Here is the full transcript of Nikhil Kamath’s talk titled “Investing 101: A Beginner’s Guide” at TEDxBITSHyderabad conference.
In this talk, Nikhil Kamath, co-founder of Zerodha, shares his extensive experience in trading and investing, starting his journey as a teenager. He emphasizes the importance of understanding market psychology and experimenting with various investment strategies, including fundamental and technical analysis, quantitative trading, and sentimental analysis.
Kamath highlights his initial success with penny stocks and how early luck in trading can be misleading. He stresses the need for personalizing investment methods to suit individual psychology and goals. Discussing the growth potential in India’s nascent equity market, he encourages participation in FinTech, Broking, and Asset Management. Kamath also details his venture with Zerodha, focusing on creating a cost-effective, trader-centric broking platform.
Lastly, he touches on Zerodha Beacon, an asset management company, emphasizing community and innovation in the financial sector.
Listen to the audio version here:
TRANSCRIPT:
Let’s talk about stock markets, let’s talk about being an investor, a trader. I think everybody and their grannies and their drivers are entering the equity market right now. So, probably, it’s a good topic to talk about. I’ll give you a few different chapters of my life where I have attempted trading and investing in different ways and what my learnings have been from that.
Early Experiences in Trading
So, I got into the world of trading and investing very early, started full-time trading at maybe the age of 17. This was around 2003-2004, somewhere around that time. At the very beginning, when I got introduced to trading, I was doing it with a finite amount of capital that I had saved up from my other job, which was working in a call center. I would make maybe 8-9,000 rupees a month and I would save this money and invest and try to buy and sell equity.
The problem when you’re trading with such a small pool of capital, a lot of you, if you’re in college, will face the same issue, is you will have to leverage and take margin to be able to make a reasonable amount of money. So, I had the same issue. I would look at stocks which were in the news and, pretty much like you play a roulette wheel, I would pick a number, in my case, that was the company and hope the price of the company would go up. I got very lucky initially.
Initial Success and Further Investments
The stock markets, in many ways, are very kind to first-time investors and most people who just start off tend to make money. It’s a psychological thing or whatever, but the lesser you know tends to work in your favor a lot of the time.
So, I bought this company called Marsoft, a tiny penny stock tech company at 4 rupees or something like that, and sold it for 20 rupees. There was absolutely no reason why the stock should have gone up; it was just blind luck. But that was my foray into stock markets and, like many other people, I was hooked and addicted.
Even if I were to lose money 20 times in the future, 20 times the amount of money I made on this one transaction, I knew for a fact that this is something that gives me a high in the industry and a profession that I would continue to be in for the rest of my life. So trading started like that, betting blindly and hoping a certain company does well. Marsoft was the number one company, this was followed by multiple bets on penny stocks which did well between the ages of 17, 18, 19; this was largely how I used to trade.
Along the way, I got introduced to a couple of books and began fundamentally analyzing companies. I think some of the few good books I read at the beginning were maybe Benjamin Graham’s book, along with a couple of fundamental analysts both onshore in India and Western peers.
Fundamental and Technical Analysis
Three or four years of fundamentally analyzing stocks got me to the realization that companies do not move based on how well they are doing fundamentally. Companies are a factor of sentiment, and how many people perceive a company will go up or a certain stock will do well tends to move the company a lot more than technical factors or fundamental factors which might be supporting the company. I followed this form of trading for a few years, and then followed it up by technical analysis.
Technical analysis is the kind of trading where you look for patterns. It is a very simple subject, bound by rules that what has happened in the past, patterns from the past, will kind of repeat themselves in the future. So, you look at charts, you look at patterns made on charts historically, then you attach an odd to that same pattern replicating in the future. I did this for a few years, was big on candlesticks for anybody who is interested out there.
The Journey Through Various Trading Phases
I think Steve Nison has a couple of great books on candlesticks; it’s a great way to foray into the world of technical analysis. You trade stuff like moving average crossovers. I remember I used to trade the 20-50 interval of moving average crossovers.
What technical analysis does very well is it’s a lagging indicator, so in a market which is trending or where there is substantial momentum, technical analysis will help you ride the tide, so to say, and catch a large part of the momentum that might be in a market, especially if you were able to get in at a very early level when a trend is just beginning.
Technical analysis happened for a few years, three or four years, and this was followed by a quantitative phase, trading on correlation, mean regression, essentially betting that say, for example, two stocks have a certain correlation between them historically, and if they diverge from that relationship, you write an algorithm which will buy one and short the other, and you try to make that divergence whenever it were to occur.