Category Archives: Applied Finance

Looper

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I know, that Bruce Willis sci-fi movie… 

… is also called Looper. 

Know any other Loopers? 

There’s one in your body. 

In hardware terms, it’s your brain. 

In software terms, it’s your mind. 

Its ability to loop can become a tendency. 

Any problems with that? 

Sure. 

Big ones. 

Imagine a trade. 

Goes wrong. 

You’re drained. 

You get out. 

Loss.

Done? 

No. 

At this point, don’t let your mind loop. 

It will, if you allow it the leeway. 

If it loops, you’ve lost the energy value of two trades or more (fatigue) while losing one trade. 

Don’t delve on the loss. 

Move on in search of your next winning trade. 

Define conditions that stop your mind from looping. 

For example, when entry value is small enough to not be bothered about, its partial or even full loss might not be enough to cause your mind to loop. 

And that’s the position you want to be in. 

No looping.

No overthinking. 

Just trading. 

🙂

Anyone up for a Quereinstieg?

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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. 

From Strength to Strength 

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Baby steps… 

… into freedom. 

What kind of freedom are we talking about? 

Universal freedom? 

If you insist, smarty, but first things first.

Financial freedom. 

That’s the kind of freedom that sparks off every other kind of freedom. 

Our first and foremost goal is to achieve financial freedom. 

What is the one big nemesis of financial freedom? 

Debt. 

Tear off debt. 

Detest it with every cell of your body. 

If it comes towards you, move in the other direction.

Don’t allow it’s tentacles to engulf and then strangle you. 

You do all that by nipping it in the bud. 

A new world order in being defined. 

The debt-free… 

… and the in-debt-ones. 

Where do you wish to belong?

The former category calls the shots. 

That’s where you belong. 

Your every move… 

… takes you from strength to strength… 

… towards debt-free-ness. 

Full financial freedom is a short walk from there. 

Story doesn’t stop there, sure, your strength-momentum sees to that.

However, it’s the first debt-free million that’s always the hardest-fought, and the most-fondly remembered.  

How much is too much? 

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Risk? 

Sure. 

No risk no gain. 

However… 

… I’m sure you’ve also heard… 

… “want gain not pain“.

How do we achieve that? 

It boils down to the level of risk. 

How much risk is too much? 

Do we have a measure? 

Sure. 

Meaning, without getting into any mathematics?

Yes. 

What’s a hands-on everyday TomDickHarry dumdum yet practical cum successful measure for risk without any hype or brouhaha? 

Sleep. 

Sleep? 

Yeah. 

How? 

Are we sleeping well? 

Is our sleep getting disturbed because of the risk we’ve taken? 

No? 

We’re fine. 

The risk we’ve taken is bearable. 

It’s not disturbing us enough to disturb our sleep. 

Yes? Sleep disturbed? Because of risk? 

We’ll, too much then. 

Reduce the risk. 

By how much? 

Till your sleep is not disturbed because of it. 

It’s as simple as that. 

What to do with a racing mind? 

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Harness it. 

Or, it’ll get you. 

How? 

It won’t stop racing till it finds something of interest. 

Then, it’ll hook on… 

… without caring too much… 

… whether that something’s good or bad.

At that stage, you might not be able to control your mind. 

Control it when it’s controllable. 

Before it’s latched on. 

Before the flow has started. 

Define for yourself the area of flow. 

Actively make your mind connect. 

Regulate your flow. 

Enjoy the harnessed potential of your mind. 

Let’s observe a practical example in motion. 

I’ve actively latched on my mind, among other things, to the stock market. 

The market has many aspects.

I need to take into account most of these, if not all, while picking a stock. 

Sure. 

However, some aspects stand out for me. 

To these aspects I latch on my mind very thoroughly. 

I like it to get a feel for honesty. 

While I’m screening a stock, my racing mind either picks honesty or it doesn’t. 

If it hasn’t smelt and felt honesty after two days of studying the stock, I just let the stock go. 

