FOMO anyone?

Sure, buy…

Where were you some days back?

Buying was a breeze, for quite a while. 

Lately, as in, since Tuesday, it’s not so much a breeze. 

Pharmaceuticals are already up to their pre-crisis prices, and IT needs to recover another 10 – 15% and it’s there. 

If this trend continues for another week, we could be talking about an interim recovery. 

Prices haven’t recovered fully, you would argue, right?

Fine. That’s a valid perspective, in the event that you are a long-term investor.

What’s your compromise?

You won’t be getting full margin of safety at these prices. 

Also, on these up days, there’s so much upwards pressure that the bid-ask spread squeezes you generously to the upside. 

A few days back both these avenues were reversed. 

Still want to buy?

Wait for a big down day.

Margin of safety will be slightly better, and downward pressure will let you buy on limit, lucratively set to harness the downward momentum. 

How do we know that a big down day is coming, in the first place?

We don’t.

What if there aren’t any more big down days in the near future?

Wonderful.

Lock your spare funds away safely, and wait patiently for the next shock. 

Waves operate in shocks. 

This is the age of shocks. 

Buy in the aftermath of a shock. 

What if one isn’t able to buy anymore?

Even better.

Lock in whatever you’ve bought, and divert your attention to other activities.

Like?

Trade.

What?

Currency.

Oil.

Bullion.

Energy.

Industrial metals. 

Do something that takes away your attention from your locked in equity.

Why?

That way you will be able to sit without spoiling your compounding that will happen while you sit. 

Just forget about FOMO. Live in the now. Have your job cut out. Wait for the right conditions to appear. Then act.

The Market Aha Moment

What is an Aha moment?

Any ideas?

Simple. It’s when you go “Aha, so that’s what it’s like!”

Or “Aha, so that’s what it’s supposed to be!”

You’ve understood something big. Finally. You see light. That’s an Aha moment. 

The human being likes to be happy. 

Professional happiness adds to our well-being. 

To be professionally happy, you need to be doing something during which you forget about time. 

What is this something for you?

Wait for your Aha moment. 

Let’s assume you’ve decided upon a profession in the markets. The next question is… which market?

Which market draws you out fully? Which market consumes you? In which market do you perform the best? In which market are you happy?

Why isn’t your Aha moment coming here too?

Well, Aha moments aren’t for free. You have to struggle for them. 

Start trying out different markets. 

See what gives you a kick.

See where you have a natural flair.

See what lingers.

Discard what you can’t stand.

Hit and try.

Try everything if you must.

Eventually, something will speak to you.

You’ll want to be in one particular market, perhaps two.  

It’ll be your calling. 

Aha. 

I’ll tell you how it went with me. 

I started with Equity. 

Fluked a few. Made some money. Bet bigger. Thought I was good. Won some more. Bet really big. Lost huge. Thought to myself – no more Equity. 

Then came Gold and Silver. Did ok. Found it boring. No more Gold and silver. 

Tried Private equity. Did ok. Boring. 

Arbitrage. Boring. But, an avenue for parking.  

Real estate. Corrupt.

Commodities…didn’t get a kick. The delivery option always loomed over my head. What if I forgot to square off?

Stock futures. Got hammered. No more. 

Foreign stocks. Time difference killed my evenings. Out. 

Foreign mutual funds. Expense ratios were sky-high. Slugged it out for a while, but then finished it off. Lost. 

Structures – broke even, then won a bit. Got bored. 

Debentures. Only do short term ones, to park funds. No kicks. Debt is boring by default.

Mutual funds. Yeah, well, did my fair bit of them. Did excite me, since they were connected to Equity. As of now, there’s just light MF activity. 

Stock options. Lost a bit, but didn’t actually get hammered. Gave me a bit of a kick. Well, it was Equity related, so no wonder. Started interfering with my second Equity stint. I let options go. 

Second Equity stint. Did ok…ok…ok…lost a bit, won a bit, was enjoying it, when suddenly…came Forex. 

Forex…whoaahh…I loved it. Swept me away. Technology, charting, skill-set, I wanted to be here. Aha. Huge leverage, though. Risk. This had to be my second game, not my first. Yeah, safety first, always. Alright, what would be my first game? Yeah, what would be my bulk game? 

Equity of course. I understood it and enjoyed it. I’d done ok. Had leant lessons. Knew how to handle it. Infrastructure was in place. Aha. Nailed it in the third attempt.

So and thus, I found my games upon my Aha moments. That’s where I am. Don’t plan to do anything else.

When’s your Aha moment coming?

Work towards it. 

And What’s so Special about Forex?

Imagine in your mind …

… the freedom to trade exactly like you want to.

Is there any market in the world which allows you complete freedom?

Equity? Naehhh. Lots of issues. Liquidity. Closes late-afternoon, leaving you hanging till the next open, unless you’re day-trading. Who wants to watch the terminal all day? Next open is without your stop. Then there’s rigging. Syndicates. Inside info. Tips. Equity comes with lot of baggage. I still like it, and am in it. It doesn’t give me complete freedom, though. I live with what I get, because equity does give me is a kick.

Debt market? A little boring, perhaps. Lock-ins.

Commodities? You wanna take delivery? What if you forget to square-off a contract? Will you be buying the kilo of Gold? Ha, ha, ha…

Arbitrage? Glued to screen all day. No like. Same goes for any other form of day-trading.

Mutual Funds. Issues. Fees. Sometimes, lock-ins. MFs can’t hold on to investments if investors want to cash out. Similarly, MFs can’t exit properly if investors want to hang on. And, you know how the public is. It wants to enter at the peak and cash out at the bottom. 

Private Equity? Do you like black boxes? You drive your car? Do you know how it functions? You still drive it, right? So why can’t you play PE? Some can. Those who are uncomfortable with black boxes can’t. 

CDOs? @#$!*()_&&%##@.

Real Estate? Hassles. Slimy market. Sleaze. Black money. Government officials. Bribery. No like.

