I know, I know…
…but am not getting cocky, please believe me.
There is something about a one-way bias,…
…so let’s discuss this one today.
When we’re only focused in one direction,…
…we’re not second-guessing the market.
We have a set strategy, whatever it might be.
We don’t abandon it, suddenly, to go reverse.
That saves us a lot of trouble, time and money.
No looking over the shoulder, as to when the market is reversing, saves trouble and time.
Reversing during a set trend fails, fails, fails, till it succeeds.
Thus, money is saved, since all these failures are avoided.
Money is made by not reversing, if reversing is to be a failure many times.
Brokerage is saved.
Yeah, bucks are saved, and perhaps made, owing to a one-way bias, let’s face it.
One might argue, though.
Here it comes.
What about the huge profits to be made when a market reverses fully and finally?
Ya, I knew this one would come.
Firstly, how would one know when a market is fully and finally reversing, before the event has set in fully and finally?
The truth is, it’s not reversing, not reversing, not reversing, till it’s reversing fully and finally.
Does one really want to keep going contra till one is proven right, breaking an arm and a leg on the path?
Canning the argument. It’s a fail.
Let’s say the market has fully and finally reversed.
Does one change one’s bias?
I knew this one one would come too!
Changing bias is detrimental to a long-term investor’s strategy.
So what does the long-term investor do when the market reverses fully and finally?
As a market over-heats, the long-term investor has been busy.
He or she has not been not buying, but selling, unwanted stuff at first, and then freeing up wanted underlyings, such that what remains in the markets is free of cost. Ideally.
Thus, when a market reverses fully and finally, such an investor is not afraid of letting underlyings be in the market, since they are “freed-up”.
Now comes the full and final reversal.
For the long-term investor it’s a valuable time to pause, giving the nerves and the system much-needed rest.
Liquidity has been created and pickled.
It’s a time for research, reading and reflection.
Activity will resume upon the next bust.
For someone with a short bias, like for the “Bears” in the Harshad Mehta TV show, though, now is an active time.
Positional traders change bias after long-term trend change.
Personally, I find going both-ways pretty taxing, so mostly, I stick to a long-long bias.
I say mostly, because once a downtrend has set in, the punting-demon does emerge, and I might trade a few puts here or there for the heck of it, if there’s nothing better to do, but not to the extent of contaminating my long-long bias.
Living in a country showing growth, active in its markets, we will do well with an upwards bias.
Short-circuiting poison will emerge from time to time.
…till you can’t.
At that point, trade a few Puts, or a Put Butterfly, or what have you, just to see what the other side feels like.
It’s just recreational, you see, not enough to contaminate one’s main bias.
In a breakaway bull market,…
…one starts to find faults with Trading in general…
since, to make money, one just needs to sit, rather than actively trade.
Almost everyone is happy with their investing,…
…in a breakaway bull market.
What kind of factors does one start pointing fingers at?
One almost always gets this wrong, specifically with regard to futures and options, which are time-bound.
Not having enough on the table…,
…yeah, yeah, heard that one before.
While trading, one doesn’t bet the farm.
When one’s trades run, one makes a bit,…
…which is not, by far, as much as any odd investment portfolio would be appreciating.
While investing, one is focused in one direction.
While trading, one looks at both directions, to initiate trades, and the market-neutral trade is another trade in a category of its own.
Hence, one is always second-guessing the market, and when one is off, it results in opportunity loss and brokerage generation.
Trading consumes almost all of one’s time.
When markets are closed, one’s mind is not detached.
Has many side-effects too.
One doesn’t have time for many other things, because of trading.
Whatever one does try to participate in, consists of half-baked efforts, because essentially, one’s mind is on the market simultaneously.
Leads to a loss in quality of life.
Now, let’s reverse the situation.
When markets slide downwards, the trader feels light.
He or she cuts longs and initiates shorts.
It’s a superior feeling versus the investor, who is stuck with large holdings on the table.
Feel-good factor is huge, and quality of life gets enhanced.
Good traders don’t have a liquidity problem.
Also, they can shut operations and switch off from the market any time, if they are able to do so, in practice.
Tappable markets are many for the trader.
Trading leads to income generation.
Investing leads to wealth creation.
