Category Archives: Applied Finance

When a Model collapses…

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… that’s when you shouldn’t collapse.

A model is something temporary. You use it. Successfully. For a while.

Then it starts to play up. You tweak it into yielding successful results.

You keep doing this, till the model is representable. Ultimately, it collapses.

You don’t grieve or look back. Construct a new model.

Tweak it into success.

Move on.

Construction of a market model requires you to use common-sense and your observatory powers.

How do you mould a market into your daily usage without tipping any other balance in your life?

Right, we are only going to be discussing holistic models. Such models should not make you a worse human being. Otherwise, find a better model.

You’ll also need to create some vacuum in your system to attract the required energies for the construction of a new model from scratch.

Use your imagination. Move stuff around. Donate. Write. Help. Be kind. Do good. Pro bono. Create a vacuum in your system.

Soon, your vacuum will attract what you deserve and require. A missing link might flash as a brain-wave. An obstacle might get removed. A vital family member might become kinder. Nature’ll give it back to you.

Before you know it, you’ll be working with your new model…

Playing the Stock or Playing a Scenario?

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Many roads lead to Rome.

Everyone’s approach to the markets is different.

Today I speak about two approaches.

One can choose to play the stock. 

Here, one decides to follow the same stocks everyday. One decides to learn their nuances. The number of stocks that one follows is manageable. As a thumb-rule, one should be able to count them on one’s fingers. No more. One should be able to recall the stocks one follows in a jiff, with no sweat at all. 

The chart of a stock begins to make sense. Trading plays emerge. One needs to then follow the progress of the same stocks everyday, and take trades as and when entry setups make themselves available. This methodology requires following the action everyday, live, during market hours.

What if we don’t want to be glued to our screens everyday?

Can we still get one action?

Yes. 

How?

Simple.

We then don’t follow any stock in particular.

We define a scenario which contains all that we want to see in the chart of a stock at that point of time, when we decide to follow the markets and perhaps take a trade. 

We then convert this scenario into an algorithm.

Again, don’t let the word algorithm scare you.

You don’t need to know how to programme. Your market software should allow you to put your algorithm together by combining chunks of simpler algorithms which define singular pieces of your scenario. These simpler algorithms are visible in your market software. You then need to copy, paste and combine your copy-pastes together with mathematical symbols. This is a vital statement. This is technology-power at its peak. This practically puts a very powerful weapon in your hands. 

From this point onwards, trade identification is a piece of cake. Your let your algorithm run through the gamut of stocks quoted on the markets. Your software does this for you in under a few minutes. Your algorithm picks those stocks that are currently exhibiting your scenario, and opens their charts for you. You need to define your algorithm in such a way, that not more than 50 charts open up. You then sift through the 50 in about 5 minutes. Just pure eyeballing. You narrow the 50 down to 5, which are showing good entry setups. You pick the stock with the best setup. Then you feed in a trigger entry order in your trading account. The whole exercise take less than 15 minutes.

Isn’t that wonderful?

How to Swallow Small Losses…

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… as if nothing has happened … is one of my biggest trading goals.

You see, our society teaches us not to lose. 

It doesn’t teach us that we can lose a bit 5 times, and after that we can win big, recovering all our losses and making money overall.

No. 

It teaches us to try and win all the time. 

That’s the exact reason 90%+ of all society members actually lose in the markets. They’ve not learnt how to lose small, move on, and take the next trade.

Mrs. Market won’t budge an inch for you. You’ll have to make the adjustment. 

So how does one take a loss in one’s stride?

Only one type of loss is immediately digestible – a small one. Therefore, define your risk in the market. Cut and scoot when required. Don’t get married to your trade.

Then, once the small loss has happened, and has been taken, it will nag you. 

It’ll be there, trying to bite your brain in the background. 

Focus on your next trade. 

Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … … [what’s the difference between implementation and entry? Well, you could be implementing the trade through a trigger, which is not equivalent to entry yet].

Don’t let the nagging bother you by keeping yourself busy with Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – Next Trade Identification – Implementation – Entry – Management – Exit – … … 

Ultimately the nagging will die out, as your mind starts to revolve around your current trades. 

If you give in to the nagging, it will grow, and will slow you down. You might snap at a family member. You might go into depression. You might freeze. DON’T. Don’t give in to the nagging. Don’t let it grow. Don’t let it slow you down. Maintain your family equilibrium at all costs. Move on. 

The nagging is worst if there’s been a close below your stop, and the market is to open the next day, or after the weekend. You have to deal with this one. If you’re not able to deal with this particular situation, you’ll either need to expose your mental stop prematurely and feed it in intraday (before there’s been a close under it), or you’ll need to follow the progress of your trade from half an hour before next market open onwards.

Yes, this last one’s tough, and you need to absolutely work your way around it. 

