Doofenschmirz Evil Incorporated Finds No Takers

The Government of India has been just about getting everything wrong. It’s been a long time since they did anything right. Have they gotten anything right since coming to power? Don’t remember.

Confidence in India as an investment is sinking, perhaps temporarily. My gut feel says that fund managers worldwide are dumping India for the time being, till some semblance of sanity returns to stay on the political front.

Today, there is danger of riots and looting breaking out, if Doofenshmirz Evil Incorporated (the Government of India has earned that name, hasn’t it?) doesn’t tackle the current impasse properly.

To say the Rahul G was off the mark is an understatement. Apart from that, the husky delivery of his words added to the ridiculousness of the situation. He might as well have delivered his words in Doofenschmirz’s German accent.

I don’t think this is the right time to buy India. Of course I might be wrong.

Going by the goofy deeds of Doofenschmirz Evil Incorporated, there might be a huge buying opportunity setting up in the weeks to come.

Crowds Eventually Start Behaving in a Deluded Manner

We’re human beings.

The majority of us likes forming a crowd.

Our crowd-behaviour eventually goes warped. History has shown this time and again.

In the market-place, I make it a point to identify crowds. The biggest money is to be made by capitalizing upon the folly of a crowd. That’s why.

So first let’s gauge very broadly, what the main aspects of market-study are, and then let’s see where crowd-behaviour fits in.

Market-study encompasses three broad areas. These are:

1). Fundamentals,
2). Technicals and
3). Sentiment.

You guessed it, crowd behaviour falls under “Sentiment”. Well, sentiment can knock the living daylights out of the best of “Fundamentals”. And, sentiment makes “Technicals”. Thus, for me, the most important factor while understanding market moves is sentiment.

A stock can exhibit the choiciest of fundamentals. Yet, if a crowd goes delusional, it can drive down the price of even such a stock for longer than we can remain solvent. Let’s write this across our foreheads: Delusional Crowds can Maraude Fundamentals.

Since we are now writing on our foreheads, let’s write another thing: Delusional Crowds can cause Over-Bought or Over-Sold conditions to Exist for longer than we can remain Solvent. There go the technicals.

A crowd thinks in a collective. All that’s required is a virus to infect the collective. A virus doesn’t have to be something physical. It can even be an idea. The space that we exist in is laden with disease-causing energies. Once a crowd latches on to a virus-like idea, its behaviour goes delusional.

Here are some examples of such behaviour. At the peak of the dot-com boom, in March 2000, a crowd of rich farmers from the surrounding villages walks into a friend’s office. They are carrying bags of cash. They tell my friend that they want to buy something called “shares”. They ask where these can be purchased, and if they are heavy (!). Since they are carrying their life-savings with them in cash, and plan to spend everything on this purchase of “shares”, they want to also effetively organize the transport of the “shares” to their homes in the villages. Thus they want to know if “shares” are heavy to transport!

In the aftermath of the dot-com bust, Pentasoft is down more than 90% from its peak. I think this legend is from 2001. A crowd of rich businessmen collects the equivalent of 20 million USD and buys the down-trodden shares with all of the money. The scrip goes down to zilch and today, one’s not even able to find a quote for it.

In the 17th century, people actually spend more than the price of a house for the purchase of one TULIP, for God’s sake.

You get the drift.

The current crowd is building around Gold. It’s behaviour as of now is still rational. In due course, it has high chances of going irrational.

Whenever that happens, we’ll definitely be able to see the signs, because both our eyes are OPEN.

And what was Mr. Fibonacci thinking?

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… , … , …

What’s this?

A random set of numbers?

Nope.

It’s the Fibonacci series.

How is it derived?

Start with 0 and 1, and just keep adding a number to the one on its right to get the next number, and so on and so forth.

What’s so peculiar about this series?

As we keep moving from left to right, the result of dividing any number by the one on it’s immediate right starts converging towards 0.62.

Also, as we keep moving from left to right, the result of dividing any number by the second number on its right starts converging towards 0.38.

The series starts with a 0.

Another number to note is 0.5.

So, in a nutshell, these are the important figures to note, which this series generates: 0, 0.38, 0.5, 0.62. There are more, but these are the most important ones.

I’ve always wondered why the 0.5 is important. Actually, “half-way” is big with mankind.

What’s the significance of this series?

In any activity involving a large number of units, these Fibonacci ratios are said to be observed.

It is said that crowds behave as per these ratios.

It is said, that for example when many leaves fall from a tree over a long period of time, a Fibonacci pattern can be determined in their falling.

It is said that these ratios are ingrained in nature.

True or false?

Don’t know.

What I do know is that the trading fraternity has taken these numbers to heart, and looks for Fibonacci levels in anything and everything. Most commonly, entry into a sizzling stock is planned after the stock has corrected past a Fibonacci level and has once again started to rise.

