Hocus-Focus

Yeah, where’s your focus at…

…as your market drops. 

Is it on your benchmark index?

Sure.

Ok. Drops further. Developing into a crash…

Where’re you at now?

My focus has shifted. 

Tell me more. 

I’m now focusing on the shares i’ve begun to accumulate,…

…and, specifically, I’m focused on the number of shares being added to my portfolio,…

…that’s my number. Yeah, that’s where my focus is at.

Not on your benchmark index?

First up, I feel the joy as this number enters my demat. After that, I cast a brief glance at whatever benchmark indices I’m looking at, and decide for myself, whether my focus needs to remain shifted. 

What if you’re rubbing your hands in glee, and dud shares are being added to your name?

That’s the whole point. These are not duds. They are gems as per due diligence done, and are going for the price of non-precious counterparts. That’s why my focus remains shifted. 

When will it shift back?

That switch happens on auto. When benchmarks start oozing expensiveness, focus automatically shifts to the benchmarks. It should no longer be on the number of shares entering your folio, because shares should not be entering your folio when benchmarks ooze expensiveness. 

Exceptions?

Sure. Specific stocks could be cheap when a benchmark is expensive. Let’s not deviate from the point though. This is about a healthy shift of focus, and then a second – healthy – shift back. 

Right. 

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Nadir Non-Focus

Scared to enter?

Things look gloomy?

Forever?

NO.

Look at History.

Markets are where they are despite what’s happened. 

Governments, scams, frauds, bribes, wars, disasters – the list is endless. 

In the end, we are still where we are.

Is that good news?

YES.

What does it mean?

Growth – reflects in the corresponding market – eventually. 

Sure – we might not be growing at 7%+.

We definitely are growing at 5%+, perhaps at 5.5%+.

In a few years, growth could well accelerate.

Why?

Earning hands are growing.

So are aspirations. 

The consumption story in India is alive and kicking. 

What we’re seeing currently is a result of eighteen months of bad news. 

Such a long spate of negative stuff churning out gets the morale down. 

People start letting go of their holdings in despair. 

Maybe there’s another eighteen months of negativity left – who knows. 

That’s not the right question.

Don’t worry yourself about the bottom and when and where it is going to come. 

Why?

Please answer something far more fundamental first.

If you don’t have the courage to go in at this level (with small quanta of course, we do follow the small entry quantum strategy)…

…do you really thing…

…that you will muster up…

…anything remotely resembling courage…

…at a number that is let’s say 20% below current levels?

Gotcha there?

You Miss, I Hit

We’re in the markets to…

…capture gains. 

How do gains come about?

Buy low sell high?

Sure, you’ve then got some gains. 

Enough?

Probably not, because everyone of us holds enough losers. That’s part of the game. Amongst many losers, we then find a winner.

How does one maximize gain?

One looks for mispricing. 

Let’s say we’ve id’d a stock. 

It passes our entry criteria.

Now, we look for an entry point that will give us a price advantage. 

We would ideally like the public to misprice the stock on the downside. 

That’s when we would like to pick it up. Higher the misplacing, higher our advantage. 

When is maximum gain captured?

This happens when the same stock is mispriced by the same public on the upside. 

Is such a strategy easy to implement?

Sounds easy, but NO!

Why?

(For starters), That’s because it goes against our grain to buy something really low, for fear of it going even lower, since sentiments are so down. 

Can well happen. You buy something really cheap, and before you know it, your something is down by another half. 

What’s your protection?

Rock-solid research. Identification of sound fundamentals. A shareholder-friendly management. Technicals that support you. Mispriced entry point. Product-profile that’s going to be around. Lack of debt. Substantial free cash flow. Etc.

If you’ve got such pillars going for you, it’s only a matter of time till they start to shine forth. 

If mass-depression causes you to wilt, though, it’s on you. 

Mispricing on the upside causes us to blunder too. 

Most sell their big winners which still have sound fundamentals, and can potentially go on to bag much higher multiples. 

Do this, sure, but only if you NEED the money. 

If not, give your potential multibaggers the time to become full-fledged ones. 

Sell early, and you won’t perhaps ever find another entry point. Winners barely ever give an entry-window. 

At market highs, sell your losers, because they’ll perhaps be inflated too, and you might get a good exit. 

When others misprice, make sure you hit some home-runs. 

The Number One Reason

Yeah, what is it?

What’s the number one reason why we fail in a long-term investment?

I’ve made this mistake, and true, those investments didn’t work out well for me.

However, I’ve stopped making this mistake.

That’s right. I don’t buy without margin of safety anymore.

Even a growth stock will eventually offer you some kind of margin of safety.

Wait for it to.

So, why doesn’t an investment work out that hasn’t been bought with margin of safety?

Mathematics…

…and psychology.

Lesser the margin of safety, the more difficult it is to make a multiple. Just do the math.

Then, investor-psychology is such, that investments bought without margin of safety don’t allow the investor to sit.