Venture Cap? Extreme due diligence required. Visits. Traveling. The need to dig very deep. Deep pockets. Extreme risk. No. 

Forex? 24 hr market. Order feed is good till cancelled. Stops don’t vanish over weekends. Stops can be pin-pointedly defined, and you can even get them to move up or down with the underlying, in tandem or in spurts. You can feed in profit-booking mechanisms too, and that too pin-pointedly. You watch about 10-11 currency pairs; you can watch more if you want to. 10-11 is good, though. You can watch 4, or even 2 or 1, up to you. Platforms are stupendous, versatile, malleable, and absolutely free of charge. You can trade off the chart. Liquidity? So much liquidity, that you’ll redefine the word. No rigging – market’s just too large. The large numbers make natural algorithms like Fibonacci work. Technicals? Man, paradise for technicals. Spreads? So wafer thin, that you barely lose anything on commissions. Oh, btw, spreads are treated as commissions in forex; there’s no other commission. Money management? As defined as you want it to be. Magnitude? As small or as large as you want to play? Comfort? You make your morning tea, sip it, open your platform, feed in orders with trigger-entry, stop and limit, and then forget about the forex market for the rest of the day, or till you want to see what’s happening. Yeah, comfort. Challenge? You’re playing with the biggest institutions in the world. What could be more challenging? I could go on. You’re getting the gist. 

Yeah.

Forex is a very special market. 

Also, the forex market is absolutely accessible to you, online. 

If you decide to enter it one day, play on a practice account till you feel you’re ready for a real account. 

If and when you do start with a real account, for heaven’s sake start with a micro account, where 1 pip is equal to 0.1 USD. 

🙂

 

 

 

Taking the Pan out of Panic

Panic – Pan = ic = i see = I SEE.

Times are unprecedented.

We’re breaking new lows of evil everyday.

Ours looks to be a hopeless nation.
Is it over for us?

Shall we pack up our bags and migrate?

Just take a deep breath. Bear with me for a moment. Try and cast your panic aside. Try and think clearly.

I’ll share with you an observation. Take any Indian. Doesn’t have to be an outperformer. Take an under-averagely performing Indian, for all I care. Weed him or her out of our pathetic system, and place him or her in a nation with good governance.

Lo and behold, our candidate will start performing. Not only that, soon, he or she will be outperforming. After a decade or so, he or she will probably have mastered the system and punctuated it with innovative short-cuts.

Get my point?

We are a resilient race. We might look fickle, frail and harmless superficially, but we can struggle, bear, survive, and finally break out. Just give us good governance.
Don’t panic. We’re not going down that easily.

What’s happening currently is a purge. Yeah, it’s a catharsis with a big C. While it continues, asset classes across the board will probably get hammered.

What does that mean for you?

Only one thing.

Stay in cash. Accumulate it. Learn to sit on cash. Sit on it as long as the purge lasts. Let its value depreciate, doesn’t matter. Park it safely with a conservative private bank. Fixed deposits would be the instruments of choice. Yeah, you don’t want to leave unattached cash lying around. Potentially, unattached cash could be susceptible to online fraud. Attach your cash, safely, and keep it before your eyes. Put some watch-dogs in place, as in sms and email alerts. Password-change attempt? You are immediately alerted. New payee added? You are immediately alerted. Watch-dogs bark.

As per my instinct, though we probably won’t go bankrupt as a nation, we might just go a long way down before the purge is over. After the purge, there will be tremendous bargains on offer, across the board, in all asset-classes. Cash will be king. Save your cash and sit on it – for that day.

Meanwhile, your wealth-manager will try to push you into panic purchases with your cash. As in, buying gold at 32k, and the USD at 65. Don’t listen. These are crazy levels. One doesn’t invest at crazy levels. These are not even normal trading levels. Yes, they are institutional trading levels. One does not invest at institutional trading levels.

It’s time to use your common-sense and maintain a cool head.

You can only do that by refusing to panic.

Happy Second Birthday, Magic Bull !!

Seasons change. So do people, moods, feelings, relationships and market scenarios.

A stream of words is a very powerful tool to understand and tackle such change.

Birthdays will go by, and, hopefully, words will keep flowing. When something flows naturally, stopping it leads to disease. Trapped words turn septic inside the container holding them.

Well, we covered lots of ground, didn’t we? This year saw us transform from being a money-management blog to becoming a commentary on applied finance. The gloom and doom of Eurozone didn’t beat us down. Helicopter Ben and the Fed were left alone to their idiosyncrasies. The focus turned to gold. Was it just a hedge, and nothing but a hedge? Could it replace the dollar as a universal currency? Recently, its glitter started to actually disturb us, and we spoke about exit strategies. We also became wary of the long party in the debt market, and how it was making us lazy enough to miss the next equity move. Equity, with its human capital behind it, still remained the number one long-term wealth preserver cum generator for us. After all, this asset class fought inflation on auto-pilot, through its human capital.

Concepts were big with us. There was the concept of Sprachgefühl, with which one could learn a new subject based on sheer feeling and instinct. The two central concepts that stood out this year were leverage and compounding. We saw the former’s ugly side. The latter was practically demonstrated using the curious case of Switzerland. There was the Ayurvedic concept of Satmya, which helps a trader get accustomed to loss. And yeah, we meet the line, our electrolytic connection to Mrs. Market. We bet our monsters, checked Ace-high, gauged when to go all-in against Mrs. Market, and when to move on to a higher table. Yeah, for us, poker concepts were sooo valid in the world of trading.

We didn’t like the Goldman attitude, and weren’t afraid to speak out. Nor did we mince any words about the paralytic political scenario in India, and about the things that made us go Uffff! We spoke to India Inc., making them aware, that the first step was theirs. We also recognized and reacted to A-grade tomfoolery in the cases of Air India and Kingfisher Airlines. Elsewhere, we tried to make the 99% see reason. Listening to the wisdom of the lull was fun, and also vital. What would it take for a nation to decouple? For a while, things became as Ponzi as it gets, causing us to build a very strong case against investing a single penny in the government sector, owing to its apathy, corruption and inefficiency. We were quite outspoken this year.

