Taking Off with Cost-Free-Ness

In Buddhism, …

…there’s a saying to the effect, …

…that as the sun rises, …

…the radiance of others stars, …

… to the observer’s eye, …

… pales, …

…into insignificance.

We’re not going to leave an observation like that hanging.

We’re going to extrude it.

When we make a well-managed underlying cost-free, …

…what are the implications, …

… on existing holdings, …

…which are not cost-free yet?

Well, over a large period of time, …

…their comparative impact on the folio…

…will start paling, … into insignificance.

Let’s say we hold x value of cost-free-ness in an underlying.

Rest of the folio’s value is y, with y = let’s say 30x.

Here’s one way go looking at it.

What’s the maximum loss you can incur on your y?

Not going to happen, but it’s 30x.

What’s the maximum gain that can occur on your cost-free holding?

Uncapped. Yeah.

At 15% per annum compounded, which is reasonable to expect for a well-managed company with many other tick-marks, if you hold your cost-free holding for 25 years, it’s value would be ~ 33x (= 1.15^25).

So, what have you done?

You’ve paled your other portion of the folio into “insignificance”, with just one created pocket of cost-free-ness.

Do ponder, what the implications would be, if you were to create a). 10 such pockets, or b). 20, or c). 50, or perhaps even d). 100 such pockets of cost-free-ness?

Can you even imagine where you would then be in 25 years?

a). With 10x of cost-free-ness, you would be at ~ 329x.

b). With 20x of cost-free-ness, you would be at ~ 658x.

c). With 50x of cost-free-ness, you would be at ~ 1645x.

d). With 100x of cost-free-ness, you would be at ~ 3292x.

Now substitute the value of x here.

Arbitrarily, let’s take x = 1.

One rupee.

One thousand.

One lakh.

One million.

One Cr.

Take what suits you.

See where you started from, and see where you’ve then come.

For example, starting with 1L of cost-free-ness, we land up at ~ 16.5 Cr in 25 years for 50 pockets.

Let’s say I have a target of creating 1 million worth of cost-free-ness in 50 pockets.

Where do I stand in 25 years?

At ~ 165 Cr (50 *1Million *1.15^25).

Alone the after tax dividend emerging from this stream would be > 2.5 Cr per annum.

Any takers?

🙂 (Happy Cost-free-ness!)

Fitting 2.0.2

What’s the most basic definition of an investment?

Buy low.

Sell high.

And how does one define a (successful) trade?

Buy high.

Sell higher.

Or…

…sell low…

…and buy back lower. 

As one might see, the ideologies of investing and trading are diametrically opposite to each other.

So, how do we fit one with the other.

Though this might not seem so, it’s a tough one.

One’s success at this hangs on finer points.

Is it even necessary to fit one with the other?

Why should a long-term investor also trade?

Then, why should a trader invest for the long term?

Long-term investing is a very hands-off affair.

There are prolonged bouts of doing nothing. 

Hardly anyone can handle that, and just to satisfy one’s urge to do something, one ends up fiddling unnecessarily with one’s long-term portfolio.

Trading fits in precisely to do away with the urge to unnecessarily fiddle. 

Finer points?

Low quantum.

Tension level becomes low.

Trading then becomes fun. 

Clear the platform of any long-term underlyings. 

When we see our long-term portfolio on the same platform on which we trade, we get mightily confused.

It’s like a short-circuit. 

Avoid.

Trade on a separate platform. Invest on another. 

Now let’s address the second question.

Who should invest?

Everyone.

Even the trader.

Why?

Power of compounding, for starters. 

Actively chancing upon margin of safety, since one is in the game all the time – another big one…

…as a trader, sometimes one comes upon great entry rates, where one can hold the underlying for a long time.

That’s a huge opportunity, so one can go for it. 

Furthermore, trading involves recirculating liquidity. After the trade is closed, one lands up back with liquidity. One doesn’t maintain an asset in hand for a longish period. It might be a good idea to do so, just sheer for the sake of diversification.

Some do only like to trade. They enjoy the lightness.

Others like to only invest for the long-term. They are able to handle long bouts of no activity well.

Suit yourself.

Judge if you need a B-game.

Then fit it to your A-game.