Hello people, welcome to issue 6 of the Varsity newsletter. We’re just 20 days into 2022, so happy new year 😬
In this issue, we talk about:
How to deal with setbacks when trading
The rise of stock market influencers
Basics of rights issues
Inevitable setbacks
I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.― Larry Hite
The stock market has to be the only place where the difference between expectations and reality is so vast. Millions of books, blogs and videos on how hard it is to make money from trading, and people still think it’s the easiest way to get rich.
Thinking that making money in the stock markets is easy is a 100% guaranteed and back tested strategy to lose money.
The reality is that the stock market is the toughest place to make money. One of the biggest reasons why trading is hard is because money is inherently emotional, and to be a successful trader, you need to keep your emotions in check. In a way, trading is a constant battle against human nature.
Saying “control your emotions” is easy, but it’s incredibly hard in reality and takes years of work.
Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions. .― Ed Seykota
The other thing about trading is that nothing is certain. You can’t predict market moves; all you can do is have a robust trading system, manage your risk, keep your emotions in check, size your positions and trust your process.
Nothing works 100% of the time, and you’ll probably lose a lot of money before you make money. You’ll have a lot of setbacks, be overrun with emotions and feel like giving up, but you won’t learn if you do.
Successful traders are positive yet realistic. They know their limitations. Making money consistently from trading is incredibly hard, which is why 9 out of 10 traders lose money. Not everybody can be a successful trader, and that’s perfectly fine. We can’t be good at everything. Knowing when to quit because you aren’t cut out to be a trader is also really important. It’s like a time-based stop loss.
This week’s Innerworth article beautifully explains just how challenging trading is and the mindset needed to be successful:
Always think strategically rather than emotionally. It’s important to focus on solving problems rather than reacting to setbacks emotionally. Don’t get fed up. When you face a setback, pick yourself up. You’ll find that with enough work, you’ll make the profits you want.
Getting Worked Up For Nothing - Varsity by Zerodha
Influenzars
One side effect of the growth of social media platforms is the rise of influencers. Today, it’s easier than ever for people to build audiences on these platforms. Once you have a following, you can make money by promoting products and services. There’s nothing wrong with it, but given human nature, things are inevitably abused.
People with huge followings on Twitter and YouTube peddling dangerous financial products and advice is a huge problem. Not that there aren’t good influencers, it’s that the bad outnumber the good ones.
When people are new to investing, they look for guidance on platforms like Twitter and YouTube. Inevitably, people discover influencers who are the loudest and have the most followers.
Since these new investors don’t have all the facts, they mistake popularity for smartness, it becomes a proxy for authority. And given that people prefer being told what to do than figure things out, they end up following the advice of these “influencers” without questioning it.
Not to generalize, but there are genuine people who educate people. But most of these so-called “influencers” will say anything and peddle anything to make money. When it comes to the stock market, becoming an influencer is even easier. All you have to do is post some fake P&L screenshots and tweet some stock market quotes. Selling greed is an incredibly powerful strategy.
People don’t want to spend time actually learning about trading and investing. They prefer videos with titles like “10 best penny stocks” or some loudmouth explaining “how to become a billionaire.”
This always ends in tears. We’ve lost count of the people who come to us after losing money by listening to random people on social media.
Last year, a couple of popular celebrities promoted some random crypto token, and It’s down 90%. A few investors in the US who lost money filed a lawsuit against them recently.
You’ll probably ignore this, but we’ll say it anyway. There are no shortcuts to creating wealth, and listening to random people just because they have a lot of followers isn’t a strategy. They’ll say anything because they don’t have an obligation to provide quality advice or disclose the risks of whatever product they are selling.
At the end of the day, you either have to learn how to manage your money or find a good advisor. Please don’t blindly trust people on social media. Be very sceptical!
Nithin had tweeted about the same thing a few weeks ago:
New chapters on Varsity
In chapter 9 of Integrated Financial Modelling, we learnt about debt schedules. In chapter 10, we understand the nuances of authorized, issued, and paid-up share capital and build a schedule to understand these items.
Reserves Schedule (Part 1) – Varsity by Zerodha Reserves Schedule (Part 1) – Varsity by Zerodha
On Twitter
A rights issue is one option for a company to raise fresh capital. In a rights issue, a company offers to sell shares to existing shareholders at a discount. In 2020, there was also a change in how rights issues worked. Over the years, we’ve seen that there are a lot of misconceptions about rights issues. We posted a thread on what are rights issues and how they work.