The Atkinsons were an uplifting family that we met. He was the ultimate market player. She was the ultimate home-maker. Her philanthropy stamped his legacy in caps. Our ubiquitous megalomaniac, Mr. Cool, kept sinking lower this year, whereas his broker, Mr. Ever-so-Clever, raked it in . Earlier, Mr. Cool’s friend and alter-ego, Mr. System Addict, had retired on his 7-figure winnings from the market. Talking of brokers, remember Miss Sax, the wheeling-dealing market criminal, who did Mr. Cool in? She’s still in prison for fraud. Our friend the frog that lived in a well taught us about the need for adaptability and perspective, but not before its head exploded upon seeing the magnitude of an ocean.

Our endeavors to understand Mrs. Market’s psychology and Mr. Risk’s point of view were constant and unfailing, during which we didn’t forget our common-sense at home. Also, we were very big on strategy. We learnt to be away from our desk, when Mrs. M was going nowhere. We then learnt to draw at Mrs. M, when she actually decided to go somewhere. Compulsion was taken out of our trading, and we dealt with distraction. Furthermore, we started to look out for game-changers. Scenarios were envisioned, regarding how we would avoid blowing up big, to live another day, for when cash would be king. Descriptions of our personal war in Cyberia outlined the safety standards we needed to meet. Because we believed in ourselves and understood that we were going to enhance our value to the planet, we continued our struggle on the road to greatness, despite any pain.

Yeah, writing was fun. Thanks for reading, and for interacting. Here’s wishing you lots of market success. May your investing and trading efforts be totally enjoyable and very, very lucrative! Looking forward to an exciting year ahead!

Cheers 🙂

Isn’t This Other Party Getting Too Loud?

We in India have decided to go for gold after the Olympics.

I mean, there’s a whole parallel party going on in gold.

What’s with gold?

Can it tackle inflation?

No.

Is there any human capital behind it?

No.

Meaning, gold has no brains of its own, right?

Correct.

Is there a storage risk associated with gold?

Yes.

Storage volume?

Yes.

Transport inconvenience?

Yes.

Price at an all time high?

Yes, at least for us in India. We’d be fools to consult the USD vs time chart for gold. For us, the INR vs time chart is the more valid one for gold, because we pay for gold in INR.

Getting unaffordable?

Yes.

No parameter to judge its price by, like a price to earning ratio for example?

No.

Then how am I comfortable with gold, you ask?

Right, I’m not.

Can I elaborate, is that what you are requesting?

Sure, it’s exorbitance knocks out its value as a hedge. A hedge is supposed to balance and stabilize a portfolio. Gold’s current level is in a trading zone. It is not functioning as an investor’s hedge anymore.

Why?

Because from a huge height, things can fall big. Law of gravity. And gold’s fallen big before. It doesn’t need to begin it’s fall immediately, just because it is too high. That alone is not a valid reason for a big fall, but the moment you couple the height with factors like improvement in world economics, turnaround in equities (if these factors occur) etc., then the height becomes a reason for a big fall. Something that can fall very big knocks out stability and peace of mind from an investor’s portfolio. The investor needs to bring these conditions back into the portfolio by redefining and redesigning the portfolio’s dynamics.

How?

By selling the gold, for example, amongst other things.

What’s a good time to sell?

Well, Diwali’s a trigger.

Right.

Then, there are round numbers, like 35k.

What about 40k?

Are you not getting greedy?

Yeah – but what about 40k?

Nothing about 40k. Let 35k come first. I like it. It’s round. It’s got a mid-section, as in the 5. It’s a trigger, the more valid one, as of now.

Fine, anything else?

Keep looking at interest rates and equities. Any fall in the former coupled with a turnaround in the latter spells the start of a down-cycle in gold.

Is that it?

That’s a lot, don’t you think?

I was wondering if you were missing anything?

No, I just want to forget about gold max by Diwali, and focus on equities.

Why’s that?

There are much bigger gains to be had in equities. History has shown us that time and again. Plus, there is human capital behind equities. Human capital helps fight inflation. What more do you want? Meanwhile, gold is going to go back to its mean, as soon as a sense of security returns, whenever it does.

And what is gold’s mean?

A 1 % return per annum, adjusted for inflation, as seen over the last 100 years.

That’s it?

Yeah.

And what about equities?

If you take all equities, incuding companies that don’t exist anymore, this category has returned 6% per annum over the last 100 years, adjusted for inflation.

And what if one leaves out loser companies, including those that don’t exist anymore.

Then, equity has returned anything between 12 -15% per annum over the last 100 years, adjusted for inflation.

Wow!

Yeah, isn’t it?

Getting Too Comfy For Our Boots, Are We?

What a party we are having in the debt-market, aren’t we?

Exceptional payouts, day after day, week after week, month after month, it’s almost going to be year after year.

Are you getting too comfortable? Lazy, perhaps?

Meaning to say, that when you can get a 10 % return after tax without having to move your behind for it, it is a very welcome scenario, right?

People, scenarios change.

It isn’t always going to be like it is at the moment.

Are you flexible enough to change with the scenario?

Or will you be lost in the current moment, so lost, that you will not recognize the signs of change?

What would be these signs? (Man, this is like spoon-feeding….grrrrrr&#*!).

Inflation begins to fall.

The country’s central bank announces back to back interest rate cuts.

Too lazy to read the paper? Or watch the news? Ok, if nothing else, your online liquid mutual fund statement should tip you off.

How?

The payout, dammit, it will have decreased.

Also, something else starts performing.

What?

Equity.

Smart investors don’t like the debt payout anymore. They start moving their smart money into value equity picks.

Slowly, media stops reporting about a gloomy economy. The buzz gets around. Reforms are on the way.

Foreign direct investment picks up. The media latches on to it. It starts speaking about inflows as if the world begins and ends with inflows.