Some are big on numbers. Some are big on charts. Sure, I look at both. Honesty delivers the final decision for me, though, as in, the crucial blow. 

Instead of resorting to all kinds of nonsense, the racing mind can be taught to become one’s greatest asset. 

What about Daddy Cool? 

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Boney M sang this blockbuster hit in the ’70s.

I’m sure you’ve heard it, because it’s still the rage. 

he’s crazy like a fool – what about daddy cool? 

Who’s Daddy Cool? 

You tell me. 

Is it you, in a cool cucumber moment, slow to respond to stimulus, devoid of anger, master of your situation in a kinda non-bossy, non-micro-managing (cool) way? 

And what of Mr. Hyde’s Dr. Jekyll nature? 

We’re talking about your “like a fool” moment.

Just for your information, winning behaviour is often termed foolish by the crowd. 

Contrarian investing is one such example. 

Successful derivative trading is another. 

To cap it, let’s not even talk about private equity in real-estate. 

Did someone mention high-yield structured-debt? 

There are many examples of “foolish” behaviour. 

These same examples earn very well. 

So… 

… how do we do it? 

We maintain our cool. 

We keep all basics going, as they are. 

With a small portion of our surplus, we take calculated risks, in a controlled environment. 

Sure, these risks will appear foolish to someone on the outside. 

However, our controlled environment has installed riders for our safety. 

A balance-sheet might be stressed, but not stressed enough for bankruptcy. 

A lock-in might be ultra-short. 

A stop-loss might be in place. 

Collateral might be up to 4x.

There might be a highly reputed Trustee in between. 

What have you.

Have your Daddy Cool fool-moments. 

Take some calculated risks with small portions of your surplus. 

These should give your portfolios an extra-boost. 

That nagging nagging push towards action 

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Yeah, it’s always lurking… 

… in the background…

…waiting for an opportunity… 

… to catch you unawares… 

… and spring to the forefront. 

Market-play is a mental battle. 

Your mind wins or loses it for you. 

Make your mind understand the value… 

… of action… 

… and of inaction. 

Make your mind pinpoitedly choose… 

… the time for action… 

… and for inaction. 

Make your mind automatically switch from…

… a state of action… 

… to a state of inaction… 

… and vice-versa… 

… and feel perfectly normal doing the switch… 

… again and again and again. 

The above by itself is a winning state of mind for you, which you can build upon. 

🙂 

The Promise of Far 

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I like “far”… 

What promises me far? 

Science fiction films. 

The Interstellar, Gravity, Inception and Contact types. 

Such films relax me. 

What relaxes you? 

Have you identified it? 

Why is this important? 

Many times, we must just sit. 

Action is harmful at such times. 

We are tense. 

We suffer from the fallacy, that action is better than inaction at all times. 

Relaxation-source identification is exactly for such times. 

Go ahead. 

Get your acts together. 

Your full acts. 

Your planning needs to incorporate strategies for inaction too. 

“The Promise of Far”  strategy works well for me.

It’s not my only inaction-strategy. 

However, it’s a successful one. 

When Do You Bet The Farm? 

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Bread and butter. 

Safety-…

…-net.

Basics.

You gather yourself to carve out a comfortable life for your family. 

Build-up. 

Debt-free-ness. 

Yeah, zero-debt. 

Feel the freedom. 

Breathe. 

No bondage. 

No tension. 

You have to feel it. 

Surplus. 

First, small surplus. 

Then, big surplus. 

You’ve made sure that nobody ever will remind you to pay your bills. 

Great! Well done. Now… 

… keeping all basics intact… 

… you play with small surplus. 

Risk. Calculated. Digestible. 

Multiplier. 

Loss. Cut small. 

Win. Allowed to grow. 

Small surplus starts giving regular fruit. 

You put back the principal into your family’s basic corpus. 

Repeat. 

Many of your small surpluses have grown into fruit-bearing trees. 

Your farm is bursting with grain and fruit. 

