I know a guy who knows another guy who knows this guy…

Well, congratulations.

So you’re well connected.

You probably play golf with the CEO of Big Balls Incorporated.

We’re not even going into how you wangled the slot.

You probably feel, that because of your connectedness, you can get away with anything in life.

Well, almost anything.

That’s the bottom-line.

You can get away with almost anything in life.

Here are two areas where your connectivity counts jack. As in El Zero. Nadda.

One is before the Almighty (presuming that God exists). Buying a slot with God using connections isn’t gonna cut it with the big guy. You can’t buy personal time with deities using money and / or connections, even if you think you can. Also, that “bought” time, when you shoved everyone else out of line, well, that time’s not going to make your life any better, or richer. You’ve just established yourself as someone who shoves others out of line using connections….that’s how your deity is going to view your performance. So, what you’re going to understand from this space is that before deities – the Almighty – God – the Metaphysical – or whatever you might want to call what I’m talking about, connections don’t work. You only end up scoring negative in your deity’s books.

Which brings us to the more relevant matter – where else do connections not work?

In the marketplace of course, my friend.

Don’t believe me? Fine, find it out for yourself, the hard way. Or, read on.

You see, in the marketplace, insiders have an agenda. All insiders. They have an agenda.

That agenda is personal. It includes them. It doesn’t include you … … if you’re not connected to the insider. Once you are, and you use that connection to fish for “lucrative” inside information, that’s where the insider’s agenda starts to include you. The information you get is as per the agenda of the insider. If a promoter wishes to off-load huge quantities of stock, you will be told that the stock’s a good buy, because blah-blah-blah-blah-blah. On the other hand, if the promoter wishes to buy back large quantities of stock, because of attractive valuations, you’ll be told to sell the stock owing to tricky prospects in the future. You are not getting quality information when you fish for tips. You’ll only find yourself getting trapped if you follow insider tips.

There are good insiders too … is that what you are saying? Ok, fine, some insiders are good human beings. They are not vicious, and they wish you well. They might even want to do you a favour, wishing that you make some money from the information they are letting out. All true. Question is, does it really work?

No.

Why?

You see, an insider never functions alone. When a company experiences a turnaround or a great quarter comes along with excellent earnings, white-collared people connected to the functioning of the company obviously know this, and they leak this information out (for a price) to smart researchers and investors. These smarties (along with their entire intimate circle of connectivity) buy into the company’s prospects. The money moved is called smart money. Smart money registers / reflects on the traders’ charts. The scrip might show a bounce-back from a low with huge volume, or a resistance might be broken, or a new high could even be made (all coupled with large volume). Traders latch on. Price movers higher. All this is happening before the CEO has announced quarterly results, mind you. Finally, a few days before the results, the corresponding results-file lands on the CEO’s desk. He or she congratulates his or her staff on the spectacular performance, and over a round of golf, the information is shared with you. The CEO is obviously thinking that the market is going to react positively to the earnings surprise that’s going to be announced.

Well, the earnings are not going to be a surprise. The market already knows, and earnings have thus already been factored into the price, before results are announced. Announcement time is generally selling time for traders, who tend to sell all stock upon the first spike after announcement. With no more buying pressure (since traders are out of the scrip), the inflated scrip tanks despite the good news, leaving you stuck with a peak-price buy. Well done, well done indeed.

See, that’s why. Don’t listen to insiders, even if they mean well.

In the marketplace, you really are on your own. Isn’t that exciting? As in challenging?

All the best, my friend. Learn to rely on your own judgement.

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Getting Too Comfy For Our Boots, Are We?

What a party we are having in the debt-market, aren’t we?

Exceptional payouts, day after day, week after week, month after month, it’s almost going to be year after year.

Are you getting too comfortable? Lazy, perhaps?

Meaning to say, that when you can get a 10 % return after tax without having to move your behind for it, it is a very welcome scenario, right?

People, scenarios change.

It isn’t always going to be like it is at the moment.

Are you flexible enough to change with the scenario?

Or will you be lost in the current moment, so lost, that you will not recognize the signs of change?

What would be these signs? (Man, this is like spoon-feeding….grrrrrr&#*!).

Inflation begins to fall.

The country’s central bank announces back to back interest rate cuts.

Too lazy to read the paper? Or watch the news? Ok, if nothing else, your online liquid mutual fund statement should tip you off.

How?

The payout, dammit, it will have decreased.

Also, something else starts performing.

What?

Equity.

Smart investors don’t like the debt payout anymore. They start moving their smart money into value equity picks.

Slowly, media stops reporting about a gloomy economy. The buzz gets around. Reforms are on the way.

