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!

🙂

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We’ll Take Boring

Boring…

…is good.

Boring means…

…that you’re on the right track.

We’ll take boring.

What are we talking about?

Equity.

When it’s working according to plan, yeah, you got it, it tends to become a bit boring in the long run.

Don’t get alarmed.

That’s exactly where you want your equity to be.

When it’s there, it’s fulfilling its function, and then some.

You’ve moved away from euphoria.

You’ve moved away from fear.

You’ve arrived at boring.

Look no further.

You’re ready to scale up.

We Don’t Want Anymore

There comes a time…

…when we don’t want anymore.

Why has this happened?

It’s a spin-off from our small entry quantum approach.

We’ve been buying at sale prices, with small entry quanta, each day, a quantum a day.

A groove has been set.

After umpteen failed attempts, prices break through.

An interesting thing happens to us.

Slightly higher prices start to pinch us.

As prices go even higher…

…our mood is off, and…

…we don’t want anymore.

From a strategy perspective, this is the best thing that could have happened to us.

We will not be buying as margin of safety vanishes and remains vanished.

Our want will be triggered once more, when margin of safety returns.

This has not taken place for free.

It is an indirect result of our painful sticking to a small entry quantum approach.

🙂

And Now, We’re Not Looking

Who’s not looking?

We. Stock people.

What are we not looking at?

Wrong question. We’re always looking at stocks.

Ok. What are we not looking for?

New stocks.

Why?

Our magic number has been hit.

What’s this magic number?

That’s the number of stocks we wish to handle.

Is it the same for everyone?

No, it’s different for everyone.

How does one arrive at this number?

Through hit and trial. Whatever that works. Where you feel good, that’s your number.

So, will your portfolio now stagnate?

No. Most definitely not. If a stock is not interesting anymore, it can always be replaced.

How does one go about doing that?

Wait for a market high. Then discard the stock you are not interested in anymore.

And how does one find a new stock in a scenario where one is not looking?

You let the stock find you.

Meaning?

You’re not looking, but something eventually hits you in the eye.

Aaahhhh.

Then you dig deeper. If all criteria are met…

…you enter.

Rriiighht….!

Making Equity Antifragile

Yeps, Taleb’s the famous one. 

Moi, je ne suis pas célèbre.

Néanmoins, j’aime le terme “antifragile” de Taleb.

Also, Taleb has termed equity as robust.

I do equity. 

I’d like my interaction and future with equity to be antifragile.

Let’s first look at Taleb’s definition for antifragile.

He says that anything that has more upside than downside from random events (or certain shocks), is antifragile; the reverse is fragile.

Robust equity will eventually crack when subjected to shock.

We are aware of that.

What do we do now?

Firstly, we take time, and put it in infinity mode. Meaning, that we stay invested, for a long, long, long time. 

We’re now allowing equity amply sufficient time to recover from not one shock, but many shocks.

Also, each time there is a shock, and equity tanks, we go in and buy some more.

How can we do this?

We are sufficiently liquid, all the time

Our small entry quantum approach is ensuring that. 

Also, we’ve chosen such equity first-up that is minimally susceptible to cracking. That’s the best we can do. 

We have either avoided debt altogether or chosen debt-levels that are adding value to the stock and can be easily taken care of in the short-term

We have chosen equity with decent quick and current ratios

We have chosen adaptable managements that function as optimal human capital, fighting inflation, showering shareholder-friendliness and adding value at all times

However, crack they do, eventually, and we keep picking up more. 

Since we’ve kept ourselves “infinitely” liquid as per our small entry quantum approach, we are then also “infinitely”poised to benefit from the cracks

As we keep getting more and more opportunities to buy with meaningful margins of safety, markets show us more upside than downside

Thus, antifragility comes to us as a function of falling price, given that the underlying has sound fundamentals, low to nil debt and benevolent, versatile and diligent management

Now, let the shocks come. 

In fact, let 20 shocks come. 

We want shocks to come…

…so that we can continue to buy at rock-bottom prices, which work in an antifragile manner for us, because of the characteristics of the equity and management we have chosen

Profiting from shocks?

More upside than downside? Owing to the effects of a shock?

What kind of behaviour is that?

That’s antifragile behaviour.

Time your Friend or Time your Enemy?

This one depends…

…on you.

How is time treated in your curriculum with regard to the markets?

Are you in a hurry…

…or is your motto “hurry spoils the curry”?

One can make any market action an extremely difficult one if one squeezes time. 

On the other hand, the same market action yields great results when time is stretched to infinity. 

One can understand this in the predicament of the trader.

Expiry is due. 

Trades are in loss. 

It seems that trades are not going to make it to break-even by expiry.

They would probably be showing a profit after expiry. 

However, time-span for validity of the trades has been squeezed to expiry. 

