Secret Ingredients in Times like Corona

Hi,

It’s been a while.

Unprecedented times call for every iota of resilience that’s inherent.

Whatever we’ve learnt in the markets is being tested to beyond all levels. 

If our learning is solid, we will emerge victorious.

If there are vital chinks in our armour, we will be broken. 

Such are the market forces that are prevailing. 

Have we learn’t to sit?

Meaning, over all these years, when over-valuation ruled the roost, did we sit?

Did we accumulate funds?

Did we create a sizeable liquid corpus?

If we did, we are kings in this scenario. 

One of the main characteristics of a small entry quantum strategy is that it renders us liquidity, almost through and through. 

If we are amply liquid in the times of mayhem, there is absent from our armour the debilitating chink of illiquidity.

Illiquidity at the wrong time makes one make drastic mistakes by succumbing to panic. 

We’re not succumbing to any panic. 

Why?

Because our minds are focused on the bargains available.

The bargains are so mouth-watering, that they are entirely taking away our focus from existing panic.

To twist our psychology into the correct trajectory in a time like Corona, the secret ingredient that’s required is called (ample) liquidity. This secret ingredient is a direct result of the small entry quantum strategy, which we follow. 

Then, let’s address the other potential chink, and just sheer do away with it. 

Having access to ample liquidity, are we now greedy?

What does greed mean?

It’s not greedy to buy when there’s blood on the street, no, it’s actually outright courageous. 

Greed Is defined here as per the quantum of buying. 

Are we buying disproportionately vis-à-vis our liquidity-size and our risk-profile?

Yes?

Greedy.

No?

Not greedy.

How will we know the answer without any doubt in our mind that we have the correct answer to this question, since it is vital to our learning curve to answer this question correctly?

The answer will make itself felt.

Are we able to sit optimally even if markets crash another double-digit percentage from here?

50% from here?

No? Greedy. We have bought in a manner that doesn’t gel with our risk-profile. Our liquidity is exhausting, and focus shifts from bargains to panic. Ensuing tension amidst further fall will very probably cause us to commit a grave blunder, with this happening very probably at the bottom of the market. We are poised to lose in the markets like this. 

Yes? Not greedy. We have bought and continue to buy as per our risk-profile. We will win…

…in the markets.

The secret ingredient that locks in great prices and continues to do so as the market keeps falling, is called quantum-control as per the tolerance level of our risk-profile towards further fall. This secret ingredient ensures that liquidity outlasts a longish fall, keeping our focus on the bargains and not on the panic. This secret ingredient provides for the basic mechanism of our small entry quantum strategy.

 

Small Shoots to Big Trees

What do I see around myself?

Lots of small shoots. 

Wherever I look, there are small shoots. 

Does this make me happy?

You bet. 

Why?

Why not?

I mean, you don’t see any trees. 

So?

You’ve been at it for a while.

So?

All you’re seeing is shoots. Does that satisfy you? None of your efforts is a big tree in all this while.

That’s a very narrow-minded, greedy and fast-buck remark. 

Explain. 

For each of the shoots I see around me, twenty efforts have died their death. However, one shoot managed to entrench itself. This one shoot is firm, and goes very deep into the ground. It’s roots have become very strong. It is now ready for the world and has decided to show itself over the ground.  Over the next many, many years, with my meticulous nurturing, this very shoot shall grow up into a mammoth tree with unprecedented positive consequences.

I see. And, you’re saying that you see many such shoots around yourself?

Yes, many many.

Wow.

Yeah, i’ve been busy. I’ve tried and discarded many things. What remained didn’t want to leave me. It got planted and grew roots. Now that the shoots are growing, they are mostly on auto-pilot. Some need tending to once a day, some once a week.

Does that give you empty spaces in between?

Yes.

How do you fill these empty spaces?

I do, and I don’t.

Meaning?

Unless something new refuses to leave me, I don’t wish to plant another tree.

Why?

I’m happy enough tending to what I have.

So you’ve reached the…what’s that called?

Sweet spot?

Yes, you’ve reached the sweet spot. But nobody knows about you. You’re not famous or anything.

That’s why the spot is sweet.

Meaning?

Nobody disturbs my privacy. I can go where I choose. Do what I want. I don’t need to share my time with anyone if I don’t want to. There are no compulsions imposed upon me. 

Do you think you will be famous one day?

When these shoots grow into big trees, that might happen.

Do you want it to happen?

I want my trees to grow. Not sure today about fame. It kills personal life. I like my life and its pace.

Any regrets?

Sometimes, I get lonely. It’s the nature of the path. Despite family and a decent social life, loneliness is still there. Applied finance requires a lot of alone-time. 

How do you deal with that?

I start tending to a different shoot. Financial. Non-financial. Recreational. Creative. Gap gets bridged, and then the loneliness is gone. 

Nath on Equity : have stuff – will talk

Behind Equity, there’s 41). human capital. 

It’s human capital that keeps 42). adjusting equity for inflation.

43). No other asset-class quotes on an inflation-adjusted basis. 

That’s good news for you, because 44). equity takes care of the number one wealth-eater (inflation) for you. 

All world equity ever quoted, whether currently existing or not, has 45). returned 6% per annum compounded, adjusted for inflation. 

46). All equity ever quoted that still exists has yielded 11% per annum compounded, adjusted for inflation.

Equity selected with good due diligence, common-sense and adherence to basic rules listed here and in previous articles is 47). well-capable of yielding 15%+ per annum compounded, adjusted for inflation. 

However, equity is 48). a battle of nerves, at times. 

This asset-class is 49). more about creating long-term wealth. 

It can be used, though, to 50). generate income through trading. 

51). Trading, however, is burdened with more taxation, commission-generation and sheer tension. 

