Market-maker

Manipulation. 

Recognition. 

Alignment. 

Trade. 

Spike. 

Out. 

How does one recognize manipulation? 

On the charts. 

After eyeballing many many charts, one gets a feel for it. 

Manipulated strike-points become pivot points. 

It’s a push from a fund-heavy conglomerate. Push becomes a cascade as traders join in. 

After the spike, the market-maker pulls out funds so cleverly that rates don’t fall. 

Funds are now ready for the next push. The same funds. 

Repeat. Same loop. 

Till strategy fails. 

Then, maker starts manipulating in opposite direction. 

Life’s busy for the maker. 

There’s trouble with the authorities. Ends on a compromise. Maker will step in when authorities need to prop the market. 

No maker – no market. 

Why do you think there’s always a quote to your underlying? 

Because of the maker. 

After a market has crossed critical mass, makers sit on their spikes. They roll-over on expiries, and enjoy the ride. 

Ride is not always smooth. 

Makers often get greedy and break their own rules. Functioning with no safeties, many makers get wiped out. To add to their woes, a large percentage functions on borrowed money. 

Makers have an electronic life, which loops from cellphone to terminal and back. It’s a life that’s punctuated by headaches, physical and mental. 

Don’t envy a maker. 

He or she is just doing his or her job. That’s all. 

Trade the maker. 

Sheer Moat Investing is not Antifragile 

There we go again. 

That word. 

It’s not going to leave us. 

Nicholas Nassim Taleb has coined together what is possibly the market-word of the century. 

Antifragile. 

We’re equity-people. 

We want to remain so. 

We don’t wish to desert equity just because it is a fragile asset-class by itself. 

No. 

We wish to make our equity-foray as antifragile as possible. 

First-up, we need to understand, that when panic sets in, everything falls. 

The fearful weak hand doesn’t differentiate between a gem and a donkey-stock. He or she just sells and sells alike. 

Second-up, we need to comprehend that this is the age of shocks. There will be shocks. Shock after shock after shock. Such are the times. Please acknowledge this, and digest it. 

To make our equity-play antifragile, we’ll need to incorporate solid strategies to account for above two facts. 

We love moats, right? 

No problem. 

We’ll keep our moats. 

Just wait for moat-stocks to show value. Then, we’ll pick them up. 

We go in during the aftermath of a shock. Otherwise, we don’t. 

We go in with small quanta. Time after time after time. 

Voila. 

We’re  already sufficiently antifragile. 

No magic. 

Just sheer common sense. 

We’re still buying quality stocks. 

We’re buying them when they’re not fragile, or lesser fragile. 

We’re going in each time with minute quanta such that the absence of these quanta (after they’ve gone in) doesn’t alter our financial lives. We’re saving the rest of our pickled corpus for the next shock, after which the gem-stock will be yet lesser fragile. 

Yes, we’re averaging down, only because we’re dealing with gems. We’ll never average down with donkey-stocks. We might trade these, averaging up. We won’t be investing in them. 

Thus, we asymptotically approach antifragility in a gem-stock. 

Over time, after many cycles, the antifragile bottom-level of the gem-stock should be moving significantly upwards. 

Gem-stock upon gem-stock upon gem-stock. 

We’re done already. 

Making the Skew – work for you

Anomalies.

Anomalies?

Opportunities.

Yeah.

It’s all about perspective.

Just align your perspective.

Get into the skin of the anomaly.

Why?

You were in this to make money, right?

So chop chop.

Anomalies are like waves.

They swell… and recede.

If you’ve missed one, wait for its one-offset to start swelling.

Oh yeah, forgot to reiterate, you’re out before it recedes.

That would be a great trade.

Getting in well before the swell and staying in would be an investment entry-strategy.

Getting out after a swell would be an investment exit-strategy.

Use your imagination.

Wishing you a lucrative market-footprint!

🙂

Speed of Rise vs Speed of Fall

Specifically, equity markets have this one repetitive characteristic.

Their average speed of rising is lesser than their average speed of falling. Much lesser, I would say. 