Now, the cauldron is hot and is getting hotter.

Debt payouts are getting lesser and lesser. Equity is already trending upwards, and has entered the meat of the move.

If the trend contnues, a medium to long-term bull market can result.

There you have it, the chronology played out till just before the start of a bull market of sorts.

Be alert. Recognize the signs early. Be mentally in a position to move out of the debt market, if the prevailing scenario changes.

Otherwise…

… you miss a first run in equity. Boo-hoo. When stocks cool at a peak, and start falling, you make multiple wrong entries into them.

You get hammered by equity, having caught it on the down-swing.

You missed the correct entry time-point in equity because the debt-market made you too comfortable. You were late to act. When you acted, finally, you caught a correction, and took a hammering.

One or two more hammerings like that, and you’ll be off equity for the rest of your life.

And that, my dear friend, would be a pity.

Why?

Because, in mankind’s history, it is stocks that have given the best long-term returns. Not gold, not debt, not bonds, but stocks.

You need to approach them properly, and timing is key.

What’s your Value to the Planet?

Nothing’s forever.

That applies to the Dollar too.

Let’s be very clear in our minds, that the Dollar is not going to rule the roost forever.

Nothing has.

Is the US showing the fundamentals that would allow the USD to hold its position for even a decade?

I don’t think so.

The policy to print notes and to throw them from a helicopter on top of any problem or issue is long-term detrimental to the Dollar’s fundamental value.

Eventually, fundamentals shine forth. What’s true is true, and eventually, the truth is recognized.

What then?

Gold-standard?

Possible.

Has been adopted before.

What speaks against it?

Gold’s too bulky. Can’t carry it around.

So what? Store it in a bank, and carry its value on a credit card, ready to be spent.

There could be Gold wars.

Aren’t there Dollar wars? Oil wars? So fine, there will be Gold wars. Tell me something new.

Gold reserves are limited.

Hmmm, after all the world’s Gold has been mined, what then?

Actually, why do we want get into this rigmarole in the first place?

How about this?

What’s your value to the planet?

Can it be translated into a point system at any given time? Can the points be carried around on a credit card, ready to be spent?

Why not?

Your blog gets a hundred clicks today, so big brother adds a hundred value points to your value point (VP) account, redeemable through a carry card, or an iris-check, or finger scan or what-have-you.

You do community service for five hours @ 50 VPs an hour and scoop up a cool 250 veeps (= VPs).

What? You invented a breakthrough technology? You get it patented through big bro, and everytime anyone uses it worldwide, 5 veeps are transferred to you. For life. You’ve made it big.

You manufacture gambols? Every unit sold fetches you 2 veeps. Oh, you’re making wimlets for 5 veeps a piece, are you?. Dragloons for 20? Hamlins for half a veep?

A burger costs one-fourth veep, and a round of groceries can set you back by up to 10 VPs.

You’ve got to keep them VPs going. If you’re clever, you’ll do something that keeps the veeps coming in on auto-pilot, so that you can focus on something new, to achieve another breakthrough elsewhere.

Dr. Dracula charges 2 veeps for a blood-test. He does 10 blood tests a day for free. Big B rewards any pro bono activities with bonus veeps. Doc Dracula doesn’t mind.

Professor Loo Sing Mind delivers lectures at 50 veeps a shot. He also lectures at the community evening school twice a week. Bro wanted to reward him 50 VPs per community lecture. Prof forwarded the reward veeps to the “food for the poor scheme”.

Herr Wasser serves water at the factory all day. He earns an eighth veep for every glass served.

Miss Gour May owns a restaurant. Any food that’s left over is distributed to the hungry. BB is not leaving any form or service unrewarded. Miss May earns an extra 100 veeps a month from the state for being an exemplary citizen.

Mrs. Sprint Fast is a national athlete. For every international race she wins, there are 50,000 VPs waiting. Her olympic gold medal got her a million veeps from benevolent big brother. When she retires, she’ll take up sports journalism @ 50 veeps per two hours of coverage or per article.

Mr. Poo R. Man is a beggar. The state shuns him. There’s no way for anyone to transfer even a single VP to him. He can only be given physical food and clothing by charitable people. He soon decides to quit begging, and joins community school to learn a craft. His studies are funded by the state. Citizens are free to donate veeps to various schemes run by the state. Community school is one such scheme.

Dr. Savio Planeto is a research scientist who works for the Climate Change Foundation. He is paid 1000 VPs for every day of research. Any breakthroughs will be rewarded extra, and befittingly. His summa cum laude on his Ph.D. earned him a million veeps from the state.

Miss Bee Keaney walks the ramp for 2000 veeps a go. 25 assignments a month keep her account flooded.

Mr. Keep D. Law is a government servant in the justice department. For any papers that he pushes through on time, there are 50 veeps waiting for him. Any slacking means no VPs. If a case is closed, he gets 500 veeps if he has a role in the case’s paperwork. Thus, the state encourages him, a small cog in the wheel, to push cases towards closure. Imagine, then, the efficiency of this state. Also, there’s no way any citizen can pass on a VP bribe to Mr. Law. It’s just not possible without anybody noticing. So it’s not done. Result is, that the government servant focuses on efficiency to ramp up his VP account.

SEE?!?

Within a few minutes, we have been able to conjure up a whole new currency system that functions on the basis of one’s value to the planet.

If we can do this within minutes, why can’t the world work towards it in the next twenty odd years?

Of course it can.

What U Gonna Do When They Come For U?

“Bad Boys Bad Boys, what u gonna do…

what u gonna do…

… when they come for you?”

Lots of bad boys floating around.

They make a beeline for an underlying, for example Gold. Hike up its price. Entice you to enter at a peak. They cash out. You, the slow poke, are left high and dry.

Then the bad boys gang up and short the underlying simultaneously. Price tanks. From one day to the next, you are sitting on a large loss. You get out, disgusted.

Don’t make yourself vulnerable to such bad boys. Get your strategy right.

