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. 

🙂

Sitting – III

Mood-swings…

…happen all the time…

…in the markets.

If we don’t get used to dealing with them, we’re pretty much gone.

When pessimism rules, it’s quite common for one to develop negative thoughts about a holding. 

Research – stands. 

There’s nothing really wrong with the stock. 

However, sentiment is king. 

When sentiment is down, not many underlyings withstand downward pressure.

Eventually, you start feeling otherwise about your stock that is just not performing, as it was supposed to, according to its stellar fundamentals. 

If your conviction is strong enough, this feeling will pass. 

Eventually, pessimism will be replaced by optimism. 

Upwards pressure…

…results in upticks. 

Finally, you say, the market is discovering what your research promised.

You feel vindicated, and your outlook about the stock changes, in the event that negativity had set in.

You’ve not ended up dumping this particular stock.

If your conviction had not been strong enough, you would have gotten swayed. 

Market-forces are very strong. 

They can sweep the rug from under one’s feet, and one can be left reeling. 

In such circumstances, solid due-diligence and solid experience are your pillars of strength, and they allow you footing to hold on to. 

However, if your research isn’t solid enough, you will start doubting it and yourself, soon (and if you’re not experienced enough, make the mistake, learn from it, it’s ok, because your mistake is going to be a small mistake just now, and you’ll never repeat it, which is better than making the same mistake on a larger scale at the peak of your career, right?! We are talking about the mistake of doing shoddy due-diligence and getting into a stock without the confidence needed to traverse downward pressure).

With that, your strategy has failed, because it is not allowing you to sit comfortably. 

Please remember, that the biggest money is made if first one has created circumstances which allow one to sit comfortably. 

Basic income. 

Emergency fund.

Excess liquidity.

Small entry quantum.

Rock solid research work, encompassing fundamentals and technicals both. 

Margin of safety.

Patience for good entries.

Exit strategy. Whichever one suits you. It should be in place, at least in your mind. 

Etc.

Fill in your blanks. 

Make yourself comfy enough to sit and allow compounding to work. 

Weed out what stops you from sitting, and finish it off forever, meaning that don’t go down that road ever again.

Very few know how to sit. 

Very few make good money in the markets.

Make sure that you do. 

Make sure that you learn to sit.

Happy Ninth Birthday, Magic Bull!

Hey,
 
Just turned nine!
 
🙂
 
We’ve seen stuff…
 
…in these nine years.
 
What is our endeavour?
 
We’re in the business of creating wealth.
 
What is wealth?
 
It is something that multiplies over a period of time, …
 
…, perhaps over a long period of time.
 
Wealth affords one things – comfort, medicare, education, luxury, and what have you. So does surplus income, but wealth has the capacity to do this whilst keeping its principle value intact, taking care of our need, and still retaining a large surplus.
 
On the grass-root level, wealth is an idea.
 
Look at it as a multiplication matrix.
 
When we’re looking at money through the spectacles of this multiplication matrix, we’re looking to create wealth.
 
When we’re looking at money without using such spectacle framework, well, then we’re looking at sheer liquidity, income, surplus income / funds etc.
 
In this form, funds are spent, or put into an instrument which returns less than inflation. Funds are burnt over time, and over the long-term, their buying power takes a huge hit.
 
Wealth, on the other hand, returns way beyond inflation. Over the very long-term, returns can even be triple-digit per annum (not using the word “compounded” yet). Double-digit returns, per annum compounded (ya, using it now), are normal. 26% per annum compounded gives a 1000%+ return over 10 years (triple-digit per year)!
 
Wealth kills inflation, and then some, actually, and then lots!
 
The assimilation of wealth doesn’t necessarily follow a linear mathematics.
 
It is better to not look at this mathematics on a day to day basis.
 
Wealth is best created out of sight, out of mind.
 
Why?
 
During the journey to wealth, one needs conviction in one’s rock-solid research.
 
Observing day to day trajectory deviation makes one lose such conviction.
 
Worst-case scenario can be to interrupt the wealth-creation process, or to stop it altogether.
 
One encounters many colleagues on the road towards wealth-creation.
 
Sure, everyone wants in.
 
Who ends up creating wealth?
 
In other words, what’s the wealth-creation mind-set?
 
Our basics have been put in place, by us, laboriously, in the beginning.
 
As in, we have a basic income going. Our needs for the next couple of years are taken care of.
 
We’ve been pickling any incoming surplus away.
 
We don’t need to draw on it for a while, for reasons explained above.
 
Our research is rock-solid.
 
Our small entry quantum strategy has been fine-tuned thoroughly.
 
However, we’ll keep at it, tuning further as per requirement.
 
We believe in ourselves, our research and our strategy.
 
WE are going to end up creating wealth.
 
Holding on to wealth and seeing it through to its logical conclusion will be the next challange.
 
Great year ahead, Magic Bull!
 
🙂 🙂

My Buddy called Compounding

Compounding…

…is my happy space.

When I’m having a difficult market day,…

…I open my calculator…

…and start…

…compounding.

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…

…(lemon squeasy).

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.

That’s it.

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.

Sit tight.

Lo, and behold.

🙂

Hocus-Focus

Yeah, where’s your focus at…

…as your market drops. 

Is it on your benchmark index?

Sure.

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. 

Exceptions?

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. 

Right. 

Making Time Work For You

Imagine…

…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?

Sure. 

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. 

Double-shot, please!

🙂

Control

Who’s in control?

You?

Market?

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?

The market?

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. 

Bravo!

How did you position yourself to achieve this?

Primary income not from the markets? 

Not.

Don’t listen to tips?

Don’t.

Have a set time for work?

True.

Have a set place for work?

Roger.

Have a set system that’s implemented?

Affirmative.

Watch market TV?

Nope. 

Read financial news online, or in print?

Only while researching a company.

Do your own solid research?

Do.

‘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.