Price Based Margin of Safety

You might laugh at this one.

However, it is need based. 

We have been talking so much about small entry quanta. 

A small entry quantum allows for smaller mistakes.

It allows you to enter many times. 

It is small enough to make your capacity for entry outlast the number of margin of safety market days in a year. 

You take your savings. You define what you want to invest in equity for the year. 

You divide it by an estimate for the margin of safety days you might be getting for the year. You arrive at this number by estimating over a ten year average. 

Upon this division, you get your daily entry quantum, for the whole year, on margin of safety days. 

I go one step further to keep a constant small entry quantum defined for longer periods, for any particular entry day. 

As we said, small entry quanta should also mean many entries. 

We won’t be getting the same margin of safety every day.

On many days, we won’t be getting margin of safety at all, in the purist sense of its definition.

We will need to tweak the definition of margin of safety a bit, to have access to many entries. 

We are doing this because we are already on safe grounds. 

First up, we are playing with money we won’t be requiring for the next ten years, or so we estimate. 

Then, this is the money that is coming from our savings and is going into equity. It is for no other purpose. If it eventually doesn’t go into equity, we will end up finding some other use for it, such is human nature, and such is the nature of these multi-tasking times. 

Thus, if we see even a smallish entry possibility, we take it, because of the nature of the small entry quantum approach. 

How do we propose to tweak margin of safety?

We watch the price of a scrip we are unable to enter in. 

We watch, and we watch. 

Still too high. High, too, are fundamental entry allowers (FEAs), like price to earnings, price to book value, price to cash-flow, price to sales, etc., and we don’t enter. 

Then, one day, price starts to drop, for whatever reason. 

It continues to drop to a level, where we feel that for this particular scrip, that’s a pretty decent correction. 

It’s all feeling. 

You can look at charts, but then you tend to look once a month, and the feeling element fails to develop properly. 

So, we’re feeling pretty good about the level of correction, and we cast a glance at the FEAs. 

These are still a tad high, albeit much lower than before. 

For the FEAs to become lower than classic margin of safety levels, there could be a longer wait, or this event might not even happen, especially if we are looking at growth scrips.

If the event does not happen, it means no entry, and with our approach of small entry quanta, this leaves us high and dry with respect to the scrip. 

Are we going to let that happen?

Because of our safe small entry quantum approach, we are not going to let that happen if we can help it. 

When price offers margin of safety but FEAs are still a tad high, we enter with one quantum. 

Then we wait.

Scrip quotes some percentage points (2%, 3%, 5%, you choose) lower than our last entry. We enter with one more quantum, and so on. 

Now, two things can happen. 

The scrip can start zooming from here, and you are going to feel good about your entries. 

Or, the scrip falls further, and quotes lower than classical FEA definitions for margin of safety. 

Are you going to feel bad about your previous entries, which were small mistakes?

No.

Why?

You are too busy undertaking further entries into the scrip, quantum by quantum, for as long as the scrip quotes at levels below classical FEA definitions for margin of safety. 

Soon, you have a lot of entries done, at these safe levels, and you have more than made up for your few small mistakes. 

You’re good. 

In the other scenario, you were good anyways. 

Thanks to your small entry quantum strategy, it’s been a win-win for you all around. 

 

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Anyone up for a Quereinstieg?

Yeah, another German word.

And it’s loaded. 

I love the German language for it’s ability to combine words so that they can deliver a fistful!

So, what does it mean?

Quer means at an angle

Einstieg means entry

If you bang with something head-on, you’re likely to rebound. 

If you chisel into something at an angle with great force, you are likely to enter that something. 

That’s the logic. 

And it works. 

Albert Schweitzer, was it?

The multiply famous nobel-laureate who proposed and demonstrated Quereinstieg into fluency with a foreign language?

The formula was, for weeks in a row, to read texts, delve into media, the whole works, all in the foreign language, without really understanding what’s happening at first, and then getting a hold of the language’s structure through Sprachgefuehl, or feeling for language

Within a month or so, one would be speaking the language. One’s skills would be enough to get by on the streets. Works. 

Sprachgefuehl in action is a prime example of Quereinstieg

These are fast times. 

Almost the whole day, one is multitasking. 

And then, something new comes along. 

A new problem. 

One has to find a solution fast. 

There is no time to start from scratch. 

All other matters must be pulled along. Many people’s daily lives and routines hang upon you pulling your load. 

So, where does that leave you?

Cut to Quereinstieg.

You delve into the new matter, fast, at an angle, without bothering how you’ll fare.

You keep all your faculties open.

Your senses are on high alert.

You use your common-sense.

You learn from the play.

As you keep playing, on and on, you master technique.

The matter is not a problem anymore.

You incorporate the new asset into your repertoire as you attack your daily routine with renewed vigour and an arsenal boasting your latest Quereinstieg conquest. 

Multitaskers and OnebyOners

Yeah, I made up that word…

…why not?

Who makes the rules?

Do you listen to all rules?

Breaking some rules is harmless…

… and those are the ones I love to break!

We live in the fast-track. 

Is there a place for slowdy-lumps?

Well, no, and yes. Or, yes, and no. 

Are you a fan of multi-tasking?

I’m not, by the way. Have to have to, sometimes. Don’t like it. 

Why?

I don’t like doing anything in a half-baked fashion. I’m sure that on some level, you don’t either. Either in it for the whole hog, or count you out, right?

Yeah. Or so thought I. 

World moves. It passes you by. If you don’t multi-task. Juggle. Use whatever word you wish to.

Is it healthy? 

No. 

Multi-tasking leads to confusion in the mind-body continuum. Feelings of enjoyment and satisfaction are muddled and befuddled at best. 

Is that the quality of life you want?

No. 

I want clear-cut stuff. 

Clear-cut defined effort. Clear-cut defined satisfaction and enjoyment. 

I’m a onebyoner. I get the above kind of satisfaction and enjoyment. It is wholesome. Quality of life enhancing. 

Am I old-fashioned?

Don’t care. 

Why?

Because quality of life is more important to me than looking stupid for a bit. 

Try being a onebyoner for a while. Note the difference in the flow of life. You get to stop between completed tasks. Breathe. Take a break. Do something else. Move on to the next task. One step at a time. Brick by brick. 

Life is more enjoyable. 

Try it.