Trading Rule – “Listen to the experts but be your own trader”

IT IS HARD FOR MOST INVESTORS IN THE MARKET TO SURVIVE WITHOUT EXPERT ADVISE. THEREIN LIES A MAJOR DILEMMA. TO WHAT EXTENT MUST YOU RELY ON THE ADVICE OF THE EXPERTS AND WHEN MUST YOU RELY ON YOUR OWN JUDGEMENT. THIS PROBLEM BECOMES ALL THE MORE PRONOUNCED WHEN YOU ARE NEW TO THE MARKETS AND ARE NOT AS WELL CONNECTED AND RESOURCEFUL AS THE ADVISOR. THAT IS WHEN YOU NEED TO EXERCISE YOUR JUDGEMENT. MORE OFTEN THAN NOT, IT IS BEST TO LISTEN TO THE EXPERT INPUTS AS AN OUTSIDER BUT YOU ARE BETTER OFF DECIDING YOURSELF

OUTSOURCE IDEAS; DO NOT OUTSOURCE DECISION MAKING

One of the cardinal rules of the stock market is that you must listen to the experts. After all, they bring enormous experience and insights into the market. They have been around for a long time and are best placed to advise you. Despite all that, one needs to draw a very fine line between listening to one’s insights and accepting one’s opinion. Your investment needs and your risk profile are an extremely complex matrix. It is difficult for any investment advisor to really understand an investment situation from your perspective. That is something only you truly understand. So, make the most of the insights of the investment advisor but do not outsource the actual decision-making process.

CASE STUDY ON RELYING ON YOUR OWN JUDGEMENT

Ankit Mehta had a unique problem. He had a corpus of Rs.10,00,000 to invest in the market but was not sure what route to adopt. He, therefore, consulted 3 different advisors. The first advisor asked him to put the entire money in an index fund as he would be saved from individual equity risk and will still earn equity returns. The second advisor asked him to split the money between equity and debt funds so that it will combine wealth creation and regular income. The third advisor asked Ankit to opt for a systematic transfer plan (STP) where Ankit could invest the entire corpus in a debt/liquid fund and systematically sweep a fixed sum of money each month into equity funds. The result was that Ankit was confused. All the 3 advisors gave the best possible idea under the circumstances but Ankit will have to eventually rely on his own judgment. Which of the 3 options he needs to go for or whether there is a fourth option he needs to consider; will be entirely Ankit’s call.

“There is only one side to the stock market and that is the right side. Whether that means bullish or bearish is entirely immaterial” – Jesse Livermore

6 REASONS TO RELY ON YOUR OWN JUDGEMENT

  1. While your broker has the best of insights into the equity market and the investment options, only you understand your unique risk and return. Your investment will eventually depend on your risk-return matrix and that is something only you will have to decipher. That is why it is best that you rely on the insights of the advisor but rely on your own judgment when it comes to investment decisions.
  2. After all, it is your own money at stake. When you are dealing with your money, the buck stops with you. Your advisor could be right or he could be wrong. The outcome is something you will have to face. When the buck stops with you it is best that you take the responsibility for the investment decision.
  3. The advisor could have his own reasons for recommending a stock or a particular strategy. While your advisors are most likely to have your best interests at heart, you have taken the pragmatic approach and believe that only you are best poised to decide on your financial matrices. That is why you must restrict the role of advisors to giving inputs and take accountability for the final decision.
  4. An advisor is not legally bound by his/her decisions. There is a service agreement that you sign with your broker/advisor which absolves them from any accountability in the event something goes wrong. They are working on a best effort basis and you are expected to take the full responsibility for your investment decisions. In that case as well take the investments decisions too!
  5. It compels you to take a more rigorous approach to investment analysis and investment decision making. By outsourcing your decisions to your advisors, you may have lulled into a false sense of complacency. When you are taking the responsibility for your own decisions, you are actually working much harder for your money. The positive impact will be visible sooner rather than later.
  6. Remember, investments decisions are not just about returns and risk. They are also about your tax status, your future plans, your liquidity requirements etc. This is where the information asymmetry comes into play. Your advisor may not have the same extent of relevant information about you as you have. Hence it is always better to take the final call based on the inputs provided by the advisor.

LET THE BUCK STOP WITH ME

The best way to learn along the investment path is to take responsibility for your decisions. That not only improves the quality of decisions but makes it more customized and relevant to your unique needs. When the buck stops with you as well make the most of it. You can combine the best of expert insights and then nourish it with your own judgment. The end result is likely to be a lot more comprehensive!

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