Here is my Equity Trading Performance in 2023. Set the right expectations.
Setting Realistic Goals & having the right Expectations at the start are vital
It is important to have realistic expectations right at the beginning of your Stock Market Journey. When you have realistic expectations it will ensure that you do not tread down the wrong paths.
I would like to first know from you about your return expectations from the Stock Market. Consider the time period to be 20 years. At the end of the 20th year from now, what is the Annualized Rate of Return you expect to earn from the Stock Market? Please answer below.
Thank you for responding. Let us explore some of the activities that you think might help meet your expectations.
Intraday Equity Trading
When it comes to Stock Market, there are 3 primary activities.
Invest
Speculate (Intraday and Short Term Equity, Futures & Options Trading)
Hedge (Protect Portfolio using Futures & Options)
Many beginners tend to think that they can earn high returns by speculating. That is, by doing Intraday Trading in Equities. They see that there is potential to make even 10% in a day or even more. Like doubling capital in a day using Options. They are blind to the risks involved and also have a good chance of wiping off capital quickly.
It is the worst thing you can do to start your journey. The likelihood of you wiping off your capital is high. I am not saying it is impossible to make money, but it is the toughest and most unlikely way to make money when you are just starting.
Here are a few words by Howard Marks on Intraday Trading from his book “The Most Important Thing Illuminated”. You must read it without skipping a word.
It seems clear that momentum investing isn’t a cerebral approach to investing. The greatest example came in 1998–1999, with the rise of people called day traders. Most were non-professional investors drawn from other walks of life by the hope for easy money in the tech-media-telecom stock boom. They rarely held positions overnight, since doing so would require them to pay for them. Several times a day, they would try to guess whether a stock they’d been watching would rise or fall in the next few hours.
I’ve never understood how people reach conclusions like these. I liken it to trying to guess whether the next person to come around the corner will be male or female. The way I see it, day traders considered themselves successful if they bought a stock at $10 and sold at $11, bought it back the next week at $24 and sold at $25, and bought it a week later at $39 and sold at $40. If you can’t see the flaw in this—that the trader made $3 in a stock that appreciated by $30—you probably shouldn’t read the rest of this book.
Intraday trading in Equities is a loser’s game in the long term. The only winners are NSE, BSE and your broker. So avoid Intraday Equity Trading altogether. I don’t do it even after 13 years of being a stock market participant.
What about Short-Term Equity Trading? That is, buying and holding stocks for a few weeks to months. Is it worth it?
Let’s explore.
Short-Term Equity Trading
When it comes to stock portfolio management, this is how I allocate my capital.
60% of the Capital is parked in Mutual Funds. This is for the long term.
30% of the Capital is allocated to Short-term Equity Opportunities that I spot.
10% of the Capital is allocated for hedging/emergencies.
Please find below the P&L of my Short-Term Equity trades.
The Overall Capital I had allocated for Short-term opportunities in 2023 was ₹40 Lakhs. I managed to generate a net profit of ₹15.5 Lakhs in Short Term Equity Trading using ₹40 Lakhs Capital. Some trades I took last year are still open and that is showing up as an unrealised profit of ₹1.71 Lakhs. If you just consider the realised P&L, the return generated is 38.75%. Not bad in absolute terms. But very bad in relative terms. Let me explain.
Most of these short-term bets I took were part of the Mid-Cap and Small-Cap stocks category. The Mid Cap and Small Cap Indices shot up more than 43% in 2023. I have under-performed the Benchmark Indices by 4.25%.
Not only that, the total charges incurred by me were around 25,000. This is about 0.6% of the capital used (₹40 Lacs). The only good thing is equity delivery doesn’t attract any brokerage. If you do Intraday Equity Trading, the brokerage might also be a significant amount over 1 year and it will be a further drag on the net return.
On the other hand, the expense ratio of a good Midcap Index Fund is about 0.3%. Find the snapshot of a good Midcap Index Fund below. This fund returned 43% between Jan-Dec 2023 with lower charges of 0.3%. Please note that I have taken this fund just to illustrate the point. I do not promote or advise buying it.
Now comes the worst part. Since all the trades I took are short term, I need to pay a 15% Short Term Capital Gains Tax. This means that I need to pay ₹3.1 Lakhs as tax. That brings the post-tax return to 31%.
