Making Time Our Friend

Hurry…

…spoils the curry.

Specifically with regard to Equity…

…one should never, never be in a hurry. 

You see…

…there will always be a correction.

You will get an entry. 

Wait for the right entry. 

You will, eventually, get a prime exit. 

Wait for the time. 

Make time your friend. 

How?

Simple.

Take it out of the equation.

Simple?

In the small entry quantum strategy, time is, by default, taken out of the equation. 

It loses its urgency as a defining factor, for us, psychologically.

We don’t have any immediate timelines. 

We go with…

…the flow. 

When opportunities appear…

…we act.

When they don’t…

…we don’t act.

Most of the time…

…we don’t act.

Then there are black swans, and we act many times in a row. Like now.

Action, or lack of it, depends on what’s happening. 

We don’t force action.

Why?

Because we have all the time in the world. We’ve made it our friend, remember.

We know that we’ll get action…

…eventually. 

We conserve liquidity and energy for when action comes.

You see, when the pressure of a time-line is gone, quality of judgement shoots up.

We make superior calls. 

Of course we make numerous mistakes too. 

However, the quantum going into the mistake is small. This is the small entry quantum strategy, remember. 

Once we’ve made a selection mistake in an underlying, and have realised this, we don’t shoot another quantum chasing our error. Instead we let it be, and wait for a prime exit from our error. It will come. 

We keep going into identified underlyings not falling into the error category, with small quanta. 

Many, many times, we make a price-error. Price going against us after entry is a price-error, because the market is always right. It’s us who are wrong when things go against us. 

Never mind. After a price-error, we enter the same underlying with another quantum, and this time we get a better price. Once gain one observes the friendliness of time, even after price has gone against us, all because of our small entry quantum strategy.

When price is going in our favour, we might not enter after a level. Though we’re not getting further entries in the underlying, appreciation is working in our favour. 

It’s a win-win on both sides of the timeline for us…

…because we’ve made time our friend.

Bonding

As Equity players…

…we enter the bond segment to…

conserve capital.

There is no other reason.

Return?

We do make a slightly better return than a fixed deposit.

We’re not in bonds to make a killing.

That is outlined for the Equity segment.

We’re Equity players, remember. 

I was just going through the top ten holdings of each of FT India’s now “discontinued” (new word for mini-insolvency?) debt funds. (I’m uncertain just now what word they’ve used, was it “stopped”? Or “halted”?) [Just looked up the internet, the words used are “winding up”].

My goodness! 

The fund managers in question wanted to outperform all other funds at the cost of asset-quality. 

Many of these top ten holdings (for six funds, one is looking at six top ten holdings) one would not even have heard of. 

A top ten holding constitutes the backbone of the mutual fund being studied. 

If the backbone is wobbly, the whole structure trembles upon wind exposure. 

This corona black swan is not a wind. It’s a long-drawn out cyclone, to fit the analogy. 

This particular structure has crumbled. 

Fund managers concerned have acted out of greed – that’s the only explanation for above top ten holdings. 

No other explanation comes to my mind. 

That they are also holding large chunks of Yes Bank and Vodafone is more an error in judgement, albeit a grave one. 

People commit errors in judgement.

Could one still overlook the a large chunk’s (10%?) segregation in FT India’s Debt folios, where Yes and Voda bonds have been marked down to zero?

Such a hit is huge in the debt segment.

Why are we in debt?

To conserve capital. 

10% hit in debt?

NO.

Wobbly top ten holdings?

NNOO!

Had no idea that the FT India debt portfolio had so many red-flags. 

Till they dropped the bombshell that they were discontinuing their six debt-funds, from last evening, one had no idea. 

Now that it’s dropped, one digs deep to understand their mistakes.

Why?

One doesn’t want to make the same mistakes. 

One doesn’t want to be invested in any funds in the debt segment which are making the same mistakes.

However, another look at their holdings reassures one that one won’t be making such mistakes, of greed, and of comprehensive failure to read managements and road conditions – in a hurry.

Nevertheless, one wishes to be aware.

