You Miss, I Hit

We’re in the markets to…

…capture gains. 

How do gains come about?

Buy low sell high?

Sure, you’ve then got some gains. 

Enough?

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!

Why?

(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. 

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The Number One Reason

Yeah, what is it?

What’s the number one reason why we fail in a long-term investment?

I’ve made this mistake, and true, those investments didn’t work out well for me.

However, I’ve stopped making this mistake.

That’s right. I don’t buy without margin of safety anymore.

Even a growth stock will eventually offer you some kind of margin of safety.

Wait for it to.

So, why doesn’t an investment work out that hasn’t been bought with margin of safety?

Mathematics…

…and psychology.

Lesser the margin of safety, the more difficult it is to make a multiple. Just do the math.

Then, investor-psychology is such, that investments bought without margin of safety don’t allow the investor to sit.

They disturb the investor when they go against him or her.

The more an investment goes against an investor, the more he or she jumps.

In the end, too much jumping leads to an erratic decision.

In the worst case scenario, one bails out of a sound investment at the lowest point of the market.

How does one avoid something like this?

Learn to sit.

Create circumstances around yourself that allow you to sit.

Buy with margin of safety.

An investment bought with ample margin of safety allows you to sit even when the investment is down.

Because you’re holding sound investments, …

… sitting makes you win in the long-term.

Have the Guts?

Somebody did say …

… that Equity was not for the faint-hearted.

Oh, how true!

Everyday, my heart stands tested!

However, because of a small entry quantum strategy, I am able to stay in the game.

If I am able to stay in the game for multiple cycles, I will prosper.

Why?

Firstly, the strategy by default renders me liquid, such are its tenets.

Then, a good hard look at fundamentals is always called for.

To close, it is important is to enter with technicals to support you.

Now let’s say I make a mistake.

What is a mistake?

Ya, good question – in the markets, what is a mistake?

In the markets, when the price goes against you, you have made a mistake.

So let’s say that I’ve made a mistake.

Is the mistake big?

No.

Why?

Because of my small entry quantum.

What does it mean for my next entry?

Added margin of safety.

Is that good?

You bet.

Why?

Because fundamentals are intact.

What’s going to eventually happen?

Stock’s going to bottom out.

I’ll have a decent amount of entries to my name.

My buying average will be reasonably low.

The margin of safety my buying average allows me will let me sit on the stock forever, If I wish to.

Down the road, one day, I might be sitting on a big fat multiple.

Please do the math.

Happy and lucrative investing!

🙂

The Cue from Disturbia

I am disturbed. 

This stock that I’m invested in is continuing to fall. 

That’s ok.

I want to be disturbed. 

That’s my cue…

…to invest more in the stock.

I’m in the stock for a reason. 

Something appeals to me. 

That something continues to appeal to me, despite the continuous fall. 

If that were not the case, the case for the stock would be closed, and one would look to get rid of it on a market high. 

However, that is the case,…

…and, I follow the small entry quantum strategy.

Where does that leave me?

My investment in the stock is small.

I am liquid.

That’s the beauty of the small entry quantum strategy.

It leaves you liquid.

Continued fall means better margin of safety, and that another quantum can go in.

The small entry quantum strategy ensures multiple entry opportunities as the stock continues to generate margin of safety.

When do my ears stand up?

When the fall is disturbing enough. 

The fall is the cue to go in. 

It is from Disturbia. 

Who said making money was easy?

This strategy works as long as one’s research is sound. 

Let’s go with what works.

Where do you want to be?

Where do I want to be?

Do I want to look at a stock price and know where things stand with the stock in question?

Yes.

That’s where I want to be.

It’s not going to come for free.

What will it take?

Looking at the stock…

…for an year or two.

That’s what it will take.

How boring, you say?

Sure.

When stock market investing seems boring…

…that’s when you’re doing it right.

Excitement and roller-coaster rides are for video-game pleasure, and for making losses.

Money is made when it’s outright boring out there.

Where do you want to be?

In the money?

I thought so.

Then, please get used to boring and don’t ever complain again that things are boring.

How does one position oneself in such a manner that one studies a stock for an year or two.

Hmmm.

Let’s put some skin in the game.

I know, this phrase is becoming more and more popular, what with Nicholas Taleb and all.

Yeah, we are picking up stock.

What stock?

The one we wish to observe for an year or two.

Why pick it up? Why not just observe it?

You won’t. You’ll let it go.

Why?

Because it’s not yours.