What do you want from your life?
Both – is a valid answer, but confuses.
If one wants to dabble in trading, but is basically an investor, one can think about initiating positional trades, which have a investing-like feel, and one’s time is less bound to the market.
If one wants to dabble in investing as a trader, hmm, this one will be markedly tougher, I think.
Don’t know what to say here, since I’m an investor who dabbles in trading…
…, but intuitively, I feel, that this one would take a lot of effort.
Ask the soldier about it.
Running out of it on the battlefield is the soldier’s worst nightmare.
We’re soldiers too, in our respective fields of work.
Our liquidity is our ammunition.
What counts when an opportunity comes is how liquid we are.
When there is a market bottom, most of us are fully invested.
Is that sound strategy?
Putting together ammunition in one place is where it starts.
Holding on to ammunition and using it when most required – that’s sound strategy.
Saving habits lead to accumulation.
Barriers hold the accumulated liquidity in one place.
What are barriers?
Welcome to the world of self-created restrictions in an effort to have liquidity ready when one most needs it.
A dedicated bank account is what one requires first.
Link a bank account to your trading account, and use this one for nothing else.
Next, whatever accumulates in this account – take it away from your direct vision.
Block it as a fixed deposit.
This is a barrier. One don’t see the funds as available. Thus one don’t feel the urge to use them.
When a trade motivates one enough to be taken, one then most need the funds.
Break the FD.
Transfer the funds.
Has a trade just culminated?
Nothing else coming up?
Again, take the funds away from your direct vision.
Block them, either directly in your trading account, by putting them in overnight funds, or transfer them back to your bank account, if you know that you are not going to be trading for another week plus.
Both options are valid. Do either. Bottomline is, the funds should not show up as available until you need them.
Link a different bank account to your investing-only trading account.
Make multiple fixed deposits in this bank account, each one being one exact entry quantum in value.
Upon identifying an entry opportunity, whenever that happens, break one quantum’s FD, move the funds, and enter into the investment.
Liquidity needs to be revered.
Unless we don’t give it proper respect, we will not have it at our beck and call when the next opportunity arises, whether we are trading or investing.
Let’s go, let’s get our ammunition together, and let’s put it to great use.
What’s the most basic definition of an investment?
And how does one define a (successful) trade?
…and buy back lower.
As one might see, the ideologies of investing and trading are diametrically opposite to each other.
So, how do we fit one with the other.
Though this might not seem so, it’s a tough one.
One’s success at this hangs on finer points.
Is it even necessary to fit one with the other?
Why should a long-term investor also trade?
Then, why should a trader invest for the long term?
Long-term investing is a very hands-off affair.
There are prolonged bouts of doing nothing.
Hardly anyone can handle that, and just to satisfy one’s urge to do something, one ends up fiddling unnecessarily with one’s long-term portfolio.
Trading fits in precisely to do away with the urge to unnecessarily fiddle.
Tension level becomes low.
Trading then becomes fun.
Clear the platform of any long-term underlyings.
When we see our long-term portfolio on the same platform on which we trade, we get mightily confused.
It’s like a short-circuit.
Trade on a separate platform. Invest on another.
Now let’s address the second question.
Who should invest?
Even the trader.
Power of compounding, for starters.
Actively chancing upon margin of safety, since one is in the game all the time – another big one…
…as a trader, sometimes one comes upon great entry rates, where one can hold the underlying for a long time.
That’s a huge opportunity, so one can go for it.
Furthermore, trading involves recirculating liquidity. After the trade is closed, one lands up back with liquidity. One doesn’t maintain an asset in hand for a longish period. It might be a good idea to do so, just sheer for the sake of diversification.
Some do only like to trade. They enjoy the lightness.
Others like to only invest for the long-term. They are able to handle long bouts of no activity well.
Judge if you need a B-game.
Then fit it to your A-game.
…spoils the curry.
Specifically with regard to Equity…
…one should never, never be in a hurry.
…there will always be a correction.
You will get an entry.
Wait for the right entry.
You will, eventually, get a prime exit.
Wait for the time.
Make time your friend.
Take it out of the equation.
In the small entry quantum strategy, time is, by default, taken out of the equation.
It loses its urgency as a defining factor, for us, psychologically.