Now that one is, all measures will be enhanced to prevent even an inkling of such an outcome for oneself. 

Wait up. 

Such measures were already in place. 

Greed? In bonds? 

We’re in bonds to conserve capital. 

No greed there. 

Top ten holdings?

Rock-solid. 

That’s the fundamental tenet one looks for while entering any mutual fund, whether in the debt or in the equity segment. 

We’re good. 

Rewiring 3.0.3

We grow up, being taught to win.

Slowly, we learn to expect shocks, but only sometimes, in sparing intervals.

We prepare fancy resumés. 

Life must look five star plus all the time, that’s the standard. 

We see this standard all around us. It encompasses us. We become it, in our minds.

It’s not like that in the markets.

Markets are a world, where loss is our second nature. 

If we’re not accustomed to loss, we die a thousand deaths, in the markets. 

What kind of loss are we taking about?

Small…

…loss. 

Your stock holding going down to 0…

…is a small loss…

…when compared to another holding multiplying 1000x over 10 years. 

Both these scenarios are very possible in the markets. They’ve happened. They will happen again. 

How do we react?

Our stock going down to zero mortifies us. We do something drastic. Some of us quit. 

When our potential 1000x candidate is at a healthy 10x, yeah, we cut it. 

Then we quickly post the win on our resumé. 

We must look great to the world, at any cost. 

We keep reacting like this…

…and, like this, we’ll perish in the markets with very high probability.

We can’t take a hit, and are nipping our saving graces in the bud. 

When does this stop happening?

When we rewire.

Rewiring is a mental process that happens slowly, upon repeated market exposure. 

For successful rewiring to take place, real money needs to be on the line, again and again and again, as we iron out our mistakes and let market forces teach us the tricks of the trade. 

While we’re rewiring, we need to play small. 

When we’re partly rewired, we wake up to the fact that this is the age of shocks. 

High-tower professors who’ve never had a penny on the line and have put together theorems about six-sigma events (black swans) setting on once in blue-moons have led us to believe that black swans are rare. 

They are not. They have become the norm. Our first-hand experience of multiple black-swans in a row teaches us that.

Once we rewire fully, the expectation of black-swans as the norm is engraved in our DNA. Then, we use this fact to our huge advantage.

How?

We realize the value of our ammunition, i.e. our liquidity. 

Whenever we have the chance, we build up liquidity. 

We become savers, and are not taken in by the false shine of the glittery world around us.

Also, when markets are inflated, we sell stuff we don’t want anymore, boosting our ammunition for the next onset of crisis…

…and, we stop preparing fancy resumés.

Markets have humbled us so many times, that we now just don’t have the energy to portray false images. 

Whatever energy we have left, we wish to use for successful market play, i.e. to make actual money. 

When that happens, yeah, we know for sure that we’ve fully rewired. 

Welcome to rewiring three nought three. 

Are you Saying These are Small Losses, Mr. Nath?

No. 

Everything is taking a hit. 

Sure. 

Hit’s actually in the “Wealth” segment…

…and not as such in the “Income” segment.

Would you like to elaborate on this one, sounds pivotal?

Yes it is exactly that, pivotal. Because of this one fact, I’m talking to you with a straight face.

I see.

Auto-pilot income-creating avenues are still doing what they’re supposed to do, i.e. creating income. Nothing has changed there, yet.

You mean something could change there?

Sure, if companies start going bust, their bonds won’t create income. Instead, principal will take a hit. It’s not come to that yet, at least in India. You have an odd company going bust here and there now and then, but nothing major as of now. Income is intact, for now. If were done with CoVID in two months, this factor might not change. Let’s focus on this scenario. 

Right. 

Secondly, we’re highly liquid. We try and become as liquid as possible during good times, ideally aiming to be 80% in cash before a crisis appears. 

How do you know a crisis is going to appear?

This is the age of crises. A six sigma event has now become the norm. After Corona it will be something else. This has been going on from the time the stock market started. It’s nothing new. Come good times, we start liquidating all the stuff we don’t want. 

Don’t want?