But when it comes to an Index Fund, there is no tax if you don’t sell and hold on to it. If you hold it for more than a year, you are going to be charged 10% Long Term Capital Gains Tax. That too 1 Lac profit is exempt. The Impact of Charges and Taxes is often ignored.
Achieving a 31% post-tax annualized return isn’t an easy task by any means. I am not unhappy. But the opportunity costs were higher. Remember, we evaluate performance not only based on Returns but also on Time spent, Stress Levels, Behavioural Difficulty and Opportunity Costs/Regret.
I lost 12% points relatively compared to the Benchmark Index.
I spent significant time doing analysis and monitoring positions. At least 2-3 hours every day.
I have displayed good behaviour throughout last year by relentlessly cutting losses and patiently waiting for the big rewards. You can see from the P&L image that there are more reds than greens. My win rate was low. But, the average loss was ₹10000 and the average profit was close to ₹1 lac. That is a risk to reward of 1:10. That is why despite the win rate being low I ended up being profitable over time. If this is not representative of good behaviour and strategy, what else is? But still, I was not able to outperform the Index.
An Index Fund did better in terms of Return, Time spent, Charges and Taxes with less Behavioural Difficulty.
Now there have been times when my short-term portfolio was ahead in terms of gross returns compared to the Index. But if you look at post-tax returns, it always lags. Also, I do not know whether I will be able to perform at the same level every year. One bad move and I go miles behind.
60% of my portfolio which is in Mutual Funds has returned 36% last year beating my post-tax Equity trading gains (31%) by 5 percentage points.
The conclusion is that even short-term equity trading is tough. I have an experience of 13 years now. I exhibit decent behaviour. I have good strategies in place. I put in good effort every day and I am well prepared. But still, outperformance is not guaranteed. A beginner who invested in a Midcap Index Fund without spending time & effort would have done significantly better last year.
Setting Your Expectations Right
If you are aiming for a 40% return through Short-Term Trading and that too every year for the next 20 years, you are daydreaming. I am not saying it is impossible, but it is highly unlikely. As your capital grows bigger, it gets increasingly difficult.
Now some might argue that Mr. Rakesh Jhunjhunwala made 50% returns for 20 years through Active Investing. So, why not me? I consider Mr Jhunjhunwala to be an outlier. Imagine holding a significant portion of your portfolio in just 1 stock for 20 years. How many of us can do it with conviction right from the word go? Mr Jhunjhunwala took a big bet and things went his way. I don’t say it is all luck, but let us not be fooled by randomness. For every Jhunjhunwala who made 50% return for 20 years, there might be 1000 Jhunjhunwalas who lost their entire capital doing the same.
Let us grapple with reality. We are not in a race. Instead of trying to do a Jhunjhunwala or be the next greatest investor, we should be focused on how to use investing to achieve our goals and dreams realistically.
Now, What is realistic?
Over the long term, Nifty 50 Index Funds have given about 13% returns, Next 50 about 16%, Midcaps about 18-20% and Smallcaps about 20-23%. Create a basket of these Funds and keep doing SIPs. Good to keep your expectations to somewhere around 15% over the long term given India does well in the coming decades.
By doing this you will reduce your opportunity costs. No need to sit in front of the trading screen for 6+ hours. No Stress. No Under-performance. No Regret. Also, focusing more on your job can help you build a vital skillset, give you that well-deserved Promotion, and eventually a higher salary/bonus which might help you build capital faster.
Use your spare time to learn more about Fundamental and Technical Analysis. Explore the operational aspects of Investing and Trading virtually without deploying real money. There are many virtual trading platforms available these days.
“Risk comes from not knowing what you are doing” - Warren Buffett
Do not play with real money till you develop a good understanding. Once you build good capital, learn Futures and Options to hedge your portfolio.
Hope I was able to provide some context on setting realistic expectations when you start your stock market journey. We will explore more. We have barely scratched the surface.
Thank u for share your valuable experience sir...
Brilliant article. I admire the way you had approached it. Clearly making anything more than 5% north of 12% consistently for 5 years is when you can claim that you are in control. Thanks for re-affirming that it is not easy to make money in markets.