Trading equity 52). eats up your day. 

Investing in equity 53). gives you enough room to pursue many other activities during your day. 

Trading strategies are 54). diametrically opposite to investing strategies. 

55). It takes market-players the longest time to digest and fully comprehend 54).

For long-term players, 56). up-side is unlimited. This is a vital fact. 

Also, 57). downside is limited to input. Factor in good DD, and that very probably won’t even go half-way. 

58). Thus, 56). and 57). make for a very lucrative reward : risk ratio. 

Equity needs courage, to 59). enter when there’s blood on the streets. 

It also needs detachment, to 60). either exit when required for monetary reasons, or when everyone else is getting ultra-greedy and bidding the underlying up no-end. 

Nath on Equity – Some more DooDats 

Yawn, the story goes on… 

Let’s 21). not think about our folio at night. 

We’re also 22). only going to connect to the market on a need-to basis, no more. 

If there’s a 23). doubt, wait. 

24). Clarify doubt. If it goes away, proceed with market action. If not, discard action. 

Don’t spread 25). too wide. 75+ stocks means you’re running a mutual fund. 

Don’t spread 26). too thin either. Just 5 stocks in the folio means that risk is not adequately spread out. Choose your magic number, one that you’re comfortable with. 

Once this number is crossed, 27). start discarding the worst performer upon every new addition. 

28). Rarely look at folio performance. Only do so to fine-tune folio. 

Don’t give 29). tips. Don’t ask for them either. 

You are you. 30). Don’t compare your folio to another. 

Due diligence will require 31). brass tacks. Don’t be afraid to plunge into annual reports and balance sheets. 

32). Read between the lines. 

Look 33). how much the promoters personally earn annually from the underlying . Some promoters take home an unjustified number. That’s precisely the underlying to avoid. Avoid a greedy promoter as if you were avoiding disease. 

Is 34). zero-debt really zero-debt?  Look closely. 

Are the 35). promoters shareholder-friendly? Do they regularly create value for the shareholder? 

Are 36). strong reserves present? 

Are the 37). promoters capable of eating up these instead of using them to create value? 

Is the 38). underlying liquid enough to function on a daily basis? Look at the basic ratios. 

Is any 39). wheeling-dealing going on with exceptional items and what have you? 

40). Is the company likely to be around in ten years time? 

Yeah, things in the equity world need to be thorough. 

We’re getting there. 

🙂 

Understanding and Assimilating the Fear-Greed Paradox

Holy moly, what are we talking about?

Let’s say you’ve done your homework.

You’ve identified your long-term stock.

Fundamentals are in place. Management is investor-friendly. No serious debt issues. Earnings are good.

Valuation is not right.

You wait.

How long?

Till the price is right.

What happens if that doesn’t happen.

You don’t pull the trigger. It’s difficult, but you just don’t pull.

Let’s say the price is becoming right.

You are looking for an extra margin of safety.

You are waiting to pounce. How long?

What’s your indicator?

Your gut?

Many things have been said about the gut.

It does feel fear.

Look for that fear.

Scrip is near a very low support, but holding. You are afraid that this last support might break and that the scrip might go into free-fall. Look for that fear. There goes your buying opportunity, you are probably saying. Intraday, support is broken. You are now sure it’s gone. Look for that feeling. Intraday, scrip comes back. Closes over support. Large volume. This chronology is your buy signal. You pick up a large chunk. Scrip doesn’t look back.

You don’t have to go through this rigmarole. You don’t have to bottom-pick. This exercise is for those who want that extra margin of safety.

Now invert the situation.

You’re sitting on a multibagger.

Lately, you’re not agreeing with the company’s business plans. You want out. Best time for you to exit would be now, sure. But, scrip is in no resistance zone, and is going up and up and up. What do you do?

Look for greed within yourself, when you start saying “Wow, this is going to be the next 100-bagger!” Look for the moment during this phenomenal rise when you’re getting attached to the scrip and don’t want to get rid of it, despite having concluded that you don’t agree with the vision of the promoters. Look for the time you start going “My Precious!”

Sell.

This chronology is your intrinsic sell signal.

Sure, radical.

I agree.

Sure, I’m combining trading techniques to fine-tune my investing.

I’ve stood on the shoulders of giants.

I’ve seen from their heights.

It’s time I start contributing.

The Thin Line

Have you met the thin line…

…  between ambition and greed?

You see it. You want to cross it without wanting to cross it.

What stops you?

A deadly sin is… deadly. If you’re sensitive enough, you do fear the effects of a deadly sin.

Greed can ruin. It has the capacity to upset an apple-cart.

Sometimes you want something that extra much.

Ambition turns into over-ambition.

You get your something.

You’re a go-getter.

You become over-confident.

You forget your basics.

Next few times around, you cross the thin line repeatedly. The high is addictive. Soon, you’re crossing…

… without even knowing.

Yeah, the vicious cycle outlined above has made you insensitive. You’ve stepped over, don’t even know it, and on you’re going. You’re blinded by greed.

It’s not happened overnight. First the thin line beckoned you to come back. Your over-ambition spurred you on a few steps more. A few more steps wouldn’t harm, right?

Wrong.

You’re not sensitive anymore. You’ve lost normal vision. You’re greedy for your goal. You’re not sticking to your basic tenets. You’re not playing safe anymore. You’ve started to even play with your safety moat, in order to achieve an even bigger goal.

You’ve set yourself up to fall… big.

If you do, I hope for two things.

First up, I hope you don’t fall too big, and that you can get up again.

Second, I hope that this fall is your last one, and that it has made you sensitive again.

Sensitive?

Towards what?

Yeah, sensitive towards the thin line.

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.