We don’t have any immediate timelines.
We go with…
When opportunities appear…
When they don’t…
…we don’t act.
Most of the time…
…we don’t act.
Then there are black swans, and we act many times in a row. Like now.
Action, or lack of it, depends on what’s happening.
We don’t force action.
Because we have all the time in the world. We’ve made it our friend, remember.
We know that we’ll get action…
We conserve liquidity and energy for when action comes.
You see, when the pressure of a time-line is gone, quality of judgement shoots up.
We make superior calls.
Of course we make numerous mistakes too.
However, the quantum going into the mistake is small. This is the small entry quantum strategy, remember.
Once we’ve made a selection mistake in an underlying, and have realised this, we don’t shoot another quantum chasing our error. Instead we let it be, and wait for a prime exit from our error. It will come.
We keep going into identified underlyings not falling into the error category, with small quanta.
Many, many times, we make a price-error. Price going against us after entry is a price-error, because the market is always right. It’s us who are wrong when things go against us.
Never mind. After a price-error, we enter the same underlying with another quantum, and this time we get a better price. Once gain one observes the friendliness of time, even after price has gone against us, all because of our small entry quantum strategy.
When price is going in our favour, we might not enter after a level. Though we’re not getting further entries in the underlying, appreciation is working in our favour.
It’s a win-win on both sides of the timeline for us…
…because we’ve made time our friend.
We grow up, being taught to win.
Slowly, we learn to expect shocks, but only sometimes, in sparing intervals.
We prepare fancy resumés.
Life must look five star plus all the time, that’s the standard.
We see this standard all around us. It encompasses us. We become it, in our minds.
It’s not like that in the markets.
Markets are a world, where loss is our second nature.
If we’re not accustomed to loss, we die a thousand deaths, in the markets.
What kind of loss are we taking about?
Your stock holding going down to 0…
…is a small loss…
…when compared to another holding multiplying 1000x over 10 years.
Both these scenarios are very possible in the markets. They’ve happened. They will happen again.
How do we react?
Our stock going down to zero mortifies us. We do something drastic. Some of us quit.
When our potential 1000x candidate is at a healthy 10x, yeah, we cut it.
Then we quickly post the win on our resumé.
We must look great to the world, at any cost.
We keep reacting like this…
…and, like this, we’ll perish in the markets with very high probability.
We can’t take a hit, and are nipping our saving graces in the bud.
When does this stop happening?
When we rewire.
Rewiring is a mental process that happens slowly, upon repeated market exposure.
For successful rewiring to take place, real money needs to be on the line, again and again and again, as we iron out our mistakes and let market forces teach us the tricks of the trade.
While we’re rewiring, we need to play small.
When we’re partly rewired, we wake up to the fact that this is the age of shocks.
High-tower professors who’ve never had a penny on the line and have put together theorems about six-sigma events (black swans) setting on once in blue-moons have led us to believe that black swans are rare.
They are not. They have become the norm. Our first-hand experience of multiple black-swans in a row teaches us that.
Once we rewire fully, the expectation of black-swans as the norm is engraved in our DNA. Then, we use this fact to our huge advantage.
We realize the value of our ammunition, i.e. our liquidity.
Whenever we have the chance, we build up liquidity.
We become savers, and are not taken in by the false shine of the glittery world around us.
Also, when markets are inflated, we sell stuff we don’t want anymore, boosting our ammunition for the next onset of crisis…
…and, we stop preparing fancy resumés.
Markets have humbled us so many times, that we now just don’t have the energy to portray false images.
Whatever energy we have left, we wish to use for successful market play, i.e. to make actual money.
When that happens, yeah, we know for sure that we’ve fully rewired.
Welcome to rewiring three nought three.
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.
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?
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.
…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.
…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.
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.
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.
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.
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?
Because of my small entry quantum.
What does it mean for my next entry?
Added margin of safety.
Is that good?
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!
I am disturbed.
This stock that I’m invested in is continuing to fall.
I want to be disturbed.
That’s my cue…
…to invest more in the stock.
I’m in the stock for a reason.
Something appeals to me.
That something continues to appeal to me, despite the continuous fall.
If that were not the case, the case for the stock would be closed, and one would look to get rid of it on a market high.