Foreign direct investment picks up. The media latches on to it. It starts speaking about inflows as if the world begins and ends with inflows.

Now, the cauldron is hot and is getting hotter.

Debt payouts are getting lesser and lesser. Equity is already trending upwards, and has entered the meat of the move.

If the trend contnues, a medium to long-term bull market can result.

There you have it, the chronology played out till just before the start of a bull market of sorts.

Be alert. Recognize the signs early. Be mentally in a position to move out of the debt market, if the prevailing scenario changes.

Otherwise…

… you miss a first run in equity. Boo-hoo. When stocks cool at a peak, and start falling, you make multiple wrong entries into them.

You get hammered by equity, having caught it on the down-swing.

You missed the correct entry time-point in equity because the debt-market made you too comfortable. You were late to act. When you acted, finally, you caught a correction, and took a hammering.

One or two more hammerings like that, and you’ll be off equity for the rest of your life.

And that, my dear friend, would be a pity.

Why?

Because, in mankind’s history, it is stocks that have given the best long-term returns. Not gold, not debt, not bonds, but stocks.

You need to approach them properly, and timing is key.

Power of Compounding II – The Curious Case of Switzerland

What comes to mind when one thinks of Switzerland?

– Blood Money – world’s haven for,

– “Neutralness” – has never fought a war in modern times,

– Beauty – it is God’s own country, with its mountains, meadows, valleys, lakes, trails…,

– Discipline – blessed with the works, punctuality, law and order, you name it,

– Technological supremacy – for example their watch-technology, or their advances in heavy mechanical engineering,

– Culinary supremacy – as in their chocolates, or for that matter their herbal know-how, superior quality of their milk, and of course, their cheese,

– Love for their country – the Swiss really look after their country, are loyal to it, and would probably die for it willingly.

Only the first factor has a negative sound.

Well, they do provide a safe-haven. I mean, look at all the other factors. People feel that their money’s safe in a swiss bank. You can’t blame a country for being a safe country.

Most of the world is not safe today. So, most of the world’s money flows to locations that are considered safe. A good percentage of the world’s money is blood money, but that’s how it is. When foreign funds flow into a country, a country doesn’t ask questions. Do we in India ask questions? No. For all we know, it is Mafia money flowing into our country, inflating our markets. Nobody cares as long as it is coming in.

When foreign funds flow into a country excessively, as is the case with Switzerland, such a country can dictate the interest-rate it pays out for such funds. For many, many decades, Swiss banks have been in demand because of the safe-haven quality of their country, and the interest-rate doled out is a pittance, something like 0.5 % or perhaps 1% per annum, something in that range. I could be making a mistake of an odd 1 % here or there, but, you see, people don’t store their money in Switzerland so that it accumulates to an even bigger amount. They store it there so that the principal stays safe. Switzerland doesn’t participate in wars. Thus, wealth is not destroyed. In fact, during wars elsewhere, fund-flow towards safe-havens heightens.

And that’s the game. Almost unlimited inflow, pittance of a payout, loan the money further on 6%, 7%, 8%, huge differential, year upon year, decade upon decade, humungous compounding, enough to spark-off, inculcate and fully support massive all-round development – couple this with all the other factors given above about Switzerland, and you have a hugely positive n-th loop. A hugely positive n-th loop is the exact opposite of a hugely negative vicious cycle. Switzerland sets the framework for the all-round blossoming of life, and the inflow provides lubrication and fuels development. After a while, they don’t depend upon the inflow anymore. In fact, the Swiss were probably self-sufficent even before the inflow began. That’s how they were able to provide a stable system. The inflow is just a bonus. Due to the power of its compounding, all the other diamond qualities of CH sparkle even more brightly.

Living in India, with its legacy of corrupt leaders who have siphoned off most of our wealth towards safe-havens, how should one react?

It is not the fault of the safe-haven. We need to evolve and make our own citizens feel comfortable with keeping their funds here. Our system needs to provide that safety.

Only then will the funds stay here. If our funds are not staying in our own country, it is our own fault.

The Ugly Side of Leverage

Not too long a time ago, in an existence nearby, people saved.

Credit was a four letter word, or a six letter word, or whatever you want to all it, as long as you get my point.

People worked hard, and enjoyed the sweet taste of their labour.

They knew their networth on their fingertips, and there was no question of extending oneself beyond.

People were happy. They had time for their families. Words like sophistication, complicated and what have you had simpler meanings.

At the end of the month, as large a chunk as possible was pickled away.

For what?

Safety. Steady growth. For building a lifetime’s corpus. For the future generation.

Life was straight-forward.

Then came leverage.