You can do it with a bit of practise. 

🙂

Dynamics of a Long-Long System

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What if your system doesn’t allow you to second-guess yourself?

Wouldn’t that be a wonderful situation?

And you’d be right there, in the middle of it all.

What would such a system look like?

Right, it would only go one way.

Long-long. “A-la-la-la-la-long”, to quote Inner Circle!

Why aren’t we talking about a short-short system?

Theoretically, we could. Theoretically, everything is possible.

Well, a short-short system would have no limits on your potential loss, if the trade went against you. That’s the fundametal problem I have against a short-short system, without even having gone into the whole leverage discussion.

You could bring the stop argument.

Fine.

Just take a deep breath.

Think clearly.

Take a look at the average price-speeds of both directions, long and short.

The average price-speed in the short direction is far higher. Price-jumps are greater. The probability of your stop getting high-jumped over is much higher in the short direction. Frankly, that doesn’t work for me.

Also, which market allows you to set an overnight stop, barring the international forex market?. None that I know of, at least in India. No stops overnight means potential exposure to a large drawdown upon next market-opening, and here I’d like to be in a long-situation, because loss is capped.

Therefore, when we’re discussing a system that doesn’t allow us to second-guess ourselves, I will only discuss a long-long system.

What does long-long mean?

Yeah, we’re talking about a system, where you’re looking for long trades all the time. You don’t look for trades to go short in-between. There’s no shorting in the equation whatsoever. The moment you start thinking about shorting, you start second-guessing your long-approach.

What does that mean for someone applying such a system?

It means that the whole world might be crumbling apart, and one is still looking for long-trades. Yes, one could take some hits here. One just needs to make sure, that one’s consecutive drawdown doesn’t exceed a bearable level. Also, as losses might pile up, one position-sizes one’s way through. The concept ot position-sizing has been pioneered and elucidated by Dr. Van K. Tharp @ www.iitm.com.

It also means that when your underlyings start to run, you’ll be piling up winning trade upon winning trade.

The thing is, nobody knows when what is going to run. If you’ve taken all second-guessing out of your equation, you’re aligning yourself with the correct direction once things start to run. Going the other way now would mean further losses.

Then, it further means that if you lock in a big winner in a running market, your paper profits can now be used to harness even greater profits in the same trade. Such big winners provide a big boost to your trading corpus, and, in my opinion, are the difference between winning and losing in the markets. One needs to keep oneself aligned correctly when such opportunities come along. A long-long system will keep you aligned, no matter what.

You could argue about dry spells.

In any dry spell, or when markets are tanking, there are still underlyings that are going up. You just have to identify them. Today, such identification is not difficult at all.

For such identification, you need market software, a data feed, and an algorithm which defines what you are looking for. Your software then scans the entire breadth of the market you’re in to try and find what you’re looking for, and opens corresponding charts for you for underlyings that are still going up, or where there is buying interest, buying pressure, unusual increment in volume or what have you.

Don’t let the word algorithm scare you. You don’t have to learn a new programming language to put an algorithm together. Common-sense is enough. You know what you’re looking for. Let’s say what you’re looking for involves volume and price. You look inside your market software. Then you couple two algorithms together into a new algorithm which defines what you are looking for. You see, a typical market software like Metastock already uses algorithms for volume moving average, price etc., and these are visible to you. Just copy-paste and make a new algorithm that suits your purpose.

Lastly for today, decouple yourself from the market during trading hours, except when you’re feeding in the trade. Analyze your current trades when the market is closed. Intuitively, you will probably feel that your decisions during off-market hours will be better than when you’re coupled to a live market. Find out for yourself. More on this some other day.

Emotion in the Marketplace – Enemy or Ally?

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Either or…

… choice is yours baby.

I’m not going to pretend we don’t have emotions.

We do.

We need to make these work for us.

Everyone feels exhilaration upon winning.

We’re down after a loss. 

Before you enter the marketplace again, dump all this somewhere …

… which, btw, is the most difficult thing in the world.

Didn’t anyone tell you that? What about your professor in financial college? Oh, I forgot, he or she never had his or her own money on the line, so he or she didn’t know this one. 

Arghhhhhhhhhhh@#$%^!

Don’t learn anything about finance from anyone who doesn’t have his or her own money on the line, and that too regularly on the line (((financial theory is worth mud unless it is realistic, applicable, and ultimately…profitable). 

So, what is this “line”? [More about “The Line” here – https://magicalbull.wordpress.com/2012/01/13/the-line/ ].

The line is an invisible connection between the vicissitudes of the marketplace and our emotional centres in the brain. 

The line gets activated once one is in a trade, or once one has initiated an investment. 

Once the line has been activated, we need to deal with its effects upon our systems. For optimal efficiency, we need to nullify the effects of the line on our systems. After that, we enter the marketplace again. 

