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.

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.

🙂

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!

🙂

Breathing Space

I like to breathe…

…between trades. 

There’s something fresh about being market neutral. 

One is decoupled from market forces. 

One feels light. 

If one has just closed a losing trade, there’s hung-over disappointment. 

Forget. 

Breathe. 

Move on. 

On the other hand, if one has just closed a winning trade…

…there’s remnant euphoria. 

Forget.

Breathe. 

Move on. 

Why forget?

The next trade is the next trade. 

It has nothing to do with the previous trade. 

Also, one is recuperating, remember?

Market forces take a toll. 

Market neutral air allows the system to regenerate. 

Don’t mistake this market neutral with the other market neutral. 

Insiders speak of being market neutral when they are hedged, and trades on both sides result in an overall market neutral stance for them. 

Hedged market neutral candidates experience a double whammy of market forces. 

You’ve understood by now, that we are talking about the “not in the of the market” neutral stance. 

Should one then even call it market neutral?

I mean, one can call it sitting out, or something. 

I like to call it market neutral breathing space.

When does the neutral strictly apply?

When I don’t know if the next trade is going to be long or short.

What will the trade direction depend upon?

Data. 

Chart. 

Technicals. 

Fundamentals. 

Whatever cooks your goose. 

However, sometimes, one is on a short-short strategy, or for that matter a long-long strategy. Meaning, that one might be out of a trade, but one is waiting to go short (long) on the next one, and so on and so forth. Meaning that one knows one’s trade direction for a defined time frame. 

Well, I still like to call the breathing space between trades market neutral, even here, because the word “neutral” reminds me to keep an unbiased mind about the next entry point. 

I try to then look at the chart free from the remains of previous experience, in my search for an entry point, even though I know the direction that I will be trading.

How much time can one spend between trades?

Depends on when the next setup arrives. 

Why the hurry?

Enjoy the calm of the space.

The Benefit of Quantum upon Quantum

Underlying equity. 

How do you protect against fraud and / or investor-unfriendliness?

You’ve done your research. 

All good. 

Stock is a buy. 

Meets your parameters. 

What’s the next step?

Protection. 

You buy quantum upon quantum. 

You don’t plunge into the stock with all you’ve got to give. 

No. 

You put in a quantum.

Then you wait. 

Better opportunity arises.

Fundamentals haven’t changed. All still good. 

You put in another quantum.

Quantum…

…upon quantum. 

That’s how you keep entering the stock till it keeps giving you a reason to enter. 

Year upon year. 

Between quanta, you’re studying behaviour. 

You’re looking for investor-friendliness. 

Your next quantum is only going in if investor-friendliness continues.

No more investor-friendliness?

No more quanta.

You wait.

Will investor-friendly behaviour resume?

And you wait.

Is it coming?

Yes. 

Good. 

Upon buy criteria being met, next quantum goes in. 

Not coming?

At all?

Ok. You’re looking to exit. 

Market will give you a high to exit. That’s what markets do. They give lows, and highs. 

Wait for the high. 

High?

Exit. 

Holding the Line

Your systems are in place.

They’re implemented. 

Basics are going. Life basics. Family basics.

Then you’ve got your income basics. They’re safe. They generate income. This income goes towards comfortable upkeep of your family. Some of it is saved. 

Your investment portfolios are firing. Savings have built these up. You don’t touch these, but keep adding to them upon opportunity. 

You’ve just finished implementing all your trading systems. 

Some of these are on auto-pilot. 

The other ones demand a little of your time each day. 

They keep you sharp and all there. 

Nothing much. 

Just fifteen to twenty minutes each. 

Skin off your teeth. 

You tackle them with your bed-tea. 

In other words, you are set as far as being income plus plus plus. 

Good. 

Now what?

Now you need to hold the line. 

What does that mean?

It means everything. 

It means no blow-ups…

…no crazy decisions that impact folios and family…

…basically nothing insane coming from you that will threaten your hard-earned situation or worse. 

Holding the line means making sure basics stay intact…

…folios keep growing…

…and new systems keep developing that add to these. 

It’s really that simple. 

When you hold the line, your next step either maintains status quo or adds to you. Preferably, it adds to you.

However, the simpler something is, the more difficult it is to follow. 

What are the demons that can slay you?

Over-confidence.

Over-ambition.

Hubris.

Greed.

Showmanship. 

Debt.

One-up-on-the-Joneses-ideology. 

This stuff looks pretty harmless at first, but is enough to give rise to cracks. 

Cracks grow… 

…till you’ve either come back to your senses and filled and sealed them…

…or till they’ve destroyed you right down to beyond your basics. 

Yeah, a full blow-up is never really far away, once cracks start to appear. 

Therefore…

…while holding the line…

… you keep reminding yourself about what you’re doing…

…why you’re doing it…

…and that you’re never going to blow up, come what may…

…and that you’re going to keep holding the line, come what may…

…and that your next step is always going to add to you.

Happy Holding!

🙂

Nath on Equity – make that a hundred

Long-term equity is 81). brought low.

The idea is to, if required, 82). sell it high.

Otherwise, 83). it is sold when you no longer believe in the stock concerned, for strong fundamental reasons. Or, it is sold when something more interesting comes along, and your magic number is capped. Then you sell the stock you’re least interested in and replace it with the new one.

84). Attitudes of managements can change with changing CEOs. Does a new management still hold your ideology-line?

Is the annual report flashy, wasteful, rhetorical and more of an eyewash? Or, 85). is it to the point with no BS? Same scrutiny is required for company website.

Your winners 86). try to entice you to sell them and book profits. Don’t sell them without an overwhelming reason.

Your mind will 87). try and play tricks on you to hold on to a now-turned-loser that is not giving you a single good reason to hold anymore.

If you’re not able to overcome your mind on 87)., 88). at least don’t average-down to add more of the loser to your folio.

89). High-rating bonds give negative returns in most countries, adjusted for inflation.

The same 90). goes for fixed deposits.

Take the parallel economy out of 91). real estate, and long-term returns are inferior to equity, adjusted for inflation.

92). Gold’s got storage and theft issues.

Apart from that, 93). it’s yielded 1% compounded since inception, adjusted for inflation.

Storage with equity is 94). electronic, time-tested-safe and hassle-free.

Equity’s something for you 95). with little paperwork, and, if you so wish it, no middlemen. In other words, there’s minimal nag-value.

Brokerage and taxes added together 96). make for a small and bearable procurement fees. Procurement is far more highly priced in other asset-classes.

One can delve into the nervous system of a publicly traded company. Equity is 97). transparent, with maximal company-data required to be online.

As a retail player in equity, 98). you are at a considerable advantage to institutions, who are not allowed to trade many, many stocks because of size discrepancies.

All you require to play equity is 99). an internet connection and a trinity account with a financial institution.

If you’re looking to create wealth, 100). there’s no avenue like long-term equity!

🙂