Different Strokes: Cricket and Equity Investing

Cricket is a passion in India and cricketers (other than film stars) of course are the demi gods. For those who play the stock market game it is no less than a passion. It would be interesting to find similarities between the two passions. Just like the followers of cricket, who think they could have done a better job than the selectors, most stock market participants also feel that no one can beat them in the world of investments. So there is no dearth of advice to Dhoni and his men on how to play cricket, as well as free advice on which are the best stocks where you can make quick money.

There are three versions of international cricket: test cricket (longer version), one-day cricket and the T-20 (instant cricket). Stock market investing also has 3 versions: Long term investment, medium term investment (from settlement to settlement), and the day trading, corresponding to the three versions of cricket. Because of the excitement it generates, the shorter version is the most popular both in cricket as well as stock markets. Shorter version of cricket generates the best TRPs for sports channels and the shorter version of markets (day trading) generates the maximum revenues for the business channels. Most of the advice given by business channels is for day traders, and long term investors need not give too much importance to that. But for real lovers of cricket, test cricket still remains the ultimate benchmark, where real merits of the players are tested. Similarly for long term investors, the real worth of a company/stock is discovered only in the long run.

Analytical skills play an important role in playing both the games. In cricket, the winning captain analysis the pitch report, the strengths of his team and the weakness of the opposition. In stock market, the investor analysis the global situation which is akin to studying the pitch report. Strength of your own team would mean analysing the strength of your economy/ company. The opposition here would mean other players in the markets, just like the bulls analyse the moves of the bears and vice-versa. Like a bad and bouncy pitch can undermine the performance of an excellent batsman, similarly an excellent stock can also decline if the global cues are negative. The stock market pitch report studies the global economic data. The Greek sovereign crisis is a case in point, which has led to a severe decline in our markets in the recent past. A test player really knows how to handle the situation if the pitch is bad. He would play defensive strokes initially and show his hitting capability when the pitch eases later in the day. Similarly, a long term investor is expected to be patient if the going is not good, if he wants to make money in the long run.

Winning a cricket game starts with selection of the best team, with a right combination of batsmen, bowlers and fielders. In stock market investing creation of the right portfolio is as much important for wealth creation. Each stock has to be picked on its merits after careful analysis. A cricketing pitch with an uneven bounce is akin to a volatile market. The volatility of the markets can be measured in terms of the volatility index (VIX), it is better to refrain from fresh investment when the VIX is high. Incidentally, the Nifty VIX has recently crossed the level of 30% after trading in the 15-25% band for quite some time. This indicates uncertainty in the markets ahead. A consistent player in cricket will always have a higher average, as compared to the one day miracles. Same is true for evergreen growth stocks versus the one day performers also known as momentum stocks. Long term investors should always focus on the former.

A cricket captain has to take a minimum level of risk to win the game. He must know when to become defensive and when to play his strokes. Too much defensive approach can also be bad for the team. Similarly, a stock market investor should know when to make a fresh investment and when to take his profits. The sweet timing of the stroke ensures that the ball will reach the boundary (destined goal). Early loss of a couple of wickets need not deter a good captain to take some bold steps to win the game. Similarly, in the markets if you have lost some money in the past should not deter you from entering the market again, but after learning from the past mistakes. Short term trading or excessive speculation is akin to lofting a good length ball, where the chances of losing your wicket (your money) are fairly high. Remember, 'a game cannot be won without playing, and wealth cannot be created without investing'. So take the plunge provided you have the appetite to take risk, there is a lot of money to be made on the stock market.