Why?

Falling has to do with selling pressure being more than buying pressure. Selling pressure is connected to fear. Add caution to fear, and one has already sold out. 

Rise has to do with buying pressure being more than selling pressure. Buying pressure is connected to optimism. As markets keep nudging higher, slowly, optimism turns into euphoria, with a hint of caution. This caution slows the speed of rising, till greed takes over in the last stage of the rise, and one fails to see any caution anymore. At this time, the speed of rising is the highest, but is still lesser than the speed of falling at the nadir. Why?

What is the prevalent situation at a nadir? There’s blood. People are running for their lives. They take action before asking questions, and before looking here or there. 

Many times, you come across someone holding a stock which he or she has inherited from a parent. This someone comes to you with the ubiquitous query – what to do, sell it now? You look at the chart. Whoahhhh! You see the buy price, one and a half decades ago. You look at the current level. You calculate the profit. Along the time axis of the chart, you also see that the stock fell back to its buy price or below in a market crash, all within a month and a half. After this, the stock has recouped its losses of the crash, and is showing a healthy profit again, six years after the crash. During the crash, how long did it take the stock to fall below the buy price of one and a half decades ago? A month and a half. Holy moly!

That’s the equity playground for you. 

It’s directly connected to human emotions. 

Anything can happen on this playground, so keep your eyes and ears open, and…

… be prepared. 

A Chronology of Exuberance

The biggest learning that the marketplace imparts is about human emotions.

Yeah, Mrs. Market brings you face to face with fear, greed, exuberance, courage, strength, arrogance … you name it.

You can actually see an emotion developing, real-time.

Today, I’d like to talk about the chronology of exuberance.

In the marketplace, I’ve come face to face with exuberance, and I’ve seen it developing from scratch.

When markets go up, eventually, fear turns into exuberance, which, in turn, drives the markets even higher.

What is the root of this emotion?

The ball game of exuberance starts to roll when analysts come out with a straight face and recommend stocks where the valuations have already crossed conservative long-term entry levels. As far as the analysts are concerned, they are just doing their job. They are paid to recommend stocks, round the year. When overall valuations are high, they still have to churn out stock recommendations. Thus, analysts start recommending stocks that are over-valued.

Now comes the warp.

At some stage, the non-discerning public starts to treat these recommendations as unfailing cash-generating  opportunities. Greed makes the public forget about safety. People want a piece of the pie. With such thoughts, the public jumps into the market, driving it higher.

For a while, things go good. People make money. Anil, who hadn’t even heard of stocks before, is suddenly raking in a quick 50Gs on a stock recommendation made by his tobacco-seller. Veena raked in a cool 1L by buying the hottest stock being discussed in her kitty party. Things are rolling. Nothing can go wrong, just yet.

Thousands of Anils and Veenas make another 5 to 6 rocking buys and sells each. With every subsequent buy, their capacity increases more and more. Finally, they make a big and exuberant leap of faith.

There is almost always a catalyst in the markets at such a time, when thousands make a big and exuberant leap of faith into the markets, like a really hot IPO or something (remember the Reliance Power IPO?).

Yeah, people go in big. The general consensus at such a time is that equity is an evergreen cash-cow. A long bull run can do this to one’s thinking. One’s thinking can become warped, and one ceases to see one’s limits. One starts to feel that the party will always go on.

Now comes the balloon-deflating pin-prick in the form of some bad news. It can be a scandal, or a series of bad results, or some political swing, or what have you. A deflating market can collapse very fast, so fast, that 99%+ players don’t have time to react. These players then rely on (hopeful) exuberance, which reassures them that nothing can go wrong, and that things will soon be back to normal, and that their earnings spree has just taken a breather. Everything deserves a breather, they argue, and stay invested, instead of cutting their currently small losses, which are soon going to become big losses, very, very big losses.

The markets don’t come back, for a long, long time.

Slowly, exuberance starts dying, and is replaced by fear.

Fear is at its height at the bottom of the markets, where maximum number of participants cash out, taking very large hits.