Hence, the trader faces loss. 

The investor, on the other hand, is invested in the stock of the same underlying, and doesn’t dabble in the derivative. 

For the investor, time has been expanded to infinity. 

The investor doesn’t feel pain from a time-window that’s about to close.

Now, let’s look at the cons for the investor, and the pros for the trader. 

The price for making time one’s friend is the principal being locked-in for that much time. 

The investor is comfortable with that. 

If not, the investor feels pain from the lock-in, and may make a detrimental move that works against long-term investing philosophy, as in cutting a sound investment at its bottom-most point during a long drawn-out correction. 

Investors need to fulfil the comfort condition before committing to infinity. 

After a small loss, the trader moves on with the bulk of his or her funds. 

Traders needs to take a loss in stride. 

If not, future trades get affected. 

The advantage of committing funds for short periods, in trades, is that one can utilize the same funds many times over. 

The price for using short periods of time to one’s advantage, however, is tension. 

One is glued to the market, and is not really able to use the same time productively, elsewhere. 

Friendship with one aspect of time works adversely with regard to another aspect of time. 

The investor is not glued to market movements. He or she can utilize his or time for multiple purposes while being invested simultaneously and then forgetting temporarily about the long-term investment. 

It is easier to forget temporarily about an investment than it is to forget about a trade. 

Over the years, I have found it difficult to combine trading and long-term investing, specifically in the same market.

However, I do take occasional trades, apart from being invested for the long term. 

This works for me when the markets in question are different, as in Forex and Equity. 

Personal Long-Term Investing Isn’t about Establishing a Mutual Fund

If it were the case, why bother?

Just put your money in a mutual fund instead. 

There are many competent fully equity-oriented mutual funds out there. 

Some of the competent ones have very reasonable expense ratios and eye-popping statistics. 

Investing in a mutual fund takes away your work-load completely. 

You put in the money for the longish-term, and then you’re done. Don’t bother for the next 5 years. 

If you’ve chose the dividend payout option, you get an SMS or an email maybe once or twice a year that puts a smile on your face. It’s a payout!

What is a mutual fund?

What’s so mutual about it?

You mutually agree to what the fund manager is doing. 

Thus, make sure that the fund-manager is competent. Study the fund-manager’s track-record. 

A mutual fund typically consists of 50-75 stocks. Some are weighted heavily, some more lightly. 

The return you get is the mathematical average of the 50-75 stocks, adjusted for the weight they carry. 

It would suffice here to say, that the MF delivers some kind of an average return, less all kinds of fees, which typically range around the 2.5% mark per annum. 

Therefore, as far as returns are concerned, after tax deductions, one is probably left with a high single-digit one or a low double-digit one, in the long run, compounded. 

Not too bad.

Remember, this is equity we are talking about. Equity is an asset-class which gives returns that are adjusted for inflation. 

Actually, great. 

Those of you who are satisfied with this need not read any further. Just go ahead and put your surplus funds into MFs.

However, some of us want that extra kick. We are not satisfied with low single digits. We want 15%+, per annum compounded, after tax and adjusted for inflation. 

This is not greed. 

Ambition perhaps. 

Drive. 

Renumeration requirement for the arduous work put in. 

We’ve struggled. 

We’ve gotten hit many, many times. Each time, we’ve stood up, taken the hit, and carried on.

We have learnt. 

All for what?

Now it’s time to cash-in.

We go about setting up our long-term portfolios in the proper fashion. 

Total number of stocks eventually in the portfolio needs to be well clear of the MF mark…otherwise, right, why bother.

MF-type diversification will give an average return. 

We will build a focus portfolio. 

Focused returns are higher in the long run.

What’s the magic number?

Well clear of 50-75 stocks in all is understood. For me, even 40 is too much. I could deal with 30, though. Hmmm, let’s steer clear of the 3 in 30, so 29 is good enough for me as a maximum. The pundits are satisfied with 15-20 stocks, no more. Focus-gurus swear by 10-15 stocks. I’m ok with a maximum of 29, (a limit I’ve not reached yet) because in reality, I just hold 6 sectors, and multiple underlyings within the sectors. Thus, even with a maximum like 29, the 6 sectors alone make it a focused portfolio. 

The bottom-line is focus. 

As long-term investors doing it ourselves, we are going to focus. 

Staggered entry. 

Small entry quantum each time, many, many times. 

How small?

Small enough, such that one can enter about 30 or so times in a year and still have ample savings on the side from one’s earnings. Why 30 or so? That’s a rough 10-year average calculated per annum, estimated by me, during which one gets margin of safety in the 220 days or so that the markets are open in the year.

There we are : focus-investing, margin of safety, staggered entry, many, many entries, small entry quantum each time and generation of ample savings despite equity exposure. 

Is that a formula or is that a formula?

🙂