We use them all the time.
A stock screen is a robot.
So why am I still saying no thank you?
I use stockscreens day in and day out.
I use them for trade selection, and I use them for long-term stock selection.
…(here comes the hammer),…
…the final say is mine.
I’d like the human touch to answer yes or no.
Also, out of say a hundred selections, I can still say no to all.
And, if something catches my eye, I can dig deeper.
I’d like to keep all these things in my hand.
I’d like my market approach to be with open eyes and usage of common-sense.
So where are we exactly?
Somewhere between one-fourth and half robotic.
That suits us.
We save hours of sweat labour.
After sweat labour has done its work, we start applying our minds.
We take over where the robot has left off.
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.
Just remember one thing…
…that the words “averaging down”…
…only go with long-term investing.
They do NOT go with trading.
After you have fully digested and understood the above, let’s to to the when.
When does averaging down go with investing?
The answer to this is – only after doing proper homework.
If you’ve not researched the underlying well enough, don’t even think about averaging down, because you could be throwing good money after bad.
When there’s a correction, the long-term investor does get tempted to increase his or her holding, because of the lucrative prices that are on offer.
Sure, why not?
Please understand, that this “sure, why not” is coming out so casually because of course the long-termer has worked overtime to arrive at the conclusion that he or she wishes to increase his or her stake in something that is already being held.
The fall in the price of the underlying does not perturb the long-termer. Solid research has been done, and the markets make huge mispricing blunders when in free fall. Market players go all psycho and discard their precious holdings at throw-away prices. Picking up quality stocks at bargains is exactly what the long-termer is in it for.
The long-termer has done a few more things.
Family has been secured with multiple income-sources and emergency funds. What’s going into the market is sheer surplus, not envisaged to be required over the next ten years.
Then, entry quantum is small each time, small enough so that entries can be made all year round, and there will still be ample savings left after all entries.
How does one calculate a small enough entry quantum that satisfies all of the above criteria?
One works backwards.
Pinpoint your income after tax for the year.
Decide what you wish to amply save. Subtract this from your income. Further, subtract expenses. You are left with an amount. Decide whether all of this amount can go into the market, or whether only a part. Maybe you wish to go for a holiday with your family, or perhaps you wish to buy a vehicle, or what have you. Subtract such additional expenditure too. Finally, you are left with the amount that you wish to plough into the market, over the course of the year.
Next, take the amount, and divide it by 30, or 40 or 50.
On the down-side, the market could offer you margin of safety on 30 of the days that it is open in the year. On the up side, the number could be 50. We are talking about ten-year average numbers. During a singular correction, the market could offer margin of safety continually for the whole year. Decide what your magic number is. 30-40-50 days per year works ok over a ten year period. Divide the amount you’ve set aside with the number you’re comfortable with to arrive at your entry quantum per entry-day, for the year in question. Now you can keep going in with this same quantum through out the year whenever margin of safety is offered, and you generally won’t have to worry about running out of investing money, on average.
Great stock-picking, excellent due diligence, surplus going in, small-enough entry quantum, ability to sit – the long-termer is armed with these weapons, and now, he or she can average down as much as desired, whenever margin of safety is offered.
Where there are markets, there are corrections.
At first, they cause us dismay.
Slowly, we get used to them.
Then, we start using them.
Next step is – exploiting them.
One can speak of exploiting if a correction persists, and one is long-term investing.
During a persisting correction, we purchase in waves.
How are we defining a wave?
Go through your long term portfolio and pick out those stocks that are offering margin of safety.
You convince yourself of their health once again. Still healthy? Go ahead.
You purchase them one by one, one per day, by putting one entry quantum into the market for each purchase.
There will be greed to buy more than one underlying in one day. Don’t give in. This will allow your buying power to persist alongside a persisting correction.
The size of your entry quantum needs to be small enough to sustain entries all year round, still leaving ample liquidity on the side. Your long-term strategy should not immobilise your financial and familial activity in any way. Thus, an optimally small enough entry quantum is vital.
You’ve gone through a wave.
Go through your long-term portfolio again.
Where does margin of safety still exist? Pick out stocks list.
Go through next wave.
Till no margin of safety is offered, or if you feel that the buying limit with a stock is surpassed.
4-5 such waves can really ramp up your portfolio.
What happens if corrections continue over multiple years?
Take long breathers between sets of waves.
Keep doing due diligence. If you’re not convinced about a stock anymore, don’t include the concerned stock in the next round of wave-buying (you can exit such a stock completely upon a market high; wait patiently for such a high and then throw the stock out, if still unconvinced about it).
Yes, ultimately, markets will start to rise again. Margin of safety dries up. You stop buying.
Your portfolio will now start showing its health.
It’s been accumulated with conviction, at the right price.