Exuberance is now officially dead, for a very long time, till, one day, there’s a brand new set of market participants who’ve never seen the whole cycle before, supported by existing participants who’ve not learnt their lessons from a past market-cycle. With this calibre of participation, markets become ripe for the re-entry of exuberance.

Wiser participants, however, are alert, and are able to recognize old wine packaged in a new bottle. They start reacting as per their designated strategies for exactly this kind of scenario. The best strategy is to trade the markets up, as far as they go. Then, you can always trade them down. Who’s stopping you? Shorting them without any signals of weakness is wrong, though. Just an opinion; you decide what’s wrong or right for you. The thing with exuberance is, that it can exercise itself for a while, a very long while – longer than you can stay solvent, if you have decided to short the markets in a big way without seeing signs of weakness.

At market peaks, i.e at over-exuberant levels, long-term portfolios can be reviewed, and junk can be discarded. What is junk? That, which at prevailing market price is totally, totally overvalued – that is junk.

Formulate your own strategy to deal with exuberance.

First learn to recognize it.

Then learn to deal with it.

For success as a trader, and also as an investor, you will not be able to circumvent dealing with exuberance.

Best of luck!

Can We Please Get This One Basic Thing Right? (Part III)

Yeah, we’re digging deeper.

How does an investor arrive at an investment decision?

It’s pretty obvious to us by now that traders and investors have their own rationales for entry and exit, and that these rationales are pretty much diametrically opposite to each other.

So, what’s the exact story here?

The seasoned investor will look at FUNDAMENTALS, and will exhibit PATIENCE before entering into an investment.

The versatile trader will look at TECHNICALS, and will NOT BE AFRAID of entry or exit, any time, any place. He or she will be in a hurry to cut a loss, and will allow a profit to blossom with patience.

What are fundamentals?

Well, fundamentals are vital pieces of information about a company. When one checks them out, one gets a fair idea about the valuation and the functioning of the company, and whether it would be a good idea to be part of the story or not.

A good portion of a company’s fundamental information is propagated in terms of key ratios, like the Price to Earnings Ratio, or the Debt to Equity Ratio, the Price to Book Value ratio, the Enterprise Value to EBITDA Ratio, the Price to Cash-flow Ratio, the Price to Sales ratio, etc. etc. etc.

What a ratio does for you is that in one shot, it delivers vital info to you about the company’s performance over the past one year. If it’s not a trailing ratio, but a projected one, then the info being given to you is a projection into the future.

What kind of a promotership / management does a company have? Are these people share-holder friendly, or are they crooks? Do they create value for their investors? Do they give decent dividend payouts? Do they like to borrow big, and not pay back on time? Do they juggle their finances, and tweak them around, to make them look good? Do they use company funds for their personal purposes? Researching the management is a paramount fundamental exercise.

Then, the company’s product profile needs to be looked into. The multibagger-seeking investor looks to avoid a cyclical product, like steel, or automobiles. For a long-term investment to pan out into a multibagger, the product of a company needs to have non-cyclical scalability.

After that, one needs to see if one is able to pick up stock of the particular company at a decent discount to its actual value. If not, then the investor earmarks the company as a prospective investment candidate, and waits for circumstances to allow him or her to pick up the stock at a discount.

There are number-crunching investors too, who use cash-flow, cash allocation and other balance-sheet details to gauge whether a coveted company with an expensive earnings multiple can still be picked up. For example, such growth-based investors would not have problems picking up a company like Tata Global Beverages at an earnings multiple of 28, because for them, Tata Global’s balance-sheet projects future earnings that will soon lessen the current multiple to below sector average, for example.

Value-based investors like to buy really cheap. Growth-based investors don’t mind spending an extra buck where they see growth. Value-based investors buy upon the prospect of growth. Growth-based investors buy upon actual growth.