So, acknowledge whatever emotion you are experiencing. Then deal with it. 

Dump the emotion of a loss in a safe place, to be nullified by a big future win. 

Dump the emotion of a big win in another safe place, lest it causes you to exit improperly and prematurely. 

How does one nullify this particular emotion? 

You see, your next activity in the marketplace can make you blow up, if there is any remnant hubris from a previous big win. 

You close your eyes, tell yourself that under no circumstances are you going to suffer the humiliation of blowing up, you centre, focus, you identify the next trade, and then you just take the next trade, as if nothing has happened. 

You have to work yourself around your own emotions. In the marketplace, emotions are your allies only if and when they are properly dealt with before the next market activity. 

Otherwise, they become your enemy. 

Loss can lead to depression and ultimate exit from the marketplace. One needs to understand and accept the concept of taking small losses. Why small? Why not small? You can define your loss. You can cut it when it’s small. Once one has understood and accepted the idea of taking small losses, these won’t bother you any more. That’s how you set yourself up to win big. Big wins, unless dealt with properly, lead to hubris, which can cause one to blow up permanently. We work ourselves around the negative potential of big wins through visualisation. 

Once you’ve sorted out the emotional angle…well, just take the next trade. Don’t wait. Just take it. 

Why work for less than 1:1?

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It’s a funny world.

In this funny world, many people work for less than 1:1.

Many of these people don’t have a choice. Their circumstances are such.

Some do, and they still choose losing odds.

What are we talking about?

The reward : risk ratio.

In the marketplace, our risk needs to be defined by default.

If we’re not thinking about defining our risk pinpointedly before entering the marketplace, let’s just pack our bags and study music instead, or biochemistry, if you please, with no disrespect to either music or biochemistry.

Define your risk! Set a stop!

Nobody plays to lose, right?

Once the risk is understood, one starts looking at reward.

Reward potential must be at least equal to or greater than the defined risk. This statement, coupled with a large sample size and more than 50 trades moving your way out of every 100 is already a winning combination.

Anyone can pick 50:50. All you need is a coin-flip.

60:40 is definitely achievable with research.

You don’t need more to win big.

Now make the 1:1 work for you. In 40 out of  100 trades, you’re stopped out at – 1 (minus being for trade going against you, and 1 being your defined unit of risk). I know it’s difficult to do, but take the next trade with a smile. When a trade starts to run, don’t cut your profit at the  +1 level. Let your profit run.

At +1, lift your stop to 0. At +2 lift your stop to +1. So on, so forth.

Don’t exit manually.

Let the market throw you and your profit out.

That’s called a proper exit.

I had promised that I would be speaking about proper exits.

Well, there you have it.

Cheers!

Approaching a Contrarian Buy as a Pivot Point Trade

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Approaching a Contrarian Buy as a Pivot Point Trade


Long live Jesse Livermore!

In his colourful life, Jesse pioneered the science of pivot points. He went bust many times while trying to understand pivot points, but ever since the fundamentals have been delineated by him, pivot points have stood the test of time.

After falling to a pivot point, where there is heavy volume, a stock then doesn’t look back for a while. Entry into a stock is considered ideal at or around a pivot point. Due to the surge-potential at pivot points, one’s trade gets into the money very fast here.

I don’t think pivot points can be predicted off-hand. Potential pivot points make themselves visible at newer lows. Their trademark is the accompanying very high volume.

So, what does one do here?

One punches in a trigger-buy above the pivot-bar or pivot-candle.

If the point pans out as a pivot, and the characteristic surge follows, one’s entry is triggered as the price pierces the pivot-bar high. Good entry.

Now manage the trade, and exit properly.

How does one exit properly?

I’ve spoken about this many times, and will do so again, not today, but very soon.

Cheers!

Am I Taking Bitcoin Seriously?

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Yeah.

Bitcoin is a serious new kid on the block.

Am I getting into it? That’s the more important question, isn’t it?

Well, not yet.

First up, I know very little about it. I’m not going to get into something because of the smoke. Gone are the days.

So, I’m educating myself.

The Web tells me that Bitcoin is not alone. Numerous Crypto-currencies have emerged. Confusing.

Many of these have their main servers or their secondary addresses located in ex-Soviet / ex-iron-curtain nations. Intimidating. I’m afraid.

Then I look at the bid-ask spread for Bitcoin. There’s typically a 1% difference between buying and selling price. That is huge. In fact, it’s outrageous.

After that I look at the Bitcoin price vs time chart.  I can see the panic in the chart. I don’t like panic. I generally stay away from panic markets. If I’m entering a long-term market, I like entering on a solid base foundation. The panic dust hasn’t settled yet. Technical bases build after panic settles, and only if the underlying has long-term mettle. They’re visible on the chart as horizontal stretches. Not happening as yet on the Bitcoin price vs time chart. Means I’m not entering yet.