So we pick up the stock? What’s the point of observing if we’re picking it up now?

Well, we’re picking up a minute quantity – one quantum – now. That gets our skin into the game. Then we observe, and observe. Anytime there’s shareholder-friendly action by the management, we pick up more, another quantum. We keep picking up, quantum by quantum. Soon, while we’ve kept picking up, we’ve observed the stock for so long, that now, one look at the stock price tells us what kind of margin of safety we are getting in the stock at this point.

Wow.

Now, future entries become seamless. One look and we have a yes or no decision. Isn’t that wonderful?

Absolutely.

That’s where we want to be.

It has to be a Dunk

When I shoot…

… it has to be a dunk.

If I’m not getting a dunk in…

… I’m not shooting.

What are the implications?

Imagine only taking market dunks for multiple decades in a row.

Where do you think that’s going to leave you?

Most of the time, though, one’s not shooting.

That’s because, most of the time, dunk trajectoires are not available.

When one is not shooting, does it become boring?

Only if you let it.

Yeah, just don’t let it.

No action is a good thing.

It saves resources.

Then, when opportunity is available, one might get twenty dunk days in a row.

Things can get so active, that one wants activity to normalize again, if not stop for a while.

Actually, not a challenge.

I’ll tell you what is a challenge…

… for me.

Dunk opportunity…

… and travel.

I don’t like this combination.

How do I deal with it?

First up, what don’t I like about it?

Distraction.

Not doing full justice to the trip.

Not doing full justice to the investing opportunity either, as in distracted due diligence.

Hmmm.

What do we do here?

Sure, you’ll argue, today one carries one’s terminal where one goes.

Does one also carry one’s zone, you know, the magical frame of mind, from within which one takes magic decisions?

Very probably not.

When one takes an investment decision, is it not better to be in this magical zone?

Therefore, unless the opportunity is just too pressing, such that it makes me open my terminal even during travel, …

…, yeah, my terminal mostly stays shut when I’m on the move, …

…, because then it’s time to do other things. Yayyyyy!

😀

Busy Times

Market falls are busy times. 

No, we’re not busy whining. 

We’re busy buying.

Are we not afraid?

That the crack might deepen?

That it might go down to zero?

No.

We’re not afraid of this scenario. 

Meaning?

Meaning that even though such a scenario cannot be ruled out…

Huh!?

Yeah, it can’t be ruled out. With trade wars and back to back black swans waiting to strike, theoretically, the bottom is zero.

And you’re not afraid?

No.

Why?

Because I buy into fundamentally sound businesses…

…zero debt…

…great 5 year numbers…

…sometimes, great ten year numbers…

…and I buy with considerable margin of safety.

Still, one is normally always afraid, right?

Wrong. A small entry quantum strategy kicks out all remnant fear.

How?

This strategy leaves me liquid. Let it go down to zero. I’ll still have liquidity to buy.

And that which you’re buying…

…is sound, yes. If I buy something sound, it will yield returns. It’s like agriculture. Crops grow in good soil. They don’t grow well in bad soil. I make sure that I choose excellent soil.

How does one do that?

Due diligence. Period.

With all the scams and frauds going on…

Well, I look long and hard for shareholder-friendly managements. Representable salaries, willingness to share, largesse, debt-averseness, intelligence, business savvy, the list goes on.

What if you land up with a fraud management?

Solid research will make you avoid scamsters. I search the internet thoroughly for any kind of smoke. Crooks leave a trail, and one is able to catch their online trail pretty easily. 

Alone online?

Second recourse are annual reports. They reveal a lot. I don’t invest in a company without having a thorough look into its annual reports. I look at CSR, the director’s report, skin in the game, balance sheets, profit and loss statements, cash-flow, special items, what have you.

What if you still land up with a fraud?

After I know I’ve landed up with a fraud management, I would look to exit at the next market high. 

What if your holding is wiped out till then?

If it’s wiped out, I have many other holdings to lean on, and don’t forget the liquidity that is yet to flow into honest managements.

So you’re not afraid of the loss?

There is some risk one has to take. Here, it is the risk of being wrong. The good thing is, once I know that I’m wrong, I won’t double up on my wrong call. I’ll get busy elsewhere and look to exit from my wrong call with as little damage as possible, perhaps even in profit.

Profit?

You forget, I like to buy with margin of safety, and you’d be surprised at what people are willing to pay at market highs. 

I see, well then, happy investing!

Thanks! 🙂