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. 

🙂

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Action Oblique Inaction Upon Field-Proof

You.

Field.

In.

No theorizing.

Just get into the field.

Act upon field-proof.

Or, don’t act…

… upon field-proof.

That’s just about it.

There’s a time for theory.

It’s to tune your mind.

Learn the ropes.

Baby-steps.

Away from the field.

So you’re yet safe.

Fine.

That stage gets over.

The onus is on you.

Real world is different.

It’s not like theory.

If it were, everyone following theory would be a billionaire.

Today’s professors don’t even put their own money on the line.

If you don’t get a feel for the LINE, your paper-knowledge has no value whatsoever.

On the field, LINE is big. Very big. You have to handle the line well. Otherwise, your money’s gone.

So, gauge the field.

What proof are you observing?

Is it compelling you to act?

Yes?

Act. Forgot about everything else.

Is it compelling you to sit still?

Yes?

Don’t act. Sit still. Forget about everything else.

Carve your own dazzling destiny.

🙂

How and Where to Look for Outperformance

Is it surprising, that the kind of outperformance we look for crops up in unexpected places?

Not really.

Yeah, it’s not surprising. 

I mean, if we found a certain brand of outperformance in an expected place, well, everyone would make a beeline for it, and soon, it would be over-valued. 

There’s only one way we want to be in something that’s over-valued – when we’ve bought it under-valued. We’ll then keep it for as long as the ride continues. 

Otherwise, we don’t want to touch anything that’s over-valued, even though it might appear to be outperformance. 

Getting into outperformance at an undervalued level gives us a huge margin of safety. That’s exactly what we want. That’s our bread and butter. 

So let’s start outlining areas to look in. 

Task gets difficult. 

I mean, how will you define areas literally?

Button-clicks. 

Algorithms. 

No, you don’t need to know how to programme, to put together an algorithm. 

Just do it online. 

Put in it what you’re looking for. 

Hit and try. 

Ultimately, you’ll hit the right combo, Stay with it, as long as it’s working. 

What do you put in your algorithm?

Value. 

Good ability to allocate capital. 

Efficiency.

Frugality.

Humility.

Etc. etc.

You ask how?

Well, this is not a spoon-feeding session. 

You’ll need to use your imaginations a bit. 

It’s all possible, let me assure you. 

Meaning, it’s possible to incorporate traits like humility into your mother-algorithm. 

Do the math. 

Ok, so you’ve translated what you’re looking for into computer language without knowing how to programme. 

You run it. 

Where?

All over the place, online. Any finance site. Yahoo Finance, for that matter. 

You get some results. 

In these you look to confirm. 

Is the outperformance you were seeking there or not?

No?

Look further. 

Yes?

Has this outperformance been discovered by the general market?

Yes?

Look further. 

No.

Bingo. 

Look for an entry strategy, provided your other parameters, if any, are being met. 

What’s the Frequency, Flipkart?

Hmmm, a zero-profit company…

In fact, a loss making company…

Do you get the logic?

People are probably seeing an Amazon.com in the making.

Amazon exists in a highly infrastructure-laden country with systems.

Can we say the same about us?

As of now – no.

Are we on the trajectory?

Sometimes yes, sometimes no. It’s been five steps forward and then three back till now.

What’s all the hype about?

Institutions want to make money during the ride.

Whether the ride culminates into an Amazon.com is irrelevant for institutions.

Public opinion acknowledges the ride.

That’s enough for institutions.

They’ll ride to a height and exit, irrespective of any MAT or what have you.

While exiting, they’ll hive off the hot potato to pig-investors in the secondary market, post IPO.

Hopefully, a valuation is calculable by then. Even the PE ratio needs earnings to spit out a valuation. No earnings means no divisor, and anything divided by zero is not defined.

Keep your wits about you. Follow performance. Follow earnings. Follow bearable debt. If you see all three, a sound management will already be in place. Then, look for value. Lastly, seek a technical entry.

Don’t follow hype blindly.

Cheers! 🙂

The Price of Value-Addition

Does value-addition carry a price-tag?

You bet.

What, you thought you could add value… for free?

Naehhhh.

Good things in life generally don’t come for free.

One doesn’t value the best of things that are free. One treats them cheaply… because they’re free.

In the marketplace, free-kinda stuff always comes with a catch, or a trap.

Ponzis use high-return free money ad-tags to lure pig-investors.

I generally steer clear of free-kinda stuff, anywhere and anyhow in life.

Don’t be afraid to pay (well) for value-addition.

By adding value, you’re doing yourself a huge favour. You’re creating an asset that will generate towards your corpus on auto-pilot. Why should something like this be coming for free?

In fact, why should something like this not be appropriately expensive?

Taking the Pan out of Panic

Panic – Pan = ic = i see = I SEE.

Times are unprecedented.

We’re breaking new lows of evil everyday.

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

Shall we pack up our bags and migrate?

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

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

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

Get my point?

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

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

What does that mean for you?

Only one thing.

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

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

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

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

You can only do that by refusing to panic.

Where to, Mr. Nath?

Last month, I scrapped my market-play system.

Happens.

Systems are made to be scrapped later.

One can always come up with a new system.

I love working on a new system.

It’s challenging.

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.