What is a good time to buy for the long-term?
Is there some kind of formula? Mathematical equation? Algorithm?
Who doesn’t look for the holy grail?
Sure, there are technicals galore, to assist one’s buying and fix its appropriate time.
Of course, fundamentals, when studied properly, are even more helpful.
However, neither technicals nor fundamentals can replace emotion.
The emotional alarm, when sounded, is a good time to buy for the long-term.
Here you are, getting alarmed at how the markets are falling.
How are you supposed to buy with a straight face amidst the panic?
That’s just it.
Markets are wired in an opposite fashion to our mentality.
At the onset of margin of safety, our mental framework emits panic upon seeing the mayhem.
Upon the vanishing of margin of safety, the same mental framework emits euphoria and wants to participate in the rally. This is trading, not long-term investing, and as long as you buy high and sell higher, you are good. What you are not going to do here is hold your trade for the long-term, thinking it’s a long-term buy. What has not been bought with margin of safety is not a long-term hold.
Margin of safety gives us a buffer.
Let the markets fall; they still don’t reach our entry price. Or, they only fall a tad under it, and then start to rise again. That’s the beauty of buying with margin of safety. You can use the low now created to pick up some more, if you are still convinced about the stock. Otherwise, you can always exit the stock on a high.
In long-tem investing, one should not exit on a low due to panic. If one does so, it’s like market suicide.
What causes exits on lows?
Need for money.
Become a strong hand.
Put in only that money which you don’t need for the next ten years. Make sure before entry that you won’t be pulling out this money in the middle of the investment if you can help it. Have a fallback family fund to lean on ready before you start putting money into the market for the long-term.
Teach yourself not to panic. Rewire yourself alongside the market. This takes time. It took me almost a decade to rewire myself. Everyone needs to go through this rewiring process.
Once you’re rewired and financially secure, your strong mind will pick up on the emotional trigger, and will start buying when the pinch-factor kicks in.
Your strong hands won’t let go owing to panic.
In the long run, your investment, which has been made with margin of safety and proper due diligence, will yield you a fortune.
Markets are correcting.
The correction seems to be gathering momentum.
Long-term portfolios lose out on net worth.
Trading portfolios get their stops hit.
It’s not pretty.
Should one be worried?
Have we not taken worry out of the equation?
We’re not worried.
In fact, we want the correction to linger.
So we can buy more.
How long can you keep buying?
How’s that possible?
Very simple. Do you have savings?
Lovely. Do your savings grow?
Yes, month upon month, they do. I make sure of this by spending less than I earn.
Even lovlier. Now take a very small potion of your total savings, and put it in the market.
Small enough, such that if you were to put in that same small quantum on all off the approximately 220 days of the year that the markets are open, even then, your savings would keep growing at a representable rate.
Ok. I see where you’re going with this.
Absolutely. Now, suddenly, your whole perspective changes. You want your next quantum to go in. Thus, you want the correction to linger.
What if the markets go up?
One keeps going in with the same quantum till one is getting margin of safety. No margin of safety anymore means no more entry.
I see. That’s where your confidence is coming from.
Not entirely. You see, by the grace of God, I have made sure that my family’s bread and butter is secure before putting even a penny into the markets.
Oh. Well done!
Then, whatever is going in, is surplus.
The rate of entry, i.e. the size of each quantum is minuscule enough to not pinch me upon the onset of a lingering correction.
Please note, that one gets one’s margin of safety on perhaps 20 – 30 days of the 220 days that the markets are open in the year, on average.
That means that your savings keep growing at almost their normal rate of growth, because you’re rarely deducting from them as far as your long-term entries are concerned.
Mostly. However, what if a correction lingers for 2 years or more? Even at a time like that, you’ve got the ammo.
Ammo, yeah, ammo is paramount. Don’t you feel like spending your savings?
I spend wisely. I don’t blow them away. I make sure, like you, that I’m saving more than I’m spending, month upon month upon month. However, I do spend.
Ok, now I’ve understood how you are so confident.
I’ve not told you about my due diligence yet.
Oh, sorry for jumping the gun.
Due diligence is my most powerful weapon. I delve into a stock. I rip it bare. I get into the nitty-gritty (I wanted to say “underpants” originally) of the management, and let all skeletons in the closet loose. If there’s something crooked, it will emerge. The internet is my oyster. Nowadays, any and everything is available online. Mostly, a stock fails my parameters within the first 15 minutes of research. If a stock survives perhaps three full on days of head-on research, that stock could be a likely candidate for long-term investment. Then, one looks for an appropriate entry point, which might or might not be there. If not, one waits for it. One could wait even a year. Markets require patience.
Wow. Can I now say that I understand where your confidence is coming from?
Yes you can. 🙂