Pieces of the Pie

When profits are made, everybody involved wants a piece of the pie.

That’s ok, human nature.

And what’s wrong in distributing profits proportional to efforts?

Well, it’s not an ideal world. In today’s real world, investment banks have started billing clients for research and have used the money for prostitution and other recreation instead (see the docufilm “Inside Job”).

Your private equity executive will travel business or first class. He or she will stay in the executive suite. Hmmm, borderline, but still bearable if the fund generates an above market-average profit for you.

What’s unbearable is the high-roller life exhibited by disgraced Lehman ex CEO Fuld for example. You know, as in fool the public, eat their pie, and pull out personal funds before the ship sinks with an overload of public stake. Inexcusable behaviour. Deserving of extremely deterring punishment.

If a listed company regularly raises its dividend and generates steady capital gains for its share-holders, I frankly couldn’t care less if the CEO zips around in a company jet, pitches his tent in the presidential suite and orders in from the most expensive restaurant in town.

On the other hand, I do take serious exception to above behaviour on company expense if the company dishes out a meagre dividend and generates no capital gains. If I’m invested in such a company by mistake, with above CEO behaviour, I’d seriously look to exit at the next opportunity. If I see the CEO downsizing on lifestyle and if I still believe in the prospects of the company, I might still stay invested, but first I want to see some humility in the CEO’s living habits.

An exit is an ultimate thumbs-down a long-term investor can give to a loser CEO and his listed company. If a business is not generating profits and the management is living it up, such a business deserves the boot from its investors.

Learning to Sit

One of the first things a baby learns is to sit.

And sitting is probably the last thing that an investor learns. Some investors never learn to sit. Their long-term returns are disastrous.

Wanna make a killing? All right, first learn to sit.

To be able to sit, one needs to create proper conditions. One needs to take “jumpiness”, or volatility, out of the equation. This is done by buying with a margin of safety.

Having bought with a margin of safety, market blow-ups affect your bottom-line lesser. You can sit thru them.

And that’s all you need to do, to allow a multi-bagger to unfold.

Wish you lucrative investing!

Noose Just Tightened

Petrol’s up 5 bucks.

This is gonna pinch the public.

Are we now clear on the fact that a beast is on the loose? And the fact that this beast has been active to hyper-active since World War I ?

This beast is called inflation. The number 1 infectious disease that inflicts modern financial society.

We are going to have to live with inflation. Period.

What is required is long-term policy-making that will minimize the affliction. That’s not happening.

Modern financial policy seeks to avoid an existence where inflation becomes hyper. That would be when food on the table costs more that a cart-load of cash. See Argentina during its currency collapse, or Germany after the first World War.

Let’s assume that human-kind is not capable of making better policies, ones that minimize (let alone eradicate) the disease. Where does that leave us?

What do we do with our money, that’s being eaten away at 8 to 9%, year upon year?

Avenues like fixed deposits pay out lesser after tax than what inflation eats away. The 100 year return in Gold has been 1% per annum compunded, after tax. Only two investment avenues have yielded more after tax than what inflation has consumed over the very long term. These are 1). Property, and 2). Equity.

The writing on the wall becomes clear. To immunize one’s money against the disease, one needs to be invested in one or both these avenues over the long-term. Both avenues come with pitfalls, where one can lose much more than what inflation eats away.

So, one first learns how to deal with the pitfalls, and perhaps one can specialize in either of these avenues, since it is not easy to focus on both.

Then, after having learnt the ropes, one can slowly start salting one’s money away.

A Fall to Remember

Ok, these are big drops in the values of commodities. Especially Silver.

Actually, I’m liking it.

No, I am not short Silver, or short Oil, or short Gold.

As far as commodities go, I don’t trade in them, I invest in them.

And as Silver falls big time, I am buying shares of Silver mining companies. Small amounts, nothing big. One needs to tread carefully. Because one doesn’t know when prices will stabilize.