Ya, one changes one’s mind about an underlying down the line. At this point, one shifts this underlying mentally into the “Don’t Want” category. Come good times, one makes the market exit oneself from this entity on a high.

Makes the market exit oneself?

Yes, through trigger-entry of sell order.

Why not just exit on limit?

Then you’ll just sell on the high of that particular day at best. However, through trigger-exit, your sell order will be triggered after a high has been made and the price starts to fall. It won’t be triggered if the underlying closes on a high. That way, if you’re closing on a high, you might get a good run the next day, and then you try the same strategy again, and again. In market frenzies, you might get a five to seven day run, bettering your exit by 15-20%, for example. Who wouldn’t like that?

You talk of market frenzies at a time like this, my dear Sir…

The market is like a rubber band. What were witnessing currently is the opposite pole of a market frenzy. Humans beings are bipolar. If they’re reacting like this, they sure as hell will react like the opposite pole when conditions reverse. Especially in India. We’re brimming with emotions. 

Which brings us back to the initial question…

Yes, these notional losses look huge. But, who’s translating them into actual losses? Not us. We’re busy enhancing our portfolios as multiples get more and more lucrative for purchase. That’s entirely where our focus is. We are numb to pain from the hit because our focus is so shifted. 

And there’s no worry?

With such high levels of liquidity, shift of focus, income tap on, dividend tap on – yeah, please don’t ignore the extra big incoming dividends, underlyings taking a hit currently are paying out stellar dividends, and these big amounts are entering our accounts, because we’ve bought such quality – – – we’re ok.

Stellar would be?

Many underlying have shared double digit dividend yields with their shareholders! That’s huge!

So no worries?

No! We’ll just keep doing what we’ve been doing, i.e. buying quality. We’ll keep getting extraordinary entries as the fall deepens. 

What if that takes a long-long time?

Well, the year is 2020. We’re all on speed-dial. 18 months in 2020 is like 15 years in 1929. Because we follow the small entry quantum strategy, our liquidity should hold out over such period, providing us entries through and through. 

And what if it’s a four digit bottom on the main benchmark, still no worries?

NO! Look at the STELLAR entry over there. A bluechip bought at that level of the benchmark can be held for life without worries. So yes, NO WORRIES.

Thanks Mr. Nath.

One more thing.

Yes, what’s that?

What’s my maximum downside in an underlying?

100%.

Correct. Now what’s my maximum upside in an underlying?

Ummm, don’t know exactly.

Unlimited. 

Unlimited?

Yes, unlimited. Entries at lucrative levels eventually translate into unreal multiples. Looking at things from this perspective, now, the size of these notional losses pales in comparison to potential return multiples. It’s a combination of psychology, fundamentals, mathematics and what have you. In comparison, these are still small losses. If we can’t take these swings in our side, we shouldn’t be in the markets in the first place, focusing our energies on avenues we’re good at instead.

Right, got it. 

Cheers, here’s wishing you safe and lucrative investing. 

🙂

When Push Comes to Shove 

Genetically… 

… we’re savers. 

Indians. 

Save. 

That’s a good thing. 

Since the ’00s though, our banks have started pushing loans as if there’s no tomorrow.

The motto seems to be : we don’t care who you are, just borrow. If we know who you are, here, borrow some more

That is dangerous policy. 

It sets the stage for a push comes to shove scenario. Savings are being lent further, and they might not come back. 

What counts when push comes to shove? 

Deposits in the bank? No. Gone. 

Real Estate? No. No buyers. No renters. Illiquid stuff just won’t move. 

Equities? No. Dumps. Good entry levels though. No resale value for a while. 

Bonds? Perhaps. Short duration ones, provided underlying doesn’t go under. 

Gold? Yes. Big. 

Trading? Yes. Options, forex, commodities, what have you. 

Cash? Yes. Provided there’s no hyperinflation. Use it for day to day life. Use surplus to acquire great bargains. 

Farmland? Yes. You’re then sorted as far as food and water are concerned. 

Use your imagination. 

Prepare for a push and shove scenario. 