Have you taken any big, indigestible risks? 

No. 

Have you ever put your family basics at risk? 

No. 

Have you ever thought about betting the farm? 

NO. 

Will you ever bet the farm, no matter how big the lure? 

NEVER. 

Nath on Equity – make that a hundred

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Long-term equity is 81). brought low.

The idea is to, if required, 82). sell it high.

Otherwise, 83). it is sold when you no longer believe in the stock concerned, for strong fundamental reasons. Or, it is sold when something more interesting comes along, and your magic number is capped. Then you sell the stock you’re least interested in and replace it with the new one.

84). Attitudes of managements can change with changing CEOs. Does a new management still hold your ideology-line?

Is the annual report flashy, wasteful, rhetorical and more of an eyewash? Or, 85). is it to the point with no BS? Same scrutiny is required for company website.

Your winners 86). try to entice you to sell them and book profits. Don’t sell them without an overwhelming reason.

Your mind will 87). try and play tricks on you to hold on to a now-turned-loser that is not giving you a single good reason to hold anymore.

If you’re not able to overcome your mind on 87)., 88). at least don’t average-down to add more of the loser to your folio.

89). High-rating bonds give negative returns in most countries, adjusted for inflation.

The same 90). goes for fixed deposits.

Take the parallel economy out of 91). real estate, and long-term returns are inferior to equity, adjusted for inflation.

92). Gold’s got storage and theft issues.

Apart from that, 93). it’s yielded 1% compounded since inception, adjusted for inflation.

Storage with equity is 94). electronic, time-tested-safe and hassle-free.

Equity’s something for you 95). with little paperwork, and, if you so wish it, no middlemen. In other words, there’s minimal nag-value.

Brokerage and taxes added together 96). make for a small and bearable procurement fees. Procurement is far more highly priced in other asset-classes.

One can delve into the nervous system of a publicly traded company. Equity is 97). transparent, with maximal company-data required to be online.

As a retail player in equity, 98). you are at a considerable advantage to institutions, who are not allowed to trade many, many stocks because of size discrepancies.

All you require to play equity is 99). an internet connection and a trinity account with a financial institution.

If you’re looking to create wealth, 100). there’s no avenue like long-term equity!

🙂

Nath on Equity – almost there

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Market being down 61). should not pinch you. If such condition does pinch you, you might react accordingly, and do something painful. 

You make market-downs not pinch you by being 62). miniscually committed at any given time. 

Also, 63). you continue committing your miniscule quanta during market downs. 

That’s because 64). you’ve made sure you have lots more to commit, by defining such an approach for yourself. 

You are 65). happy that the market is down, because it is giving you an opportunity to enter. 

You 66). switch off market TV. You don’t wanna know from them, because they themselves don’t know what works for you. 

All 67). useless emails and smses are put on block. 

That’s because 68). information overload is your nemesis. 

You 69). learn from everything you experience. 

However, you 70). don’t follow any market-person. 

That’s because 71). you are unique. Only you can benefit yourself, ultimately. 

You are going to 72). teach yourself to become a strong hand. 

Thus, you will 73). not get affected by the behaviour of weak hands, ie. the masses.

Instead, you will teach yourself to 74). take advantage of the behaviour of weak hands. 

Market players 75). commit the same blunders again, and again and again. 

That’s because 76). every few years, a whole new batch of market players starts behaving unreasonably. 

This proves to us 77). that the only real learning comes first hand from market-play, to you and you alone, and only from your market-play.

This also pretty darn well insinuates that 78). theoretical learning from books or universities has zilch value in the markets.

You’re lucky 79). if the market knocks you around during your first seven years of market-play, when the kitty is small. 

That’s because 80). exactly that learning from 79). is going to earn you big as the kitty increases during your meat-years of market-play. 

Nath on Equity : have stuff – will talk

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Behind Equity, there’s 41). human capital. 

It’s human capital that keeps 42). adjusting equity for inflation.