In simpler terms, aggressive traders who buy on dips will look for a 38% correction of pivot to peak before entering.

Less aggressive traders will wait for a 50% correction and then enter upon the rise of the underlying.

Traders who like to value-buy will wait for a 62% correction, which might or might not come.

If the underlying goes on correcting past 62%, it is best left alone, because the correction can well continue beyond 0, the starting point of the prior rise.

A current example where you’ll most definitely see Fibonacci ratios in action is with Gold.

The million dollar question I have been hearing around me today is when to enter Gold now, especially because it is correcting heavily.

The immediate answer for me would be to enter at a Fibonacci level of correction.

Which level?

That depends upon your risk profile.

Understanding Loss and Reacting to it in a Winning Manner

In the world of trading, we deal with loss everyday.

We have no option but to deal with it.

If we want our performance to improve, we need to deal with it in a winning manner.

What is loss? I mean, apart from its monetary ramifications…

A loss has the propensity to suck the living daylights out of you.

That’s if you allow it to.

You see, in the world of trading, losses have the propensity to grow.

You need to cut them when they are still bearable. Period.

If you don’t, they can become unbearable.

You then still have the option of cutting the unbearable loss as opposed to letting the loss eat into your gut and cause insolvency. Choice is yours. I’ve seen it happening with my own eyes.

You see, losses not only suck out money, they also suck out emotional energy from your system. Your mind loses focus, and instead of concentrating on your A-game, your mind focuses on the loss. The result is that your A-game becomes a B- or a C-game. Unacceptable.

Health deteriorates and one is snappy around the family. Totally unacceptable. Just cut the loss, stupid.

In FY ’08 – ’09, my senior partners walked into my office. I was being consulted, hurrah, a winning moment by itself for me.

Our company was entered into a derivative USD hedge at the time. The trade had turned sour, and was showing a loss of half a million USD. I was being asked what to do.

In a situation like this, a trader does not dilly-dally. I advised my senior parners strongly to cut the loss as it stood, no ifs, and no buts. That’s what we did.

Two other companies in our town were involved in a similar hedge. They chose not to cut their losses at this stage, but to hope, pray and wait for a recovery.

Well, recovery did happen ultimately. This was that swing when the USD first went up to INR 38 and then down all the way to INR 52.50. Before recovery occured, let’s see what else happened.

One company declared insolvency, because it could not repay the 22 milllion USD loss in the hedge, because that’s the amount the loss had ballooned to at a later stage, before recovery even started. The other company, I believe, settled its losses at 25 million USD, and enjoys a cash-strapped existence today.

So that’s what. My training as a small-time trader came in handy, and I was able to help our family run export business in a major way.

This was also a big test for me. It showed me that I had understood loss as a trader, and was able to react to it in a winning manner.

And that’s the prequisite required to understanding winning and reacting to it like a champion. More on that when I’ve mastered this myself!

Baby-Stepping One’s Way Up the Financial Ladder

Everyday, without fail, I get a few opportunities to make this a slightly better world. I’m sure you do too.

And I’m ok with that. No further ambitions. Just doing what comes my way. I’ve always done what I believe in. Have never followed crowds. Have never joint someone’s battle which I don’t fully understand.

Baby-step contributions are drops in the ocean. Nevertheless, they are contributions. I’m proud of the fact that opportunities to contribute come my way regularly. I don’t act upon all of them. Have become very discerning of late. Don’t want to be involved with any frauds whatsoever. And India is brimming with frauds. For me, the world of contributing is about baby-steps. I’m content with that.

I believe that baby-stepping is the way up the financial ladder too, as far as one’s investing or trading activity is concerned.

In the world of trading, there exists the concept of position-size (developed to the nth level by Dr. Van K. Tharp). In a nutshell, this concept teaches one to scale it up one baby-step at a time as one’s account shows a profit. Also, one learns to scale it down a notch upon showing a loss.

Common-sense? Then why isn’t everyone doing it?

Why does everyone around me behave as if he or she is gunning for the big hit? The bringing down of institutions. Of governments. The desire to make it big and in the limelight in one shot. The desire to bring about sweeping change within a week’s time. Ever heard of speed of digestion and incorporation? Metabolism? Assimilation? Speed of evolution?

Life takes time to happen. Let’s give it that time. Let’s not hurry it up with our over-ambition. Do we want life to blow up on our faces because of over-ambition?

Frankly, I want to evolve with equilibrium. Really, really not in one shot. My system will explode if it tries to evolve in one shot. Many people are going to find that out the hard way on their own systems.