It probably won’t happen. 

However, you’re prepared, just in case. 

The Collapse of Mt Gox and its Meaning for You

February 2014.

Mt Gox collapses.

It’s not a mountain.

Mountains don’t collapse.

The largest Bitcoin exchange in the world – gone.

What happened?

Hazy area.

If one reads through the company’s press releases, it seems they themselves are not sure. Or, they’re trying to cover up that they got hacked, big-time.

Company’s claiming a black-swan event. Software goes into a crazy loop. Transaction shows as failed. However, system releases Bitcoin. Do this over and over again. You’re down 750k Bitcoin. Half a billion dollars. Hmmmmmmmmmm. Not buying it.

It’s probably not an inside job. Trail would’ve been too hot.

They’ve actually and probably gotten hacked. Possibly in the earlier days. Perhaps they tried to cover it up for the longest time, till it was no longer possible. There came a time then, it would seem, to throw in the towel and declare bankruptcy, coupled with the release of an unbelievable explanation.

Do the math. Conjecture.

We are down to conjecture, after an abominable event like this, where retail investors along with handlers, dealers and the works get fried.

For heaven’s sake.

Makes you rethink Bitcoin majorly.

Diversification is a safe thing. However, not at the cost of converting your computer into a big red flag.

There are two kinds of computers in the world. Those with Bitcoin or its cousins, and those without.

Currently, those with are targets.

There’s no better system of storing Bitcoin.

Banks aren’t taking it up systematically.

Dollar lobby is too strong.

It’s not letting Bitcoin settle.

Who was behind the possible hack?

You tell me.

Why would anyone sacrifice one’s sleep?

No tension, please.

We don’t wish to lose sleep over the fact that our computer might get hacked in the night. Also, will the cousin’s ever sort themselves out?

If criminals could hack Mt Gox, what are the chances of one’s desktop surviving?

Yeah, where does that leave you?

Till Bitcoin gets accepted more systematically, and till mainstream banks start storing it for you in their cyber-lockers, I’m afraid this leaves you off the Bitcoin demand-list.

Yeah, safety first.

What is an Antifragile approach to Equity?

Taleb’s term “antifragile” is here to stay.

If my understanding is correct, an asset class that shows more upside than downside upon the onset of shock in this age of shocks – is termed as antifragile.

So what’s going to happen to us Equity people?

Is Equity a fragile asset class?

Let’s turn above question upon its head.

What about our approach?

Yes, our approach can make Equity antifragile for us.

We don’t need to pack our bags and switch to another asset class.

We just approach Equity in an antifragile fashion. Period.

Well, aren’t we already? Margin of safety and all that.

Sure. We’ll just refine what we’ve already got, add a bit of stuff, and come out with the antifragile strategy.

So, quality.

Management.

Applicability to the times.

Scalability.

Value.

Fundamentals.

Blah blah blah.

You’ve done all your research.

You’ve found a plum stock.

You’re getting margin of safety.

Lovely.

What’s missing?

Entry.

Right.

You don’t enter with a bang.

You enter at various times, again and again, in small quanta.

What are these times?

You enter in the aftermath of shocks.

There will be many shocks.

This is the age of shocks.

You enter when the stock is at its antifragile-most. For that time period. It is showing maximal upside. Minimal downside. Fundamentals are plum. Shock’s beaten it down. You enter, slightly. Put yourself in a position to enter many, many times, over many years, upon shock after shock. This automatically means that entry quantum is small. This also means you’re doing an SIP where the S stands for your own system (with the I being for investment and the P for plan).

Now let’s fine-fine-tune.

Don’t put more than 0.5% of your networth into any one stock, ever. Adjust this figure for yourself. Then adjust entry quantum for yourself.

Don’t enter into more than 20-30 stocks. Again, adjust to comfort level.

Remain doable.

If you’re full up, and something comes along which you need to enter at all costs, discard a stock you’re liking the least.

Have your focus-diversified portfolio (FDP) going on the side, apart from Equity.

Congratulations, you just made Equity antifragile for yourself.