The trader doesn’t bother with fundamentals. He or she wants a management to be flashy, with lots of media hype. That’s how the trader will get volatility. The scrips that the trader tracks will rise and fall big, and that’s sugar and honey for the trader, because he or she will trade them both ways, up and down. Most of the scrips that the trader tracks have lousy fundamentals. They’ve caught the public’s attention, and the masses have sprung upon them, causing them to generate large spikes and crashes. That’s exactly what the trader needs.

So, how does a trader track these scrips? Well, he or she uses charts. Specifically, price versus time charts. The trader doesn’t need to do much here. There’s no manual plotting involved. I mean, this is 2012, almost 2013, and we stand upon the shoulders of giants, if I’m allowed to borrow that quote. Market data is downloaded from the data-provider, via the internet and onto one’s computer, and one’s charting software uses the data to spit out charts. These charts can be modified to the nth degree, and transformed into that particular form which one finds convenient for viewing. Modern charting software is very versatile. What exactly is the trader looking for in these charts?

Technicals – the nitty-gritty that emerges upon close chart scrutiny.

How does price behave with regard to time?

What is the slope of a fall, or the gradient of a rise? What’s the momentum like?

What patterns are emerging?

How many people are latching on? What’s the volume like?

There are hundreds of chart-studies that can be performed on a chart. Some are named after their creators, like Bollinger bands. Others have a mathematical name, like stochastics. Names get sophisticated too, like Williams %R, Parabolic SAR and Andrew’s Pitchfork. There’s no end to chart  studies. One can look for and at Elliott Waves. Or, one can gauge a fall, using Fibonacci Retracement. One can use momentum to set targets. One can see where the public supports a stock, or where it supplies the stock, causing resistance. One can join points on a chart to form a trendline. The chart’s bars / candle-sticks will give an idea about existing volatility. Trading strategy can be formulated after studying these and many more factors.

Where do stops need to be set? Where does one enter? Exit? All these questions and more are answered after going through the technicals that a chart is exhibiting.

One needs to adhere to a couple of logical studies, and then move on. One shouldn’t get too caught up in the world of studies, since the scrip will still manage to behave in a peculiar fashion, despite all the studies in the world. If the markets were predictable, we’d all be millionaires.

How does the trader decide upon which scrips to trade? I mean, today’s exchanges have five to ten thousand scrips that quote.

Simple. Scans.

The trader has a set of scan criteria. He or she feeds these into the charting software, and starts the scan. Within five minutes, the software spits out fifty odd tradable scrips as per the scan criteria. The trader quickly goes through all fifty charts, and selects five to six scrips that he or she finds best to trade on a particular day. Within all of fifteen minutes, the trader has singled out his or her trading scrips.

Do you now see how different both games are?

I’m glad you do!

🙂

Anatomy of a Multibagger

Wouldn’t we all like to rake it in?

A multibagger does just that for you. Over a longish period, its growth defies normalcy.

In the stock markets, a 1000-bagger over 10 years – happens. Don’t be surprised if you currently find more than 20 such stocks in your own native markets.

Furthermore, our goal is to be a part of the story as it unfolds.

Before we can invest in a multibagger, we need to identify it before it breaks loose.

What are we looking for?

Primarily, a dynamic management with integrity. We are looking for signs of honesty while researching a company. Honest people don’t like to impose on others. Look for a manageable debt-equity ratio. Transparency in accounting and disclosure counts big. You don’t want to see any wheelin’-dealin’ or Ponzi behavior. If I’d been in the markets in the early ’80s and I’d heard that Mr. Azim Premji drove a Fiat or an 800, and flew economy class, I’d have picked up a large stake in Wipro. 10k in Wipro in ’79 multiplied to 3 billion by ’04. That can only happen when the management is shareholder-friendly and keeps on creating value for those invested. Wipro coupled physical value-creation with market value-creation. It kept announcing bonus after bonus after bonus. God bless Mr. Premji, he made many common people millionaires, or perhaps even billionaires.

A good management will have a clean balance-sheet. That’s the number two item.

The company you’ re looking at will need to have a scalable business model.

It will need to produce something that has the ability to catch the imagination of the world for a decade or more.

