An Elliott-Wave Cross-Section through a Crowd Build-Up

At first, there’s smart money.

Behind this white-collared term are pioneering investors who believe in thorough research, and who are willing to take risks.

Smart money goes into an underlying, and the price of this underlying moves up. Wave 1.

At the sidelines, there are those who have been stuck in this underlying. As the price moves above their entry level, they begin to off-load. There’s a small correction. Wave 2.

By now, news of the smart money has perforated through the markets. Where is it moving? What did it pick up? Who is behind it? Thus, more investors following news or fundamentals (or both) enter. The price moves past the very recent short-term high of Wave 1, accompanied by a surge in volume.

This is picked up on the charts by those following technicals, who enter too. By now, there are analysts speaking in the media about the turn-around in company so and so, and a large chunk of people following the media do the honours by entering. Wave 3 is under way.

Technical trend-followers latch on, and soon, we are at the meat of Wave 3, i.e. the middle off the trend.

Analysts on the media then speak about buying on dips. All dips are cut short by a surge of entrants seeking to be part of the crowd.

The first feelings of missing the bus register. The pangs of these cause more people to enter.

Meanwhile, the short community has been getting active. Large short positions have been in place for a while, and they are bleeding. Eventually, the short community throws in the towel, and there’s massive short-covering, causing a further surge in price.

Short-covering is sensed by gauging buying pressure despite very high price levels. It is the ideal time for smart money to exit. That’s exactly what it does, without any dip in the price of the underlying whatsoever.

Short-covering is over. Smart money starts boasting about its returns of X% in Y days, openly, at parties, in the media, everywhere. This causes pangs of jealousy and intense feelings of missing the bus in those still left out. Some enter, throwing caution to the wind.

The price has reached a level at which no one has the guts to enter. Demand dries up. With no buying pressure, the price dips automatically. Bargain hunters emerge, and so do shorters. The shorters sell to the bargain hunters right through a sizable dip. This dip happens so fast, that most of the crowd still remains trapped. Wave 3 has ended, and we are now looking at the correcting Wave 4 in progress.

At this stage, technical analysts start advising reentry upon Fibonacci correction levels. Position traders buying upon dips with margin of safety enter, and so does the second-last chunk of those feeling they’d missed the bus. The price edges up to the peak of Wave 3 and past it. That’s the trigger for technical traders to enter.

We now see a mini-repeat of Wave 3. This is called Wave 5. Once Wave 5 crosses its meat, the last chunk of those still feeling they’d missed the bus makes a grand entry with a sharp spike in the price. These are your Uncle Georges, Aunt Marthas and Mr. Cools who know nothing about the underlying. They cannot discern a price to earnings ratio from an orangutan. They desperately want to be a part of the action, since everyone is, at whatever the price. And these are the very people that traders sell to as they exit. With that, the crowd is at its peak, and so is the price. There are no more buyers.

What’s now required is a pin-prick to burst the bubble. It can be bad news in the media, the emergence of a scandal, a negative earnings report, anything.

The rest, they say, is History.

The Short-Term History of Idealism

1989, Konstanz, Germany.

I’m quietly eating a Nutella sandwich in the commom-room of our student-hostel. There’s a commotion near the TV area. The Berlin Wall is falling. A few students rush to pack their bags. They are off to Berlin. The one’s not going, including me, request them to bring back a few extra pieces of the Wall. That’s one Nutella sandwich I’ll never forget in my life.

Slowly, communist infrastructure in the Soviet Union starts to fall apart too. With the exception of a few strongholds, most of it is gone today.

The most repeated pro-communism argument I have heard after the fall of the Wall is this: Communism failed (wherever it failed) because it was too idealistic for mankind. So, according to this argument, mankind could not live up to the ideals of communism. All people were equal, but some were more equal than others, to analogically quote George Orwell.

Maybe, maybe.

And here is mankind again, trying to be idealistic. The epicentre of this idealism is, well, Germany. Its leaders, including the Pope, are asking its citizens to dig into their pockets and support the Euro against breakdown, come what may.

No other European nation is financially capable of bailing out the Euro. France’s economic problems are visible. It is now up to Germany. The question that remains is: IS THIS FAIR to the German citizens, who will have to take on pressurizing austerities for the follies of others to achieve this idealistic goal?