🙂

So, … … , When’s Judgement Day?

The “fiscal cliff” thingie has come and gone…

Gone?

People, nothing’s gone.

If something is ailing, it needs to heal, right?

What is required for healing?

Remedial medicine, and time.

Let’s say we take the medicine out of the equation.

Now, what’s left is time.

Would the ailing entity heal, given lots of time, but no medicine?

If disease is not so widespread, and can be expunged over time, then yes, there would be healing, provided all disease-instigating factors are abstained from.

Hey, what exactly are we talking about?

It is no secret that most first-world economies are ailing.

Specifically, the US economy was supposed to be injected with healing measures, which were to take effect from the 1st of Jan., ’13. Financial healing would have meant austerity and a more subdued lifestyle. None of that seems to be happening now. The healing process has been deferred to another time in the future, or so it seems.

You see, people, no one wants austerity. The consumption story must go on…

So now, since the medicine’s been taken out of the equation, is there going to be any healing?

No. Disease-instigating lifestyles are still being followed. Savings are low. Debt with the objective of consumption is still high. How can there be any healing?

Under the circumstances, there can’t.

So, what’re we building up to?

We’re all clear about the fact that consumption makes the world go round. What is the hub of the world’s consumption story? The US. That part of the world which does save, and where there is real growth, well, that part rushes to be a part of the consumption story. It produces cheaply, to sell where there’s consumption, and it sells there expensively. Yeah, like this, healthy economies get dragged into an equation with ailing economies. Soon, the entanglement is so deep, that there’s no turning back for the healthy economy. It catches part of the ailment from the diseased economy. Slowly, non-performing assets of banks in such healthy economies start to grow. The disease is spreading.

Hold on, stay with me, we’re not there yet. Yeah, what are we building up to?

Healthy economies take time to get fully diseased. Here, savings are big, domestic manufacturing is on the rise, and there a healthy demographic dividend too. Buffers galore, the immune system of a healthy economy tries to fight the contagion for the longest time. As entanglement increases, though, buffers deplete, and health staggers. Non-performing assets of banks grow to disturbing levels.

That’s what we are looking out for, when we are invested in a healthy economy which has just started to ail. Needless to say, we pulled out our funds from all ailing economies long back. Our funds are definitely not going back to economies which refuse to take medicine, i.e. which don’t want to be healed. Now, the million dollar question is …

… what’s to be done with our funds in a healthy economy which has just started to become diseased due to unavoidable contagion?

Nothing for now. Watch your investments grow. Eventually, since no one is doing enough to stop the damage and the spread, big-time ailment signs will invariably appear in the currently “healthy” economy, signs that appeared a while back in currently ailing economies. Savings will be disappearing, manufacturing will start to go down, and bad-debt will increase. Define your own threshold level, and go into cash once this is crossed. You might not need to take such a step for many years in a row. Then again, you might need to take such a step sooner than you think, because the ailing mother-consumer economy is capable of pulling everyone down with it, if and when it collapses. And it just stopped taking its medicine…

Let’s get back to your funds. In the scenario that you’ve gone into cash because you weren’t confident about the economy you were invested in, well, what then?

Option 1 is to look for an emerging economy that gains your confidence, and to invest your funds there.

Not everyone is comfortable investing abroad. What if you want to remain in your own economy, which you have now classified as diseased. There’s good news for you. Even in a diseased economy, there are pockets of health. You need to become a part of such pockets, just after a bust. So, remain in cash after a high and till after a bust. Then, when there’s blood on the streets, put your money into companies with zero-debt, a healthy dividend-payout record and a sound, diligent and honest management. Yeah, at a time like that, Equity is an instrument of choice that, over time, will pull your funds out of the gloom and doom.

You’ve put your funds with honest and diligent human capital. The human capital element alone will fight the circumstances, and will rise above them. Then, you’ve entered at throwaway prices, when there was blood on the streets. Congrats, you’ve just set yourself up for huge profit-multiples in the future. And, the companies you’ve put your money with, well, every now and then, they shower a dividend upon you. This is your option 2. Just to share with you, this is my option of choice. I like being near my funds. This way, I can observe them more closely, and manage them properly. I suffer from a case of out of sight, out of mind, as far as funds are concerned. Besides, when funds are overseas, time-differences turn one’s life upside down. This is just a personal choice. You need to take your own decision.