43). No other asset-class quotes on an inflation-adjusted basis. 

That’s good news for you, because 44). equity takes care of the number one wealth-eater (inflation) for you. 

All world equity ever quoted, whether currently existing or not, has 45). returned 6% per annum compounded, adjusted for inflation. 

46). All equity ever quoted that still exists has yielded 11% per annum compounded, adjusted for inflation.

Equity selected with good due diligence, common-sense and adherence to basic rules listed here and in previous articles is 47). well-capable of yielding 15%+ per annum compounded, adjusted for inflation. 

However, equity is 48). a battle of nerves, at times. 

This asset-class is 49). more about creating long-term wealth. 

It can be used, though, to 50). generate income through trading. 

51). Trading, however, is burdened with more taxation, commission-generation and sheer tension. 

Trading equity 52). eats up your day. 

Investing in equity 53). gives you enough room to pursue many other activities during your day. 

Trading strategies are 54). diametrically opposite to investing strategies. 

55). It takes market-players the longest time to digest and fully comprehend 54).

For long-term players, 56). up-side is unlimited. This is a vital fact. 

Also, 57). downside is limited to input. Factor in good DD, and that very probably won’t even go half-way. 

58). Thus, 56). and 57). make for a very lucrative reward : risk ratio. 

Equity needs courage, to 59). enter when there’s blood on the streets. 

It also needs detachment, to 60). either exit when required for monetary reasons, or when everyone else is getting ultra-greedy and bidding the underlying up no-end. 

Nath on Equity – Some more DooDats 

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Yawn, the story goes on… 

Let’s 21). not think about our folio at night. 

We’re also 22). only going to connect to the market on a need-to basis, no more. 

If there’s a 23). doubt, wait. 

24). Clarify doubt. If it goes away, proceed with market action. If not, discard action. 

Don’t spread 25). too wide. 75+ stocks means you’re running a mutual fund. 

Don’t spread 26). too thin either. Just 5 stocks in the folio means that risk is not adequately spread out. Choose your magic number, one that you’re comfortable with. 

Once this number is crossed, 27). start discarding the worst performer upon every new addition. 

28). Rarely look at folio performance. Only do so to fine-tune folio. 

Don’t give 29). tips. Don’t ask for them either. 

You are you. 30). Don’t compare your folio to another. 

Due diligence will require 31). brass tacks. Don’t be afraid to plunge into annual reports and balance sheets. 

32). Read between the lines. 

Look 33). how much the promoters personally earn annually from the underlying . Some promoters take home an unjustified number. That’s precisely the underlying to avoid. Avoid a greedy promoter as if you were avoiding disease. 

Is 34). zero-debt really zero-debt?  Look closely. 

Are the 35). promoters shareholder-friendly? Do they regularly create value for the shareholder? 

Are 36). strong reserves present? 

Are the 37). promoters capable of eating up these instead of using them to create value? 

Is the 38). underlying liquid enough to function on a daily basis? Look at the basic ratios. 

Is any 39). wheeling-dealing going on with exceptional items and what have you? 

40). Is the company likely to be around in ten years time? 

Yeah, things in the equity world need to be thorough. 

We’re getting there. 

🙂 

Nath on Equity – Yardsticks, Measures and Rules

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Peeps, these are my rules, measures and yardsticks. 

They might or might not work for you. 

If they do, it makes me happy, and please do feel free to use them. 

Ok, here goes. 

I like to do my homework well. 1). DUE DILIGENCE. 

I like to write out my rationale for entry. 2). DIARY entry.

I do not enter if I don’t see 3). VALUE.

I like to see 4). MOAT also. 

I don’t commit in one shot. 5). Staggered entry.

I can afford to 6). average down, because my fundamentals are clear. 

My 7). defined entry quantum unit per shot is minuscule compared to networth. 

I only enter 8). one underlying on a day, max. If a second underlying awaits entry, it will not be entered into on the same day something else has been purchased. 