However, that is the case,…
…and, I follow the small entry quantum strategy.
Where does that leave me?
My investment in the stock is small.
I am liquid.
That’s the beauty of the small entry quantum strategy.
It leaves you liquid.
Continued fall means better margin of safety, and that another quantum can go in.
The small entry quantum strategy ensures multiple entry opportunities as the stock continues to generate margin of safety.
When do my ears stand up?
When the fall is disturbing enough.
The fall is the cue to go in.
It is from Disturbia.
Who said making money was easy?
This strategy works as long as one’s research is sound.
Let’s go with what works.
Today, we turn eight.
This is an extreme time.
Extraordinary moves have become normal.
How do we react to a world full of upheavals?
Does anyone have a satisfactory response?
We don’t know, and time will tell if our responses are correct.
However, we do know, that we possess common sense…
…, and we are going to hold on to it for all our life’s worth.
It has not come for free.
It has been earned after making costly mistakes.
It is very valuable.
It is going to see us through.
The topsiness and the turvyness is good for us.
It will set up opportunities.
We are only going to grab opportunities.
When there’s no opportunity, we do nothing.
We have learnt to do nothing.
Doing nothing actually means no entry.
We use this time to do due diligence for the future, when entry is allowed as per our entry criteria.
Doing nothing is a steady part of our repertoire.
However, when opportunity comes, we are going to let go of all fear, and we are going to pull the trigger.
We know how to pull the trigger.
We are not afraid.
We are debt-free.
Our basic incomes are in place.
Our families are taken care of.
Without that, we don’t move.
We invest with surplus.
We implement a small entry quantum strategy.
We enter again and again and again, upon opportunity.
Because of our small entry quantum, we are liquid for life.
Bring it on.
We’ll keep going in, small entry quantum upon small entry quantum.
Don’t forget, we have rendered ourselves liquid for life.
And, we’ve got stamina!
Happy eighth birthday, Magic Bull!
You’re learning to sit.
You buy with margin of safety.
You buy in small quanta,…
…and that’s why you’re always liquid,…
…to avail any opportunity that arises.
Yeah, there’s nothing impeding your liquidity…
…because you’ve kept yourself virus-free, i.e. debt-free.
You only buy quality…
…that’s going to be around for a long, long while,…
…because you don’t sell for a long, long while.
You don’t listen to what the grapevine is saying…
…because of the conviction and strength of your own research and opinion.
Yes, you regularly go against the crowd.
You either buy into debt-free-ness, or into managable debt that spurts growth.
Your input into the market doesn’t affect your daily life, leaving you tension-free to address your non-market world and thrive in it,…
…and that is why,…
…for all the above reasons,…
…your blockbuster gain story is going to happen,…
…and what’s more,…
…you are also enjoying the ride leading up to it.
We’re not going for the jugular.
Or are we?
The jugular has the most copious flow.
Maybe we are then…
… going for the jugular.
However, there’s no stabbing happening.
We do everything from the inside of our comfort-zone.
We act with harmony.
We try and be non-violent about it.
What are we doing?
We’re looking to create wealth.
What makes us look?
Security. Our basic income secures us.
Boredom. Adding to our basic income has become boring.
Overflow. As basic income starts to overflow, it needs a long-term avenue in which it doesn’t demand our constant attention.
What’s the best way…
… to go about it?
Where there’s honey, there are bees.
Finance-people find you. You have money. They have investments. For finance-people, you are bread and butter.
So, you sit.
You let them come.
You’ve got discriminatory-ability.
You sift. 99% of what comes goes into the bin.
You like 1%.
You invest in that 1%.
Whatever you pre-define as your per-annum outflow into wealth-creation.
Only that much.
What’s the bottom-line?
What’s your holding strategy?
“The biggest money is made…
You’re not even looking at your long-term investment more than once a month.
You’re not interested in daily quotes.
The daily quote can say zero. You don’t care. You know that you are in the process of creating wealth, and that it’s going to take long, and within that period you don’t care if the world thinks your holding is zero, because you know it isn’t.
Ability to think differently.
Ability to see wealth in its nascent stage, and to recognize it.
You have these things.
They didn’t come for free.
You took some solid hits to earn them.