Buy at strategic points. If you are buying at dips, do so at pinpointed levels, like Fibonacci ones. You can also buy when a resistance is broken. Or, you can buy when a high is taken out with volume. Don’t buy above that. Meaning to say, that’s the vulnerability cut off. After that, you expose yourself to the bad boys, because you don’t have any margin of safety after that point. Through your actions, you activate bad boy zone.

On the short side, go short at strategic points in a rally. That’s where margin of safety is maximum. You can also short when a support is broken. Or, you may go short when a low is taken out with volume. Below that is bad boy zone.

At times, the human being likes the thrill of being in bad boy zone. Got me there, I like it too. Only sometimes. In bad boy territory, you need to be light. Don’t carry too much cash in your pockets when they come for you. In bad boy territory, do options. Options are your best friends here.

The advantage of operating in bad boy territory is that every now and then, there’s a jackpot for the taking. There’s no telling how far bad boys take an underlying in a particular direction. Where there’s risk, there’s reward. Out of ten option trades you put on, at least two or three should hit the pot if your research is good. That’s all you need.

In bad boy territory, the only position you want to be in is about showing the jackpot in the one hand and the finger from the other. By default, your losses must be small here, and they are, because you are doing options. Period. With that, you’ve shown the necessary aggression that is required in this territory, and you’ve also shown proper backfoot (defence) strategy. That is winning behaviour in bad boy territory. That’s the language understood by bad boys, telling them to lay off. Now, even if they try to come for you, they’ll not get you. Ever.

Is Commodity Equity Equal to Commodity?

Rohit likes Aarti, but has no access to her.

Priya wants to be friends with Rohit. Priya looks a bit like Aarti and behaves like her too, at times.

Rohit and Priya become friends.

Is Priya = Aarti?

Can this question be answered with a resounding yes or no?

Of course Priya is not equal to Aarti. Priya is Priya and Aarti is Aarti. Ask Rohit about it during one of Priya’s temper tantrums.

And, at other times, Priya is just like Aarti. At still other times, Priya is as calm as the Pacific Ocean. Even calmer than Aarti. At those times, Rohit feels he is even better off with Priya than he would have been with Aarti.

After this short diversion into human relationships, let’s study the correlation between commodities and commodity equity.

The average working individual does not have access to commodities as an asset class. He or she is not a farmer, and doesn’t have the time or the nerve to play futures and options, in an effort to put some money in commodities.

Is there any avenue such a person can access, to invest a piece of his or her pie in commodities.

It’s time to study the world of commodity equity.

For example, we are talking about agriculture stocks, precious and non-precious metal mining stocks, oil and natural gas stocks etc. etc.

Do such stocks always behave as their underlying commodity?

Can one put one’s money in commodity equity, and then feel as if one has put the money in commodities?

These questions can be answered in terms of correlation.

There are times when Gold moves x%, and Gold equity also moves x%, in the same direction. At such times, the correlation between Gold and Gold equity is 1:1.

At other times, the levels of movement can be mismatched. For example, the correlation can be 0.8:1, or 1.2:1. Sometimes, there is even a negative correlation, when Gold moves in one direction, and Gold equity in the other. At still other times, one moves, and the other doesn’t move at all, i.e. there is no correlation.

You see, Gold equity first falls under the asset class of equity. It is linked to the mass psychology of equity. When this mass psychology coincides with the mass psychology towards commodities, here specifically Gold, there is correlation. When there is no overlap between these psychologies, there is no correlation. When the public just dumps equity in general and embraces commodities, or vice-versa, there is negative correlation. These relationships can be used for all commodities versus their corresponding commodity equity.

What does this mean for us?

Over the long-term, fundamentals have a chance to shine through, and if there is steady and rising demand for a commodity, this will reflect in the corresponding commodity equity. Over the long term, the discussed correlation is good, since truth shines forth with time. That’s good news for long-term investors.

Over the medium-term, you’ll see correlation at times. Then you’ll see no correlation. You’ll also see negative correlation. Position traders can utilize this information to their benefit, both in the long and the short direction.

Over the short-term, things get very hap-hazard and confusing. It would be wrong to look for and talk in terms of correlation here. In the short-term, for trading purposes, it is better to treat commodity as commodity and commodity equity as equity. If you are trading equity, a gold mining stock or any other commodity equity stock might or might not come up in your trade scan. When such a stock does get singled out for a trade as per your scan, well, then, take the trade. Don’t be surprised if at the same time your friend the commodities trader is trading oil futures instead, or is just sitting out. That’s him or her responding to his or her scan. You respond to your scan. In the world of short-term trading, it is hazardous to mix and correlate commodities with commodity equity.

Phew, that’s it for now. It’s taken me a long time to understand commodity equity, and I thought that I’d share whatever I understood with you.

Jumping Jackstops

Recently, Mr. Cool and Mr. System Addict decide to get into a trade.

Yeah, surprise surprise, Mr. Cool is liquid again!

They’ve decided to trade Gold, and are pretty much in the money already. Their trades have come good first up. Both are leveraged 25:1, which is common with Gold derivatives. Mr. Addict has bet 5% of his networth on the trade, and Mr. Cool, true to his name, has matched Mr. Addict’s amount.

Gold prices jump, and Mr. Addict’s target is hit. He exits without thinking twice, and is pretty pleased upon doubling his trade amount within a week. He pickles 90% of the booty in fixed income schemes, and is planning a holiday for his girl-friend with the remaining amount. Instead of trading further, he decides to recuperate for a while.

Meanwhile, Mr. Cool rubs his hands in glee as the price of Gold shoots up further. His notional-profits now far exceed the actually booked profits of Mr. Addict. When’s he planning to exit? Not soon. He wants to make a killing, and once and for all prove to Mr. Addict and to the world, that he rules. He wants to bury Mr. Addict’s trade results below the mountain of his own king-sized profits. Gold soars further.

Mr Cool has trebled his money, and is still not booking any profits. He picks up his cell to call Mr. Addict. Wants to rub it in, you know.