Well, what’s fair in life and the History of the world? Sacrifices have to be made for the greater good. Is the existence of the Euro “greater good”?

There exist discrepancies between the Euro nations regarding work-attitude and work-ethics. Europe is NOT one nation with one government. We are looking at diverse nations with diverse needs. Some hate to work overall. One likes its retirement age to be 57. The call to behave like one nation to tackle bankruptcy is the imposition of an artificial existence. History has shown mankind, that artificial existences tend not to last.

Left to sink or swim, people much rather decide to swim. Although a sovereign default will impose upon the concerned nations huge austerities in the short-term, they will opt to stay afloat rather than sink. Long-term work ethics will change. Attitudes will change.

Never-ending bailouts will tend not to affect faulty or wanting work-attitudes. That’s the danger here, a repeat loop mechanism, till the bulk of Germany’s resources are drained in supporting the Euro. That’s what we are looking at. First there’s 370 billion Euros for Greece to clear. The figures for Spain, Portugal and Italy are still unclear to the common-man. Figures are being revealed one by one in the media, from mini-bailout to mini-bailout. How long can this go on? Is Germany some kind of holy grail with a never-ending supply of funds and resources?

The questions Germany and its leaders need to address are these: Is the short-term mayhem after a possible Euro collapse the worst-case scenario for Germany’s industry and people? Or is it the slow, long drawn sucking out of its hard-earned life-time earnings and resources, drop by drop, possibly to the last few drops.

Only after answering these two questions will German leaders be ready to vote for or against the Euro in parliament.

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.

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?


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.

Defining one’s Dragons and Kissing them Goodbye

The final impediments between you and successful trading are your dragons.

Define them, and kiss them goodbye.

As a trader, your workplace is the Zone. We’ve spoken about the Zone before. The Zone is not a physical workplace. It is a mind-space where your nervous system tunes into the market, and starts moving with its rhythm, so much so, that when the market turns, you turn with it. It’s like a flock of birds turning in mid-flight. Nobody cares who turned first. Bottom-line is that the flock turned. In the Zone, you become one with the market. If the market turns, it takes you with it. It’s called connection.

Dragons keep your system from getting into the Zone.

There’s the dragon of ill-health. The other day I was running a fever and forgot my wallet, keys etc. etc. in my friend’s car. When have I ever in my life forgotten my wallet, like, anywhere? See? Ill-health makes you commit critical blunders. It’s the real world, people. Ill-health happens. So when this dragon appears, don’t initiate a fresh trade. If you’ve got any open positions, just play them according to the rules you defined when your system was not diseased, i.e. when you were in the Zone and initiated the positions. You have to understand this: the dragon of ill-health knocks you out of the Zone.

Then there’s the powerful and magnetic media-dragon. See, first there’s the market. Then there are people who report about the market, with all their biases and their opinions. As a trader, are you about to listen to the media dragon’s second- or third-hand opinion about the market? Or would you much rather build a first-hand opinion by connecting to the market yourself? Though the answer to this question is rhetorical, the magnetism of the media-dragon is so powerful that even the strongest of traders gets sucked into it. What’s to be done? OK, indulge in media, but tell yourself that this is your time-off, and that you are indulging / amusing yourself. Don’t take any media report at face-value, because there are vested interests. By the time news arrives in print, the market has already factored it in the price long back. Basically, you need to try hard to not let the media dragon bias you against your trading strategy which you formulated while connected in the Zone.

We move on to the dragon of emotions. This one can knock you out of the Zone in the flash of a second, without you even knowing it. That’s why it’s so dangerous. Other dragons take time to knock you out, they build up to it. This one’s effect is instantaneous. Balance, balance, where art thou? As a trader, balance is your biggest friend. Balance keeps this dragon away. If it still manages to surface, balance keeps it under control till it goes away. As a trader, one has to learn to balance oneself; am working on this myself. Perhaps you could teach me a trick or two here.

