…is my happy space.
When I’m having a difficult market day,…
…I open my calculator…
My friend clears all doubts in a flash.
It’s easy to compound on the calc.
In German they’d say “Pippifax”.
The younger tribe in the English-speaking world would say easy peasy…
Let me run you through it.
Let’s say you wish to calculate an end amount after 25 years of compounding @ 9 % per annum.
Let z be the initial amount (invested).
The calculation is z * 1.09 ^25.
You don’t have to punch in 25 lines. It’s 1 line.
What if you went wrong on the 18th line?
So 1 line, ok? That’s all.
What’s ^ ?
This symbol stands for “to the power of”.
On your calculator, look for the y to power of x key, and then…
…punch in z * 1.09 (now press y to the power of x)[and then punch in 25].
What does such an exercise do for me?
Meaning, why does this exercise ooze endorphins?
Let’s say I’m investing in sound companies, with zero or very little debt, diligent and shareholder-friendly managements, and into a versatile product profile, looking like existing long into the future, basically meaning that I’m sound on fundamentals.
Let’s say that the stock is down owing to some TDH (TomDicK&Harry) reason, since that’s all it’s taking for a stock to plunge since the beginning of 2018.
I have no control over why this stock is falling.
Because of my small entry quantum strategy, I invest more as this fundamentally sound stock falls.
However, nth re-entry demands some reassurance, and that is given en-masse by the accompanying compounding exercise.
At the back of my mind I know that my money is safe, since fundamentals are crystal clear. At the front-end, Mr. Compounding’s reassurance allows me to pull the trigger.
Let’s run through a one-shot compounding exercise.
How much would a million invested be worth in thirty years, @ 11% per annum compounded.
That’s 1 * 1.11^30 = almost 23 million, that’s a 2300% return in 30 years, or 75%+ per annum non-compounded!
Now let’s say that my stock selection is above average. Let’s assume it is good enough to make 15% per annum compounded, over 30 years.
What’s the million worth now?
1 * 1.15^30 = about 66 million, whoahhh, a 6600% return in 30 years, or 220% per annum non-compounded.
Let’s say I’m really good, perhaps not in the RJ or the WB category, but let’s assume I’m in my own category, calling it the UN category. Let’s further assume that my investment strategy is good enough to yield 20% per annum compounded.
Ya. What’s happened to the million?
1 * 1.20^30 = about 237 million…!! 23700% in 30 years, or 790% per annum non-compounded…
…is out of most ballparks!!!
How can something like this be possible?
It’s called “The Power of Compounding”…,
…most famously so by Mr. Warren Buffett himself.
Try it out!
Pickle your surplus into investment with fundamentally sound strategy.
Lo, and behold.
Yeah, where’s your focus at…
…as your market drops.
Is it on your benchmark index?
Ok. Drops further. Developing into a crash…
Where’re you at now?
My focus has shifted.
Tell me more.
I’m now focusing on the shares i’ve begun to accumulate,…
…and, specifically, I’m focused on the number of shares being added to my portfolio,…
…that’s my number. Yeah, that’s where my focus is at.
Not on your benchmark index?
First up, I feel the joy as this number enters my demat. After that, I cast a brief glance at whatever benchmark indices I’m looking at, and decide for myself, whether my focus needs to remain shifted.
What if you’re rubbing your hands in glee, and dud shares are being added to your name?
That’s the whole point. These are not duds. They are gems as per due diligence done, and are going for the price of non-precious counterparts. That’s why my focus remains shifted.
When will it shift back?
That switch happens on auto. When benchmarks start oozing expensiveness, focus automatically shifts to the benchmarks. It should no longer be on the number of shares entering your folio, because shares should not be entering your folio when benchmarks ooze expensiveness.
Sure. Specific stocks could be cheap when a benchmark is expensive. Let’s not deviate from the point though. This is about a healthy shift of focus, and then a second – healthy – shift back.
…entering into a stock…
…many, many times.
When would you do that?
When your research is solid, …
… when you’re amply liquid, …
… and of course when the stock keeps giving you margin of safety to enter for a longish period of time.
There’s no excuse for not doing solid research.
It’s a given.
Research – solid – period.
How do you render yourself amply liquid?