At times like this, bonds are not an option, because many companies can cease to exist in the mayhem, taking your investment principal out with them.

Bullion will give a return as long as there is uncertainty and chaos. Let there be prolonged stability, and you’ll see bullion tanking. Yeah, bullion could be option 3 at such a time. You’ll need to pull out when you see signs of prolonged stability approaching, though.

One can use a bust to pick up cheap real-estate in prime localities. Option 4.

You see, you’ve got options as long as you’re sitting on cash. Thus, first, learn to sit on cash.

Before that, learn to come into cash when you see widespread signs of disease.

Best part is, widespread disease will be accompanied by a big boom before the bust, so you’ll have time to go into cash, and will be ready to pick up quality bargains.

You don’t really care when judgement day is, because your investment strategy has already prepared you for it. You know what to do, and are not afraid. If and when it does come, you are going to take full advantage of it.

Bring it on.

When Cash is King

I don’t like crowds.

The last thing I ever want to do is to conform to crowd behaviour.

That’s one goal defined.

What does this mean?

Very clearly, for starters, it means singing one’s own tune, i.e. defining one’s own path.

It also means not listening to anyone. That requires mental strength, and the power to resist. Very tough.

In life, generally, one likes to be in tandem with the Joneses. And then, smart cookies that we are, we like to go one up on the Joneses, which would be the cue for the Joneses to catch up and then overtake us. Hypothetically, this is how the Joneses and the Naths could blow up all their cash.

It doesn’t stop there. To keep up, the average citizen doesn’t think twice before leaping into debt.

Bottomline is, when cash is king, hardly anybody has cash. In fact, most people owe money at that time.

This is the age of black swans. Crisis after crisis, then a bit of recovery, then another crisis, then some recovery, followed by a mega-crisis.

When a master-blaster crisis ensues, cash becomes king. Quality stuff on the Street starts to sell so cheap, that one needs to pinch oneself to believe the selling prices. Margins of safety are unprecedented. Now’s the time one can salt away a part of one’s cash in Equity, for the long-term.

That’s if one has cash to spare. This is report card time. How have you done in your REAL investment exam? Have you learnt to sit on cash? Have you learnt to buy with margin of safety? The Street doesn’t care for your college degree, in fact, it vomits on your college degree. Your college degree has no value on the Street, it’s just a piece of paper.

Learning on the Street happens everyday, with every move, every investment, every trade, every observation. Unless and until your own money is on the line, this learning is ineffective.

Get real, wake up, so that when cash is king, you feel like an emperor!

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 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.

You must be Joking, Mr. Nath!

Ok, so there are aliens, so what?

I mean, is that so hard to believe? Which law says that Earth is the centre of activity in this universe?

Look around you. The horizon is full of scams. An honest management is most difficult to find. Honesty and integrity have become alien virtues. Scarce, don’t bump into them in normal life, and you might read an odd story about them in the papers.

So where does this leave you as an investor?

In a dishonest world, one needs to think in a warped manner to make money. You know, “two steps away from the norm” kinda thinking. So if the norm is to buy on a dip, in Kalyuga one waits to buy on a mega-dip. And these have started occuring more often than they used to. 10-Sigma or Black Swan events happen every now and then.

The thing I like about scams is that eventually, they explode. The one scam that is exposed (against the 20 that go unexposed) is enough to hit mass psychology. The common investor starts selling everything, even stuff that’s not affected by the scam. The market as a whole falls, sometimes cracking big.

Since we’re mostly down to buying scam-artist run corporations as investors, above-mentioned crack is the time to buy them, i.e. when they are hit badly. That’s when you are getting good value for your money. That’s when you are getting your margin of safety.

So, wait for the explosion. Buy in its aftermath. The interim period between explosions is to be used to pinpoint what you want to buy with a margin of safety, whenever that margin of safety abounds.