And I’m really satisfied with baby-stepping it up the financial ladder, using the concept of position-sizing. Slow and easy, little by little, tangible progress, day by day. No nuclear blasts, no tense situations or mood-swings, lots of time for the family, small quantums of realistic progress and its assimilation… what more can one ask for?

You should try it too.

Nature’s Dilemna with a 100 Hundreds

What after that?

That’s nature’s dilemna with a 100 international hundreds.

What could continue to make “God” strive, once even this milestone is achieved?

With that, natural course of events delay the milestone, just a wee bit more. Disappointing for us and him, but keeps Master Sachin going.

Another person many considered God was Ayrton Senna.

Senna’s car would perform at a level that was many notches beyond the capabilities of the car.

Senna single-handedly changed the face of Formula 1 racing between ’84 and ’93. His “pure and contact” racing style, at times, would crash headlong into the wall of politics. Ayrton would pick himself up and continue to strive.

At his peak, in ’94, Senna moved from Mclaren Honda to Williams Renault. Here was super-man meeting super-car. As to the calibre of Ayrton, there remained no question in the eyes of the world; he was totally from the stables of God. The self-balancing Renault he would drive in had reached electronic perfection under Frank Williams.

It seems at this stage nature was again forced to ask the question: what happens after this? What levels of achievement would there still be left to conquer?

Electronics were scrapped from all teams and the stripped cars were asked to go into the ’94 season without these major break-throughs in Formula 1 technology, so as to give all cars a level playing field. Also, there was this feeling that the game now was about electronics and not the driver, and this ruling would allow the driver’s talent to continue to shine.

Unfortunately, the Williams car, stripped off its electronics, was nothing short of a joke. It would over-compensate on a turn, and then under-compensate on a later turn, thus not allowing the driver to build up any confidence in the car.

Senna struglled. The car’s antics were knocking him out of races. Team Williams was working 24×7 to get their car back on track. Ayrton had always been a hands-on driver. He was working on the car along with the mechanics. They tried hard, so hard, that disaster happened.

Senna’s car failure at Imola leading to his death caused the worlds of millions of people to crash. Ayrton had gone down fighting, at the peak of his career, trying to make a joke of a car race-worthy. His fighting spirit was the spirit of kings, perhaps the spirit of God.

These are two stories of excellence where the barrier between human and super-human becomes redundant. At such times, nature can intervene in whatever way it deems fit.

On a much, much smaller level of achievement, I have felt over-confidence once, in January 2008. This is not to say that the above stories are about over-confidence – they are not. It’s just that in my case, when nature intervened, it was about over-confidence.

In January 2008 I walked with a swagger that was deafening. I felt that I had conquered the markets. Of course the natural course of events showed me my place.

That swagger has never come back and never will.

Now, whenever I feel that I’ve done well, I try and forget about it. Then I look for someone who hasn’t done well, in an effort to try and lift his or her game.

Resting on laurels is not part of any script.

Is it Over for the Long-Term Investor?

Long-term portfolios are getting bludgeoned.

I can feel the pain of the long-term investor.

Is it over for this niche segment?

I really wouldn’t say that.

It’s not over till the fat lady sings, as somebody said.

What if someone trained hard so as to not allow the fat lady from starting her performance in the first place?

Well, for this breed, it’s not over by a long way. In fact, things are just getting started.

And what are the areas of training?

First and foremost, for the millionth time, one needs to understand what margin of safety is. In this era of black swans, one can fine-tune this area with the word “large”. So, simple and straight-forward: the long-term investor needs to buy with a large margin of safety.

This is a game of PATIENCE. Patiently wait for entry. Entry is the most important act while investing. If you cannot learn to be patient, change your line. Be a trader instead.

However scarce the virtues of honesty and integrity have become, keep looking. When you finally find them in a company, ear-mark the company for a buy. For you, managements need to be intelligent and shareholder-friendly too. They need to be evolved enough to take you into account as a shareholder. Keep looking for such managements, and you’ll be amazed at the unfolding potential of diligent human capital.

Before you enter this arena, answer another question please? Have you learnt to sit? If you don’t even know what this question means, you are by no means ready for the game.

So, when is one capable of sitting through some serious knocks, like now? If the money you’ve put on the line is not required for the next 5 to 10 years, you’ve totally helped your cause. Then, your risk-profile should fit the pattern. If a knock causes you an ulcer, just forget about the game and look for another game that doesn’t cause you an ulcer. Your margin of safety will help you take the knock. Knowing that your money has bought a stake with honest and diligent people who can work their way around inflation will help your cause even more.

