Negating Promoter Greed

You like a stock. 

You’ve checked it out. 

Fundamentals are under control. 

You find the management reasonable.

They’re shareholder-friendly. 

They have high salaries though, specifically those connected to the promoter-group. 

Now, you need to answer some questions.

Are you ok with high salaries for the top staff?

What is your definition of high?

Are salaries performance-driven?

Do the company’s number justify what promoter-connected management is taking home?

Ok. 

You’ve answered these questions. 

You still want the stock, despite the fact that an answer to two could be an outlier. 

That’s fine. 

One won’t find perfection anywhere. 

If one finds it, the stock will probably already be overpriced. 

So, you’re ok with mild imperfection, as long as your basic needs are met. 

You decide to purchase the stock. 

Here’s how you can negate promoter greed. 

The fancy cars, the family dish outs, the pushed-in lunch bills, the first class travel, you get the drift. 

Who doesn’t do it, given the opportunity?

Your promoter is human, and will surround him- or herself with comforts, at the company’s expense. 

That is the norm. Get used to it. 

Here’s how you are not letting this affect you. 

You buy in a staggered fashion. 

You buy with margin of safety. 

Because you’re sure of fundamentals, you average down. 

Each time your holding average touches a new low, you’ve secured yourself against promoter greed just a tad more. 

Because of sound fundamentals, ultimately, the stock will start to rise. 

That’s the time your low holding average will show a stellar profit for you. 

Perhaps your holding average is better than that of the promoter.

If that is the case, rise in price has given you more profit than it has to the promoter. 

Therefore, while the promoter got to live in the lap of luxury at the cost of the company, you were busy raking in a better result owing to the price rise.

Successive margin of safety buying amounting to averaging down after convincing oneself of intact fundamentals has been the key for you. 

Use this key, but do so wisely, and safely. 

Remember, that averaging down only works well in the case of diligent, research-based long-term investing. Averaging down is a strict no-no for short-term traders, however. 

Wishing you happy and fruitful investing!

🙂

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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. 

When is it Ok to Average Down?

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. 

Why?

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.  

Margin of Safety and Trading

MoS and trading have a somewhat funny relationship.

When MoS is offered, you don’t feel like looking at your trading portfolio.

Why?

Because it is bleeding?

Maybe.

Actually, you are in a hurry to clock some long-term investments. After all, there’s MoS on the table. Yes, you’d much rather occupy yourself with your long-term portfolio.

With serious MoS in the pipeline, the market makes it easier for you. It bludgeons your trading portfolio, such that you sheer exit it, and now you are free to focus solely on your long-term investing portfolio.

Fine. Great. Is that it?

There’s a tad more to the connection between MoS and trading.

What is trading?

Buying high, and selling higher? Selling low, and buying back lower? Yes, that’s trading.

On first instinct, you’d buy on a high, or sell on a low, that’s what you’d think.

However, on the ground, margin of safety makes itself felt.

Players wait for the underlying to correct a bit, or rally a bit, and then pick it up, or sell it. They’re not picking it up on the fresh high, with no resistance opposing them. They are taking a chance, that there will be a correcting move, and that’s when they will pick it up. Vice-versa for the bears.

Those few extra buck of fall will add to their profits when the underlying starts to rise again and makes new highs. Expressed for the bears, those few extra bucks of rise will add to their profits when the underlying starts to fall again and makes new lows.

The pay-off is, that this doesn’t always work. The trader might miss the trade altogether, if the correcting or rallying move does not take place, and the underlying zooms (falls) to make one high (low) after another.

So when does waiting for MoS actually work in trading?

Almost always. Except…

…when it’s a full-blown bull or bear run.

This means that it works like 90% of the time, which is a pretty high number.

Does that make you want to adopt MoS full-time while trading too?

Of course it does.

How do you still make use of the opposite strategy – buying upon highs, or selling upon lows?

You let a few setups go amiss. Missing a couple of trades due to bull or bear runs is the signal.

Now you can switch to buying on fresh highs or selling on fresh lows.

Handling a Long-Long Trading Portfolio During a Market Correction

You’re probably laughing at the use of the term “long-long”!

Hahahahaha, I laugh with you, 🙂 !

In India, we like to get our point across without caring too much for terminology, and / or how funny it may sound. 

What I mean is, and you’ve obviously gotten the drift, that the average trader is normally long in a trading portfolio.

Now, how is the trader to deal with his or her trading portfolio and its dwindling valuation during a long-drawn out market correction?

Sure, there are many options. 

One is to hold and sit it out. 

No good. 