It is entirely within the realm of possibilities to live at peace with aliens. And it is equally possible for an investor to learn to live honestly but lucratively in a world full of corporate criminals.

Of Kalyuga and the Skewed Nature of Growth

Once or twice a day, I need to remind myself that this is Kalyuga. Gone are the times when people were honest in general, and the human mind was not corruptible. In Kalyuga, one refers to the price at which a human mind is corruptible. That it is corruptible in the first place is a given.

One of the economic characteristics of Kalyuga is the fact that wherever there is growth, it is skewed in nature, and not uniform. Nations claiming uniform growth are often surprised by a black swan event which nullifies years of financial penance by the founding fathers of such nations. Few examples are the Iceland bankruptcy, the sub-prime crisis, a near default by Greece on its sovereign debt, with possible defaults brewing in Portugal, Spain and Ireland in the near financial future of world economics. Even 9/11 was an event that was triggered due to skewed growth. Of course that is no justification for such an event.

What meets the naked eye in developed nations on the surface is – development. Showers, telephones, infrastructure, emergency services – everything functions. So where are the anomalies that skew the path of uniform growth in such nations? These anomalies are found beneath the surface, in the corruptible minds of those in power. Whether it is the nexus between high-level politicians and bankers, or that between the former and the armed forces, such examples successfully dupe the low-level but honestly functioning majority of the population in developed countries. Ask the pensioner in Greece, who suddenly finds his pension reduced by half due to no fault of his. Or the 9/11 rescue worker, who then contracted complications and died a dog’s death because he wasn’t entitled to healthcare due to no health insurance, which he couldn’t afford. These are example of growth going skewed, that very growth that first seemed uniform in nature.

Emerging nations have never boasted uniform growth. The definition of an emerging market that you won’t find in the text-books speaks of high economic growth at the cost of a segment of the population or a culture. In India for example, 500 million citizens are enjoying growth at the cost of 645 million others, who a UN study has found to be devoid of the very basics in life. Here, corruption from the top has sickered through to the bottom, and the 500 million concerned are able to grow at about 9 % per annum. The crafters of this growth plan believe that the growing millions will pull up the stagnant and deteriorating millions ultimately; i.e. growth will sicker through. Of course that can only happen if it is allowed to by the corruptible minds in-charge.

In Russia, high growth is enjoyed by those who’ve joined hands with the Mafia. Those who take the plunge commit all kinds of crimes from murder to child pornography. Those who choose not to, lead endangered, poor and suffocating lives in their efforts to stay clean.

China has a labour portion of its population and an entrepreneur portion of its population that are growing economically. The former has no time to enjoy the USD 750 – 1000 salary per month because of a 12 hour working day and perhaps 2 or 3 free days a month. Mostly, man and woman both are working, and due to non-overlap in free days, they rarely see each other. Their economic growth will be enjoyed by their children perhaps. The entrepreneur portion is of course splurging. What of the farmers? They haven’t really grown economically. And the vast and spiritual Chinese culture of olden days, i.e. the Mandarin essence of China? Gone into hiding, where it cannot be prosecuted or finished off by the mad-men in-charge. And what of Tibet? Suppressed and destroyed. Some parts of it filled with nuclear waste. And what of freedom of speech and expression? Never existed, and when it started to exist, was finished off from the root in the Tiananmen Square massacre. Heights of skewed growth.

So where does one put one’s money to work? After all, there are problems everywhere. Good question, and one that needs to be sorted out by everyone on a personal level. One thing is certain though. These are times of uncertainty, and in such times, Gold gives superlative returns. So, one needs to get into Gold on dips. There’s no point leaving money in fixed deposits, because inflation will eat it up. Also, one can start identifying debt-free companies with idealistic and economically capable managements, who can boast of uniform and clean growth within their companies (yes, there are encapsulated exceptions to skewed growth on the micro-level). It’s these exceptions one needs to be invested in.

