Bifurcation Ability – Do you have it?

No?

Develop it asap, please.

Otherwise, don’t be in more than one market. 

However, who is satisfied with just one market?

That would leave one with a lot of time on one’s hands, wouldn’t it?

Time on hands means looking for another market, and another, and another, till one’s time is fully occupied, and one’s thirst for market activity quenched. 

With multiple markets on one’s radar, one needs to bifurcate. 

As in time and mind compartmentalisation…

…which basically translates as…

…that when you’re working on the one market, you’re not letting any overhang from another market bother you. 

If an overhang is bothering you, take two, or take ten, or take however long it takes to kill the overhang. 

Loss, depression, profit, jubilation, exuberation, whatever cause or emotion is prevailing, let its effect come and let it go. Wait for it to go. Then open the next market. The last thing you want is for the other market to be observed and analysed while there’s emotional bias from a former market. 

Therefore…market done…market closed…next market. There’s no other formula here. 

Most market people are both traders and investors. 

This is the area where they really, really need to bifurcate and compartmentalise. 

Why?

Trading and investing involve diametrically opposite implementation strategies, that is why. 

If you’re making changes within your investment portfolio, but are still in the trading mindset, you are going to make major mistakes, which will most definitely disturb whatever balance you have managed to instill within your investment portfolio. 

Similarly, if you’re looking to open a trade and are still in the investing frame of mind, you are optimally poised to botch up your trade big time. 

This is how I approach the matter. 

I do a first half – second half thing. 

The first half during which the markets are open are for investment decisions. 

Then there’s lunch.

By lunch, I forget how the first half of the day has been spent. At least, I try and forget. 

I let the scrumptious lunch help me drown my memory. 

After lunch, the second half starts, which is dedicated to trading decisions.

Strategies used after lunch are diametrically opposite to the ones used before lunch. 

This works for me. 

There comes a time when there are no more investment decisions to be taken, at least for a while. Markets become expensive, and margin of safety vanishes. One is not thinking of entries. Exits are far, far away, as this is long-term investing. Here is when one can dedicate oneself to one’s trading. One’s got the whole day for it. It’s a great situation, because the need for bifurcation between trading and investing is gone. 

Then there comes a time where no trades are developing. Lovely.

Right, pack up, take a break, let’s go for a short and sweet holiday!

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I Got the Feeling

What feeling?

The feeling of value-creation – that’s the feeling we’re talking about. 

When can one create value?

When there is value…

… and one sees it,…

…upon which one has the courage to act…

…and make that value one’s own.

This normally happens during and after a correction. 

Therefore…

…a correction is not a cause for depression.

Please understand that and please incorporate that into your DNA.

A correction is a time for action.

You go about adding value to your portfolio, again, and again, and again, as long as the correction lasts, and after, till bullishness sets in beyond your comfort level.

How can you keep on doing this?

This can be achieved by keeping your entry quantum small enough each time. We’ve been over that many times, and only recently, we went over it very thoroughly. 

So, the markets are falling, and you are going on and on, adding value. To be able to follow through properly, your system needs to be fully convinced about what you’re doing, and that’s why, I ask you again. 

Do you have the feeling?

Do you have the feeling that you’re creating value and adding it onto your holding?

Keep doing so, till the feeling persists. 

Stop, when the feeling is gone. 

Save, so that you have the resources to go on and on adding value. 

Enter small, so that you can enter many, many more times, perhaps adding even more value the next time. 

Be sensitive towards when the feeling comes and goes. 

Soon enough, during a burst of bullishness, you’ll see how this knowledge translates into a burgeoning portfolio. 

Defining a Long-Term Hold

Homework, people, is the most essential element of long-term investing.

No wonder they stressed so much upon homework in school. 

They knew what they were talking about. 

And, it has counted. I always took my homework very seriously. 

Things are no different in the markets. 

Do your homework well, and diligently, and the pay-off might surprise you. 

In the markets, you are not paid off with marks, but with appreciation in the value of your holding. 

So, what kind of homework goes into defining a long-term hold?

Today, we have stock-screeners, so use a stock-screener to spit out some potential long-term holds after defining the screener’s parameters as per your wishes. Choose a stock from the results of the screening that you might want to delve into. Then, delve into it. 

In scam-ridden India, the first things that one needs to look for are honesty and integrity.

Look very, very hard.

Do repeated fraud / scam / bribe searches. The web is your oyster. 

Look into salaries of top personnel. Low is good. If salaries are on the higher side, is it justified? Specifically, scrutinize the salary of the top promotor and the CEO. If not justifiable, just drop the stock. 

Look for acts of good governance. 

Openness.

Sharing.

Shareholder-friendliness.

Truth.

Responsibility.

Once honesty and integrity are established, go over the fundamentals. 

Overall, fundamentals will either meet your parameters, or they won’t. Also, it is you who is going to define the fundamentals you wish to gauge, and what you wish to see. 

Are you seeing what you wish to see?

No?

Discard.

Yes?

Proceed.

Is the stock going to be around even after ten years?

Gauge. Product, business-model, circumstances…

You think no?

Discard.

You think yes?

Proceed.

Is the business scalable?

No?

Rethink.

Yes?

Proceed.

Is there debt in the equation?

Are you comfortable with the level of debt?

No?

Discard.

Yes?

Proceed.

Get the overall picture. 

Are you comfortable with the overall feeling you are getting?

No?

Discard. 

Yes?

Proceed.

Look for an entry point. Open the chart and try and enter upon a base or some other technical level. If none is available, wait for a level to come, and then make your entry. 

Thus, you have successfully defined and entered your long-term hold. 

 

Benefit from a Small Entry Quantum

You enter the markets with an amount each time. 

That’s your selected quantum. 

The idea that’s being discussed here is as follows. 

Enter the market as many times as you want. 

Just do one thing before that. 

Adjust your quantum level to a point where it doesn’t pinch you, and…

… such that any entry mistakes make themselves felt only minimally, seen from an overall perspective.

In other words, keep your quantum of entry small.

Also, keep it constant, so that overall errors and benefits are able to average out in the long run.

Let’s get some picturization into play, to elucidate the concept. 

Let us assume that you wish to buy stock X for the long term, and you’ve decided upon staggered entry, many times, with quantum Y each time. 

You enter with one quantum Y on day A in the morning. By late afternoon, you are disappointed to see that the price has moved 5% against you. Happens. You start wishing that you had waited till late afternoon for entry. This can be classified as a random entry error through no fault of yours. Such random “errors” keep happening all the time in the markets. Get used to them.

Because your quantum Y was small, your “error” was also small. That’s the point being made here. 

You are going to enter with quantum Y many times. Sometimes, immediately after entry, price might move in your favour. There might be lesser slippage. You might get a gap-down entry. You might enter after a big correction. Overall, whatever goes in your favour gets written off against all “errors”, such that in the long run, over many entries, the effect of errors is nullified. 

Well you got me there. Nullified, I say. Then you ask what the entry error minimalization talk was all about, when it would get nullified in the first place. 

Which is when I ask that what was it that would lead to nullification?

Many, many entries, right?

What has preserved your capital enough to last for those many, many entries?

A small entry quantum.

Also, psychologically, you know that your small quantum translates into a small potential entry error for you. So, your psyche is all geared up and raring to go. It is not afraid of entry, or of the error you might make upon wrong entry. 

To sum up, at first, a small quantum works in your favour because it causes lesser potential entry error, seen as an amount. 

Then, because your entry quantum is small, your capital lasts for many, many entries, which is when one can start speaking of entry error nullification because of evening out. 

Whichever way you look from, it is the small entry quantum that works for you.