‘Nobody can save a man determined to grow rich suddenly’. This profound quote, attributed to an old English lawmaker, is something that is well understood only by those who have experienced bull and bear market cycles play out in full. For new entrants, the lure of getting wealthy in markets may appear irresistible and enticing, especially in an era where a few self-proclaimed experts in social media parade fictitious trading profits and misleading claims on how it is easy to get rich!
But the fact is crystal-clear. Money does not grow on trees and genuine wealth creation, for most, is a long-drawn process. The path to becoming super rich quickly in markets is paved with landmines. Investing in F&O is only for those who have discipline to follow a process and stick to stop loss rules.
Recently, there was the unfortunate news of a software employee in Chennai taking his own life allegedly due to trauma caused by mounting debts. He had incurred huge losses by borrowing and investing in markets. Such incidents are not uncommon, but what makes it unacceptably tragic is that it is avoidable. Last week, SEBI Chairperson Madhabi Puri Buch expressed her confusion and surprise as to why many investors continue to indulge in F&O despite the odds of winning being low – 90 per cent chance of losing money in her view and as per a SEBI report put out earlier this year.
If you are one of those investors who is unfortunately already caught in the web of losses from investing/trading in markets and feeling traumatised by it, here are a few points to consider in dealing with it.
Get free of stigmas
Donald Trump became President of the US although six of his companies had filed for bankruptcy in the past. One of the reasons the Silicon Valley in California has become the most innovative place on earth is because of the culture of rewarding not just risk-taking, but failure too. Unfortunately, in India, there is stigma associated with losses and debt. It is very important to discard any stigma associate with risk-taking in investing as well.
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The loss of money apart, there is nothing to feel bad in losing a battle where the odds are so stacked against you, especially in F&O. Maybe you entered the derivatives segment without clearly understanding the product, or acted quickly without researching well, or you were just plain unlucky. But the bottom line is this — many individuals have tried it and there is nothing to feel ashamed to be in a group of the bottom 90 per cent.
So is the case with borrowing and buying stocks. While better avoided, it is a risk not many have the courage to take. But while the courageous do not live for ever, the fearful never live at all. If you had the courage to try something, it’s now time to face its consequences more courageously. So, accepting losses gracefully is step one in dealing with losses.
Next, get thoroughly aware of your emotional reaction to losses. Research by Nobel Laureate Daniel Kahneman indicates that the pain of losses is double the pleasure of success. So the pain of loss and associated emotions, especially where it involves leverage, may only push you into making more irrational decisions. Nobody likes to be a loser and one’s ego might not allow one to accept failure. One might be tempted to think they have learnt from their mistake and use the knowledge to win next time. But here is the important point to consider: if all 9 out of 10 traders who lost money in F&O think the same, the odds of winning in F&O still will not change much. So is the case with borrowing and buying stocks. It will only increase the debt spiral.
In most cases, given the biases we have in assessing ourselves, it is better to take the help of your spouse, or other close family member or friend in assessing whether your emotional response to your losses is rational or not. Taking recourse to professional counselling may be ideal in most cases.
Follow the rules
Make a rational decision on the way forward. In most cases the best option is to let go and move on. Recovering from heavy losses is not easy if it involved leverage/F&O. The losses teach lessons that otherwise are not learnt and can be used in other aspects of life or for a more measured investing journey in the future. For example, learning the art of when to let go is an important attribute in dealing with many practical life situations. Dealing with losses is an opportunity to learn that skill.
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However, if you decide to persist in your aggressive investing/trading endeavour, you need to ensure you have clear rules and processes to ensure it does not end in a downward spiral. Leaving the decision solely to yourself may not be wise. It’s better to entrust the power of overruling your decision to your spouse or relative or a trusted friend.
The legendary Jesse Livermore is considered one of the greatest traders by many market participants and his rulebooks to trading are still relevant 80 years after his death. However, he suffered from his inability to follow his own rules and committed suicide in 1940 after incurring huge losses.
The key lessons to take from this – it is very difficult to stick to rules without intervention of an external person you trust. Losses increase addiction to investing and will make you break rules, which can be as harmful as any other well-acknowledged addictions such as alcoholism.
So, if you cannot follow this process of involving external oversight, it is better to let go and try other things in life.