What’s that other fellow doing?

The human being is nosy.

Maybe curious is a better word.

Problem is, this one characteristic is enough to make one fail in the market.

Curiousity is a good thing. At the right time and in the right area, yes.

Curiousity is a bad thing at the wrong time and in the wrong area.

However, that’s how we are wired. We like to know what that other fellow is doing, the one who is successful. We want to do the same thing. We want to ape the success. Whether we know anything about that other fellow’s field or not becomes secondary.

That’s when the walls begin to crumble.

Know your field.

Develop it.

Be curious in your field.

Succeed in your field.

If you don’t, after trying repeatedly, change your field.

Find a field that you’re successful in.

If one successful field doesn’t fulfill you, develop a second field.

However, just because your best friend hit the jackpot in his field, don’t move over to his field and expect to hit the jackpot too.

Unfortunately, we show that kind of behaviour again, and again and again.

That’s human nature.

A prime example comes from the stock market.

At the end of a boom, the last ones holding the hot potatoes (stocks that have gone up too much) are the “pigs” (retail traders and investors who buy at exorbitant prices after getting lured in by the successes of the earlier parts of the boom), who then get slaughtered. This is common stock-market jargon, by the way. It has gotten so streamlined, because it has happened again, and again and again.

If you’re doing stocks, do stocks properly. Make stocks your life’s mission. Or, don’t do stocks. Period. There’s no in-between to being successful. Success in stocks, like success in any other field, demands your full attention. Don’t do stocks just because the other fellow made a killing in stocks.

Memory is weak.

Give the bust a few years, and a whole new set of pigs launch themselves at the fag end of the next boom.

Right.

Slaughter.

You’re not a pig.

Know your field. Stick to it. Succeed in it. Period.

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Discipline or Brilliance, what would you have?

Both?

Ha!

Getting cocky already?

That’s brilliance for you.

Over-confident, lazy, show-offy, indulgent, holier-than-thou…, the list goes on.

These are some of the things brilliance also leads to, apart from displays of itself.

Would you still have it?

Many would.

The average being likes being spared the spade-work.

And you know what? I don’t even desire it in this form, with all these poisonous side-effects.

However, it’s acceptable to me in a different form, without the poison.

How does that work?

Ever slogged?

Hard work and discipline, people?

Heard of these?

These two have the side effect of – sparks of brilliance, without the poison.

How?

Bell curve of human effort – imagine.

You’re working at it’s edge.

Miniscule parts of you stray over to its beyond.

Rest of you eventually asks – hey, where are those miniscule missing parts?

Back they come.

They’re bring back vibrations from beyond the bell-curve.

These vibrations diffuse into you.

Some of them get absorbed. The rest dissipate.

Those getting absorbed find thought patterns they can cling to. That is how they are absorbed.

This energy from outside of our three perceivable dimensions, now fused with nascent but constructive thought patterns – what does it do?

It brings these thought patterns to fruition and to their logical conclusion.

Such actions are perceived as sparks of brilliance by humanity.

Such actions change humanity for the better.

That’s the kind of brilliance to strive for – through hard work and discipline.

Endgaming?

What’re we up to, in this world?

We’re endgaming.

Am I crazy?

No.

Why am I saying so?

Look at our policies.

It’s not just finance.

Everything.

We’re endgaming everything.

Good or bad?

Whether good or bad, we’re in it.

Where does that leave you?

You’re part of we.

You’re in it too.

How should you react?

Build a strategy for an endgame.

Live like there’s a tomorrow.

Your system needs to incorporate endgame parameters.

Distance yourself from those who live like there’s no tomorrow.

Save.

Build structures.

Spread your frugality.

Help.

Teach.

Donate some of your surplus. Spread hope, and goodness.

Create positivity. Let its protective bubble go big. So big, that it protects in a radius of kilometers.

Play like you’re playing for your life.

Everything’s at stake.

Give it all you’ve got… and then some.

Ignore your aches and pains.

Lend vital support to those tumbling around you.

This is it.

There’ll only be a tomorrow if there are more like you.

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!

And How Are You This 20k?

20k’s knocking on our sensory index.

How are you feeling, this 20k?

I remember my trading screen, the first time 20k came. Lots of blue till it came, and when it came, the screen just turned into a sea of red.

Sell orders hit their auto-triggers, as if it were raining sell orders along with cats and dogs.

What is it about round numbers?

Why do they engulf us in their roundness?

I don’t think I am making a mistake in stating that the first person to recognize the significance of round numbers in the game was Jesse Livermore, the legendary trader. Jesse developed a round number strategy that he pulled off repeatedly, with enormous success. It is because of Jesse Livermore that a trader takes round numbers … seriously.

So, what is it about the roundness of 20k?

Plain and simple. The 0s engulf the 2. You don’t see the 2 anymore, and the 0s scare you. Or, they might excite you. Round numbers make the human being emotional.

Big question for me, to understand my own mindset – how am I reacting to 20k?

I would like to share my reaction with you, because it could help you understand your own reaction.

Also, writing about it makes me understand my own reaction better. Thoughts get assimilated.

Yeah, it’s not all social service here, there’s some selfish element involved too.

Besides, I have a bit of a guilty conscience about the amount of research the internet allows me to do, free of cost. I mean, I can get into the skin of any listed company with a few button-clicks. All this writing – is a give-back. You’ll get your calling soon enough. Nature will tell you where you need to give back. When that happens, don’t hold back – give freely. It’s a million dollar feeling!

Back to the topic.

I’ve seen 20k twice before, I think, perhaps thrice. Oh right, between late September and December ’10, it came, was broken, then it came back, to be again broken on the downside, all within a few months.

The aftermath of the first time I saw it (in November ’07) hammered me, though, and taught me my biggest market lessons. I’m glad all this happened in my early market years, because one doesn’t normally recover from huge hammerings at an advanced stage in one’s market career.

The second / third time I saw 20k, I was profiting from it to a small extent. A vague kind of strategy was developing in my mind, and I was trying all kinds of new trading ideas so as to formulate a general strategy for big round numbers.

This morning, I saw 20k for the fourth time, for a few minutes.

By now, I was on auto-pilot.

A human being will have emotions. A successful market player will know how to deal with these emotions.

I bifurcated my emotions into two streams.

One was the fear stream.

The other was the exuberance stream.

The former helped me decide my future investment strategy.

The latter helped me decide my future trading strategy.

In my opinion, a good investment strategy in times of market exuberance would be to not look for fresh investments anymore. This morning, I decided to stop looking for fresh investments, till further notice.

Sometimes, when you’re not looking for an investment, you might still chance upon a company that sparks your investment interest.

If that happened, I would still scrutinize such a company very, very thoroughly, before going ahead. After all, these were times of exuberance.

Yeah, fresh investments would be on the backburner till margins of safety were restored.

Now let’s speak about the exuberance stream.

Market looked ripe for trading. Fresh market activity would take the shape of trading.

Trading is far more active an activity, when compared to investing. We’ve spoken a lot about the difference between trading and investing, in previous posts. Investors enter the market when stocks are undervalued, because the general market is unable to see their intrinsic value. Traders take centre-stage when stocks are overvalued, because the general market is repeatedly attributing more and more value to stocks, much more than should be there. Traders ride the market up, and then short it to ride it down.

Yeah, till further notice, I would be spending my energies trading. After a while, I would re-evaluate market conditions.

That’s what I thought to myself this morning.