“Applied Intelligence is Power” – The Gambler

I woke up with a mixed feeling. I was excited to be the owner of one lot of Nifty. But now I felt lost. I had sort of mastered the art of negotiating a lower price. Last day’s close of Nifty below my contracted price had broken this delusion of mastery. The explanation of the Gambler did make sense. I had saved money and owned one lot of Nifty. I remembered the Gambler promised to meet me today.

Soon, I was at the café and had already ordered my mocha frappe and some breakfast. The Gambler joined me in a short while. I had already pre-ordered the coffee for the Gambler. The girl at the counter was kind enough to get the coffee at the table as soon as the Gambler settled down. I was eager to know what lesson was in store for me today.

After some small talk, the Gambler came to the topic of interest. The Gambler asked me to recall the first day at the stock market.

I said, “I was eager to buy the stocks and return home. But eventually I learned that the objective was not to own stocks but to get some steady return on the money I own. It was okay to not do a trade as long as I go home with money in my pocket.”

“Good. Remember one thing… the market is a two-person stage. For every buyer there must be a seller. One person’s loss is other person’s gain.”, added the Gambler.

The Gambler continued, “Let us now imagine the thinking of the person who made the deal to sell the nifty to you at 16400. What do you feel he was thinking?”.

I had never given a thought to this. Every person comes to the market to earn profit. Every transaction is between two persons … each of whom think they will make a profit. But one person will gain and the other will lose. Such is the nature of the market.

Now that I own one lot, I could think in the other person’s shoes. I shared, “The person wanted to sell the Nifty at a profit. But he was obviously worried a wee bit of the price falling and having to incur a loss. So, when we approach him with our offer, it seemed good for him to at least lock in a price of 16400 with a little premium.”

“Correct perspective”. The Gambler nodded knowingly and asked, “Now, this worry…can we say it was also a fear of loss?”.

I concurred, “Yes.”

The Gambler inferred for me, “So, because he was fearful, he paid us to placate the corner of his mind where this fear resided.”

The Gambler continued, “Today, you are the owner of the nifty lot. We are the seller. What do you think will make a buyer fearful?”

I replied, “This one is easy. That day, I had 900,000 and was eager to buy at rate of 18,000. But if the price had gone higher than 18,000, I would be disappointed as I could not then afford the Nifty lot. So, a buyer is fearful that the price will go above what he can afford.”

“Cool. You learn fast. So, today, how do you think we can get a buyer to pay us some money for this fear.”, posed the Gambler to me.

“We can promise to sell him my nifty stock at a fixed rate in case the price goes higher. If it is lower, we let him buy from the market. So, again we take the risk of selling our stock at a lower price if the price zooms high today. And hence he pays us for our risk and his fear.”, I answered triumphantly.

“Hmmm…I see my protégé is learning fast. When you thought both sides of the trade, you gained some intelligence. It is important to apply this intelligence for either perspective. Here is an important nugget for you… Applied Intelligence is Power.”, said the Gambler.

“But won’t we make a loss if the price goes higher by selling to the buyer at the lower contract rated?”, I asked the Gambler.

The Gambler seemed disappointed with this query. Shaking head, the Gambler said, “Alas, Greed. I was too early to judge you. You surely have lot to learn. Remember, fear and greed are what kills a trader’s account.”

Now started the quick fire round I was getting used to.

“How much interest was the bank paying for your money?”

“5% with no risk”

“Are you sure there was no risk?”

“Yes.”

“What if the bank goes broke and shuts down?”

“Oh… okay… there was risk. But the deposit was insured.”

“Not to the full amount. So, for a small risk you got 5%. When we looked at the accounts on the first day, you were happy with 12% return.”

“Yes. I was aiming for double the return from the bank. So, I would have been happy with 10% also.”

“How much does that work out per month?”

“Say, 1%”

“How much did you buy Nifty for?”

“8,45,000.”

“So, you just said you wanted 1%. That makes it 8,450 is what you want from this stock as profit this month. And the 55,000 in the bank will also earn interest for you.”

“Okay..and your point is.”

This was the grand finale for the argument. The Gambler stood up while concluding, “You have a target in mind of 1% and that is what we should look for. The nifty may double today… but remember trading is a state of mind. So, we will be happy with our 1%. We need to control our greed.”

I had to agree and said, “I get the point. We bought the nifty for 16,900. At one percent, this will be 17,069. I will thereby contract for this rate of 17,069 today. If I have to sell, then I will sell at this rate and come home with 1% profit for this session.”

The Gambler finished the coffee, smiled and said, “Cheer up, my student. I was only setting your expectation. It was important to control your greed. Don’t worry…we will try to get more than 1% return. Let’s grab our stuff. It is time to go to the market.”

I started reading and understanding this math behind the trading world. I will be sharing my notes in series of future articles. I am also forming a group of like-minded traders. If you are interested, kindly register at?https://forms.gle/LN7sr77PFQL1bmRA7.?You will receive details when I announce such programs.

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Hope this was insightful read. Do leave your comments below.

This is part of a series of articles on trading. You can start reading from the first one in this series click here.