I’ve left 9). reentry options open to unlimited. 

I enter for 10). ten years plus. 

Funds committed are classified as 11). lockable for ten years plus. 

For reentry, 12). stock must give me a reason to rebuy. 

If the reason is good enough, I don’t mind 13). averaging up. 

Exits are 14). overshadowed by lack of repurchase. 

I love 15). honest managements. 

I detest 16). debt. 

I like 17). free cashflow. 

My margin of safety 18). allows me to sit. 

I pray for 19). patience for a pick to turn into a multibagger.

I keep my long-term portfolio 20). well cordoned off from bias, discussion, opinion, or review by any other person. 

There’s more, but it’ll come another day. 

🙂

The Department of no-frills 

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Markets can be played in holes. 

No disrespect to the “hole”. 

Let’s put it this way. 

I trade the markets from a “bucket shop”. It’s actually a small brokerage. Parallels a bucket-shop, and all legit. 

There’s twenty odd people. 

Basic desktops. One gets to use them even with medium-sized accounts. A large account holder can walk into the manager’s office and get the manager to trade his or her strategy for him or her for the day. A three minute daily discussion is all it takes. This discussion can even happen on Whatsapp. 

If required, food comes from the street-vendors below, in newspapers and plastic cups. 

Welcome to the department of no-frills. 

No business-class travel or fancy-schmanzy wining-dining is required here. It’s sheer trading with no BS. 

Why? 

No overheads. 

No headaches. 

No constant terminal monitoring. Someone’s doing it for you.

Safety? Yes. Trust. Long-term relationship. Email and sms security measures. No nonsense. 

One doesn’t talk to the twenty odd people. 

One just trades. 

Trading for you isn’t really about building a consensus. You just trade. If then the market builds a consensus, that’s a different thing. You then trade the consensus. For or against is your call. 

This is as raw as it gets. 

You ask a question. 

You put your money where your mouth is. 

If your inquiry is in the correct direction, you get rewarded. If not, you lose a part of your money. 

Goes without saying, that overall, you try to win more than you lose. 

Department of no-frills cuts to the chase without useless paraphernalia. 

Monotony

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Plan in motion? 

Let it play. 

Sure, monotonous. 

Monotony bores you, right? 

Boring monotony yielding acceptable results is a good outcome. Don’t spoil its party. 

Divert your attention. 

Try a stunt. 

Risk a little. 

Maybe one out of your ten stunts works out. 

Develop this one further. 

Still working. 

Scale it up slowly. 

Working. 

Auto-pilot. 

Monotony. 

Results still good. 

Stop looking. 

Let it play. 

Look elsewhere. 

Do something new with yourself. 

Soon, it’ll be time to go. 

Meanwhile, build a legacy to leave behind, in your memory, one that benefits many. 

Satisfaction

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Satisfied?

No?

Why not?

Trading badly?

No.

Investing badly?

No.

Then what?

Can’t pinpoint.

I see. 

I’ll tell you what.

What?

I’ll tell you what I think it is.

How would you know?

It’s an educated guess. 

Ok, go ahead.

Are you doing what you’ve come to do?

Meaning?

You’re in finance, correct?

Correct.

Do you feel happy about being in finance?

Yes. 

In finance, how many things are you doing?

Many.

How many?

Nine. Maybe ten. 

What do you think is the reason for your dissatisfaction? It’s not results, you said. Look in the ten things. Is there one thing amongst them that you’ve come to do?

Yes. 

Are you doing enough of it?

No. 

Why not?

I’ve just started developing it. It’s risky. I’ve started slowly. 

When’re you going to scale up?

Over the next twenty years.

Huh?

Yeah, because sky’s the limit. I’m going to scale up very slowly, and always as a single digit percentage of my total networth.

So over the next ten years, will you have reached a substantial level.

Yes, of course. 

Do you think you’ll still be dissatisfied?

No. 

There you go. 

Market-maker

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Manipulation. 

Recognition. 

Alignment. 