If you are taking a very serious hit right now, you need to decide something. Are you gonna sit it out? Can you afford to, age-wise and health-wise? Yes? Fine, go ahead. I sat it out in 2008. If I could do it, so can you. It did take a lot. Taught me a lot too. I now know so much more about myself. Was a rough ride, is all I can say. Nevertheless, it’s a good option if age and health support you. If you decide to sit it out, please train yourself, from this point onwards, to do it right. Needless to say, don’t make the same mistakes again. Let’s be very clear about this point. If you are feeling pain at this point, it’s because you have made one or more investing mistakes. Don’t blame the market, or the times. This is your pain, because of your mistakes. Take responsibity for your actions. Do it right from here onwards.

If you can’t take the hit anymore, age-wise or health-wise, then you need to reflect. It’s none of my business to tell you to sell out. That would be inappropriate. All the same, as a friend, I would like you to ask yourself if you feel you are cut out for this niche segment. There are other very successful niche-segments. I know highly successful traders who started out as miserable long-term investors. So, just this one thing, get the questioning process started. Now. Then, listen to your inner voice and decide what you want to do.

There’s this one other point. Some people feel they can focus on both these segments simutaneously. You know, trade in one portfolio and maintain another long-term portfolio. Possible. People are doing it. I’m not about to start a discussion on focus versus diversification just now, because I’m leaving it for another day. Not because I don’t possess the mettle, but because I’m a little tired just now.

Wish you safe investing! 🙂

One Step Closer to the Gold-Standard?

The gold-standard is an extreme scenario.

Imagine the world’s top currencies collapsing. For lack of a better alternative, the world resorts to gold for conducting international trade.

Probably a situation that’s not going to occur.

But then, are we doing anything to stop it from occuring?

Q: Is the US doing anything concrete to reduce its debt?

A: No.

Interpretation: USD will lose its stronghold as global currency at this rate.

Q: Does Europe have any concrete ideas about its financial future?

A: No.

Interpretation: Euro is nowhere near toppling USD from its global currency status.

Q: Is China doing anything concrete to increase transparency?

A: No.

Interpretation: Doesn’t make the Yuan a strong contender for top post.

Q: Is India doing anything concrete to reduce corruption?

A: Er…blah blah blah… No.

Interpretation: I’m not even trying to interpret the eyewash going on here.

Let’s move on to a country called Venezuela.

President Hugo Chavez just called all his gold home…!

Even if this is to taunt the US, it still is HOARDING.

Hoarding is infectious. The start of hoarding can trigger a “Domino-Effect”.

Whatever his ulterior motives were, Big Boy Hugo has taken the world one step closer to the gold standard.

To prevent hoarding from escalation, a counter statement needs to come, like NOW, from the major economic players of the world, something confidence-boosting. Don’t see that happening anytime soon. Seems that hoarding might escalate.

The gold-standard seemed to be a myth a few months ago. Now, at this stage, we seriously need to educate ourselves with regard to the gold-standard and position ourselves accordingly.

Defining one’s Dragons and Kissing them Goodbye

The final impediments between you and successful trading are your dragons.

Define them, and kiss them goodbye.

As a trader, your workplace is the Zone. We’ve spoken about the Zone before. The Zone is not a physical workplace. It is a mind-space where your nervous system tunes into the market, and starts moving with its rhythm, so much so, that when the market turns, you turn with it. It’s like a flock of birds turning in mid-flight. Nobody cares who turned first. Bottom-line is that the flock turned. In the Zone, you become one with the market. If the market turns, it takes you with it. It’s called connection.

Dragons keep your system from getting into the Zone.

There’s the dragon of ill-health. The other day I was running a fever and forgot my wallet, keys etc. etc. in my friend’s car. When have I ever in my life forgotten my wallet, like, anywhere? See? Ill-health makes you commit critical blunders. It’s the real world, people. Ill-health happens. So when this dragon appears, don’t initiate a fresh trade. If you’ve got any open positions, just play them according to the rules you defined when your system was not diseased, i.e. when you were in the Zone and initiated the positions. You have to understand this: the dragon of ill-health knocks you out of the Zone.

Then there’s the powerful and magnetic media-dragon. See, first there’s the market. Then there are people who report about the market, with all their biases and their opinions. As a trader, are you about to listen to the media dragon’s second- or third-hand opinion about the market? Or would you much rather build a first-hand opinion by connecting to the market yourself? Though the answer to this question is rhetorical, the magnetism of the media-dragon is so powerful that even the strongest of traders gets sucked into it. What’s to be done? OK, indulge in media, but tell yourself that this is your time-off, and that you are indulging / amusing yourself. Don’t take any media report at face-value, because there are vested interests. By the time news arrives in print, the market has already factored it in the price long back. Basically, you need to try hard to not let the media dragon bias you against your trading strategy which you formulated while connected in the Zone.