You do this for example by following a small entry quantum strategy.
Let’s have a look at one advantage that springs up in particular.
You become an expert in the stock you are entering into again and again.
You know its nuances over time.
You start getting a hang of its overpricing, underpricing, par value, good results, bad results, and what have you.
You’re in it till you’re convinced about it, sure.
While you’re in it, you’ve developed an expertise on it.
You’ll take that, right?
What exactly have you done?
You’ve made time work in your favour.
First up, staying invested in a fundamentally sound stock over a long period of time should give you a good return.
Then, repeated interaction over the passage of time gives you expertise.
Who’s in control?
Does the market control you?
Do you control yourself?
How do you answer this?
Why are these questions relevant?
Control is pivotal.
It sets the tone for market life, and its overhang affects normal life too.
That’s why it is essential to have such control in one’s hands, and not hand it over to Mrs. Market.
So, how does one answer this question?
What triggers you to open your terminal?
Or you yourself, at a time and place of your own choosing?
If your answer is the former, the market controls how you act.
However, if you decide when and where to let market forces into your life, and for how much time, well, then you’ve not handed over such control.
How did you position yourself to achieve this?
Primary income not from the markets?
Don’t listen to tips?
Have a set time for work?
Have a set place for work?
Have a set system that’s implemented?
Watch market TV?
Read financial news online, or in print?
Only while researching a company.
Do your own solid research?
‘K, you’ve not handed over control all right.
Sure. Hand over control and the next thing you know it’s your life you’re handing over.
Is this even a word?
You know, I don’t care.
It gets a lot across.
Isn’t that what matters?
I care about what matters.
I don’t care about what doesn’t.
What do we understand by “impedimenting”?
Putting stuff in the path, right?
Yeah. We put stuff in our path, deliberately.
Are we mad?
Would one put stuff in one’s path, oneself?
Yes. We would. We are not mad.
Amongst other things, markets…
Amongst other things, we as market players are…
We need to let the fall deepen.
Our action must be staggered.
How does one stagger one’s action.
This is done by putting impediments in the path.
I can tell you about my ones.
I start the day with exercise and prayer.
Then comes a good meal.
It’s already well, well past noon.
Back to the markets.
Dust has settled.
Then, there’s two hours to do whatever needs to be done in the markets.
No more market work for the day.
Out of the two hours for action, I only act during half an hour, or an hour.
How many mistakes can I make in half an hour?
However, a lot lesser than those others can and do make in six and a half hours.
Success in the markets is all about getting a handle on our mistakes.
In long-term play, less is more.
We’re in the markets to…
How do gains come about?
Buy low sell high?
Sure, you’ve then got some gains.
Probably not, because everyone of us holds enough losers. That’s part of the game. Amongst many losers, we then find a winner.
How does one maximize gain?
One looks for mispricing.
Let’s say we’ve id’d a stock.
It passes our entry criteria.
Now, we look for an entry point that will give us a price advantage.
We would ideally like the public to misprice the stock on the downside.
That’s when we would like to pick it up. Higher the misplacing, higher our advantage.
When is maximum gain captured?
This happens when the same stock is mispriced by the same public on the upside.
Is such a strategy easy to implement?
Sounds easy, but NO!
(For starters), That’s because it goes against our grain to buy something really low, for fear of it going even lower, since sentiments are so down.
Can well happen. You buy something really cheap, and before you know it, your something is down by another half.
What’s your protection?
Rock-solid research. Identification of sound fundamentals. A shareholder-friendly management. Technicals that support you. Mispriced entry point. Product-profile that’s going to be around. Lack of debt. Substantial free cash flow. Etc.
If you’ve got such pillars going for you, it’s only a matter of time till they start to shine forth.
If mass-depression causes you to wilt, though, it’s on you.
Mispricing on the upside causes us to blunder too.
Most sell their big winners which still have sound fundamentals, and can potentially go on to bag much higher multiples.
Do this, sure, but only if you NEED the money.
If not, give your potential multibaggers the time to become full-fledged ones.
Sell early, and you won’t perhaps ever find another entry point. Winners barely ever give an entry-window.
At market highs, sell your losers, because they’ll perhaps be inflated too, and you might get a good exit.
When others misprice, make sure you hit some home-runs.