At first, leverage was an idea that was looked down upon. People were slow to leave their safety zones.

Then they saw what leverage could do.

It could make possible a lifetime of fun. One could do things which were well out of one’s financial reach currently. Leverage could even buy out billion dollar companies.

All one had to do was to pledge one’s incoming for many, many years. If that didn’t suffice to fulfill one’s fun-desires, one could even pledge the house. The money borrowed would eventually be paid up, along with the compound interest, right? After all, one had a steady job that promised regular income.

What use was a lifetime of sweat if one didn’t get to enjoy oneself? One couldn’t really live it up after retirement, could one? That’s when one would eventually possess enough free funds to do what one was doing now, with the advent of leverage.

The do-now-pay-later philosophy soon took over the world.

Without being able to afford even a meaningful fraction of their expenditure, people began to go beserk.

What people didn’t know, and what they are now finding out the hard way, is that leverage is a double-edged sword. Since people didn’t know this, and since they didn’t bother to read the fine-print of the documents they were signing while leveraging their monthly salary or their home, well, financiers didn’t bother to educate them any further. No hard feelings, it was just business strategy, nothing personal.

Today, we know more. Much much more. Hopefully we have learnt. We are not going to make the same mistakes again.

So, when you buy into a company, look at the leverage on the balance-sheet. A debt : equity ratio of 1 : 1 is healthy. It promises balanced growth. If the ratio is lower, even better. We’ll talk about debt : equity ratios that are below 0.5 some other day.

Most companies do not have a healthy debt : equity ratio. Promoters like to borrow, and borrow big. You as an investor then need to judge. What exactly is the promotor using these funds for? Is he or she using these funds to finance a hi-fi lifestyle, with flashy cars, villas and company jets? Or is the promoter using these funds for the growth of the company, i.e. for the benefit of the shareholders? Use your common-sense. Look into a company’s management before buying into any company.

As regards your own self, reason it out, people. Save. As long as you can avoid taking that loan, do so. Loaned money comes with lots of hidden fees. If I’m not mistaken, now you’ll even need to pay service tax and education cess on a loan, but please correct me if I’m wrong. There’s definitely a loan-activation fee. Then there’s the huge interest, that compounds very fast. Ask someone who has borrowed on his or her credit card. There’s the collateral you’re promising against the loan. That’s your life you’re putting on the line. All for a bit of leveraged fun? How will your children remember you?

Also, when you invest with no leverage on your own balance-sheet, your mind is relaxed. There is no tension, and your investment decisions are solid. Furthermore, if you’re invested without having borrowed, there’s no question of having an investment terminated prematurely because of a loan-repayment date maturing coupled with one’s inability to pay.

How does the following sentence sound?

” Then came leverage, and common-sense disappeared.”

Not good, right?

The Road to Greatness

” time goes by

so naturally

while you receive

infinity “

– (Guru Josh Project).

Are you systematic? Punctual? Disciplined? Persevering? Large-hearted? Do you think out of the box?

All of the above?

Relax. You are already on the road to greatness.

So what if the world hasn’t recognized you…yet?

Why do you want the world to recognize you?

Why does the world’s opinion of you matter to you?

Why do you need a stamp of approval to feel you’re on the right path?

Frankly, if you’re treading a new path, where no person has gone before, well, then, nobody’s qualified enough to give you that stamp of approval.

Right, the road to greatness is paved with identity crises.

Greatness is achieved, if you do something differently, and do it well. With the passage of time coupled with your perseverance, you discover and outline a new dimension in your field. You’ve struggled along the path, because it’s a new path, with no roadmaps. People have made fun of you and have ridiculed you, because you are different, and refuse to conform to a norm set by “average” society. Exactly that’s the struggle.

Averageness is comfortable. For greatness, one needs to pull the extra distance.

Alone.

Because one is not average, one needs to discover who one is. This happens along the path.

The path to greatness is not comfortable.

Nevertheless, it is enjoyable.

Yes, after a while, struggle starts to get enjoyable, once you become used to it. You start enjoying being pushed to your limits. The biochemistry of your body’s peak-performance state can actually give you a huge kick, as in a “high”. Try and stay there, as long as you can. This “high” is only happening to you. Stay there, as “(the) time goes by, so naturally, while you receive … … infinity.(Guru Josh Project).

“Don’t Turn Around – Der Kommissar’s in Town”

There’s activity within our slow-poke government.

Yup, we just got a new finance minister. PC’s back. Or, as the newspaper said, PC reboots.

He’s probably reinforcing backdated taxation.

He’s hinted at interest-rate cuts.

He’s after more service-tax candidates.