They disturb the investor when they go against him or her.

The more an investment goes against an investor, the more he or she jumps.

In the end, too much jumping leads to an erratic decision.

In the worst case scenario, one bails out of a sound investment at the lowest point of the market.

How does one avoid something like this?

Learn to sit.

Create circumstances around yourself that allow you to sit.

Buy with margin of safety.

An investment bought with ample margin of safety allows you to sit even when the investment is down.

Because you’re holding sound investments, …

… sitting makes you win in the long-term.

Have the Guts?

Somebody did say …

… that Equity was not for the faint-hearted.

Oh, how true!

Everyday, my heart stands tested!

However, because of a small entry quantum strategy, I am able to stay in the game.

If I am able to stay in the game for multiple cycles, I will prosper.

Why?

Firstly, the strategy by default renders me liquid, such are its tenets.

Then, a good hard look at fundamentals is always called for.

To close, it is important is to enter with technicals to support you.

Now let’s say I make a mistake.

What is a mistake?

Ya, good question – in the markets, what is a mistake?

In the markets, when the price goes against you, you have made a mistake.

So let’s say that I’ve made a mistake.

Is the mistake big?

No.

Why?

Because of my small entry quantum.

What does it mean for my next entry?

Added margin of safety.

Is that good?

You bet.

Why?

Because fundamentals are intact.

What’s going to eventually happen?

Stock’s going to bottom out.

I’ll have a decent amount of entries to my name.

My buying average will be reasonably low.

The margin of safety my buying average allows me will let me sit on the stock forever, If I wish to.

Down the road, one day, I might be sitting on a big fat multiple.

Please do the math.

Happy and lucrative investing!

🙂

MP vs MoS : the lowdown on Trade-Entry

Margin of Safety (MoS)… 

… hmmm… 

… wasn’t that in investing? 

Well – surprise – it’s in trading too. 

You can enter a trade with MoS. 

How? 

Ok.

ID the trend. 

Wait for a minor reversal.

Let the reversal continue towards a pivot, or a support or a what have you. 

During this reversal, whenever you feel that you have considerable MoS, well – enter. 

Why shouldn’t you wait for the pivot to get touched? 

Things happen real fast at a pivot. Upon a pivot-touch, you can lose your comfort-zone even within minutes. 

Two vital things can happen at a pivot. 

Either there’s a quick bounce-back, or the pivot gets broken. 

Bounce-back means your trade is now in the money, and that you can go about managing your trade as per your trade-management rules. Wonderful. 

Pivot-break is not a worry for you. 

Why? 

Because you’ve placed your stop slightly below pivot, after the noise. 

Upon pivot-break, you get stopped out. You take the small hit and move on to your next trade. 

Eventually, things heat up. 

There is movement. 

Tops get taken out. 

Fast money can be made. 

How do you enter here? (Needless to say, for shorts, everything is to be understood reversed). 

Momentum play (MP)… 

… is the weapon of choice. 

You set up a trigger entry after a top or a resistance or a what have you, and wait for price to pierce, and for your entry to get triggered. Then you place your stop, below top or resistance or what have you. 

MP vs MoS is a matter of style. 

If you’re not comfortable changing your trading style to adapt to times, that’s fine too. Stick to one style.

If you’re conservative, stick to MoS. 

In a frenzy, however, MoS might almost never happen. 

In a frenzy, entry will be triggered exclusively through MP.

Take your pick. Adapt. Do both. Or don’t. Do one.

You call the shots. 

This is about you.

Nath on Equity – Yardsticks, Measures and Rules

Peeps, these are my rules, measures and yardsticks. 

They might or might not work for you. 

If they do, it makes me happy, and please do feel free to use them. 

Ok, here goes. 

I like to do my homework well. 1). DUE DILIGENCE. 

I like to write out my rationale for entry. 2). DIARY entry.

I do not enter if I don’t see 3). VALUE.

I like to see 4). MOAT also. 

I don’t commit in one shot. 5). Staggered entry.

I can afford to 6). average down, because my fundamentals are clear. 

My 7). defined entry quantum unit per shot is minuscule compared to networth. 

I only enter 8). one underlying on a day, max. If a second underlying awaits entry, it will not be entered into on the same day something else has been purchased. 

I’ve left 9). reentry options open to unlimited. 

I enter for 10). ten years plus. 

Funds committed are classified as 11). lockable for ten years plus. 

For reentry, 12). stock must give me a reason to rebuy. 

If the reason is good enough, I don’t mind 13). averaging up. 

Exits are 14). overshadowed by lack of repurchase. 

I love 15). honest managements. 

I detest 16). debt. 

I like 17). free cashflow. 

My margin of safety 18). allows me to sit. 

I pray for 19). patience for a pick to turn into a multibagger.

I keep my long-term portfolio 20). well cordoned off from bias, discussion, opinion, or review by any other person. 

There’s more, but it’ll come another day. 

🙂