This is not investing. This is trading. Trading means that once a stop is hit, you’re out. Period. 

Second option – bludgeon it. Cut the entire portfolio. 

Hmmmm, that’s not trading. 

Many stocks will not have their stops hit yet. Why are you cutting these? This would mean losing your position. What if the reversal starts right now? You did the right research, you entered, and now you’ve lost your position. 

Not good. 

We’re not bludgeoning it all. 

Of course we are continuing to cut those stocks whose stops are hit. 

No question about that. 

Now comes a kind of a “pointe”. 

You’ve hit a stop during the correction. You’ve gotten out of this stock, as per your trading rules. Look for another stock with a northwards chart that is not getting so affected by the correction, but has fallen a tad so as to allow margin of safety during trading entry. 

You’ve done three things here. 

You’ve entered a robust stock. 

Simultaneously, you’ve benefited from a slight price advantage. 

Thirdly, your trading portfolio is still going. Its contents are getting robust. Come the rally, and the robust contents are going to zoom. 

You’re trading on surplus. You’re not afraid to lose till your stop. You’re not afraid to reenter. So why cut it all? 

There’s no telling about turnarounds. 

However, when they happen, you are positioned. 

Optimal positioning while trading leads to big profits.

What’s the worst case scenario?

Stop after stop being hit, and eventually you being out of the whole portfolio?

Remember, the other side of the coin promises big profits, were the turnaround to happen now, with your portfolio full of robust stocks.

Are you willing to make the trade-off?

No?

Well, then don’t trade an entire portfolio. You’re better off trading one underlying, like an index derivative. Cut it when you like, no questions asked. 

Yes?

Well, then, what’re you waiting for? Make the trade-off. Go for it!

🙂

Let if Fall to Zero, I Say

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?

Why?

Have we not taken worry out of the equation?

Sure. 

We have. 

We’re not worried. 

In fact, we want the correction to linger. 

Why?

So we can buy more. 

How long can you keep buying?

Till eternity.

How’s that possible?

Very simple. Do you have savings?

Yes.

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. 

How small?

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. 

Right. 

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. 

Great. 

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.

Really?!

Yes. 

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. 🙂

Dealing with the Nag

Sadly, one’s spouse is the butt of many jokes in life. 

However, at the outset, I wish to make it very clear, that this piece is not about a joke at the cost of my beloved spouse, who, by the way doesn’t even fall under the N-word category. 

Having gotten that out of the way, what kind of nag are we talking about. 

This one’s almost a constant, and starts off as soon as your money goes on the line. 

At first it’s a tug. 

What are the markets doing?

How is your holding faring?

Let’s have a look. 

Come on, come on…

The tug is very compelling. 

You have a look. 

You see that your holding is taking a hit. 

There is disappointment. 

You shut your terminal in disgust. 

You’re trying to do other stuff, to divert your mind, but your mind keeps flowing back to the status of your holding. 

The tug has become a nag. 

This is the nag we’re talking about. 

We wish to outline a strategy which takes the nag out of your way. 

So, how does one deal with the nag?

It will be there. However it won’t be in your way. How do we create this condition?

If you can manage by ignoring, that’s just great. This might not work though. Nag-value mostly defeats ignoring power. 

Enter small each time. You will take away greatly from the nag-factor. It won’t hit you as much. You will me waiting to enter again, small of course, in the event that your holding has fallen. This is long-term investing we’re talking about. You’ve done your due diligence, and are not afraid to repurchase umpteen times as long as you’re getting margin of safety. Re-entry upon a fall in price of the underlying does not work while trading. In fact, re-entry upon a fall while trading is a strict no-no. You exit your trade if the fall goes through your stop-loss. You don’t re-enter. However, the small entry quantum during long-term investing goes a long way in reducing the nag factor. 

How do we wash away what’s left of the factor?

Do many market activities, as in, play multiple markets. After you’re done with one market, forget about it and move on to another. Mind will genuinely be distracted. Nag value will be further reduced, and greatly. However, it will still be there, minutely. 

Once you are done with all your markets, close your connection to them for the rest of the day, and only open the connection during the next market session, and that too upon requirement only. Meanwhile, you’re doing other stuff. Life has so much to offer. All remnant nag will be washed under the rug. 

You need to now just hold it together and resist the lure of a nudge in your mind to see how the markets closed, or any similar urge. You’re done for the day, and don’t you forget it. Don’t fall back into the trap, or the rest of your day (and perhaps your night too) would be ruined. Ask yourself if that would be worth it. No? Then move on. Enjoy the rest of your day doing other stuff.

You’re done already!

🙂