Then there’s this mining stuff. Like, virtual mining. I don’t understand it. Yet. Looks silly, off-hand. Could this be connected to currency-backing? Or, is this just a hype-creating gimmick that doesn’t make economic sense? I’m not sure, I tell myself.

Last point I’m making against current Bitcoin entry – theft and loss. If I store Bitcoin on my computer, it becomes a potential target. I don’t wish to have the 5 million odd extremely sharp ex-Soviet ex-chess wizard brains targeting my computer. Period.

So, where do we stand?

Meaning, why am I taking Bitcoin seriously?

The USD has nothing backing it. The US seems to be following a fiscal policy with high risk of implosion due to escalating debt. They’ve got no reserves left. Savings are nil. The USD will probably maintain its hierarchy till the world has another alternative.

A few years ago, I thought that Gold could be this alternative. Today, I think Bitcoin is a more serious contender.

First, I need to convince myself that Bitcoin is backed. Meanwhile, the noise will even out, and only the most solid crypto-currencies shall live on. I’d like Bitcoin to still be at the top of all crypto-charts once the noise settles. By then, there’ll be someone reliable in my own country offering Bitcoin investment and trading, someone I know, like an HDFC Bank, or a Kotak Securities. Volumes will escalate. Slippage will be down to a bearable 0.1% or less. Bitcoin’s chart will show a base foundation. I’ll have understood the virtual mining stuff, and hopefully it’ll be connected to currency-backing. Banks will store Bitcoin as an e-holding, which will reflect in one’s Netbanking.

That’s when I’ll enter Bitcoin.

Happy Third Birthday, Magic Bull!

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Hey,

We turn three.

You know it, and I know it…

… that this year’s been a slow going.

Sometimes, life is slow.

Such junctures are great times to recuperate and consolidate.

Inaction is big in the markets.

Very few know how to be inactive – and stay sane.

Those who do – well – they make big bucks when it’s time for action.

That’s only if they haven’t gotten rusty and lazy by then.

Yeah, inaction is an art.

In the markets, it is at least equal in importance to – action.

So, for the most part of the year that’s gone by, my market activity’s been practically zilch.

It’s not that I’ve been sitting and twiddling my thumbs. No! For heaven’s sake! Of course I’ve been doing other stuff.

Inaction in the markets must be coupled with action elsewhere, if one plans to stay sane, that is.

Also, inaction in the markets leads to preservation of capital. That, what you made during active times, remains safe, pickled and intact.

Then, when there’s opportunity, you’ve got your whole arsenal to cash in with.

While changing gears, don’t jump out of your seat with your saliva drooling, though.

Have some rules in place for opportunistic action.

I have some basic rules for myself at such junctures. I don’t put more than 10% of my networth on the line, while pursuing an idea. This rule applies for me while changing gears too, more than ever. Also, I don’t pursue more than two ideas at any given point of time. Most of the time, I’m not pursuing any idea, till an idea appears, refuses to break down, and just sticks.

Safe.

Simple.

Comfortable.

Ideal circumstances…

… to hit the sweet-spot…

… when it’s time for action.

Wishing you happiness, safety and profits in whatever market activity you pursue,

Yours sincerely, and just there for you, period,

Magic Bull.

Taking the Pan out of Panic

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Panic – Pan = ic = i see = I SEE.

Times are unprecedented.

We’re breaking new lows of evil everyday.

Ours looks to be a hopeless nation.
Is it over for us?

Shall we pack up our bags and migrate?

Just take a deep breath. Bear with me for a moment. Try and cast your panic aside. Try and think clearly.

I’ll share with you an observation. Take any Indian. Doesn’t have to be an outperformer. Take an under-averagely performing Indian, for all I care. Weed him or her out of our pathetic system, and place him or her in a nation with good governance.

Lo and behold, our candidate will start performing. Not only that, soon, he or she will be outperforming. After a decade or so, he or she will probably have mastered the system and punctuated it with innovative short-cuts.

Get my point?

We are a resilient race. We might look fickle, frail and harmless superficially, but we can struggle, bear, survive, and finally break out. Just give us good governance.
Don’t panic. We’re not going down that easily.

What’s happening currently is a purge. Yeah, it’s a catharsis with a big C. While it continues, asset classes across the board will probably get hammered.

What does that mean for you?

Only one thing.

Stay in cash. Accumulate it. Learn to sit on cash. Sit on it as long as the purge lasts. Let its value depreciate, doesn’t matter. Park it safely with a conservative private bank. Fixed deposits would be the instruments of choice. Yeah, you don’t want to leave unattached cash lying around. Potentially, unattached cash could be susceptible to online fraud. Attach your cash, safely, and keep it before your eyes. Put some watch-dogs in place, as in sms and email alerts. Password-change attempt? You are immediately alerted. New payee added? You are immediately alerted. Watch-dogs bark.