Lastly, today, I’ll speak about a fourth dragon. It’s called the dragon of indiscipline. It’s connected to the dragon of emotions, but is important enough to get dragon-status. When the dragon of indiscipline strikes, one initiates disproportionately large-sized positions because of greed, or one cuts perfectly profitable positions because of fear. Or, one fails to initiate a normal-sized position because of fear, even after seeing a perfect setup. The learning curve of a trader forces him or her towards defined discipline. Discipline demands from the trader to always open positions that are proportionately sized to the portfolio size. Furthermore, if a position turns profitable, it should only be cut by the market itself, when a trailing stop is hit. Then, no matter what, if a perfect setup is identified, a normal-sized position needs to be initiated. To the trader, that’s the definition of discipline. And, the dragon of indiscipline causes the trader to act otherwise. Want to deal with this one? Here’s a trick. When the dragon of emotions has appeared, ultimately you will realize it. When you do, just repeat the magic words “I am NOT going to allow the dragon of emotions to summon his ally called the dragon of indiscipline!” At this stage, you need to remember: 1). No opening of disproportionately large-sized positions, 2). No manual cutting of perfectly profitable trades and 3). No let-up in the opening of a normal-sized position once a perfect setup has been identified. That’s all I know about this one.

Maybe some other day we’ll take about more dragons! Till then, good luck taming those you have identified!

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.

From Crisis to Crisis : The Concept of Pain-Threshold

Mid-flight, you hear a bang, and start going down. There’s panic everywhere, and the aircraft is starting to lurch one last time. The guy next to you is praying loudly. Before the last thud, you wake up. Bad dream. You wake up, because your pain-threshold is crossed, and your subconscious machinery notices this, thus pulling a trigger.

You are in a live poker game. Losing, of course. An hour gone, down a hundred dollars. Another hour goes by. Down three hundred. It’s starting to pinch you. Your mind is reporting to you that you are nearing your pain threshold, and is trying to make you leave the table. You ignore this report, and are down six hundred in the next few hands. Another pang. One last attempt from the mind. You ignore your pain threshold repeatedly. Now things really start to go wrong. When your opponent puts you all-in for fifteen hundred, you go with the move because you are making a set of nines, promptly ignoring the three heart cards lying on the table. Your opponent shows down the nut heart-flush to bust you completely. So, down US$ 2100, a hefty fine for ignoring your pain-threshold. Once it is crossed, you don’t feel any difference between losing US$ 600 and US$ 2100, until you lose that US$ 2100 and come to your senses. For the next seven nights you don’t sleep too well.

You work in a chemistry lab. Your absent neighbour in the overlooking cubicle is performing an experiment that springs a hydrogen sulphide gas-leak. The lab starts reeking of rotten eggs. You are at a crucial stage in your particular experiment. Can’t leave. Your mind is currently so focused on your experiment that it ignores all the warning bells being sent by your sense of smell. It forgets temporarily what it has learnt in safety class, that hydrogen sulfide lames the power to smell after a few minutes, and that of course the gas is poisonous, and because one can’t smell it after the first few minutes, one can drop unconscious, and then eventually die due to gas overdose. That’s almost exactly what happens, with the good fortune that just when you fall unconscious, your neighbour returns, and rescues you. In this example, because your sense of smell has been lamed, it cannot warn your system that your pain-threshold is soon going to be crossed.

When a market crashes, there’s pain amongst investors. Those with low thresholds bail out immediately. Those with high thresholds take time. Trending markets move fast, so almost always, they manage to cross the pain-thresholds of the majority of investors. These investors don’t feel the difference between being down 20% and being down 50% before they are actually down 50%, but by then half their equity corpus has been lost.

This is the age of crises. There’s one, and then there’s another. And so on and so forth. Having learnt from experience that markets are inefficient with the rider that the over-efficient media makes markets specifically over-efficient during a crisis, one learns that it is extremely lucrative to buy for the long-term in the aftermath of a crisis.

Needless to say, one is buying for the long-term in a market where there are good prospects for future growth. Crisis after crisis is triggered by markets where there are no prospects for future growth. Such markets take down even those markets with bright futures. During the first few crises, the dents in the market with growth prospects are big too. As crisis after crisis keeps coming, this particular market falls too, but lesser each time. Simultaneously, quarter after quarter reveals strengthening growth. Eventually, the nth crisis does not trigger a fall here, because a certain pain-threshold has been crossed amongst the investors of this growth market, who by now cannot ignore the quarter upon quarter net increase in sales and profits for the last numerous quarters as exhibited by this market, crisis or no crisis elsewhere. This particular market decouples, on the basis of its own strength, and its intrinsic and burgeoning growth. In this example, the pain is being caused by unhealthy markets, whereas the market where one is invested into is in good health. Here, crossing the pain-threshold makes the healthy market immune to the disorders that the other unhealthy markets are causing.