Mr. Addict puts down his daiquiri by the poolside in his hotel in Ibiza. His girl-friend has at last started admiring him. They’ve been swimming all morning. “All right, all right, he’ll take this one call. Oh, it’s Mr. Cool, wonder what he’s up to?” Mr. Addict is one of the few people in the world who are able to switch off. He’s totally forgotten about Gold and his winning trade, and is really enjoying his holiday.

Mr. Cool tries to rub it in, but receives some unperturbed advice from the other end of the line. He’s being asked to be satisfied and to book profits right now. Of course he’s not going to do that. All right, fine, if he wants to play it by “let’s see how high this can go”, he needs to have a wide-gapped trailing stop in place, says Mr. Addict. Of course he’s got a wide-gapped trailing stop in place, says Mr. Cool. Mr. Addict wishes him luck, cuts the call, and forgets about the existence of Mr. Cool, dozing off into a well-deserved snooze.

As Gold moves higher, Cool starts to think about that wide-gapped trailing stop. Let alone having one in place, he doesn’t even know what it means. A quick call to the broker follows. The broker is ordered to install a trailing stop into Mr. Cool’s trade. Since Cool doesn’t know what “wide-gapped” means, he forgets to mention it. The broker doesn’t like Cool’s attitude and his proud tone. He installs a narrow-gapped trailing stop.

Circumstances change, and Gold starts to drop. It’s making big moves on the downside, falling a few percentage points in one shot. Cool’s narrow-gapped trailing stop gets fully jumped over; it doesn’t get a chance to become activated in the first place, because it is narrow-gapped and not wide-gapped. The price of the underlying just leaps over the narrow gap between trigger price and limit price. Happens. Cool does not install a new stop. Stupid.

Next morning, Cool’s jaw drops when he sees Gold down 15% overnight. On a 25:1 leverage, he’s just about to lose his margin. The phone rings. It’s the margin call. Cool panics. He answers the margin call. His next call is to Mr. Addict, asking what he should do. Mr. Addict is shocked to learn that Cool has answered the margin call. He asks him to cut the trade immediately.

Cool’s gone numb. Gold drops another 4%. Phone rings. Second margin call. Cool doesn’t have the money to answer it. In fact , he didn’t have the money to answer the first one. In the broker’s next statement, that amount will show up as a debit, growing at the rate of 18% per annum.

Mr. Cool’s not liquid anymore. Actually, he’s broke. No, worse that that. He’s in debt. Greed got him.

A Fall to Remember (Part 2)

Part 1 was when Silver fell almost 20 $ an ounce within a week. Like, 40%. Swoosh. Remember? Happened very recently.

And now, Gold does a Silver, and falls 20 % in a few days. These are the signs of the times. “Quick volatility” is the new “rangebound move”. Put that in your pipe and smoke it.

The wrong question here is “What’s a good entry level in general?” Why is this question wrong?

When something new becomes the norm, there is too little precedence to adhere to. It becomes dangerous to use entry rules which were established using older conditions as a standard.

I believe there is one way to go here. The correct question for me, were I seeking entry into Gold or Silver, would be “Is this entry level good enough FOR ME?” or perhaps “What’s a good enough entry level FOR ME?”

Let’s define “good” for ourselves. Here, “good” is a level at which entry doesn’t bother YOU. It doesn’t bother you, because you are comfortable with the level and with the amount you are entering. You don’t need this sum for a while. It is a small percentage of what you’ve got pickled in debt, yielding very decent returns. If the underlying slides further after your entry, your “good” level of entry still remains “good” till it starts bothering you. You can widen the gap between “not-bothering” and “bothering” by going ahead with a small entry at your “good” level, and postponing further entry for an “even better” level which might or might not come.

If the”even better” level arrives, you go ahead as planned, and enter with a little more. If, however, your “good” level was the bottom, and prices zoom after that, you stick to your plan and do not enter after that. This would be an investment entry strategy, which sigularly looks for a margin of safety. Entry is all-important while investing, as opposed to when one is trading (while trading, trade-management and exit are more important than entry).

Trading entry strategies are totally different. Here, one looks to latch on after the bottom is made and the underlying is on the rise. Small entries can be made as each resistance is broken. It’s called pyramiding. Trading strategies are mostly the complete opposite of investing strategies. Please DO NOT mix the two.

Sort yourself out. What do you want to do? Do you want to invest in Gold and Silver, or do you want to trade in them? ANSWER this question for yourself. Once you have the answer, formulate your strategy accordingly. U – good level – how much here? U – even better level – how much there? U – no more entry – after which level?

Life is so much simpler when one has sorted oneself out and then treads the path.

A Hedge is a Hedge is a Hedge

U guessed it, this is again about Gold.

Why do I keep harping on Gold?

Situations crop up, questions arise, people ask stuff…whatever.

I’ve always treated Gold as a hedge. Luckily, I don’t suffer from any Midas affliction.

There’ll be a time in one’s investing timeline, when there’s no need to hedge. As of now, there is a need to hedge, seeing the uncertainty around us. This does not mean, under any circumstances, that you go around picking up your Gold for hedging at these rates. A hedge is best picked up cheap. Curretly, Gold is 2 or maybe 3 multiplied by cheap.

So, if Gold is your hedge of choice, this is not the time to pick it up. There is absolutely no margin of safety at these levels.

Once you’ve picked up your hedge cheaply, you can turn it into a double whammy and sell it really expensively. That option will always be with you.

You also have the option of not buying your hedge, whatever hedge it might be, if you don’t get a cheap enough price.

Exercise your options. Mrs. Market gives you lots of freedom till you act. Once you do act, you have to bear the consequences, whatever they are.

Don’ be in a hurry to act, especially if you are an investor. For the investor, the entry is of prime importance. Entry is the investor’s singular weapon.

And please, for heaven’s sake, treat Gold as a hedge. In good economic times, it’s going right back where it came from. The 100 year return on Gold has been 1% per annum compounded.

Whenever one gets into any underlying, one needs to be clear about what one is getting into.