As per my instinct, though we probably won’t go bankrupt as a nation, we might just go a long way down before the purge is over. After the purge, there will be tremendous bargains on offer, across the board, in all asset-classes. Cash will be king. Save your cash and sit on it – for that day.

Meanwhile, your wealth-manager will try to push you into panic purchases with your cash. As in, buying gold at 32k, and the USD at 65. Don’t listen. These are crazy levels. One doesn’t invest at crazy levels. These are not even normal trading levels. Yes, they are institutional trading levels. One does not invest at institutional trading levels.

It’s time to use your common-sense and maintain a cool head.

You can only do that by refusing to panic.

One Up on the Romans

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Sometimes, words are hard to come by.

Like now.

It’s a dry spell.

Happens.

At other times, well, they burst forth as if a geyser’s exploded.

Then, I’m not able to stop their flow.

That also happens.

Welcome to the dual-natured environment of Earth.

While we’re steeped in this duality, there’s no option but to get used to it.

One can always go on to then master it.

Oh, I forgot, that’s optional.

I’ll tell you what I’ve done to master such fluctuating fortunes, as far as word-flow is concerned.

Two simple steps, that’s all.

When we’re dry,…, we’re dry. No PhDing over the fact that we’re dry. We’re just dry. Period. Accepted. Digested. We just go on to do other stuff. There are millions of other things that grab our interest on this dual planet.

When we’re up and running – that’s just it – we’re up and running. No PhDing over why we’re up and running. We let the flow happen. We can decide to make it happen even more. That’s optional…, but we don’t stop the flow… till the tap dries itself out.

Similarly, you can experience a string of losses in the markets. Losses make you hit your cut-off. A cut-off is a cut-off. You don’t keep on trading. Nature’s telling you to lay off till your mind and body align themselves with the flow of the markets again. Just do other stuff till you’re mentally and physically back.

On the other hand, when profits run, they can really run. PLEASE LET THEM RUN. Don’t PhD about the run. Let them run till they dry out.

When in dualism, the idea here is to first live through dualism, in order to understand its nature.

We’re one up on the Romans, though.

We’re trying to be masters over our fluctuating dualistic environment.

Yeah, in the markets, we’re getting through losing spells with minimal damage.

Simultaneously, we’re maximizing the potential of profit-runs.

That’s what we’re doing.

If not, then that’s exactly what we are going to do.

Cheers

🙂

The Art of Emotional Recycling

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Taken a hit?

If yes, at least admit it… to yourself and for your own sake.

People take hits at various times in their lives.
That’s the way of the market.

That’s how it teaches us to make money next time.

Think of your loss as tuition fees.

In my opinion, the best way forward is to take lots of small hits in the first seven years.

Then, in nine cases out of ten, you won’t fall for the big ones.

Big hits can decapacitate a player, especially when they come late, since there is no time for full recovery. Besides, emotional breakdown at a late stage is very difficult to get out of.

Make it a point never to take a big hit.

That’s only possible, if at any given time, the capital that is risked is within reasonable limits.

Let’s say you risk not more than 1% of your networth at any given time. What’s the maximum hit you will take at one time? Right, 1%.

That’s bearable.

That’s something you can shake yourself out of, and move on.

Moving on is a huge quality to possess in the markets.

Taken a hit?

Move on and make your next trade.

All this while, you are putting any remnant emotional hurt in cold storage.

Yeah, there’s a certain portion of emotional hurt that won’t be nullified by family time, vacations, hobbies etc. We’re talking about the hurt to your ego. Only a big win will wash that away. Only then is your emotional recycling complete.

Put yourself in line for that win.

After a hit, rest, recuperate, grab your wits, focus, and…

… put on the next trade.

What’s your Answer to Dictatorial Legislature?

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Cyprus almost bust…

Money from savings accounts being used to pay off debt…

Five European nations going down the same road…

US economy managing to function for now, but without any security moat (they’ve used up all their moats)…

Our own fiscal deficit at dangerous levels…

Scams in every dustbin…

Mid- & small-caps have already bled badly…

Let’s not even talk about micro-caps…

Large-caps have just started to fall big…

Just how far could this go?

Let’s just say that it’s not inconceivable to think… that this could go far.

Large-caps have a long way to fall. I’m not saying they will fall. All I’m saying is that the safety nets are way below.

I see one big, big net at PE 9, and another large one at PE 12. Getting to either will mean bloodshed.

Inflation figures are not helping.

In a last-ditch attempt to get reelected, the government recently announced a budget for which it’ll need to borrow through its nose.