Yeah, you have what it takes, and that’s why…
… you’re going for the multiple.
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.
Or lack of movement?
What will you have?
Who discusses such a topic?
Is this lame?
Is it that we have nothing better to do?
Fund movement is a central topic.
Funds are blood.
You need to be master of their movement. Winners are.
What’s there to discuss?
Aren’t things obvious?
To most people, things wrt movement of funds are everything else but obvious.
No pipelines are created.
No sheds for storage.
No safety mode in the firing gun.
Gun fires as soon as the load is available.
You see, all this leads to losing positions.
One should not fire as soon as one can load.
One should fire when one sees a ripe target for the taking.
What should one do till then?
Store the load. Elsewhere. Give it some light work to do. Put it in a position that it can make its way easily back to you as soon as you call it in.
When do you call it in?
When you see the big fat target.
Again, isn’t all this obvious?
Again, no, to most people, no, no, no.
Most people are busy getting sophisticated.
They don’t focus on the basics.
Basics win you the game.
Sophistication might deceive you into the false belief that you are winning or are one up, but because you’ve forgotten to focus on the basics, chances are high that you’ll end up losing.
So here’s what one needs to do.
No gun in the house.
No load in the house.
Big fat target. Identify.
Go to load. Load = funds.
Direct load to gun. This is the movement process. It happens online. Funds are directed to a website.
Fire. Pull the trigger on the concerned website. Yeah, gun’s in cyber-space.
Wait for next opportunity.
So on and so forth.
This way, due to sharply controlled fund movement, one creates positions with high potential to win.
Come on, get your basics in order. Leave sophistication to the losers.
What’s your market footprint like?
Meaning, where do you tread?
How do you tread?
Are you making a hash of it?
Do you connect the dots?
Are you organized?
Does your one action span across multiple goals?
What exactly are we talking about?
You are your own light.
Nobody can help you, except you, ultimately.
Therefore, gear yourself up, to win the game for yourself.
It possibly won’t come to exist, that you do one market thing.
Market activity is multi-faceted.
Even if you’re trading one single entity, there are many actions that go along with this one single activity.
Yes, we’re talking about market actions.
The sum total of your market actions is your market footprint.
Make your actions additive.
Each action should add to you.
If an action is not adding to you, don’t do it.
Even an action that stops further loss adds to you, for example.
Also, make your actions connect across segments.
Let’s say I’m eyeing a stock for a possible purchase, or a repurchase. Stock gaps down next morning, before my action. Aha. Hold. 60-70% of all gap-downs play out further. There’s a solid reason for gap-downs. So… hold. Yeah, action on hold. Why? I will possibly get a better price for reentry later, there’s a 60-70% chance of that. Thus, an action now won’t add to me. Action postponed. What do I do with the money set aside for the repurchase? Liquid mutual fund purchase. Online. Seamless. Connecting across? Absolutely. I’m simultaneously accumulating liquid funds to later go in for a private-placement NCD. Therefore, my one action from the equity segment has connected across to the debt segment. Yeah, connectivity. Additive. Stopped me from possible high entry. Made upcoming NCD purchase more possible by adding to its intended corpus. Additive Connectivity.
Yeah, make yours a winning footprint.
Before signing off, I’d like to share with you that i’ve just decided to take additive connectivity to the nth level for myself.
Sure, I’ll be sharing more examples.
Sharing brings joy to everyone, even to the person who is sharing.
Last month, I scrapped my market-play system.
Systems are made to be scrapped later.
One can always come up with a new system.
I love working on a new system.
What I want to talk to you about is why I scrapped my last system.
I found four accounting frauds, as I did my market research, all online.
You see, my last system worked well with honest accounting.
It had no answer to accounting frauds.
Also, I got disillusioned.
Are we a nation of frauds?
How does one deal with a nation of frauds?
More importantly, how does one play such a nation?
Does one invest in it? Or, does one sheer trade it?
Questions, questions and more questions. These encircle my mind as I work to put my new system together.
I am in no hurry to come up with an answer. A country like India deserves a befitting answer, and that it will get, even if the sky comes down on me while I put my system together.
Slowly, I started to think. How many systems had I scrapped before?
Hmmm, four or five, give or take one or two.