Do you buy your car without doing the appropriate due diligence? No, right?

By the same right, investing demands proper due diligence too.

Just 40 $ Away…

The first signs of greed can be sensed.

We’re talking about Gold.

A few months ago, serious players in Gold had identified Rs. 28,000 / 10 grams as their target for Gold.

This target has been achieved for a while now. Nobody’s booked their Gold.

Instead, the target has been revised to Rs. 30,000 / 10 grams, which is just another 40 $ an ounce away.

Please don’t tell me that nobody is going to book (meaning sell, as in booking profits) their Gold @ Rs. 30,000 / 10 grams. I’ve got this nagging feeling that they’re not.

Hmmm, greed is setting in. Nothing unusual. That’s how a bubble progresses.

Yesterday, an update from Reliance alerted me to the hypothesis that Rs. 40,000 / 10 grams was a real possibility in Gold.

Maybe, maybe not. As of now, Reliance is sounding like that fellow who predicted a Dow level of 36,000 some years ago. Today, 36k on the Dow seems impossible, even in one’s dreams.

Does it matter to you how high Gold can go? Or is your target more important? Both are valid questions.

If your target has been achieved, here’s one scenario. Book the Gold and put the released funds into debt. Debt in India is safe, and is giving excellent returns, especially to the retail investor.

If your stomach is full, do you dream about more food?

Seriously people, playing this by targets is a serious option.

It’s also ok if you wanna play it in a “let’s see how high this can go” manner. That’s just another way of playing it. Fine. In this case, you need to set trailing stops, and you need to stick to these if they get hit.

Either way, identify a booking strategy for Gold and stick to it.

Take greed out of the equation. There’s no room for greed in the career of a market player. There’s no room for fear either.

We’ll talk about taking fear out of the equation some other day, if and when unprecedented gloom and doom abounds.

And Gold Overshoots Platinum

For me, this is a pivotal event.

It signals to me the beginning of the last stage of the bubble in Gold.

The last stages of bubbles are the most eventful.

The basic message being broadcast here is that the ornamental value of the yellow metal is no longer a consideration during its purchase. The whole-hearted focus of Gold-purchase now is its safe-haven value. There is absolutely no question about it anymore.

For the sticklers, I believe we are well on our way to reaching the pinnacle of Wave 3 with the last burst to come in the coming weeks. Wave 3s are normally followed by a correcting Wave 4, and then those who missed Wave 3 latch on to make Wave 5. I also believe that it will be a subdued Wave 4, with perhaps a 23.6% or a 38.2% Fibonacci level correction, before Wave 5 takes over.

For heaven’s sake, if you are entering Gold now, do so only to trade. There is no question of investing in Gold at this level. Where are you seeing the margin of safety to be making such an investment decision?

So, it’s passing the hot-plate from this level onwards. The last donkey standing with the hot-plate still in hand will get burnt, whenever that happens. Just forget about time-frames and focus on the tape.

As someone said, the “devil takes the hind-most”.

And what was Mr. Fibonacci thinking?

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… , … , …

What’s this?

A random set of numbers?

Nope.

It’s the Fibonacci series.

How is it derived?

Start with 0 and 1, and just keep adding a number to the one on its right to get the next number, and so on and so forth.

What’s so peculiar about this series?

As we keep moving from left to right, the result of dividing any number by the one on it’s immediate right starts converging towards 0.62.

Also, as we keep moving from left to right, the result of dividing any number by the second number on its right starts converging towards 0.38.

The series starts with a 0.

Another number to note is 0.5.

So, in a nutshell, these are the important figures to note, which this series generates: 0, 0.38, 0.5, 0.62. There are more, but these are the most important ones.

I’ve always wondered why the 0.5 is important. Actually, “half-way” is big with mankind.

What’s the significance of this series?

In any activity involving a large number of units, these Fibonacci ratios are said to be observed.

It is said that crowds behave as per these ratios.

It is said, that for example when many leaves fall from a tree over a long period of time, a Fibonacci pattern can be determined in their falling.

It is said that these ratios are ingrained in nature.

True or false?

Don’t know.

What I do know is that the trading fraternity has taken these numbers to heart, and looks for Fibonacci levels in anything and everything. Most commonly, entry into a sizzling stock is planned after the stock has corrected past a Fibonacci level and has once again started to rise.

In simpler terms, aggressive traders who buy on dips will look for a 38% correction of pivot to peak before entering.

Less aggressive traders will wait for a 50% correction and then enter upon the rise of the underlying.

Traders who like to value-buy will wait for a 62% correction, which might or might not come.

If the underlying goes on correcting past 62%, it is best left alone, because the correction can well continue beyond 0, the starting point of the prior rise.

A current example where you’ll most definitely see Fibonacci ratios in action is with Gold.

The million dollar question I have been hearing around me today is when to enter Gold now, especially because it is correcting heavily.

The immediate answer for me would be to enter at a Fibonacci level of correction.

Which level?

That depends upon your risk profile.

One Step Closer to the Gold-Standard?

The gold-standard is an extreme scenario.

Imagine the world’s top currencies collapsing. For lack of a better alternative, the world resorts to gold for conducting international trade.

Probably a situation that’s not going to occur.

But then, are we doing anything to stop it from occuring?

Q: Is the US doing anything concrete to reduce its debt?

A: No.

Interpretation: USD will lose its stronghold as global currency at this rate.

Q: Does Europe have any concrete ideas about its financial future?

A: No.

Interpretation: Euro is nowhere near toppling USD from its global currency status.

Q: Is China doing anything concrete to increase transparency?

A: No.

Interpretation: Doesn’t make the Yuan a strong contender for top post.

Q: Is India doing anything concrete to reduce corruption?

A: Er…blah blah blah… No.

Interpretation: I’m not even trying to interpret the eyewash going on here.

Let’s move on to a country called Venezuela.

President Hugo Chavez just called all his gold home…!

Even if this is to taunt the US, it still is HOARDING.

