Precis

A police office catches a dreaded dacoit. The dacoit escapes from jail and exacts terrible vengeance. He kills almost his entire family but lets him live after cutting his hands. The police officer hires two petty thieves to catch the dacoit so that he can have his revenge. The thieves catch the dacoit and in the process one of them is killed.

Another short story: Two thieves are hired by an ex police officer to catch a dacoit. As they strive to do that, they find a new purpose and meaning in their otherwise nomadic life. They manage to catch the dacoit but at a terrible cost as one of them dies in the final shootout.

Any Indian would have realised that both the stories are simplistic versions of the same complex story of the movie Sholay. In their simplified form both stories lose some of the nuances of the entire movie. They necessarily have to focus on only one aspect of the larger story. Also the side stories and the moments which drove the original story forward are lost in this simplification.

The equity market is a far more complex story than even Sholay. So complex that it cannot be written in any one single form. When one sits down to write the market story, one will necessarily have to simplify and in the process lose some of its nuances and some important parts of the story. But this simplification is necessary in order to understand and trade/invest in it.

So one story can go like this. "Markets consist of companies and various stages in their life cycle. The best investment strategies involve looking for companies which have shown a 5yr track record of high return on capital, a steady positive earning number, cash flows which are a significantly positive and a P/E which is in the lower end of its range" The moment one writes a story like this, one can convert that story into a quantifiable screen and reduce the number of investible companies from the thousands listed to a hand few.

Or one could write another story and say " Markets consist of companies which are listed and participants who invest and trade them. The human nature being what it is, it will make people want to buy companies that others are buying into and sell what others are selling into. This results in trends and therefore a stock that goes up continues to go up and one that goes down continues to go down" If your simplified story of the market reads like this then you can create a trading system based on trend following.

I guess each participant comes to his own simplified version of the market story over a period of time. The faster the better. In the process he could lose out on other versions of the same story. But sticking to his personal version and method gives him the highest chance of success in his endeavor to make money in the market.

The problem starts when intelligence comes in the way of simplification and the human mind rebels. When it starts saying that the market is a complex structure and therefore it feels compelled to make its market story as complex as possible. It is then that a consistent investment or trading approach becomes impossible. The trader jumps from one version of the story to another and makes his own life completely miserable in the process.

Needless to say, I have never had to deal with the rebellion of the mind. I have gone by the simplest version of the market story that is possible which states the the markets trend enough to make money over a period of time. Now I am living on the hope that simple stories do work.

I went long yesterday which was a mistake in my calculations. I have shorted again at 5143 and will cut my short positions and go long only above 5192