Playing Around with the Axis of Time

You’re seated in an exam, and the examiner just announces that the time allocated for completion has been shortened by 1 hour. Sweat sweat, your exam just became more difficult to pass. 5 minutes later, the ruthless examiner again announces that time allocated has been shortened by another hour. Now, making passing grade seems impossible to you. Instead of passing, you pass out.

Shorten the time-frame for almost anything in life, and doing that particular activity properly and well becomes more and more difficult. What if time was taken out of the equation for the above examination? Well, chances of making passing grade just got a huge fillip, because over infinite time, everyone would eventually clear the exam!

Now substitute “examination” with “investment”. Hmmmm, what do we have here? Is it easier to make money from an investment, if time were taken out of the equation?

After the great depression, those businesses that actually recovered, took 20 years or more to do so. Many never recovered. In investing, a 20 year time-frame is definitely taking time out of the equation. So here we have an example where the answer to the question asked is a most definite no. But, that was then. I mean, pre computer-age, pre internet, pre everything. What’s the world like now? Information flows at the speed of thought. Business cycles are much, much shorter. The Fed creates bubbles, and after they pop, crises happen. So, now we rephrase the question, pertaining to today’s scenario. Today, is a 20 year investment horizon going to give you better odds of making money?

One thing is clear, if your horizon is long enough, today you are going to see the underlying going through at least a few cycles. A buy low – sell high strategy has the best chances today of rewarding you very much within your lifetime.

But, what is low, and what is high? Is 1226 dollars an ounce too high a price to enter gold? Or, should one wait for Bharati Airtel to fall to Rs. 250 before making a contrarian purchase, or is the current Rs. 300 the bottom for Bharati? Nobody knows the answers to these questions.

With a long enough investment horizon where you’ve taken time out of the equation, you’ve simultaneously removed these questions from the equation too, or have you? Let’s say you go ahead with your contrarian purchase of Bharati at Rs. 300 and the scrip plunges to 150. Business cycle is short, remember? Today, realistically speaking, telecom could take maximum 5 years to hit a high in the cycle, so you could tank up on another load of Bharati at Rs. 150 and wait for the cycle to hit a high before offloading. Needless to say, before making any contrarian purchase, you should be convinced that the company won’t go bust in the current low of the business cycle. That’s one risk that looms while making contrarian purchases, but if you do your research properly, perhaps one in ten of your contrarian picks will be so unlucky, and those are perfectly acceptable odds.

What about the other end of the barrel? Gold is at an all-time high, and nobody knows where it is going from here. The whole world is confused. What if you take the plunge and enter gold at 1226 dollars an ounce? Now, two things can happen. If gold rises further you make money immediately. Let’s say gold peaks at 2000 dollars an ounce, and then the cycle in gold starts going towards the lower side. In this case, one could keep booking profit all the way up, and hopefully one could be out fully before or even at the peak. In the other scenario, gold peaks where it currently is, and starts going down. You start losing money on your investment. Let’s say it bottoms at 800 dollars an ounce in one year’s time. You’ve been sitting it out. What are the chances of you making money on your investment, and that too soon, let’s say within another year? Based on sheer gut feel, I’d say your chances are high. What’s my rationale for saying this?

Over the last 100 years, gold has given returns in spurts, only to fall back to lows again. It’s 100 year return has been pathetic, only just about in the black. It’s the time it begins to spurt that one needs to look out for. That occurs in times of uncertainty, which is now. If one allows gold leeway on the time-axis in uncertain times, one new high could be taken out after the other till stability and certainty return. So, if your entry into gold crashes on your face immediately, just keep sitting it out if uncertainty on the world currency of choice front keeps looming, and eventually, you’ll have recovered your principal and perhaps made a little money. The worst-case scenario for you here could be that the world suddenly discovers a currency of choice other than gold, gold crashes to god knows what level, and remains there for another 20 years. That would be a black swan event which looks unlikely currently, because the world is far away from finding a currency of choice, and till it does, one can keep stretching the time axis of a gold investment.

If your picks are solid, the market will reward you for patience more often than it will not. So couple patience with excellent research, and then sit back and relax!