feel quite at home with million and billion-year time scale.

The question is whether these people are relevant to each other?

I am sure they are! A VLSI architect designs the microprocessors which help other experts to analyse their data to perfection. An anthropologist provides valuable insight into various aspects of the evolution of mankind that helps to predict the path of future developments and requirements of a human being. Similarly, a geologist would advise on the availability of natural resources in future and likely changes in the environment that might, for example, help a VLSI architect in selecting the appropriate material for his chips.

However, a VLSI designer would certainly not start storing water in his house, just because some geologist is suggesting that water in the river Ganga would dry up in the next 200 years. He would also not migrate to other cities or country just because a geologist is forecasting that the groundwater in his city may reach zero levels in the next 100 years. Also, he will not change the design of his chip because an anthropologist is suggesting that the human mind may require a million times faster computer in the next ten thousand years.

Similarly, in stock markets, we have investors, traders, punters and day traders/tick traders. They all are concerned with the stock prices and the accretion to the money they put on the table. But their time scale and the amount of accretion to the money they seek is quite different.

The investors take the investment in stocks from a business perspective and therefore his time horizon normally coincides with the business cycle of the company he has invested in. It may last anywhere between 3-30 years or even more. In terms of returns, they seek to outperform the average returns of the industry by investing in the best or better players in that industry. "Valuation", "Profitability", "Sustainability", "Cash Flows", "Market leadership", "Innovation", "Technology leadership" of the business they are investing in are some of the primary concerns for investors.

The traders seek to take advantage of the short term imbalances in the demand and supply situation in the market. Their time horizon may be anywhere between one week to a year. They usually seek a return that is better than the return they would otherwise get in bank fixed deposit or liquid fund. They take minimal additional risk to optimise the return on their surplus liquidity. "Liquidity", "Volatility", "Corporate Event", "Volumes" and "Technical Trends" are some of the key monitorable for the traders.

The punters put money on the table with a hope to multiply it almost instantaneously. Their planned time horizon is usually one hour to one month. For them buying a stock is akin to buying a lottery ticket. They are well prepared for losing their entire capital. "Intuition", "Gut Feeling", "Tip", "Solid News", "Insider Information" etc are the key drivers for the punters.

Day traders/tick traders seek to take advantage of intraday imbalance in the demand and supply conditions. Their time perspective ranges between a few seconds to one trading session. They seek to earn a few hundred bucks daily and make a living out of that. "Nimbleness", 'Trading Screen", 'Risk Management", "Small units of Profit" are some of the words associated with day traders/tick traders.

The question could be asked whether they relevant to each other.

The answer is definitely yes!

The day-traders and punters provide the necessary liquidity in the market. The punters keep the wheels of the market well oiled by consistently infusing money in the system through losses and fee payment. The traders provide the necessary financing to the market and investors provide the stability and sustainability to the market and businesses.

In normal course, everyone should achieve their goals in their respective time horizons. But unfortunately, it is not seen to be happening, at least in the Indian stocks market. Why?

The reason I decipher is that all four kinds of participants have not been maintaining the necessary discipline.

The day traders react to the news that is relevant only for the investors. For example, Marc Faber (akin to an anthropologist) predicting about commodity cycle.

The traders react to the news that is relevant only to the day-traders. For example, a bomb blast somewhere or income-tax raid on a market participant.

The investors react to the news that is relevant to punters and traders. For example, a technical analyst (akin to a VLSI architect) predicting a correction of 2-3 percent in the stock indices.

The moral of the story is if you want to make money in the stock market—“Be Thyself”.

Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation.

Read his columns here.

First Published:Oct 3, 2019 6:05 AM IST