Oops, I forgot, it doesn’t have a nose.

The whole world is aware about work-culture ground-truths in India.

Things are out of control, and this could go far, unless a miracle occurs and Mr. Modi gets elected. Before such an eventuality, though, things could go far.

When large-caps fall, everything else falls further.

How prepared are you?

Hats off to those with zero exposure.

Those with exposure have hopefully bought with large margins of safety.

Those who are bleeding need a plan B.

In fact, a plan B should have been formulated during good times.

Anyways, how prepared is one for a Cyprus-scenario, where dictatorial last-minute legislature allows the government to whack money from savings accounts?

In future, you might need to find a solution for loose cash in savings accounts. It needs to be kept in a form where government doesn’t have access to it.

As of now, what’s serving the purpose is an online mutual fund platform, through which loose cash can be moved and parked into liquid mutual fund schemes. For government to exercise full control over mutual fund money, it’ll probably need to be more than a bankruptcy scenario.

That’s just for now. Adaptability is the name of the game. It’s always good to be aware of one’s plans B, C & D.

Organic is In

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Is your institution “organic”?

What could organic mean?

Let’s try and answer this based on sheer intuition, without surfing the net or getting biased by other opinions. It doesn’t matter if we’re wrong. At least we’re thinking independently, and that is invaluable.

So, what kind of an institution is organic?

A non-synthetic one? Hmm.

One that’s alive? Not bad.

In sync? Better.

One whose left hand knows what its right hand is doing? Good.

One that tugs at the same string at the same time in the same direction. Yeah!

One that’s devoted to a holistic boss. You got it.

Are you part of such an institution?

Yes? God bless you.

No?

Why?

Never looked?

Looked and never found?

Looked, found, and then couldn’t fit in? Keep trying. If you don’t fit in fully into any such institution, firstly, don’t get worried. It’s ok. Found your own organic institution. On the other hand, maybe you are your own institution, but don’t know it yet. When you do discover it, try and be an organic one.

Organic growth is digestible. It sustains.

Short cuts are big in our world.

Why do we try and cut others short?

As investments, look for institutions where employees are not cut short. When talent is rewarded, it starts to perform beyond boundaries.

Apart from good valuations, corporate governance criteria and organic growth are critical factors that one must look for in an investment.

Organic is in, and will remain in.

Where Is The Love?

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There’s this song by The Black Eyed Peas, called Where is the Love?

It’s playing on my phone as I write. It’s really good. Features Justin Timberlake. Very catchy tune, amazing lyrics. The Peas are talented. Gotta hear them.

I drag myself through two customer-care calls, one with Dish TV, and the other one with Bharti Airtel.

Exasperating. Pathetic. Nuisance-value. Drains one out. Long.

Where’s the love?

These are some of the words / phrases / questions that come to mind.

Meanwhile, the Dish and Airtel jingles are coming out of all body exits.

Then, I remember my customer-care calls with AmEx.

Smooth.

Officers are clued in.

Zak-Zak-Zak, and your work is done.

Short, and sweet.

And, there’s love, for whatever reason.

What kind of a corporate India are we growing up in?

Indigestible growth over short periods leads to disease.

Are the majority of our corporates diseased?

If they’re not, one should be feeling the love.

Where’s the love?

One does feel it, in some companies. M&M, I think, Thermax, Wipro….Dabur maybe…

Before investing in a company, it might be a good idea to talk to the company’s customer-care, and to see if there is any…love.

It’s got to trickle down from the top. You are only as good as your boss is. If the boss is holistic, the company becomes a beacon of love, understanding and digestible growth. That’s the kind of company one feels like working for…

… and that’s the kind of company one feels like investing in.

Is Your Money Comfortable?

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Everyone likes being comfortable.

So does your money.

Can you function optimally under tension?

Well, neither can your money.

So… make it comfortable. Allow it to breathe.

Money is a concept, a force.

Soon, it’ll find its flow. Till it does, yes, you’ve allowed it to breathe.

What does all this mean?

What are we talking about?

Don’t worry, I’m not getting metaphysical on you…, yet.

Simple – no confinement, no locking, just parking, no further expectations – that’s when your hard-earned life-savings breathe freely.

Yeah, you park them, where you can see them.

If, then, a daily dividend emerges, well, that’s a bonus. Try and make sure that the avenue you’ve used for parking doesn’t reduce your corpus on a daily basis, even slightly. You are more than happy with a miniscule daily dividend, which, of course, is auto-reinvested into the same avenue.

Now, both entities are breathing freely – you and your corpus.

You can take a break.

Reassuring is the fact that your resting corpus is visible to you on your mobile.

You do take that break.

At times you think – freely.

You enjoy life for a bit.

Slowly a thought process emerges.

Where will your money go next?

Where does it want to go?