He’s transferred lots of portfolios.

He’s trying to dish out motivational quotes, so that the economy revives.

“Alles klar, Herr Kommissar?”

The last time PC was in town, there was volatlity in the markets. First they went up and up and up, and then they went down and down and down. Mr. Chidambaram is a by-word for volatility.

How does he do it?

Frankly, I don’t care.

If I’m getting volatility, I’m taking it.

Not that India as a market lacks any volatility without PC.

We Indians are emotionally volatile people. When we are happy, we are sooooooo happy. When we are down and out, man, we are totally gone. No surprise that our markets reflect our topsy-turvy and dramatic emotional nature. Yes, the trader in India is blessed with a volatile trading scenario by default.

So, PC or no PC, volatile trades make themselves available to us in the Indian markets regularly. What PC does is, he gives the system’s volatility a turbo-boost. Our market’s “beta” goes up wth PC, and it goes up fast, quite fast.

Man, how does he do it?

You know, I still don’t care, but if I did, I think this would be the correct answer.

Der Kommissar seems to do it in two steps. First he creates carrots, lots of carrots. These are dangled before India Inc. Things start hotting up. Foreign investment wakes up – demand – buying pressure – our markets go up. Then, when the balloon is inflated, der Kommissar will appear on television and will let out comments (implementation of stick, like the backdated taxation thing) which the market takes exception to. Or, he might give some interview in the media which India Inc. interprets negatively. Well, down we come crashing. Frankly, I still couldn’t care less. Upwards or down, there’s a trade to be found.

Just a few days in his seat, and pivot points are leading to bounce-backs, supports are holding, resistances cracking (it’s the carrots), and technicals are very, very initially changing from “range-bound” to “trending”.

Fine, let’s just trade the Kommissar while he’s in town.

I’ve quoted Falco above and I’m quoting him again : “Alles klar, Herr Kommissar!”

Finding the “Switch-Off” Button

Gadgets have a switch-off button, right?

Whatever for, have you ever wondered?

Do we have one too?

If we do, is it clearly marked, i.e. is it easy to find?

If we do, and if it isn’t clearly market, where and how can we find it?

Why is it essential to find it?

What if we don’t have a switch-off button?

First, let’s observe the Master. Sherlock Holmes. Master at the art of switching off.

Observe Holmes when the next obvious lead will take a day to obtain. Since the case is going nowhere, Holmes will take the day off. He will play his violin, trip on some coke to study its effects on mind and body (he’s Holmes), go to the art gallery, or what have you. The case at hand has gone into oblivion. Attenuated. What happens when it is time to pursue the case again? Holmes switches on. He is fresh. Alert. The switching-off really helped.

Remember the “attenuate” button on your car’s stereo?

Why do you think it is there?

So you can take that call without getting disturbed by the music. The music is still there, but upon pressing this button, it becomes really soft. So soft, that you don’t get affected by it. You conduct your business on the phone, and then press this button again, and the music comes back on in its full glory.

Same goes for the markets.

Once you are in a trade, market-forces are connected to you.

If you cannot attenuate them during off-market hours, you can ruin your evenings, nights, weekends, health and family life

Big, big price to pay.

Not worth it, so get busy and learn to attenuate the market’s connecting force once you switch your terminal off. Rest assured, it will come blaring back at you when you switch your terminal back on, but that time between terminal off and terminal on is oh so precious. That time belongs to you, and not to Mrs. Market. Don’t allow her that extra privilege. Use that time for things that you wish to do in life. Use it for your family. Mrs. M will be getting your undivided attention during the next market session anyways. Let her be content with that. Keep her in her place.

Just as any gadget needs rest, so do you.

Sometimes, the markets go nowhere, and / or are choppy. It doesn’t pay to trade. Switch off from the markets. Take a holiday. Do something else, till conditions become better for trading.

Yes, we do have a switch-off button. It is not clearly marked. It is located in the mind. One activates it indirectly. By switching on to some other relaxing activity that has the ability to grab the mind’s interest.

Switching off is a skill, and this skill needs to be developed. We don’t necessarily come with it. Most of us need to learn it. Otherwise, we’ll become tired, erratic, irritable etc. etc., scale up to commit big blunders, and then we will eventually burn out. That’s if the Street doesn’t throw us out as paupers before a looming burn-out. Also, our family lives will have gone for a toss. Our children will remember us as dreadful parents. Yes people, we need to find the switch-off button asap, and then we need to learn to activate this button at will. Essential.

And please don’t worry about not having such a button. After all, it was the human being who put such a button into all gadgets. Well, the idea must have come from somewhere. From inside our own mind, perhaps, where our own button exists?