I have an uncompromising market rule of going fully liquid when I scrap a system.
Full liquidity is a tension-tree state. It allows one to think freely and in an unbiased manner. Being invested during volatility impedes one’s ability to think clearly and put a new system together.
Ok, so what answer would my new system have towards fraud?
All along, it was very clear to me that future market activity would be in India itself. Where else does one get such volatility? I am learning to embrace volatility. It is the trader’s best friend.
Right, so, what’s the answer to fraud?
Trading oriented market play – good. Not much investing, really. First thoughts that come to mind.
Buying above supports. Selling below resistances. Only buying above highs in rare cases, and trailing such buys with strict stops. Similarly , only selling below lows in even rarer cases, and again, trailing such sells with strict stops.
Trading light at all times.
Fully deploying the bulk of one’s corpus into secure market avenues like bonds and arbitrage. You see, bonds in India are not toxic. Well, not yet, and with hawks like the RBI and SEBI watching over us, it might take a while before they turn toxic. If and when they do start turning toxic, we’ll be getting out of them, there’s no doubt about that. Till they’re clean, we want their excellent returns, especially as interest rates head downwards. In India, one can get out of bond mutual funds within 24 hrs, with a penalty of a maximum of 1 % of the amount invested. Bearable. The top bond funds have yielded about 13 – 15% over the last 12 months. So, that 1% penalty is fully digestible, believe me.
With the bulk of one’s returns coming from secure avenues, small amounts can be traded. Trade entries are to be made when the odds are really in one’s favour. When risk is high, entry is to be refrained from. A pure and simple answer to fraud? Yes!
You see, after a certain drop, the price has discounted all fraud and then some. That’s one’s entry price for the long side. On the short side, after a phenomenal rise, there comes a price which no amount of goodness in a company can justify and then some. That’s the price we short the company at.
Of course it’s all easier said than done, but at least one thing’s sorted. My outlook has changed. Earlier, I used to fearlessly buy above highs and short below lows. I am going to be more cautious about that now. With fraud in the equation, I want the odds in my favour at all times.
These are the thoughts going on in my mind just now. Talking about them helps them get organized.
You don’t have to listen to my stuff.
I’m quite happy talking to the wall.
Once these words leave me, there’s more space in my system – a kind of a vacuum.
A vacuum attracts flow from elsewhere.
What kind of a flow will my vacuum attract?
Answers will flow in from the ether.
Answers to my burning questions.
The “fiscal cliff” thingie has come and gone…
People, nothing’s gone.
If something is ailing, it needs to heal, right?
What is required for healing?
Remedial medicine, and time.
Let’s say we take the medicine out of the equation.
Now, what’s left is time.
Would the ailing entity heal, given lots of time, but no medicine?
If disease is not so widespread, and can be expunged over time, then yes, there would be healing, provided all disease-instigating factors are abstained from.
Hey, what exactly are we talking about?
It is no secret that most first-world economies are ailing.
Specifically, the US economy was supposed to be injected with healing measures, which were to take effect from the 1st of Jan., ’13. Financial healing would have meant austerity and a more subdued lifestyle. None of that seems to be happening now. The healing process has been deferred to another time in the future, or so it seems.
You see, people, no one wants austerity. The consumption story must go on…
So now, since the medicine’s been taken out of the equation, is there going to be any healing?
No. Disease-instigating lifestyles are still being followed. Savings are low. Debt with the objective of consumption is still high. How can there be any healing?
Under the circumstances, there can’t.
So, what’re we building up to?
We’re all clear about the fact that consumption makes the world go round. What is the hub of the world’s consumption story? The US. That part of the world which does save, and where there is real growth, well, that part rushes to be a part of the consumption story. It produces cheaply, to sell where there’s consumption, and it sells there expensively. Yeah, like this, healthy economies get dragged into an equation with ailing economies. Soon, the entanglement is so deep, that there’s no turning back for the healthy economy. It catches part of the ailment from the diseased economy. Slowly, non-performing assets of banks in such healthy economies start to grow. The disease is spreading.
Hold on, stay with me, we’re not there yet. Yeah, what are we building up to?
