A Little Bit of Manual is a Good Thing

Sure.

Auto is the motto.

Keep some pivotal stuff on manual, though.

It’ll give you something to do.

Because it’s pivotal stuff, it decides direction, or quantum, or what have you.

Position-sizing is ideally done on auto.

You can write an algorithm for it too.

Yeah.

You can take auto to the nth level and then some.

Keeping position-sizing on manual, though, for example, makes you remain in touch with portfolio expansion or contraction. Central.

In my opinion, setting risk:reward is a trade to trade thing, and depends upon the underlying chart. Hence, being manual here gives more dexterity.

Same goes for setting stop-losses.

Which auto strategy to look at, when, is by default a manual thing. It should be, anyways, in my opinion.

This adds spontaneity to life.

Spontaneity has a certain freshness to it which makes work fun.

Some strategies are better off when not looked at for days.

Manual helps here.

When an auto strategy stops working, one needs to manually fit it to work again.

If the strategy needs dumping, you’ll need to see to this yourself.

Creation of a new strategy – you got it – manual.

The manual stuff keeps you moving, and fit.

The auto stuff just goes on auto, and if that’s all there is for you, you’re going to start getting lazy.

Befriend manual, but don’t become a slave to manual.

A little bit of manual is a good thing.

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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.

🙂

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.

When Money goes on Auto

What does “doing well” mean for you?

Making money – does that mean you are doing well?

Not necessarily.

You could be making money, but in the bargain, your life could be out of balance.

In my world, that’s already a fail.

Ideally, I like to keep the market in my pocket, and be in some sort of balance, such that a feeling of well-being is generated.

What am I feeling happy about?

Firstly, about defining my market scope. I have outlined how I wish to interact with the market. I’ve not allowed the market to define me. That makes me happy.

Secondly, I’ve stuck to my strategy. Before that, I found my strategy. Phew!

Now you try it out.

The market shouldn’t bother you after you’re done with it. See to it. Programme yourself in such a manner. Once you’re done with the market, you can then utilise your time for other vitally important things in life. If the market were bothering you with its constant nag, you would not be able to do these things properly.

Congratulations, your life is now rounded off, and not mono-faceted.

Sticking to a winning strategy when things are not going your way is going to see you through.

I know, the urge to call it off and look for a new strategy is huge when your current one seems to be going South. However, you’ve tried and back-tested your strategy. It should hold and then some. Now, have the confidence to stick to a plan.

Notice something?

I’ve not spoken about money.

Why?

Because, mostly, money goes on auto, when these basics are standing strong.

The Stand-Out Price

You’re ready with your small entry quantum,…

…looking to add on to you portfolio. 

You’re always liquid,…

…owing to your small entry quantum strategy. 

Where do you enter?

This is not a difficult question.

Why is this question not difficult?

That’s because the stocks in your portfolio are fundamentally tested, and have been found to be sound by you.  

Fundamental soundness is a bombastic plus. 

Now comes the next question.

Where is margin of safety being offered to you?

Is it enough margin of safety for you?

Are more stocks offering this kind of margin of safety?

What, then, is a stand-out price?

You will enter there. 

A stand-out price hits you in the eye. 

It is unusual. 

It speaks of a large fall such that the level of the price draws your attention within milliseconds. 

When you see a stand-out price on the way down like this, you ask the next questions. 

Why is the price where it is? 

What has happened?

Whatever that has happened, is it a one-time thing?

Is the momentum of the fall subsiding, or mid-way, or what?

Ask as many questions as you may want. 

The answer you want to drive at is yes or no.

Yes as in you would like to use your small entry quantum to pick up the stock in question. 

No as in you would like to wait for more clarification. 

If you pick up, you’re done for the day, if you follow a one-entry per day strategy, that is. 

If not, you look for another stand-out price. 

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. 

 

Useless vs Useful Expansion

I’m guilty of useless expansion. 

I end up doing it all the time. 

Can’t help myself, you see.

I like to keep exploring new stuff in the market. 

The silver lining is, the even though I might be expanding sideways, there are two good things happening also. 

There is no scaling up happening immediately. Good. 

There is also a lot of discarding going on. Things that don’t work out are eventually abandoned. Great. 

My issue is that I might have between 1 to 2 useless strategies in my repertoire at any given time. 

These strategies are not working. In fact they are dying out. Reasons can be many. A strategy might be sound, but it might not be a fit. 

For a strategy to work for you, it must be practically lucrative in the long run, and it must fit you. 

By the time I realize that a strategy needs to be discarded, money has been lost. Tuition fees? Yes. 

Ultimately, things boil down to a handful of successful strategies. It can even ultimately boil down to one or two successful ones.

Get there. I’m trying too. To do so, useless strategies will need to be discarded, like, now. 

The problem is, you don’t know that a strategy is useless till it has hit you a few times. 

Also, you don’t wish to discard something that you think might just work out for you in the long run. 

Fine. Keep grinding, and ultimately narrow down your sideways expansion, till you’re only working with strategies that are yielding, and show a long-term promise of being around. 

Right. 

You’re there. 

Now you can scale up. Doing so using a yielding strategy that fits is called useful expansion. 

Scale up slowly. 

You can position-size, and scale up using profits. This way you are not putting in extra principal. Let the strategy continue to prove itself by yielding. As long as it does so, you keep scaling up on your positions using the newly earned profits. 

Why is useful expansion not easy to maintain?

We get carried away.

We might scale up too fast, and then baulk at a loss when the size of the loss is too difficult to swallow. Large input can result in a largish potential loss.

Trading is about containing loss, and letting profits run. 

Scaling up too fast makes an early loss look big if we haven’t tasted the corresponding potential profits yet. Such an event can even cause us to abandon a successful strategy because we are disheartened. 

Therefore, try not to scale up by putting in new principal, if you can help it. 

Try scaling up on profits alone.

Position-sizing automatically controls the scale-up-scale-down factors by defining the size of a constant stop as a percentage of the principal remaining between trades.

Position-sizing makes one scale-up and scale-down on auto-pilot in a relatively balanced fashion.

Please incorporate this wonderful ideology (which comes from the stable of Dr. Van Tharp) into your trading strategy. 

🙂