The road less travelled by retail investors

Staying agile and alert in financial markets is extremely important

By Dhaval Jasani/Money matters

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Published: Mon 22 Jan 2024, 4:10 PM

Last updated: Mon 22 Jan 2024, 4:11 PM

The beginning of the year brings fresh opportunities. As individuals, we jot down a list of resolutions for the new year and one of these resolutions ideally would be to increase savings and optimise spending.

These savings will have to be deployed eventually to generate income rather than incurring notional cost as the value of money tends to decrease with passage of time considering inflation. In the process of deploying savings, intent should always be to preserve capital and generate income.

Financial markets have witnessed massive participation from retail and individual investors across jurisdictions, and this is only expected to grow over time. While investors pursue their investment journey, listed herein are some of the signages which may facilitate their journey and provide direction –

The 90:10 theory

A lion or leopard does not hunt every day. They hunt only when they are hungry and once they decide, they observe their prey till the time they are almost confident of hitting the target. Following similar analogy, investors may spend time in observing price movements on a regular basis and then decide the ultimate price range for entry and exit to ensure that real opportunities are not missed out. Buy everything daily and sell everything daily is just not practical. All instruments traded in financial markets do not move in one direction daily, be it up or down. At times, financial markets take 90 per cent of the time to decide where to go and reach there in 10 per cent of the time. Hence this formula of 90:10 — observe 90 per cent of the time and devote 10 per cent time for timely execution.

Opportunity is always in transit

Staying agile and alert in financial markets is extremely important. Given the massive participation of investors globally and the amount of liquidity available, buyers are keen to buy when prices enter in a certain range that may differ from investors’ expectations. Investors need to develop their own system of monitoring price and buy or sell if the system triggers entry or exit based on the price movement and other factors outlined. Opportunities are always in transit and they will knock someone’s door and move forward if not tapped. On the other hand, fear of missing out (FOMO) or news-based entry or exit is always risky and investors may end up losing part of their capital in the process.

Questioning valuation and price

We often hear that financial markets have soared and it’s just a hype, valuation is too steep, such high levels are not sustainable and so on. Well, financial markets are not affected by individual comments. Large investors willing to acquire the entire company will have the appetite to negotiate the valuation or price. In the open market, there is a seller and buyer for every transaction. If Buyer A does not buy, Buyer B will buy and so on. Someone at some point will always have the appetite and affordability to buy at a particular price level. That may be higher that expected for purchase or lower than expected for sale. If an instrument or stock is beyond the price range the investor has defined, avoiding a buy or sell beyond the price range is the ideal step, unless the rules defined by the Investor provide a trigger to execute the transaction.

Know the road before you travel, monitor key economic indicators of the market you follow

Investors may be participating in financial markets in their home country or a foreign country, in emerging markets or developed markets. First-hand basic knowledge of the country’s key economic indicators that may affect price movements in those markets is required. Investors should prepare and update this list of key economic indicators from time to time and monitor impact on financial markets when data is published. Examples of such economic indicators are GDP, inflation, unemployment, interest rate etc. Financial markets tend to forecast expectations and price movements absorb these expectations to a larger extent while rest of the movement in prices happen when actual data is published. Ideally, investors should learn the economics of finance.

Ignore the noise, specially “I said so dot com”

Dhaval Jasani is founder and CEO of ZTI Global
Dhaval Jasani is founder and CEO of ZTI Global

On social media, we often read messages saying price of a stock would reach a particular level and the messages flash when price reaches that level. Well, someone may be right at some point in time. Social media and the worldwide web have a plethora of views. Type a keyword and the search results run into number of pages. Prices in financial markets do not move based on such views. There will always be two views on price movement for a particular investment or stock, one favouring upside and the other favouring downside. Hence, ignoring the noise is important to enhance focus. The investor has to carry out due diligence and detailed analysis before subscribing to a particular view. Ultimately, the investor has to travel through this journey, once a particular view has been subscribed, respecting the rules defined for entry and exit.

Observe and analyse the price chart, let the chart tell you the story

Investors have to familiarise themselves with chart reading and tools / technical indicators used to assist them in chart reading. The price chart has a number of hidden stories that can be uncovered only after careful analysis and observation, hence the emphasis. The price chart depicts the trend that would assist the reader of the chart to project next move(s) based on price action. Practice reading and analysing price charges regularly. This skill will only develop with study and experience.

Only jump in the water with your safety gears on

Divers dive deep into the waters only after necessary training and they never do so without putting on safety gadgets. Knowledge of the subject and patience are essential safety gears. Investors need to get the basics right before jumping in the water. Trendlines, support, resistance, bull, bear, moving averages etc. are some of the basic concepts that investors should familiarise with and master it before diving into the waters. Investors should define, customise and update this list of indicators that would act as their safety gears while they pursue this journey.

Projecting the trend is one part of the action, following the trend is the other part

Assuming that price of a particular stock will increase at the same pace, as in the past, is detrimental to the investor. Price may or may not rise at the same pace considering past trend. Past performance is not a guarantee to the future. Projecting price trend based on analysis and study is one part of the action. The other and the most important part is to follow the trend, keeping in mind the entry or exit plan. Trend should be considered as your friend. Follow the trend. Headwinds slow down pace while tailwinds increase the pace of price movements. No trend is one way for financial markets in general. Downside trend reverses to upside and upside trend reverses to downside. This is the conventional pattern for market moves. Investors need to choose the trend to follow, plan a trade based on the investment option selected and the given price range. Right trade in the right price range based on the right trend will certainly reward the investor.

Develop strong mental fitness

Strong mental fitness is a pre-requisite when dealing in financial markets. Given the outreach of media and its accessibility, reactions on price movement in financial markets globally are very instant and at times, beyond the levels perceived. Volatility is and will only continue to increase considering geopolitical events and several other factors. Investors, who are willing to withstand this volatility and ride the trend with adequate patience and strong mindset should venture into this sphere. Otherwise, placing funds as a fixed deposit with bank(s) is a better option with less risk and lower reward.

To conclude, financial markets are a cave of huge wealth, with several obstacles and hurdles, that investors must cross, with patience, to gain access to this treasure. Wishing all the readers the very best while you pursue this journey of learning and earning.

The writer is founder and CEO of ZTI Global.

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