Healthy economies take time to get fully diseased. Here, savings are big, domestic manufacturing is on the rise, and there a healthy demographic dividend too. Buffers galore, the immune system of a healthy economy tries to fight the contagion for the longest time. As entanglement increases, though, buffers deplete, and health staggers. Non-performing assets of banks grow to disturbing levels.
That’s what we are looking out for, when we are invested in a healthy economy which has just started to ail. Needless to say, we pulled out our funds from all ailing economies long back. Our funds are definitely not going back to economies which refuse to take medicine, i.e. which don’t want to be healed. Now, the million dollar question is …
… what’s to be done with our funds in a healthy economy which has just started to become diseased due to unavoidable contagion?
Nothing for now. Watch your investments grow. Eventually, since no one is doing enough to stop the damage and the spread, big-time ailment signs will invariably appear in the currently “healthy” economy, signs that appeared a while back in currently ailing economies. Savings will be disappearing, manufacturing will start to go down, and bad-debt will increase. Define your own threshold level, and go into cash once this is crossed. You might not need to take such a step for many years in a row. Then again, you might need to take such a step sooner than you think, because the ailing mother-consumer economy is capable of pulling everyone down with it, if and when it collapses. And it just stopped taking its medicine…
Let’s get back to your funds. In the scenario that you’ve gone into cash because you weren’t confident about the economy you were invested in, well, what then?
Option 1 is to look for an emerging economy that gains your confidence, and to invest your funds there.
Not everyone is comfortable investing abroad. What if you want to remain in your own economy, which you have now classified as diseased. There’s good news for you. Even in a diseased economy, there are pockets of health. You need to become a part of such pockets, just after a bust. So, remain in cash after a high and till after a bust. Then, when there’s blood on the streets, put your money into companies with zero-debt, a healthy dividend-payout record and a sound, diligent and honest management. Yeah, at a time like that, Equity is an instrument of choice that, over time, will pull your funds out of the gloom and doom.
You’ve put your funds with honest and diligent human capital. The human capital element alone will fight the circumstances, and will rise above them. Then, you’ve entered at throwaway prices, when there was blood on the streets. Congrats, you’ve just set yourself up for huge profit-multiples in the future. And, the companies you’ve put your money with, well, every now and then, they shower a dividend upon you. This is your option 2. Just to share with you, this is my option of choice. I like being near my funds. This way, I can observe them more closely, and manage them properly. I suffer from a case of out of sight, out of mind, as far as funds are concerned. Besides, when funds are overseas, time-differences turn one’s life upside down. This is just a personal choice. You need to take your own decision.
At times like this, bonds are not an option, because many companies can cease to exist in the mayhem, taking your investment principal out with them.
Bullion will give a return as long as there is uncertainty and chaos. Let there be prolonged stability, and you’ll see bullion tanking. Yeah, bullion could be option 3 at such a time. You’ll need to pull out when you see signs of prolonged stability approaching, though.
One can use a bust to pick up cheap real-estate in prime localities. Option 4.
You see, you’ve got options as long as you’re sitting on cash. Thus, first, learn to sit on cash.
Before that, learn to come into cash when you see widespread signs of disease.
Best part is, widespread disease will be accompanied by a big boom before the bust, so you’ll have time to go into cash, and will be ready to pick up quality bargains.
You don’t really care when judgement day is, because your investment strategy has already prepared you for it. You know what to do, and are not afraid. If and when it does come, you are going to take full advantage of it.
Bring it on.
Pop-quiz, people – how many of us know the basic difference between investing and trading?
The logical follow-up question would be – why is it so important that one is aware of this difference?
When you buy into deep value cheaply, you are investing. Your idea is to sell high, after everyone else discovers the value which you saw, and acted upon, before everyone.
When you’re not getting deep value, and you still buy – high – you are trading. Your idea is to sell even higher, to the next idiot standing, and to get out before becoming the last pig holding the red-hot scrip, which would by now have become so hot, that no one else would want to take it off you.
The above two paras need to be understood thoroughly.
So that you don’t get confused while managing a long-term portfolio. Many of us actually start trading with it. Mistake.
Also, so that you don’t start treating your trades as investments. Even bigger mistake.
You see, investing and trading both involve diametrically opposite strategies. What’s good for the goose is poison for the gander. And vice-versa.