We move on to the dragon of emotions. This one can knock you out of the Zone in the flash of a second, without you even knowing it. That’s why it’s so dangerous. Other dragons take time to knock you out, they build up to it. This one’s effect is instantaneous. Balance, balance, where art thou? As a trader, balance is your biggest friend. Balance keeps this dragon away. If it still manages to surface, balance keeps it under control till it goes away. As a trader, one has to learn to balance oneself; am working on this myself. Perhaps you could teach me a trick or two here.

Lastly, today, I’ll speak about a fourth dragon. It’s called the dragon of indiscipline. It’s connected to the dragon of emotions, but is important enough to get dragon-status. When the dragon of indiscipline strikes, one initiates disproportionately large-sized positions because of greed, or one cuts perfectly profitable positions because of fear. Or, one fails to initiate a normal-sized position because of fear, even after seeing a perfect setup. The learning curve of a trader forces him or her towards defined discipline. Discipline demands from the trader to always open positions that are proportionately sized to the portfolio size. Furthermore, if a position turns profitable, it should only be cut by the market itself, when a trailing stop is hit. Then, no matter what, if a perfect setup is identified, a normal-sized position needs to be initiated. To the trader, that’s the definition of discipline. And, the dragon of indiscipline causes the trader to act otherwise. Want to deal with this one? Here’s a trick. When the dragon of emotions has appeared, ultimately you will realize it. When you do, just repeat the magic words “I am NOT going to allow the dragon of emotions to summon his ally called the dragon of indiscipline!” At this stage, you need to remember: 1). No opening of disproportionately large-sized positions, 2). No manual cutting of perfectly profitable trades and 3). No let-up in the opening of a normal-sized position once a perfect setup has been identified. That’s all I know about this one.

Maybe some other day we’ll take about more dragons! Till then, good luck taming those you have identified!

Jimmy Bean meets Jackie Daniels

Jimmy Bean’s a long-only positional trader. People think he’s silly because of his long-only bias. Jimmy doesn’t care. He does what works for him.

JB’s nervous system requires periods of recuperation, which it gets when the market is flat, choppy or in a down-trend. JB uses this time to relax, read, go on a holiday or even to analyze his previous market mistakes. He’s balanced, and nice to his family. His trading doesn’t have negative effects on his life.

His material reasoning for the long-only bias is that stocks can only go down to zero, but have an unlimited upside. Makes sense, gotta give him that. Besides, he says that when the general market is in a down-trend, he likes to identify those stocks which show good relative strength and these are the stocks he trades when the trend turns. He’s happy with his world, and it’s working for him. Let’s not be too clever by half, and let’s just let him be, all right?

Then there’s Jackie Daniels. She’s a sharp contrast to Jimmy Bean. She’s a short-only trader. She likes quick returns. She’s nimble and takes her stops. She gets one or two good runs a month, during which she makes enough to cover her bad runs, and then some.

Where she does have problems, though, is with staying out of the market. She’s always trying to anticipate the next short run, because in the world of shorting, events occur very quickly. Delay can make one miss the bus. Thus, she’s almost always playing the market, and hardly gets any rest. She’s snappy, and is rude to her family. She doesn’t have much of an other life. Her nervous system is liable to break down one day. Though she’s making money, she’s not happy.

When Jimmy Bean meets Jackie Daniels, he’s fascinated by her. She’s everything that he’s not, and thus there’s attraction. He calms her down. She learns from him to stay out of the markets after reading the appropriate signals. She finally starts getting more rest. Her trading performance is automatically enhanced, because a rested nervous system enables the brain to think clearly and make good trading decisions. She’s not snappy anymore, and is nice to her family.

Meanwhile, Jimmy Bean has got backbone enough to not take on Jackie Daniel’s former negative traits. His is an already successful trading system which sustains health, and he’s not about to rock his own boat.

They live happily ever after.

Did Europe Forget the Exit Clause?

It’s the early to mid ’90s. Reunification is getting set in Germany. Europe is slowly moving towards the Euro. Meanwhile, Yugoslavia disintegrates into smaller states.

My friend Jerome prepares his tuna salad to take to work. This pround Frenchman from Lyon then passes a remark that causes me to reflect. He says something to the tune of “Look at them, falling apart like this, while the rest of Europe comes closer.”

Europe, on the whole, is excited about the upcoming Euro. It adds to their identity on the world stage. The economic implications of the Euro look promising on paper. Europe goes ahead with the Euro soon after the turn of the millenium.

The “All for one, one for all” idea is an ideal. It’s utopic. Unfortunately, we live in the real world. The real human being is a selfish animal. In this real world, ideals have a tough time existing.

In its excitement, Europe probably forgets to add an exit clause. If there is an exit clause, we are not hearing about, and now would be the time to hear about it.

A decision taken while one is excited causes one to overlook the flip-side. This flip-side is emerging now. Certain nationals are more industrious and believe in paying their taxes. Others are lazy, corrupt and believe in cutting corners. Certain Euro nations are more economically astute and clued in. Others are perhaps not so intelligent or don’t want to be, and have made disastrous economic and financial choices.

