Why Stock Markets Have More Day Traders than Value Investors?

Actual Question:

Why does there seem to be so many more day traders than value investors in the style of Warren Buffett, etc.?

Answer:

Dear Friend!

Such a wonderful question!

I too wonder the same.

In my opinion there are three fundamental reasons for the gross aberration that there are more day traders than value investors operating in the stock market.

Greed:

Greed and fear are the most common and difficult to control human emotions. Of the two greed comes first and fear follows. When markets are rising (present situation) greed attracts more players. Most of the people enter not knowing anything about stock markets. They have simply overheard somebody saying that markets are rising and there is a killing waiting out there!

Desire for making a quick-buck:

Many people have a strong desire to make a fast-buck. They do not want a longer but surer path like value investing. This fundamental nature of human beings is further reinforced by modern technology, which strives to provide instant gratification of needs - people just don’t want to wait anymore - they want internet banking, immediate downloads, and so on. Marketers, online shops, et al, work hard to satisfy this craving for instant gratification.

Gambling Instinct:

Man seems to have been created with an inborn gambling instinct. This is not new. We have been having it since the Mahabharat times, with the Pandavas betting and losing even their beloved wife in fit of gambling rage.

Day trading provides a very convenient dignity to what is otherwise pure gambling. Families of day traders honestly believe that day traders are engaged in serious and respectable business or profession, and they spread this belief about their day trading family members among the larger family and the society at large.

Related:

• Trading/ Day Trading
• Margin Trading
• What is Short Selling?
• What is the Differences Between Fundamental and Technical Analysis?
• Why Day Traders Cannot Quit?
• Is Algorithms Based Trading Safe?
• How Warren Buffett Trades in Stocks?

Conclusion:

Finally, my dear friend, please do not think I am delivering this sermon standing tall from a high moral ground.

I had been once what I have described above, till one day I lost all my life’s savings in the fraction of a second during a market meltdown.

After this costly burning of fingers, I had abandoned the stock markets for a very, very longtime.

Fate touched me and made a value investor after a long interlude.

I too am striving my bit through my blog ‘Wealth Vidya’ to convert day traders into value investors, but cannot fail to wonder, just like you, why there are more day traders than value investors operating in the markets today!

Thank you,

With Best Regard,

Anand

Can I Trade my Old Bond for a New One when Interest Rate Goes Up?

Actual Question:

Should you sell your bond and buy a new one when interest rate increases?

Answer:

Dear Friend

It is quite obvious that when interest rates increase, it is smart to sell the old bond with a lower coupon rate and buy a new one with a higher interest rate.

However, is it as simple as it appears?

Can one actually make such a smart move?

Well, the answer is NO and YES.

Financial markets worldwide are supposed to be efficient. Any such opportunities are quickly capitalised upon till the benefit exists no more.

How can this happen?

The market price of your old bond will fall immediately after the announcement the increase in the interest rate. The fall in the price usually will more or less match the potential gain.

However, ‘Value Investors’ also find that the markets are not as efficient as they are supposed to be. They always find a few stocks with excellent intrinsic values trading below their fair price. They also find that many good stocks as well as poor one trading at valuations that cannot be rationally justified. So you may indeed find an opportunity, though rare, to profit by selling the old bond and buying (subscribing) a higher interest rate denominated bond.

Thank you,

With Best Regards,

Anand