For example, while trading, you do not average down. Period. Averaging down in a trade is like committing hara-kiri. What if the scrip goes down further? How big a notional loss will you sit upon, as a trader? Don’t ignore the mental tension being caused. The thumb rule is, that a scrip can refuse to turn in your direction longer than you can remain solvent, so if you’re leveraged, get the hell out even faster. If you’re not leveraged, still get the hell out and put the money pulled out into a new trade. Have some stamina left for the new trade. Don’t subject yourself to anguish by sitting on a huge notional loss. Just move to the next trade. Something or the other will move in your direction.
On the other hand, a seasoned investor has no problems averaging down. He or she has researched his or her scrip well, is seeing deep-value as clearly as anything, is acting with long-term conviction, and is following a staggered buying strategy. If on the second, third or fourth buy the stock is available cheaper, the seasoned investor will feel that he or she is getting the stock at an even bigger discount, and will go for it.
Then, you invest with money you don’t need for the next two to three years. If you don’t have funds to spare for so long, you don’t invest …
… but nobody’s going to stop you from trading with funds you don’t need for the next two to three months. Of course you’re trading with a strict stop-loss with a clear-cut numerical value. Furthermore, you’ve also set your bail-out level. If your total loss exceeds a certain percentage, you’re absolutely gonna stop trading for the next two to three months, and are probably gonna get an extra part-time job to earn back the lost funds, so that your financial planning for the coming months doesn’t go awry. Yeah, while trading, you’ve got your worst-case strategies sorted out.
The investor doesn’t look at a stop-loss number. He or she is happy if he or she continues to see deep-value, or even value. When the investor fails to see value, it’s like a bail-out signal, and the investor exits. For example, Mr. Rakesh Jhunjhunwala continues to see growth-based value in Titan Industries at 42 times earnings, and Titan constitutes about 30% of his billion dollar portfolio. On the other hand, Mr. Warren Buffett could well decide to dump Goldman Sachs at 11 – 12 times earnings if he were to consider it over-valued.
Then there’s taxes.
In India, short-term capital gains tax amounts to 15% of the profits. Losses can be carried forward for eight years, and within that time, they must be written off against profits. As a trader, if you buy stock and then sell it within one year, you must pay short term capital gains tax. Investors have it good here. Long-term capital gains tax is nil (!!). Also, all the dividends you receive are tax-free for you.
Of course we are not going to forget brokerage.
Traders are brokerage-generating dynamos. Investors hardly take a hit here.
What about the paper-work?
An active trader generates lots of paper-work, which means head-aches for the accountant. Of course the accountant must be hired and paid for, and is not going to suffer the headaches for free.
Investing involves much lesser action, and its paper-work can easily be managed on your own, without any head-aches.
Lastly, we come to frame of mind.
Sheer activity knocks the wind out of the average trader. He or she has problems enjoying other portions of life, because stamina is invariably low. Tomorrow is another trading day, and one needs to prepare for it. Mind is full of tension. Sleep is bad. These are some of the pitfalls that the trader has to iron out of his or her life. It is very possible to do so. One can trade and lead a happy family life. This status is not easy to achieve, though, and involves mental training and discipline.
The average investor who is heavily invested can barely sleep too, during a market down-turn. The mind constantly wanders towards the mayhem being inflicted upon the portfolio. An investor needs to learn to buy with margin of safety, which makes sitting possible. An investor needs to learn to sit. The investor should not be more heavily invested than his or her sleep-threshold. The investor’s portfolio should not be on the investor’s mind all day. It is ideal if the investor does not follow the market in real-time. One can be heavily invested and still lead a happy family life, even during a market down-turn, if one has bought with safety and has even saved buying power for such cheaper times. This status is not easy to achieve either. To have cash when cash is king – that’s the name of the game.
I’m not saying that investing is better than trading, or that trading is better than investing.
Discover what’s good for you.
Many do both. I certainly do both.
If you want to do both, make sure you have segregated portfolios.
Your software should be in a position to make you look at only your trading stocks, or only your investing stocks at one time, in one snapshot. You don’t even need separate holding accounts; your desktop software can sort out the segregation for you.
That’s all it takes to do both – proper segregation – on your computer and in your mind.