The lack of an exit clause allows parasite nations (the truth is harsh) to stooge off the diligent ones till infinity, or till time does them apart.

Though it’s very late to say these words, one doesn’t see enough people saying them already. Not treating the financial disease at its root is causing it to spread. Unfortunately, everyone’s affected, at least for now. Whenever decoupling sets in, decoupled nations won’t be affected, but decoupling doesn’t seem to be happening anytime soon.

Would you like it if someone took your hard-earned cheese away? No, right? Well, nor do the Germans, or the French. Why would one expect them to like it, or pretend to keep lilking it?

Thus, why would one expect the Euro to remain intact till infinity?

One More Lollipop

And another lollipop emerges from the stables of Bernanke et al.

Though this particular lollipop is stimulus-flavoured too, it is packaged a bit differently, in a “low interest rate regime till mid 2013” manner. This old-wine-new-bottle packaging is making it taste good to the public. A psychological distortion of reality? Yes.

The last lure, i.e. the actual stimulus lollipop, had stopped having its usual effect of doing away with panic. If you have the same lollipop ten times in a row, it starts tasting stale.

How many lollipops can one possibly have up one’s sleeve? How is one able to fool the public for soooo long? Is the public totally low IQ?

What do ultra-low interest rates mean?

Well, they don’t encourage you to save. You’d rather put your money in more speculative ventures that promise to yield more. Low interest rates thus create liquidity in the market and suitable policies push this liquidity towards speculation and spending. This in turn fuels markets and consumerism. The US financial think-tank seems to think that this formula is going to get them out of the woods.

When markets are fueled well enough with liquidity, investment banks make eye-catching short-term trading profits. Their quarterly balance sheets look good, because the short-term trading profits hide the lack of fundamentals (savings) and the non-performing assets. The public is made to believe that their economy is doing well because their large banks have performed “well”.

Question is: Where are the fundamentals? Long-term growth without the cushion of savings??? No excess fat on one’s body to cushion one from shocks??? You know it, and I know it, and so does the black swan, whose population has reached a record high. This is the age of crises and shocks. If you’re not adequately cushioned, the next shock might get you. And the next quake will occur soon enough, because this era has defined itself as the age of shocks. That doesn’t need to be proven anymore.

Thing is, El Helicoptro Ben Bernanke isn’t bothered about savings presently. His primary concern is to revive a failed / dying economy. He’s willing to try anything to achieve this, however drastic the method might be. And he’s chosen to enhance consumerism. It’s a short-term remedy. Unfortunately, it makes the long-term picture even worse.

The flip side of consumer spending gone overboard dulls the mind into believing that one can spend as if there’s no tomorrow, even if one has to borrow after spending one’s own excess cash. This might fuel an economy over the short-term, but over the long-term, the burgeoning debt will make the system implode.

The US economy is not changing its course owing to fear that if it does, it might face the inevitable right away. It has chosen a path of postponing the inevitable. Over the course of time between now and looming debt-implosion, more and more of the world is getting entangled into this web, since globalization is in and decoupling is out. This is what pilots of the US economy are banking upon, that if the entire world might be devastated by a US debt implosion, the entire world might choose to live with the current financial hierarchy for the longest time rather than reject it right now.

If nothing else, what this one more lollipop does do, is that it buys a little more time to breathe. That’s it, nothing more.

El Helicoptro’s not able to Smell the Coffee

Helicopter Ben Bernanke just doesn’t get it, does he?

People have lost confidence in the Fed and its “stimulus”.

That’s why, when Benny Boy announced more stimulus a day after the “debt deal”, the Dow along with broader markets tanked even further.

The Dow only encompasses 30 stocks. Let’s look at the broader US market. For example, the Russell 2000 fell 9 % yesterday.

Now if that’s not a vote of no-confidence, then what is?

If we observe Bernanke’s dealings of yesterday, he heightened his stimulus announcement from one-week ago to “even more stimulus”. This is a death-trap.

How does El Helicoptro plan to finance his stimulus? By printing notes. Such free printing of notes leads to more and more currency in circulation, which ultimately leads to devaluation of the currency in question.

The devaluation process of anything financially connected to the US has been set in motion. Ben Bernanke is still not smelling the coffee.

Where does that leave you?

Ideally, one should have asked this question back in 2008, but if one didn’t, one will be forced to ask it now.

That’s what Mrs. Market does, it forces you to keep questioning your basics till you get her groove.

For the newbie investor who’s caught in the current fall and is taking his or her share of hits, well, the silver lining is the learning effect. He or she will buy with a margin of safety as an investor in the future, or will learn to respect a stop-loss as a trader. Mrs. Market will either force him or her to learn these basics, or will throw him or her out of her game forever.