What’s the most lucrative path for it to flow upon?

You listen to the universe.

The answer floats in the universe.

It is your answer – the resultant vector of your struggle and learning.

For it to flow into your mind, your per saldo vibration must match the exact vibration of that part of the universe, where your answer lies.

If there’s a mismatch, then perhaps you need to struggle a bit more, till your vibration gets even finer and there’s a match.

The solution flows into you.

It’s like an energy bomb, that slowly explodes inside of you, and as the emitted energy starts to seep into every cell of your body, your new system simultaneously starts to dawn upon you.

You are now ready to move your funds to a more permanent and lucrative location. Speed of movement is defined by your new system. So are time, mode, avenue, repetitiveness and tenure.

Meanwhile, your funds have remained intact. That’s a very big thing. Very few human beings know how to keep their funds intact. If you know it, you already know a lot.

Soon, your new system takes over. More than half the battle’s won already.

All the best, wish you well, and if I did get metaphysical on you, it was only to get the point across.

Maybe you actually even liked the meta-bits, so let’s call it even stevens.

Where to, Mr. Nath?

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Last month, I scrapped my market-play system.

Happens.

Systems are made to be scrapped later.

One can always come up with a new system.

I love working on a new system.

It’s challenging.

What I want to talk to you about is why I scrapped my last system.

I found four accounting frauds, as I did my market research, all online.

You see, my last system worked well with honest accounting.

It had no answer to accounting frauds.

Also, I got disillusioned.

Are we a nation of frauds?

How does one deal with a nation of frauds?

More importantly, how does one play such a nation?

Does one invest in it? Or, does one sheer trade it?

Questions, questions and more questions. These encircle my mind as I work to put my new system together.

I am in no hurry to come up with an answer. A country like India deserves a befitting answer, and that it will get, even if the sky comes down on me while I put my system together.

Slowly, I started to think. How many systems had I scrapped before?

Hmmm, four or five, give or take one or two.

I have an uncompromising market rule of going fully liquid when I scrap a system.

Full liquidity is a tension-tree state. It allows one to think freely and in an unbiased manner. Being invested during volatility impedes one’s ability to think clearly and put a new system together.

Ok, so what answer would my new system have towards fraud?

All along, it was very clear to me that future market activity would be in India itself. Where else does one get such volatility? I am learning to embrace volatility. It is the trader’s best friend.

Right, so, what’s the answer to fraud?

Trading oriented market play – good. Not much investing, really. First thoughts that come to mind.

Buying above supports. Selling below resistances. Only buying above highs in rare cases, and trailing such buys with strict stops. Similarly , only selling below lows in even rarer cases, and again, trailing such sells with strict stops.

Trading light at all times.

Fully deploying the bulk of one’s corpus into secure market avenues like bonds and arbitrage. You see, bonds in India are not toxic. Well, not yet, and with hawks like the RBI and SEBI watching over us, it might take a while before they turn toxic. If and when they do start turning toxic, we’ll be getting out of them, there’s no doubt about that. Till they’re clean, we want their excellent returns, especially as interest rates head downwards. In India, one can get out of bond mutual funds within 24 hrs, with a penalty of a maximum of 1 % of the amount invested. Bearable. The top bond funds have yielded about 13 – 15% over the last 12 months. So, that 1% penalty is fully digestible, believe me.

With the bulk of one’s returns coming from secure avenues, small amounts can be traded. Trade entries are to be made when the odds are really in one’s favour. When risk is high, entry is to be refrained from. A pure and simple answer to fraud? Yes!

You see, after a certain drop, the price has discounted all fraud and then some. That’s one’s entry price for the long side. On the short side, after a phenomenal rise, there comes a price which no amount of goodness in a company can justify and then some. That’s the price we short the company at.

Of course it’s all easier said than done, but at least one thing’s sorted. My outlook has changed. Earlier, I used to fearlessly buy above highs and short below lows. I am going to be more cautious about that now. With fraud in the equation, I want the odds in my favour at all times.

These are the thoughts going on in my mind just now. Talking about them helps them get organized.

You don’t have to listen to my stuff.

I’m quite happy talking to the wall.

Once these words leave me, there’s more space in my system – a kind of a vacuum.

A vacuum attracts flow from elsewhere.

What kind of a flow will my vacuum attract?

Answers will flow in from the ether.

Answers to my burning questions.

Shaken, and not Stirred, Mr. Trader…

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Trading models crumble. Happens often.

Does this shake you?

Please don’t let it. Models are meant to crumble.

Construct a new trading model, instead of mourning over the loss of your current one.

Your belief in your model might be shaken, but you are not stirred, right? Helooooo, Mr. Trader, are you there?

Let’s get this straight – you are not stirred. You stand solid as a rock.

What allows you to do so?

