Making the Grade

It’s your convocation. From now on, you’ll be a degree-holder.

Yippeeee!

Just pause for a second.

All your life, you’ll be introducing yourself as a master’s in this or a bachelor’s in that, or perhaps even as a Ph.D. in xyz.

Have you even once considered, that your respective field will continue to evolve, long after you stop studying it?

For example, one fine day, in a Chemistry lecture to class XII, I noticed that the stuff I’d learnt for my master’s degree exams was the very stuff I was now teaching these 17-18 year-olds. That was a big realization for me. It then dawned upon me, that I had to either keep moving with the developments in the subject, or I needed to change my profession. I moved on from Chemistry in 2004.

So, for heaven’s sake, a paper degree is not your ticket to your subject for life. Things, people, seasons, subject-matter, issues at hand – everything changes. Every decade or so, there’s a complete overhaul. To stay on top, and still feel like a degree-holder of your subject, you need to be with things as they move, through the whole decade.

Does your marriage give you a licence to stay married to that same person for life without working on the relationship day in, day out? No, right?

Your degree doesn’t make you a king-pin in your subject for life either, without the appropriate ground-work everyday. Let’s please digest this truth.

The worst-case scenario of whatever I’ve said above happens in the markets. It is a worst-case scenario, because you enter the markets with some finance degree, thinking that the degree has taught you to play the markets successfully. Nothing is further from the truth. Here, you have a piece of paper that gives you false confidence, and you see your balloon bursting after your first few live shots at Mrs. Market.

Financial education in colleges and universities lacks two basic factors. The thing is, these two factors are game-changers. Get them wrong, or don’t know much about them, and your game becomes a losing one.

What are these two factors?

Everything and everyone around us teaches us not to be losers. We are taught to shove our losses under the carpet.

Cut to reality: winning market-play is about losing. Losing, losing, losing, but losing small. To be successful in the markets, we need to learn how to lose small, day in day out. It’s not easy, because our entire system is geared up to win, every time.

Then, everything and everyone around us teaches us to seal that win and post it instantly on our resume, on facebook, on twitter. Modern society is about showing off as many wins as possible. Losers don’t get too many breaks.

Cut to reality: winning market-play is about winning big, very big, every now and then, amidst lots of small losses. That can’t happen if we immediately book a winner. We need to learn to nurture a winner, and to allow it to win big. Again, that’s not easy, because as soon as a winner appears, our natural instinct tells us to book it and post it. So bury your “win it-cut it-post it” attitude. Instead, win, let the winner win more, and more, and when you feel it’s enough, without getting greedy, cut it, and then keep quiet, bring your emotions back to ground zero, and move on to the next winning play.

The reason, that most teachers of finance in colleges and universities don’t know about these two factors, is that their own money is almost never on the line. They have almost never felt the forces of live markets through this “line”, day in, day out. The line one puts on is one’s connection to market forces. Only a regular connection to these forces teaches one about realistic, winning market-play.

One could argue that the case-studies examined in finance school are very real. Well, they are very real for those protagonists who actually went through the ups and downs of the case-study in real-life. They got the actual learning by being exposed to live market forces. You are merely studying the statistics and drawing (dead) inferences, devoid of first-hand emotions and market forces. Whatever learning you are being imparted, is, well, theoretical.

Theory doesn’t cut it in the markets. Theory doesn’t make the grade.

So, what makes the grade?

I consider a seven year stint at managing your own folio a basic entry requirement into bigger market-play. What happens during this time?

Each body cell gets attuned to real market forces, live. You get to know yourself. You build up an idea about your basic risk-profile. Your market-strategy takes shape. It is fine-tuned to YOU.

During this stint, money needs to be on the line, again and again, but the amounts in play need to be small, because you are going to make many, many mistakes.

And please, make whatever mistakes you need to make in this very period. Get them all out of your system. Make each mistake once, and never repeat it, for life. Point is, that after this stint, money levels in play are going to shoot up. Mistakes from this point onwards are going to prove costly, even devastating. The kinds, where one can’t stand up again. You don’t want to be in that situation.

Once you are comfortable managing your funds, and don’t get rattled by Mrs. Market’s constant action, her turnarounds, crashes etc. etc., your market decisions are such, that you start applying your knowledge of money-management successfully. You have now become a practitioner of applied finance.