What about more experienced players, who saw 2008, or perhaps older crises? If they are still taking a hit just now, well, they too need to get back to the basics. Mrs. Market does not discriminate between who is making the mistake. She’s universal in doling out her punishment to the non-performers, but also universal in doling out her reward to the diligent learners.

So what are these basics?

Mrs. Market 1.0.1 teaches two basic lessons.

Lesson numero 1 is for investors. They need to BUY WITH A MARGIN OF SAFETY. This allows them to sit tight during such a crisis, because they aren’t taking much of a hit.

Lesson numero 2 is for traders. They need to TAKE A STOP-LOSS once it is hit. With that they are out of the market and she can’t hurt them anymore.

That’s it. 2 lessons, people. No way around them. They need to be incorporated into one’s DNA before one can move on to second base with Mrs. Market.

This is what it sounds like, When Kings Whine

Back in the ’80s, musician genius Prince released the multi-generation blockbuster hit “When Doves Cry”. The song was unusual for its time, in that it gave R&B and rapping a pop twist. When something makes an impact, it sticks. The masses latch on.

The sound of whining coming out of Washington at S&P downgrading the US is something new. One’s not heard them whine before. It’s sounding unusual, but it’s provoking anger and dismay worldwide, and these feelings are catching on. S&P’s indication of further future downgrades are making the whining worse.

When Kings whine, their public loses faith in them. This new sound from Washington is dangerous for world markets. One likes to believe that one’s King has backbone. With that, one’s willing to die for one’s King. Which is something one is not willing to do for a spineless King. In that case, one would rather change one’s King.

If some resemblance of “spinefulness” doesn’t emerge from Washington very soon, the move from the Dollar to Gold is going to escalate even more.

The Towering Value of Decisive Action

Decisive action can’t just come outta nowhere.

There has to be a build-up to it, a kinda revving up of engines and stuff.

Point is, this category of action generates a lot of force, and is required to do away with situations that cause panic. As in not let a situation become panic-causing to you. As in the current situation. As in the Dow falling 512 points last night. Will they have a name for it, Black Thursday perhaps? I don’t think so. Because I don’t think we’re done just yet. Situation might get blacker.

Back in December 2007, there were those who were taking decisive action, i.e. they were booking profits. These were people who had been taught by the market to do so. Unfortunately, I didn’t belong to this category at that time. On the contrary, I was busy topping up my portfolio with more investments at the time.

Mayhem in the market should teach you for the next time. If it doesn’t, there’s something wrong with you.

By the fall of 2008, the new market players of the millenium had gone through with their first piece of decisive action – an oath to never be in a situation again that causes them to panic or to spend another sleepless night. The events of the first nine months of 2008 were more that enough to drive them to this.

An important part of peace in the market is hedging. Serious players chose Gold as their hedge, and started building up large positions in Gold. The world around them was screaming “how could they?” Gold was already touching a high back then. They possessed the spine to take this decisive action, because 2008 had taught them to hedge. That’s how they could.

Many worked their way towards zero US exposure. When the cracks in the Euro appeared in 2009-2010, they worked their way towards zero Europe exposure. People around them were screaming that the USD would continue forever as the world currency, and that Europe was under-valued and thus a screaming buy. All to no avail. These decisive players had started to mistrust Alan Greenspan from the moment he started urging his people to take loans against their homes and to put the borrowed money in the market. For me, the icing on the cake or the snapping moment was when Ben Bernanke had the cheek to announce more stimulus one day after the “debt deal”. That’s when I gave up on the US market. Very late, I admit. Yeah, yeah, I’m a real slow learner.

Then, serious new players started to buy on lows. And they got some big-time lows, especially the ones of October 2008 and March 2009. The world around them was screaming “how could they?” and that “we weren’t done yet” and that “economies would get bleaker”. They had the courage to buy. The market had taught them to.

And, finally, they started succumbing lesser and lesser to greed. They would finally book profits. They learnt to sit on cash for long periods of time. They learnt not to listen to tips. They learnt to have their own market outlook and to be self-reliant as far as the chalking of their own path was concerned. They decoupled themselves from their bankers and their market advisors. They got tech-savvy to a point when they could control their entire market operation from their laptops. Basically, they took control.

And, they slept peacefully last night.

The Funny Things about Technicals

There’s something uncanny about technical analysis.

More often than not, just before an apparent market turning point, technical analysis tends to position the trader appropriately.

Now that’s saying a lot.

Why could this be so?

At the base of every big move in the market, there are always “insiders”. These are people “in the know”, i.e. the smart money. These people pre-empt a market move with their smart money, because they possess certain market-moving information that most others don’t have.