Prices were way too high earlier to go ahead with these purchases. But, as Silver falls, one starts getting a margin of safety in Silver mining companies. I feel this has just started happening. Which is not to say that Silver won’t fall more.

Which is when I’ll buy more.

This is long-term investing. Here, the ideology is the complete opposite of trading.

Where are u going, Mrs. Market?

Mrs. Market follows no one’s rules.

She’s got a mind of her own.

We need to understand that.

She likes attention. We need to keep asking her where she’s going.

The wrong thing is to ask each other where she’s going. Why not ask the source?

So how does one ask her?

By putting one’s money on the line and getting into a trade.

You’ll get your answer all right.

She’ll tell you where she’s going. If it’s a winning trade, she’s going where you think she’s going.

If it’s a losing trade, she’s got other plans.

And you’ve got your job cut out: i.e. to get out of the losing trade and to move in her direction.

Strategies for Correcting Silver – One Approach

Mega rallies are followed by big drawdowns in a bull market.

That’s how it is.

Anyone who doesn’t understand this will be made to understand it. The market doesn’t care about one’s emotions.

In today’s bull markets, a volatile entity like Silver can correct by 9 $ an ounce within a few days. Let’s accept the fact that this has happened, because it has.

So how does one play correcting Silver?

A bull market ceases to be a bull market below a certain price level as per Dow theory. That hasn’t happened yet, so a trader, in my opinion, still needs to play the long side. Of course with a stop. And not any odd stop. A risk-profile tuned stop with trigger activation, and with a large difference between trigger price and limit price. This is because Silver is moving very big either way currently within a very short time span, and if trigger and limit aren’t separated by a huge gap, they can both be overshot and the poor trader can be left hanging in the losing trade, holding on to his pants.

The investor, on the other hand, is waiting patiently for Silver to reach a certain level of correction before buying bullion. Opinions vary what this level should be. My opinion is that a 61.8% Fibonacci correction level should suffice for entry. I think that’s happening now, so if Silver stabilizes at or near the current price (40.84 $ an ounce), that would be my price for a medium term entry.

Of course I could be all wrong.

I like to make mistakes, because they are the best teachers. Better that any professors or theoreticians.

Trigger Mechanisms in Trading

Trigger mechanisms can fine-tune one’s trading by leaps and bounds.

There’s the buy stop. It’s used to only get into a trade above a certain price level. Below that price level, one isn’t bullish, and doesn’t wish to enter the trade.

Then there’s the sell stop. It’s used to execute a short sale below a certain level. One is bearish below that level only; above the level one doesn’t wish to enter the trade.

A short-seller can also use the buy stop to square off a short sale going against him or her.

Similarly, a person who is long can use the sell stop to square off a buy going against him or her.

How does the trigger mechanism work? There are two components: the trigger price and the limit price. Once the trigger price is “triggered”, only then is the order activated. This triggered order is then carried out within the range defined by the limit price. If the trigger price is not reached, the order is not activated.

This gives the trader the added advantage of not having to watch the screen all the time. In fact, some traders use the trigger mechanism while punching in their orders, and do something else the rest of the day.

More importantly, the trigger mechanism allows the trader to be where the action is when the action happens.

Trigger mechanisms are how professionals do it. You can use them too, because they are available on any and every trading platform doing the rounds.

Options 1.0.2

Options can be approached intuitively. I love that about options.

They carry their own stop-loss with them. That’s the second thing I love about them.

Soon, they’ll be operable from your mobile handset.

I mean, could it get any more versatile?

The voodoo mathematics surrounding options might or might not work. Sheer intuition coupled with a manual stop is another way of doing it.

Yup, one isn’t dependent on the automatic in-built stop in options, though this is a good tool when one doesn’t have access to a laptop. When one does, one can fine-tune the stop manually.

Options are getting more and more liquid in India. Still can’t compare them to the US options scenario, which is a thriving and rollicking state of affairs, but things are setting up beautifully here.

Amidst everything, I forgot to mention that options are a wonderful hedging tool. That’s probably their most important function.