Investing vs Trading: An analogy with Cricket…

By: Sitaraman Iyer, CFA

I believe the world of sports and investments have a lot in common. Being an Indian, I will take theliberty of drawing comparisons between cricket and investments. Over the next few weeks,I will try to cover some themes that are common to these two professions.

Are you a Trader or an Investor?

For me, this is most important question one has to ask before indulging in any form of investing because if you are not certain, it could be detrimental. The ability to cut losses and not turn into an investor when you are a trader, or the ability to not cash out early and turn into a trader when you are an investor goes a long way in defining your success in the field of investment.

For me, the equivalent of short-term trading and long-term investing would be batting in T20 and test cricket, respectively. Both disciplines require completely different skills and mindsets.Very few people have been successful in juggling both the fields.

 

 

No matter how boring a player looks while playing test cricket, it is his ability to leave deliveries (avoid bad stocks and be patient), play risk-free cricket (stick to one’s core competencies),and adapt to different situations(identify optimistic/pessimistic market conditions) that stands him in good stead. Test cricket, like investing, is about planning, analysing, and utilising all information around before taking a decision.

In T20 cricket,you have to be restless, attack (quick churn), make impactful contributions (quick gains), and have the ability to ride your luck when the momentum (directional trading) is right. You also have to quickly assess a good score for a particular pitch to plan your innings (identify market pulse in order to time your exit). T20 cricket, like trading, is about predicting short-term flows and taking decisions without the luxury of having all the data points.

Definition of Success

Just as a T20 player scoring a quick-fire 30 will be as valuable as a player scoring a patient 150 in test cricket, gaining 3-4% in a day while trading would be as valuable as doubling your returns over 2-3 years while investing.

I have a confession to make: just as a novice gets attracted to T20 cricket because of the glitz and glamour associated with it, I too was attracted to the markets because of the stories that floated around during the famous bull run of 2003 and 2008.

However, my investment philosophies have evolved over time. I have realised that short-term investing/trading is not my cup of tea. With all due respect, the stalwarts of the markets, just like in cricket, are those who have done well over the long term.

 

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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