The company you’re looking at will need to come from the micro-cap or the small-cap segment. A market-cap of 1B is not as likely to appreciate to 1000B as a market-cap of 25M is to 25B.

Then, one needs to get in at a price that is low enough to give oneself half a chance of getting such an appreciation multiple.

Needless to say, the low price must invariably be coupled to huge inherent value which the market is not seeing yet, but which you are able to correctly see.

After that, one needs the courage and conviction to act upon what one is seeing and has recognized.

One needs to have learnt how to sit, otherwise one will nip the multibagger in the bud. Two articles on this blog have already been dedicated to “sitting”. Patience is paramount.

The money that goes in needs to be a small amount. It’s magnitude shouldn’t affect your normal functioning.

Once a story has started unfolding, please remember one thing. If a stock has caught the imagination of the public, it can continue to quote at extended valuation multiples for a long time. As long as there is buying pressure, don’t exit. One needs to recognize buying pressure. That’s why, one needs to learn charting basics.

Phew, am I forgetting something here? Please feel welcome to comment and add factors to the above list.

Here’s wishing that you are able to latch on to many multibaggers in your investing career.

🙂

Learning to Sit (Part II)

Can you sit?

I mean, can you really sit?

Maximum money is made by sitting, not by wiggling about.

I didn’t say that, but people far, far greater did.

To name just two who did say so, I’m sure you’ve heard of Jesse Livermore and Warren Buffett.

Fact remains – if you’re a long-term investor, you have to be able to sit.

One can’t sit for very long if one isn’t comfortable.

So, logic dictates – make yourself comfortable first.

Get rid of all extra background noise that disturbs you.

Keep consolidating – till you are comfortable to a point of not wanting to move from where you are.

You’ve gotten rid of investments you don’t understand.

Then, you’ve also dumped those investments that you do understand, but which don’t interest you.

Your rapport with your family is healthy.

You eat and sleep well.

You enjoy your life.

Then, the investments that you’re gonna sit on – are their volumes influencing the normal flow of your life?

If yes, it’ll be hard to stay focused somewhere down the line, because some fragment of your life will invariably be disturbed positively or negatively due to the voluminous investment in question.

Can you digest the volume such that its level does not interfere with your daily life?

What is your capacity for volume digestion?

Some have very large digestive capacities, like RJ. Such people can sleep comfortably on gigantic invested volumes for a very long time.

Others don’t digest volume at all, and can’t sleep over volume, like that day-trader who lives down the road. When the market closes, his invested volume is nil. Otherwise, the rest of his day is ruined.

Identify your volume threshold.

Invest below it. Then, you’ll be able to sit on your investment.

Any investment must have a rationale. Is your investment rationale sound? You’ll only be able to sit long-term on an investment made with sound rationale.

Therefore, take your time. Do solid research. Your research is pivotal for your investment. It doesn’t have to be so technical or so fundamental as to psyche a lay-person. It doesn’t have to deal with nitty-gritty. It doesn’t have to look for wheels within wheels.

In my opinion, market research needs to be broad-minded, and done with common-sense. Researching a company is an art. One doesn’t need to go ballistic with numbers, mathematics, projections, charts etc. One needs to formulate the long-term picture in one’s mind, based on key ratios, charting basics, knowledge of cycles, quality of management etc., and of course (based on) the million dollar question – is one looking at a multibagger? You can fill in the blanks here, for yourself.

Then, don’t enter with too big a bang. That’s my formula. Enter small. You can always top up later, if your conviction about your investment has grown. That’ll allow you to sit if your investment goes wrong in the initial stages. If you’ve entered too big and things go awry, you won’t be able to sleep, and then the first thing you’ll do is exit. So, enter small.

See, you can average down if you’re an expert, but for the longest time and till you get the hang of things, do not average down.

Why am I saying this?

Averaging down can make you even more jumpy if the stock in question goes down further. Your chances of sitting on your investment become even lesser.

Now for the flip-side. Sitting on a profit? Are you booking? Yes? No?

Depends. On you. On your outlook.