Fortunately for us, their market behaviour registers on our charts. Today our data-feed is as good as any institution’s data-feed, and with that the face of this whole game has changed. I would go on to say that today our personal data-feed with all its paraphernalia (including social-networking sites) is so fine-tuned to the individual it is servicing, that it is better for that individual than any institution’s data-feed.

And that’s saying everything. When a big trend starts out, its seeds first register on a Twitter timeline. Simultaneously, its initial behaviour registers on one’s laptop in the form of charts. This enables one to position oneself as per the move. Also, even the potential intensity of an upcoming move can be indicated in the charts, so that one can decide the trade size based upon this if one wishes.

Thus, by the time the public latches on to the information, the technical analyst has already entered the trend.

Same goes for exits. As smart-money exits, technicals push one to enter exit orders that are to be triggered by a falling market. If the market then actually falls, the trading platform pushes one out of the market automatically.

In a choppy market, technicals stop you out a couple of times, and then you need to read the cue and take a break. Go on a holiday or read a book. Yes, technicals are telling you here to lay off the market for a while.

The bottom-line here is that a serious market player cannot afford to ignore technicals.

So give it a shot. Learn technicals. All resources are available on the web, and most of them are free of cost.

US Treasury Bonds, Anyone?

Panic is something I felt during 2008.

It was actually good that I did, because now I know what it feels like.

Meaning that if a similar situation starts to arise again, now there are internal warning signals in my system.

Investors learn from mistakes. That’s the good thing about mistakes.

It will not take a Moody’s rating agency to tell even an average investor that US treasury bonds don’t deserve a AAA rating. Most investors I know have shunned any investment product with US treasury bond exposure since 2008.

Didn’t such ratings agencies give CDOs a AAA rating? Frankly, I don’t even feel like acknowledging the existence of ratings agencies. I’d much rather just use my common sense.

So, one’s learning curve freed one up from dangerous exposure after 2008. Are one’s investments still going to be unaffected from the ongoing and critical developments in the US?

Globalization is in. Decoupling seems to be out for the moment. If the US economy crumbles, investments worldwide are going to be affected for the worse. To lessen such shocks, God created hedges.

The best known hedge to mankind over the last 100 years has been Gold. After 2008, central banks worldwide started scrambling to find an alternative to the USD to hold their wealth in. Only Gold is standing their test. More and more central banks have started converting their USD holding to Gold.

Much as I don’t feel like acknowledging the existence of ratings agencies, unfortunately, I have to. If there’s a ratings downgrade in the US, Gold purchases by central banks are going to escalate. The astute investor will need to position him- or herself accordingly if he or she has not done so yet, starting right now.

As we bathe in the glory of Gold, let’s not forget that it is just a safe haven, a crisis-hedge. If economic stability returns to the world this or next decade (or whenever), Gold is going right back to where it came from.

Something else used to enjoy the safe-haven status till a few years ago. I think one calls them US treasury bonds.

Seasons change. If Gold is the flavour now, it’s possibly a temporary flavour.

Keep your eyes open, and keep using your common sense.

Wishing you safe investing.

Fine-Tuning the Need for Action : A Dialogue

It’s a multi-tasking world around us.

Things move.

We grow up with a need for action. Some with less need, some with more. Nevertheless, this need for action is here to stay.

And with this highly individualistic need for action, we enter the market.

So when does the conflict arise?

When one’s innate need for action is lesser or more than one’s market activity. Then, there’s imbalance, leading to market mistakes.

So how does one strike balance?

By fine-tuning one’s market activity with one’s need for action. These two need to be in sync for balance to exist.

And what kind of market mistakes is one looking at if imbalance exists?

Well, overtrading for one. Then there’s missed exits, early entries, missed stops, chart-related over-interpretation etc. to name a few.

And what was the key again, for striking this balance you are talking about?

Experience. There’s no substitute for experience. You’ve just got to go out there, put your money on the line, and trade. Ultimately, after some years, you strike balance.

And that’s it, is it?

Nope. Once you’ve struck balance, you need to maintain this balance.

That must be easy, right.

On the contrary, maintaining balance is one tough cookie. Here, everthing comes into play. Your family situation, relationship tensions, worldly problems…everything’s waiting to throw you off balance.

Man, sounds tough.

Naehhhh, you take it as it comes. One gets knocked off balance at intervals, and then one has to just find it back. It’s called Life.

And what’s your market activity like when you are off balance?

I’ll tell you a secret, listen up. When I’m off balance, I don’t trade.

Must be tough, going cold turkey, just like that?

Naehhh, it’s defintely better than the mistake-laden trading plays that one makes when off balance.

Oh, right.

Off with you, then, I’ve got work to do.

Ok, thanks and bye.

Bye.