Busy Times

Market falls are busy times. 

No, we’re not busy whining. 

We’re busy buying.

Are we not afraid?

That the crack might deepen?

That it might go down to zero?

No.

We’re not afraid of this scenario. 

Meaning?

Meaning that even though such a scenario cannot be ruled out…

Huh!?

Yeah, it can’t be ruled out. With trade wars and back to back black swans waiting to strike, theoretically, the bottom is zero.

And you’re not afraid?

No.

Why?

Because I buy into fundamentally sound businesses…

…zero debt…

…great 5 year numbers…

…sometimes, great ten year numbers…

…and I buy with considerable margin of safety.

Still, one is normally always afraid, right?

Wrong. A small entry quantum strategy kicks out all remnant fear.

How?

This strategy leaves me liquid. Let it go down to zero. I’ll still have liquidity to buy.

And that which you’re buying…

…is sound, yes. If I buy something sound, it will yield returns. It’s like agriculture. Crops grow in good soil. They don’t grow well in bad soil. I make sure that I choose excellent soil.

How does one do that?

Due diligence. Period.

With all the scams and frauds going on…

Well, I look long and hard for shareholder-friendly managements. Representable salaries, willingness to share, largesse, debt-averseness, intelligence, business savvy, the list goes on.

What if you land up with a fraud management?

Solid research will make you avoid scamsters. I search the internet thoroughly for any kind of smoke. Crooks leave a trail, and one is able to catch their online trail pretty easily. 

Alone online?

Second recourse are annual reports. They reveal a lot. I don’t invest in a company without having a thorough look into its annual reports. I look at CSR, the director’s report, skin in the game, balance sheets, profit and loss statements, cash-flow, special items, what have you.

What if you still land up with a fraud?

After I know I’ve landed up with a fraud management, I would look to exit at the next market high. 

What if your holding is wiped out till then?

If it’s wiped out, I have many other holdings to lean on, and don’t forget the liquidity that is yet to flow into honest managements.

So you’re not afraid of the loss?

There is some risk one has to take. Here, it is the risk of being wrong. The good thing is, once I know that I’m wrong, I won’t double up on my wrong call. I’ll get busy elsewhere and look to exit from my wrong call with as little damage as possible, perhaps even in profit.

Profit?

You forget, I like to buy with margin of safety, and you’d be surprised at what people are willing to pay at market highs. 

I see, well then, happy investing!

Thanks! 🙂

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Nature of the Beast

Stocks…

…crash.

It’s the nature of the beast.

Stocks also multiply.

For stocks to multiply, one needs to do something.

What is that something?

One needs to buy stocks when they crash.

Let me give you an example. 

Let’s assume markets are on a high, and there’s euphoria.

Excel Propionics is cruising at a 1000.

The prevailing euphoria seeps into your brain, and you buy Propionics at a 1000.

For Propionics to multiply 10 times in your lifetime, it will now need to reach 10,000.

Likely? Wait.

Cut to now.

Stocks are crashing. 

The same stock, Excel Propionics, now crawls at 450.

You have studied it. 

It’s debt-free.

Positive cash-flow.

Ratios are good.

Numbers are double-digit.

Leverage is low.

Management is shareholder-friendly. 

You start buying at 450. 

By the time the crash is through, you have bought many times, and your buying average is 333.

For Propionics to multiply 10 times in your lifetime, it will now need to rise to 3330.

Which event is more likely to happen?

Just answer intuitively.

Of course, the second scenario is more likely to play out than the first one. In the second scenario, Propionics will need to peak 3 times lower.

Simple?

No!

Try buying in a crash.

You are shaken up. 

There’s so much pessimism going around.

Rumours, stories, whatsapps, opinions. The whole world has become an authority on where this market is going to go, and you are dying from inside.

What’s killing you?

The hiding that your existing portfolio is taking, that’s what’s killing you.

Are you liquid?

No?

Very bad. 

Why aren’t you liquid?

Create this circumstance for yourself.

Be liquid.

Optimally, be liquid for life. 

Then, you will look forward to a crash, because that’s when you will use your liquidity copiously, to buy quality stocks, or to improve the buying averages of the already existing quality stocks in your folio. 

How do you get liquid for life?

You employ the small entry quantum strategy.

Yes, that’s about right. 

We’ve been speaking about this strategy in this space for the last two years.

Read up!

🙂

Factoring in Doomsday

Because of your small entry quantum, you are always liquid.

That’s how you have defined the strategy.

What happens when there’s a market crash?

Your existing folio takes a hit.

You’ve been buying with margin of safety.

Because of your small entry quantum strategy, your hit is not hitting you.

Your focus is elsewhere.

It is on the bargains that the crash has created.

You keep targeting these with your fresh entry quanta.

You keep getting margin of safety.

Suddenly you realise, that you like it.

You like being in bargain area.

You like the sale that’s going on.

It won’t always be so.

There will be times that you won’t be getting any margin of safety whatsoever.

Then, you realize another thing.

You’re not afraid of a crash…

…because…

…you are ready, to pick more.

What has empowered you?

Margin of safety.

Small entry quanta.

Controlled level of activity.

Great fundamentals.

Great managements.

Quality.