I mean, are you going to nip a multibagger in the bud?

I think you got the point.

So, till when do you sit?

Till you’re comfortable. Till you can sleep and eat well. Till you have a happy family life. Again, define you own “tills”.

The rest, as they say, is (your own investing) History.

Isn’t This Other Party Getting Too Loud?

We in India have decided to go for gold after the Olympics.

I mean, there’s a whole parallel party going on in gold.

What’s with gold?

Can it tackle inflation?

No.

Is there any human capital behind it?

No.

Meaning, gold has no brains of its own, right?

Correct.

Is there a storage risk associated with gold?

Yes.

Storage volume?

Yes.

Transport inconvenience?

Yes.

Price at an all time high?

Yes, at least for us in India. We’d be fools to consult the USD vs time chart for gold. For us, the INR vs time chart is the more valid one for gold, because we pay for gold in INR.

Getting unaffordable?

Yes.

No parameter to judge its price by, like a price to earning ratio for example?

No.

Then how am I comfortable with gold, you ask?

Right, I’m not.

Can I elaborate, is that what you are requesting?

Sure, it’s exorbitance knocks out its value as a hedge. A hedge is supposed to balance and stabilize a portfolio. Gold’s current level is in a trading zone. It is not functioning as an investor’s hedge anymore.

Why?

Because from a huge height, things can fall big. Law of gravity. And gold’s fallen big before. It doesn’t need to begin it’s fall immediately, just because it is too high. That alone is not a valid reason for a big fall, but the moment you couple the height with factors like improvement in world economics, turnaround in equities (if these factors occur) etc., then the height becomes a reason for a big fall. Something that can fall very big knocks out stability and peace of mind from an investor’s portfolio. The investor needs to bring these conditions back into the portfolio by redefining and redesigning the portfolio’s dynamics.

How?

By selling the gold, for example, amongst other things.

What’s a good time to sell?

Well, Diwali’s a trigger.

Right.

Then, there are round numbers, like 35k.

What about 40k?

Are you not getting greedy?

Yeah – but what about 40k?

Nothing about 40k. Let 35k come first. I like it. It’s round. It’s got a mid-section, as in the 5. It’s a trigger, the more valid one, as of now.

Fine, anything else?

Keep looking at interest rates and equities. Any fall in the former coupled with a turnaround in the latter spells the start of a down-cycle in gold.

Is that it?

That’s a lot, don’t you think?

I was wondering if you were missing anything?

No, I just want to forget about gold max by Diwali, and focus on equities.

Why’s that?

There are much bigger gains to be had in equities. History has shown us that time and again. Plus, there is human capital behind equities. Human capital helps fight inflation. What more do you want? Meanwhile, gold is going to go back to its mean, as soon as a sense of security returns, whenever it does.

And what is gold’s mean?

A 1 % return per annum, adjusted for inflation, as seen over the last 100 years.

That’s it?

Yeah.

And what about equities?

If you take all equities, incuding companies that don’t exist anymore, this category has returned 6% per annum over the last 100 years, adjusted for inflation.

And what if one leaves out loser companies, including those that don’t exist anymore.

Then, equity has returned anything between 12 -15% per annum over the last 100 years, adjusted for inflation.

Wow!

Yeah, isn’t it?

The Frog That Lived in the Well

Once upon a time, there was a frog.

It lived in a well.

Its cousin, however, lived in the ocean, and this particular cousin came to visit.

Cousin froggy was stunned. How could one thrive in such a small space? Our original froggy, however, did not believe that one’s world could get any better. It loved the well, and only after much coaxing did it agree to see what the ocean was like.

Upon seeing the magnitude of an ocean, our original froggy’s head exploded. This story’s from Paramhans Yogananda. 

I’m sure you’ve heard this story from someone. Something similar probably happened to you too, of course on a much smaller scale of magnitude, with no head explosions and all that.

I used to walk around pretty smugly with my Blackberry, thinking that I was like there, connected. Experienced kind of a head explosion upon moving to an Android smartphone.

What is it about us humans?