Applied finance is advanced level market-play. To win at applied finance, your money-management basics need to be fully in place and rock-solid. You can define applied finance as Money Management 2.0.

Winning at applied finance is self-taught. You don’t need a degree for it. In my eyes, a degree here is in fact detrimental, because you then spend a long time unlearning a lot of university stuff during real market-play. You actually see for yourself, that most of what you learnt applies only in theory. The stuff that makes winners, where is that? Why wasn’t it taught? Well, you’ve got to go out there and learn it for yourself.

Let theory be where it belongs. Respect it, but leave it in its appropriate world. The world needs its theoreticians to make it go round, but you need to go beyond theory, to win big.

Put on your practical shoes when you put your good and real money on the line, and be ready for anything.

Let your mistakes teach you.

Keep making the grade, day in day out.

Long after society tells you that you’ve made it.

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The Concept of Satmya

This one’s from the world of Ayurveda, folks.

We’re not geeks.

We move around amongst all segments of life, grab whatever is useful, and then try and apply its usefulness into our world of applied finance.

And that’s exactly what we’re going to do with the concept of Satmya.

Imagine in your minds a first-time smoker. The first puff breaks him or her out into a coughing flurry. A new stimulus is choking the respiratory system. The body rejects it.

That’s roughly the story for any first-time stimulus which is disturbing.

Upon repeated exposure to the stimulus, the body slowly gets habituated. Ultimately, rejection recedes. One’s tissues are now not only bathing in the stimulus, they are enjoying it. In fact, they want more.

Habituation is where we want to keep it at, no further. That’s the point of Satmya. At the point of Satmya, you enjoy the stimulus without falling sick, since your body-chemistry can now deal with the stimulus without getting imbalanced.

When we put on a live trade in any market, we expose ourselves to market-forces. A gamut of emotions comes alive inside of us. The level of reaction in our system is proportional to the size of the trade. First exposure makes us erratic. Therefore, it is very important to keep this first exposure small.

Markets swing. Joy wells inside of us with notional profit. Sorrow consumes us upon notional loss. Body-chemistry now needs to adapt.

If losses are kept small owing to the usage of stops, one’s system gets used to small losses. Meaning to say, small losses don’t shake you anymore. Market exposure results in small losses all the time, provided you’re using stops. Once these don’t shake you, and your entire world is still balanced despite them, you’re not afraid to put on the next trade, even after a string of losses. This very next trade could well turn out to be a multi-bagger, so you need to put it on. If you’re afraid to put on the next trade, you take yourself out of circulation, and fail to catch a big market move.

A habituated system makes one put on the next trade.

When the market swings in your favour, your notional profit causes you to become emotionally imbalanced. The first time this happens, you effervescently go about promising everyone the world, and get into situations you can’t deliver upon later. You might even make the other mistake of booking your profit early, not allowing the underlying to yield even more profit. Why, why, why?

Get used to sitting on a profit. Let it happen many, many times. Don’t go jumping about when it happens. Take it in your stride. Let the trade develop into a multi-bagger so that it can make up for your many small losses and yield even more beyond your overall break-even point. Such a state of mind is only earned once your system is habituated with regard to profit-yielding situations.

Another big mistake we make after a profitable trade is to put on a disproportionately large position-size in the next trade. Habituate your system to not increase position-size disproportionately. Calm it down after a profitable trade. Then coolly calculate your new position-size, taking total equity and steady maximum-loss percentage into account. Only increase position-size as per the mathematics of your trading strategy, not according to how good you are feeling after a profitable trade.

Habituation will also fine-tune you while lessening position-size after a string of losses. On the one level your math proposes a new lower size to trade in such a situation. On the second level, your body-chemistry will signal to you from inside whether you are comfortable with this size in a new position. Listen to your body and mind. If they are not able to take more than a certain quantum of market-forces at a given time, they will tell you. If you are able to listen to them and then can adjust your position-size further down to a level that body and mind are comfortable with, you are then taking the concept of position-sizing to a metaphysical level.

So, see what the concept of Satmya or habituation has done to your trading. It has made trading holistic for you. With the incorporation of this concept, you are trading in a manner that is comfortable for your mind and body.

The net result is that you don’t fall sick because of trading, and because you stay in the game, you are able to catch the big winners when they come.

Happy Trading! ๐Ÿ™‚