Crashes come. Crashes go.

You’ll keep buying stocks with the above criteria as per your outlined strategy, and you’ll keep adding on to your purchases with small entry quanta.

It’s not hurting you, because the money you’re putting in has been defined in such a manner.

Your mind has digested this definition, and your strategy is in place.

The market being down while you buy is a requirement for your strategy to be successful in the long run.

It is a good thing for you. It is not a bad thing.

It takes a while to realize this.

Not Everyday is an MoS Day

Dear Long-Term Investors,

How are you?

Hope this finds you in the pink of health, and without itchy fingers. 

After running through a 70-odd day corrective phase, the Indian markets don’t seem to be offering margin of safety (MoS) anymore. 

Or so I feel. 

The groove had become natural from mid January to the beginning of April. 

There was something to be bought, almost everyday. 

One would wake up thinking about what one would be buying for the long-term when the markets opened. 

Over the last ten days, I haven’t felt like buying anything. 

My fingers are itchy.

I’m raring to go. 

However, margin of safety is not there. 

It might return, in some form or the other, and that too soon. However, it doesn’t prevail just now, as per my understanding. 

Where does that leave me?

I can now opt for compulsive buying. However, my market experience has taught me otherwise. It’s a simple rule – no margin of safety, no buying. Period. 

I focus on other stuff. 

I have a trading operation. 

I focus on that. 

I write. 

I read.

I chant. 

I plan my summer vacation. 

I attend to family matters. 

There’s other business that needs attending. 

I travel. 

However, I don’t resort to compulsive buying. 

Can you stop yourself from compulsive buying? However itchy your fingers are?

It’s not easy. Nevertheless, it’s mandatory. 

The follow-through energy from an existing groove needs to be diverted until it is fully dissipated. 

If you don’t succeed with this, you’ll end up with over-priced buys in your long-term portfolio.

This spells disaster, because lack of margin of safety won’t allow you to sit when markets crash. 

And crash they will. 

Every market crashes, some time or the other. 

That’s when your margin of safety allows you to sit quietly and sleep properly. 

You then have the acumen to recognize the re-existence of margin of safety.

Also, you have the energy to act upon your identification of the re-existence of margin of safety. 

You buy more, because MoS days are there again. 

Markets & Detachment – Possible?

We’re pushing limits here.

Making the improbable possible – doesn’t that give you a kick?

Am I even qualified to talk about detachment in the markets?

Well, I can at least tell you how I’m approaching the subject.

Hmmmm – where to begin, let’s see…

Let’s start at the nascent stage where a pang of attachment causes you to worry.

You sit up.

What’ll happen to my stock?

What if there’s a huge crash overnight?

What if I get wiped out?

What will my wife think of me?

Will I become the laughing stock of the Universe?

It’s ok.

Worry.

Burn your heart out worrying.

One needs to feel the pain of the disease to want to weed it out comprehensively.

Worrying and burning your heart out is not the only thing you are doing, though.

You are simultaneously making a list of all the questions that are cropping up courtesy your burning heart.

Yes, yes, make the list. Cast aside the silliness of the questions. No matter how silly a question is, include it in the list if it has cropped up even once. Get on with it.

There then comes a time where you can confidently say, that yes, my list of questions is pretty much complete. No new question seems to be asking itself.

Wonderful.

Now go about creating the circumstances for each question to not crop up.

Meaning that you have undergone actions that are now enabling you to answer each question with “this will not happen because I have created such infrastructures that exactly this will not happen”.

How are you addressing those question for which you can’t create such infrastructures, like an imminent market-crash, or what your spouse might think of you?

To address these particular questions, you create circumstances that cause you to be least affected in the event of the appearance of such questions.

For example, to be mostly insulated from the effects of crashes, buy with margin of safety. Or, set stops. Or, don’t buy. Short. Hedge. Do what suits you, but do it.

Regarding spouse, he or she will think what she thinks. You can’t change that. You just need to have a clear conscience. Commit those actions that give you the clear conscience. Hahahahahaha! 🙂

Right.

There then comes a time, where all queries have been comprehensively addressed. They stop cropping up.

Next, you need to stop committing those actions that can act as catalysts for a query to pop up.

Only look at the market when you have to. Don’t, otherwise. Try only looking at the underlying. Broader markets – well, poisonous, keep these at a minimum. Try and bring down your market action to once a day. Limit the action to the minimal time possible.

Weed out any kind of market conversation with other individuals. There’s no need. There’s you, there’s the market, there’s your system. That’s all you need.

Keep brokers and middle-men at a manageable level. Preferably at zero, and maximally at lower single digits. Only do business with them, no loose-talk, no exchange of tips. Tips are another big poison.

Find your own investments or trades. Resources are phenomenal today. You have everything at your beck and call with a computer and an internet connection.

Shut off business TV. More than a glance at the business page of the newspaper is unnecessary. Business magazines? Forget it. Every piece of info is accessible pinpointedly on the net. You wish to enter into an investment at the nascent stage, right? By the time the story gets published, smart money is already in, and there’s already been a run-up. Your margin of safety is gone.

Finally, take a look at yourself now.

Your results are improving drastically…

…and you’ve detached in the markets…!