Why are we so limiting?

Why do we create barriers around our life-experience, around our possibilities?

Market conditions keep changing. Just as we get tied up into a rut and define a market as range-bound and going nowhere, it breaks out. Are you able to cope?

Be honest.

Can you adapt to such changes in conditions?

Are you quick on your feet? Or are you lethargic, and full of inertia?

What’s that song by The Black Eyed Peas?

“don’t…don’t…don’t … … don’t-stop-the-party!”

I know you’ve been humming this song during your continuing debt market party, but there is more to the scene than just the debt market. The debt market is not where things start and end in the world of investing. There’s more.

The world of investing is like an ocean.

The next buzzing market will make itself known. It’s only a matter of time. Be ready for it. Don’t remain clogged up within the claustrophobic walls of one market only, out of sheer laziness and a false sense of security.

Get out there.

Experience the ocean, without your head needing to explode.

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.

“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!”

Wisdom of the Lull

It’s awfully quiet.

Are you enjoying the silence?

Or are you fretting and fuming, that there’s no action?

There’s a buzz to silence. It’s charged.

And you can harness that charge.

What for?

For the storm of course. Which is to follow. Don’t you want to be ready for it?

Cycles, people. Finance moves in cycles.

In the ’00s, I used to move from market to market. Action here, action there, action everywhere. Result was, well, I became a “Jack of all trades”, and a master of none.

Well, that’s changed now. With time, I’ve zeroed in on the markets I wish to master. I stay with these markets. No abandoning.

Tell you a secret – every market has idiosyncrasies. These four words take long to find out. Lots of hits. And then one learns these magic words.

Nuances, markets have nuances. Market A will have nuance Z, and market B will have nuance Y.

To master a market , you need to stay with it. Don’t abandon it when it is quiet. You do want to master it, right? So stay. Watch. Don’t do anything if you don’t wish to, but watch. Recognize the idiosyncrasies and their patterns.

Welcome to the wisdom of the lull.

A lull gives you time to consolidate and get your action-plan ready. It allows your nervous system to recharge. You can catch up with stuff you’ve missed out on. Financially, you’re not worried, even if you’re not trading.

Why?

Because your trading corpus is giving you fixed income when its units are not being utilized for trading, silly. And, this fixed income is large enough to support you and your family and then some, remember? That was a basic tenet we had carved out for ourselves before we got into serious trading. Don’t forget the basics. Keep reminding yourself. Financially, a lull needs to give you enough income to support your family and then some, such that you are not required to pull a single trade. Trading 1.0.1. If that’s not the case, first muster up a large enough corpus that fulfills this condition, before you get into serious trading.

Why?

A lull should not have you jumping in your pants, eager to implement dozens of trades in an effort to get basic income going. When Mrs. Market goes nowhere, your trades will eventually keep getting stopped out, because of money stops or time-stops. That’s how you recognize a lull. Now you can shut shop, recharge, watch, and your corpus is still generating basic fixed income, allowing you to harness the full wisdom of the lull.

This is also a time to go over previous trading errors. Let me tell you a story. Remember Jesse Livermore? Well, Jesse was eccentric. Geniuses are eccentric. Jesse was a genius trader. Since there would be no trading action around the end of December and the beginning of January, Jesse used to lock himself up in a bank-vault during this period, stocked with ample food and drink supplies . He would then go over all his trades implemented in the previous year, trying to understand the mistakes he had made. He would come out of the vault when the previous year’s trading had been fully digested by his system. When he emerged from the vault, he was ready to take on the new year.

Why a bank-vault, you ask?

Jesse said he wanted to get a physical feel for money. He wanted to be with it for a while. Trading was too abstract, and one lost touch with reality. By living with real money in a closed space for a few days, Jesse’s system was acknowledging that trading has to do with real money, real losses, real profits.

Yeah, I’m sure the vault had a washroom. Jesse Livermore could pull any stunt with his bankers.

Jesse Livermore was the first trader to realize and harness the wisdom of the lull.

Thanks, Jesse.