Playing Around with the Axis of Time

You’re seated in an exam, and the examiner just announces that the time allocated for completion has been shortened by 1 hour. Sweat sweat, your exam just became more difficult to pass. 5 minutes later, the ruthless examiner again announces that time allocated has been shortened by another hour. Now, making passing grade seems impossible to you. Instead of passing, you pass out.

Shorten the time-frame for almost anything in life, and doing that particular activity properly and well becomes more and more difficult. What if time was taken out of the equation for the above examination? Well, chances of making passing grade just got a huge fillip, because over infinite time, everyone would eventually clear the exam!

Now substitute “examination” with “investment”. Hmmmm, what do we have here? Is it easier to make money from an investment, if time were taken out of the equation?

After the great depression, those businesses that actually recovered, took 20 years or more to do so. Many never recovered. In investing, a 20 year time-frame is definitely taking time out of the equation. So here we have an example where the answer to the question asked is a most definite no. But, that was then. I mean, pre computer-age, pre internet, pre everything. What’s the world like now? Information flows at the speed of thought. Business cycles are much, much shorter. The Fed creates bubbles, and after they pop, crises happen. So, now we rephrase the question, pertaining to today’s scenario. Today, is a 20 year investment horizon going to give you better odds of making money?

One thing is clear, if your horizon is long enough, today you are going to see the underlying going through at least a few cycles. A buy low – sell high strategy has the best chances today of rewarding you very much within your lifetime.

But, what is low, and what is high? Is 1226 dollars an ounce too high a price to enter gold? Or, should one wait for Bharati Airtel to fall to Rs. 250 before making a contrarian purchase, or is the current Rs. 300 the bottom for Bharati? Nobody knows the answers to these questions.

With a long enough investment horizon where you’ve taken time out of the equation, you’ve simultaneously removed these questions from the equation too, or have you? Let’s say you go ahead with your contrarian purchase of Bharati at Rs. 300 and the scrip plunges to 150. Business cycle is short, remember? Today, realistically speaking, telecom could take maximum 5 years to hit a high in the cycle, so you could tank up on another load of Bharati at Rs. 150 and wait for the cycle to hit a high before offloading. Needless to say, before making any contrarian purchase, you should be convinced that the company won’t go bust in the current low of the business cycle. That’s one risk that looms while making contrarian purchases, but if you do your research properly, perhaps one in ten of your contrarian picks will be so unlucky, and those are perfectly acceptable odds.

What about the other end of the barrel? Gold is at an all-time high, and nobody knows where it is going from here. The whole world is confused. What if you take the plunge and enter gold at 1226 dollars an ounce? Now, two things can happen. If gold rises further you make money immediately. Let’s say gold peaks at 2000 dollars an ounce, and then the cycle in gold starts going towards the lower side. In this case, one could keep booking profit all the way up, and hopefully one could be out fully before or even at the peak. In the other scenario, gold peaks where it currently is, and starts going down. You start losing money on your investment. Let’s say it bottoms at 800 dollars an ounce in one year’s time. You’ve been sitting it out. What are the chances of you making money on your investment, and that too soon, let’s say within another year? Based on sheer gut feel, I’d say your chances are high. What’s my rationale for saying this?

Over the last 100 years, gold has given returns in spurts, only to fall back to lows again. It’s 100 year return has been pathetic, only just about in the black. It’s the time it begins to spurt that one needs to look out for. That occurs in times of uncertainty, which is now. If one allows gold leeway on the time-axis in uncertain times, one new high could be taken out after the other till stability and certainty return. So, if your entry into gold crashes on your face immediately, just keep sitting it out if uncertainty on the world currency of choice front keeps looming, and eventually, you’ll have recovered your principal and perhaps made a little money. The worst-case scenario for you here could be that the world suddenly discovers a currency of choice other than gold, gold crashes to god knows what level, and remains there for another 20 years. That would be a black swan event which looks unlikely currently, because the world is far away from finding a currency of choice, and till it does, one can keep stretching the time axis of a gold investment.

If your picks are solid, the market will reward you for patience more often than it will not. So couple patience with excellent research, and then sit back and relax!