Trade. 

Spike. 

Out. 

How does one recognize manipulation? 

On the charts. 

After eyeballing many many charts, one gets a feel for it. 

Manipulated strike-points become pivot points. 

It’s a push from a fund-heavy conglomerate. Push becomes a cascade as traders join in. 

After the spike, the market-maker pulls out funds so cleverly that rates don’t fall. 

Funds are now ready for the next push. The same funds. 

Repeat. Same loop. 

Till strategy fails. 

Then, maker starts manipulating in opposite direction. 

Life’s busy for the maker. 

There’s trouble with the authorities. Ends on a compromise. Maker will step in when authorities need to prop the market. 

No maker – no market. 

Why do you think there’s always a quote to your underlying? 

Because of the maker. 

After a market has crossed critical mass, makers sit on their spikes. They roll-over on expiries, and enjoy the ride. 

Ride is not always smooth. 

Makers often get greedy and break their own rules. Functioning with no safeties, many makers get wiped out. To add to their woes, a large percentage functions on borrowed money. 

Makers have an electronic life, which loops from cellphone to terminal and back. It’s a life that’s punctuated by headaches, physical and mental. 

Don’t envy a maker. 

He or she is just doing his or her job. That’s all. 

Trade the maker. 

The Thing with Focus

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Depth. 

Confidence. 

Proper entry. 

Decent exit, if required. 

Understanding. 

Lack of panic. 

Overall picture. 

These are some of the things that focus is capable of giving. 

Swagger? 

One-basket attitude. 

Over-depth. 

Narrow-mindedness. 

Loss of overall picture due to over-chewing one subject. 

Robotic mindset leading to freeze. 

Yeah, these too. Within the capabilities of focus. 

We want the former qualities. 

We’re discarding the latter ones. If they come knocking at our doorstep, we’re shooing them away. 

We spoke about diversified focus. 

Whatever we do in life, let’s do it well. 

We’ll have our many baskets. Why should we take the risk of having just one basket? 

And, into our many baskets, we’ll delve deep-deep-deep. 

Period. 

Sheer Moat Investing is not Antifragile 

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There we go again. 

That word. 

It’s not going to leave us. 

Nicholas Nassim Taleb has coined together what is possibly the market-word of the century. 

Antifragile. 

We’re equity-people. 

We want to remain so. 

We don’t wish to desert equity just because it is a fragile asset-class by itself. 

No. 

We wish to make our equity-foray as antifragile as possible. 

First-up, we need to understand, that when panic sets in, everything falls. 

The fearful weak hand doesn’t differentiate between a gem and a donkey-stock. He or she just sells and sells alike. 

Second-up, we need to comprehend that this is the age of shocks. There will be shocks. Shock after shock after shock. Such are the times. Please acknowledge this, and digest it. 

To make our equity-play antifragile, we’ll need to incorporate solid strategies to account for above two facts. 

We love moats, right? 

No problem. 

We’ll keep our moats. 

Just wait for moat-stocks to show value. Then, we’ll pick them up. 

We go in during the aftermath of a shock. Otherwise, we don’t. 

We go in with small quanta. Time after time after time. 

Voila. 

We’re  already sufficiently antifragile. 

No magic. 

Just sheer common sense. 

We’re still buying quality stocks. 

We’re buying them when they’re not fragile, or lesser fragile. 

We’re going in each time with minute quanta such that the absence of these quanta (after they’ve gone in) doesn’t alter our financial lives. We’re saving the rest of our pickled corpus for the next shock, after which the gem-stock will be yet lesser fragile. 

Yes, we’re averaging down, only because we’re dealing with gems. We’ll never average down with donkey-stocks. We might trade these, averaging up. We won’t be investing in them. 

Thus, we asymptotically approach antifragility in a gem-stock. 

Over time, after many cycles, the antifragile bottom-level of the gem-stock should be moving significantly upwards. 

Gem-stock upon gem-stock upon gem-stock. 

We’re done already.