Hoarding is infectious. The start of hoarding can trigger a “Domino-Effect”.

Whatever his ulterior motives were, Big Boy Hugo has taken the world one step closer to the gold standard.

To prevent hoarding from escalation, a counter statement needs to come, like NOW, from the major economic players of the world, something confidence-boosting. Don’t see that happening anytime soon. Seems that hoarding might escalate.

The gold-standard seemed to be a myth a few months ago. Now, at this stage, we seriously need to educate ourselves with regard to the gold-standard and position ourselves accordingly.

US Treasury Bonds, Anyone?

Panic is something I felt during 2008.

It was actually good that I did, because now I know what it feels like.

Meaning that if a similar situation starts to arise again, now there are internal warning signals in my system.

Investors learn from mistakes. That’s the good thing about mistakes.

It will not take a Moody’s rating agency to tell even an average investor that US treasury bonds don’t deserve a AAA rating. Most investors I know have shunned any investment product with US treasury bond exposure since 2008.

Didn’t such ratings agencies give CDOs a AAA rating? Frankly, I don’t even feel like acknowledging the existence of ratings agencies. I’d much rather just use my common sense.

So, one’s learning curve freed one up from dangerous exposure after 2008. Are one’s investments still going to be unaffected from the ongoing and critical developments in the US?

Globalization is in. Decoupling seems to be out for the moment. If the US economy crumbles, investments worldwide are going to be affected for the worse. To lessen such shocks, God created hedges.

The best known hedge to mankind over the last 100 years has been Gold. After 2008, central banks worldwide started scrambling to find an alternative to the USD to hold their wealth in. Only Gold is standing their test. More and more central banks have started converting their USD holding to Gold.

Much as I don’t feel like acknowledging the existence of ratings agencies, unfortunately, I have to. If there’s a ratings downgrade in the US, Gold purchases by central banks are going to escalate. The astute investor will need to position him- or herself accordingly if he or she has not done so yet, starting right now.

As we bathe in the glory of Gold, let’s not forget that it is just a safe haven, a crisis-hedge. If economic stability returns to the world this or next decade (or whenever), Gold is going right back to where it came from.

Something else used to enjoy the safe-haven status till a few years ago. I think one calls them US treasury bonds.

Seasons change. If Gold is the flavour now, it’s possibly a temporary flavour.

Keep your eyes open, and keep using your common sense.

Wishing you safe investing.

The Thing with Gold

Equity has a human face behind it. Gold does not.

The human face with its human mind is capable of the best and the worst, the highest and the lowest.

The intelligent investor selects Equity with benevolent and diligent human faces and minds behind it to garner multibagger returns.

Gold is a metal. Period. It doesn’t have a brain. It is not able to find a way around inflation. Its prices fluctuate as per demand and supply. In times of uncertainty, it goes up and up. In times of economic and financial stability, it goes down and down. The net result of Gold’s price fluctuations over the past 100 years has been a 1% annually compounded return, adjusted for inflation.

What you should not expect from Gold is more than a 2- or 3-bagger return over the medium term. If things go really sour for world economy, you might get a 5- or even a 10 bagger return (looking at a kind of a doomsday scenario). If you are hoping for anything more from Gold, dream on.

2-, 3-, 5- and even 10-bagger returns are quite common in Equity over the medium term, and over the long-term, there’s no limit. Wipro’s been a 300,000-bagger over 25 years. There are hundreds of examples of 1000-baggers, and thousands of examples of 20+-baggers in Equity. Meanwhile, over the long-term, Gold goes back to the median.

Why Equity behaves like this is because of the human capital behind Equity. We’ll go into the details of this some other time.

Bottomline remains that, realistically speaking, Gold functions best as a hedge. In case 80% of our portfolio goes for a toss, that 20% which is in Gold for example can save the portfolio with its 5-bagger return.

If we enter Gold with the desire to make a killing, we either have unrealistic expectations, or we need to play Gold futures or Gold Equity. These have their own nuances, about which, again, we’ll talk another day.

Here’s Trying to answer a Million Dollar Question

During the financial meltdown, my portfolio took a huge knock. It was the biggest eye-opener I had ever experienced. I contemplated quitting the markets, but survived the strong impulse. From then on, I only operate in the markets with a hedge. Early 2008, I identified gold as my hedge, and ever since, I have maintained a steady 10% of my portfolio in gold.

I am stating this here because of the one question that is going around in everybody’s minds – what to do with their gold investments???

By default, I have to answer this question for myself. If my answer benefits anyone, even better.

And my answer to the question – What to do with my gold investment? is – nothing.

Yup, I’m not touching it. It’s a hedge, man, protecting the other 90% of the portfolio, which is inversely correlated to gold more than 80% of the time.

What happens if 400 dollars an ounce get knocked off gold’s current price? Well, I’ll be partying in Vegas, because the other 90% in the portfolio will have done well in this scenario.

And what happens if gold goes on to touch 1500 dollars an ounce, or even 2000 dollars an ounce eventually. Again partying in Vegas, this time because of gold, but the other 90% will have taken a bit of a beating, so I might party at home. But the bottomline is, I’ll get to ride gold if it sky-rockets.

Now what would happen were I not using gold as a hedge, but as a sheer investment. To illustrate this, let me give you an example. My relationship manager in Singapore who’s handling my gold investment just called twenty minutes back, excited and eager and rattling on about the current level of the investment and about how we had to book gold right now. Told him the same thing. It’s a hedge for me. Let it ride to 5000 dollars an ounce, I’ll still ride it as a hedge. What becomes clear is that if one has approached gold as a sheer investment and not as a hedge, one is facing the dilemna today of whether or not to book profit.

Frankly, I don’t know the answer to that one.

I’m good either way, with a decline in gold as well as with a rise in gold. So would you be, if you hedged. Hedging is for safety, and it comes at a cost. My investment in gold is the cost of protecting my bulk investments. So, by no means am I getting rid of it, despite the lure of the price level.

Thus ends the lesson in hedging.