On Turning a ULIP into a TULIP

In sixteen hundred and something, the world went bananas about tulips. What ensued was an enormous boom in the tulip market, with species selling for thousands of gilders, and with futures quoted for shoots which were planted or even about to be planted. Murders were commited, all for tulips. Nobody knew this at the peak of the mania, but a virus had hit the tulip plantation industry, resulting in tulip species emerging in all kinds of exotic colour combinations, which were so intriguing, that it led to the mania. Now this virus was a one time thing, it didn’t happen after that. So, as the exotic species and their shoots died, it became apparent to the market that there would be no more exotic specie supply, and a bust followed. Fortunes got wiped out. Suicides resulted. Nevertheless, a tulip remains what it is, a serene flower, adding harmony to the environment, currently fairly priced.

Now what’s a ULIP, or a Unit-Linked Insurance Policy? As the name suggests, it’s an insurance policy, which is linked to units (of equity / debt). When I entered the world of investing, my office got swamped with ULIP salesmen, and I invariably ended up buying 4 ULIPs from various companies because of the excellent sales pitch, and because I didn’t know any better. The killer and sealing remark in the sales pitch was that what form of investment could not be confiscated by any authority, were one to land in trouble or jail? The answer – an insurance policy. And what better an insurance policy than one that is linked to the markets?

Each ULIP has a lock-in, typically 3 – 4 years. So there I was, locked-in with products I knew nothing much about. Hmmmm ULIP – sounded like tulip. I thought to myself – “What if I can find a way to get maximum benefit from these ULIPs? I’m stuck with them anyways.” And my mission statement became – “I’m gonna turn these ULIPs into tulips.” Later, when I had succeeded in this, I even concocted a new name for them, i.e. TUrbo cum Leveraged Insurance Products or TULIPs.

As I set about doing research on ULIPs, all the negatives came up first. Apart from the fee structure being irritating, each premium had a huge additional deduction to go with it. One ended up investing only 80 – 85% of what one paid as premium. The rest went to the insurance authorities. After all, they would charge for an insurance cover. Then, the salespeople held all my passwords in their hands, as per the power of attorney I had signed while investing. They switched in and out of equity at all the wrong times, and my investments were taking a hammering. Then, while switching, one could only catch the end of the day NAV etc. etc. etc.

Slowly, I invited each salesperson for tea in the office. This was much before the financial meltdown, and the merchant banker / investment sales agent was still king, whereby the investor was starved for new investment products. After boosting up their egos, I pulled each login ID and password out of their clutches, and immediately went online to effect a password change. OK, I was no longer under their control.

I noticed that switching between equity and debt was free of cost. What if I switched 50 times a year, not that I was going to, but what if I did? Free 24 times, Rs. 100 per switch after that. Hmmmm. Any direct equity investment would have resulted in brokerage generation, and in ULIPs, there was no brokerage generation. The fund house put up the money for whatever brokerage was generated by ULIP clients. They were probably their own brokers, so they didn’t end up losing much anyways. So, how much was I saving on brokerage per switch. Typically, 0.75% of the total investment if I looked at a complete buy and sell transaction, i.e. switch in to equity and switch out of equity. So, how much money would I save in brokerage if I switched a corpus of Rs. 1 million 50 times over? Rs. 3,75,000/-. Hmmm, sizable. A trader with a high turnover didn’t need to trade directly, he could do it through ULIPs. And the trader would be in and out of the market with one click, there was no need to sell or buy 20 or more different scrips. Still, one would only get the end of the day NAV. The bottom-line was that the trader would save huge amounts on brokerage with this kind of turbo ULIP switching.

What further made this avenue attractive for the trader was the fact that ULIPs did not require one to pay any short-term capital gains tax because of the lock-in. Wow. This was big. So, If I made a million on a million in less than one year, I got to keep all of it, and would not have to part with 15% as short-term capital gains tax. Such tax-saving leverages the portfolio, because one invests the tax-saving back into the market, and future gains are compounded owing to a larger initial investment corpus. In fact, the brokerage saving component was adding to this leverage too in the same way.

So there I was. I had put my investment philosphy regarding ULIPs together, and had actually turned them into TUrbo cum Leveraged Insurance Products, or TULIPs. After recovering my losses and gaining some, I soon got bored, and when the lock-ins ended, I got rid of the TULIPs.

What remains with me today is that this was my first victory in the world of investing, a feeling of harmony that never fails to energize me, just as the mere thought of a field of colourful tulips would energize / harmonize the mind