Charlie Munger, John Templeton: What kind of market participant would you like to be?

By Karthik Rangappa

Each market participant has his or her own unique style to participate in the market. Their style evolves as and when they progress and witness different market cycles.

Their style is also defined by the kind of risk they are willing to take in the market. Irrespective of what they do, they can be categorized as either a trader or an investor.

A trader is a person who spots an opportunity and initiates the trade with an expectation of profitably exiting the trade at the earliest given opportunity. A trader usually has a short-term view on markets.

A trader is alert, and on his toes during market hours constantly evaluating opportunities based on risk and reward. He is unbiased toward going long or going short. There are different types of traders -

a) Day Trader: A day trader initiates and closes the position during the day. He does not carry forward his positions. He is risk-averse and does not like taking the overnight risk. For example – he would buy 100 shares of TCS at Rs 2212 at 9:15 AM and sell it at Rs 2220 at 3:20 PM making a profit of Rs 800 in this trade. A typically day trader usually trade in 3 to 5 stocks per day.

b) Scalper: A type of a day trader. He usually traders very large quantities of shares and holds the stock for very less time with an intention to make a small but quick profit. For example – He would buy 10,000 shares of TCS as Rs 2212 at 9:15 and sell it Rs 2212.1 at 9.16.

He ends up making Rs 1000  profit in this trade. In a typical day, he would have placed many such trades. As you may have guessed a scalp trader is highly risk averse (in terms of carrying overnight risk).

c) Swing Trader: A swing trader holds on to his trade for a slightly longer time duration, the duration can run into anywhere from few days to weeks. He is typically more open to taking risks.

For example – He would buy 100 shares of TCS at Rs 2212 on January 12, 2018 and sell it Rs 2267 on January 19, 2018.

Some of the really successful traders the world has seen are – George Soros, Ed Seykota, Paul Tudor, Micheal Steinhardt, Van K Tharp, Stanley Druckenmiller etc.

An investor is a person who buys a stock expecting a significant appreciation in the stock. He is willing to wait for his investment to evolve. The typical holding period of investors usually runs into a few years. There are two popular types of investors -

a) Growth Investors – The objective here is to identify companies which are expected to grow significantly. The growth is mainly attributed to industry and macro trends.

A classic example in the Indian context would be buying Hindustan Unilever, Infosys, Gillette India back in 1990s. These companies witnessed huge growth because of the change in the industry landscape thereby creating massive wealth for its shareholders.

b) Value Investors: The objective here is to identify good companies (irrespective of their growth phase), whose stock prices are beaten down significantly due to the market volatility, thereby making a great value buy.

Value investors pay more attention to the entire value of the business (reflected in the stock price), and they buy the business only when they perceive the valuation of the business to be significantly lower than its true worth.

Value investors do not really pay much attention to the market movement on a daily basis and their capital comes with a lot more patience.

Some of the really famous investors the world has seen – Charlie Munger, Peter Lynch, Benjamin Graham, Thomas Rowe, Warren Buffett, John C Bogle, John Templeton etc.

So what kind of market participant would you like to be?