Firstly, your safety net stands. Meaning, nothing’s making your safety net crumble. That’s the first thing you do as a trader – construct  a safety net that stands. Your safety net generates steady income and affords your family a comfortable lifestyle. Before that happens, not a single trade is pulled.

Secondly, ever since your safety net has been standing, you have been trading lightly. You’ve been chiselling away at this trading model, but are still a little uncertain about it, and thus, you’ve been going light. It’s recent crumbling has given you losses – which are also light. You are able to swallow such losses easily, since their magnitude is digestible. You’ve been very sensible in not scaling up prematurely.

Then, you’ve stuck to all your trading rules, and this is helping you immensely. Your rules called for a week’s break between two trading models, and you took it. You were not afraid to not work for a week. You didn’t care about what society said. You were confident about yourself, and made your own rules. This week off has kept your personality balanced, and you continue to be a good human being, working for the welfare of society. Your relationship with your family continues to be excellent, despite any losses on the markets.

Yeah, you’re still standing, and pretty comfortably so. Recuperated, and rejuvenated. You are raring to put together a new trading model after the collapse of your old one.

Slowly, you start chiselling again. You watch the market and its movements for a week. Charts are studied. A befitting trading instrument is identified. Trading direction is pinpointed. Trading magnitude is determined. A comfortable entry setup is chosen…and you’re in. Your trade triggers.

After trade upon trade upon trade, your fine-tuned trading model takes shape and yields profits…until it crumbles and gives way to a newer one.

Welcome to the world of trading. You’ll be shaken, many times, but if you stick to a few basics, nothing will be able to knock you off the path.

All the best! 🙂

Can Anyone Match Our Financial Sentinels?

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It was the aftermath of ’08.

There was blood everywhere.

In my desperation to get a grip on things, I was about to make yet another blunder.

The Zurich International Life pitch had found its way into my office through a leading private bank.

The pitch was fantastic.

I got sucked in.

Access to more than 150 mutual funds world wide…

No switching fee…

Switch as many times as you want…

Joining bonus…

Premium holiday after 18 months…

I quickly signed the documents.

What remained cloudy during the pitch was the 10-year lock-in.

Also, nobody mentioned that the exit penalty was exorbitant. I mean, as I later found out, the level of the exit penalty would make Shylock look like JP Morgan.

In the pitch, I found myself hearing that one could exit after 18 months upon payment of 9% interest p.a. on the joining bonus.

Nobody mentioned the full management fees, which I later calculated to be a staggering approximate of 7.75% per annum for myself, since I had opted for a premium holiday as soon as I could.

I mean, when about 7.75% was being deducted from your corpus each year, what in the world was the corpus going to generate? I found myself asking this question after four years of being trapped in the scheme.

I had soon realized that the pitchers had lied in the pitch. In the fine-print, there was no such clause saying that one could exit after 18 months upon payment of 9% interest p.a. on the joining bonus. If I escalated the matter, at least three people would lose their jobs. Naehhh, that was not my style. I let it go.

When I would look at interim statements, the level of deductions each time made me suspect that there were switching fees after all. I could never really attribute the deductions to actual switches, though, because the statements would straight-away show the number of mutual fund units deducted as overall management fees. If there were switching fees, they were getting hidden under the rug of management fees. Since the level of overall fees was disturbing me totally, I had this big and nagging suspicion that they were deducting something substantial for the switches, and were not showing this deduction openly in their statements.

When I compared all this to how Unit-Linked Insurance Plans (ULIPs) were handled in my own country, I was amazed at the difference.

In India, customer was king.

The customer had full access to the investment platform, and could switch at will from his or her own remote computer. Zurich did not allow me such direct access.

The expense-ratio in India was a paltry 1.5% – 2.0% per annum. Compare this to the huge annual deductions made in the case of my Zurich International Life policy.

Lock-ins in India were much lesser, typically three odd years or so.

Some ULIPs in India allowed redemptions during lock-ins, coupled with penalties, while others didn’t. Penalties were bearable, and typically in the 2 – 5 % (of corpus) range. Those ULIPs that did allow such redemptions only did so towards the latter part  of the lock-in, though. Nevertheless, lock-in periods were not long when compared to ten whole years, during which the whole world can change.

The debt-market funds paid out substantially larger percentages as interest in India when compared to the debt-market funds encompassed by Zurich International Life.

In India, deductions from ULIP premiums in the first few years (which were getting lesser and lesser each year due to legislature-revision by the authorities) were off-set by absence of short-term capital gains tax and entry/exit equity commissions upon excessive switching. This meant, that in India, short-term traders could use the ULIP avenue to trade without paying taxes or commissions. Whoahh, what a loop-hole! [I’m sure the authorities would have covered this loop-hole up by now, because this research was done a few years ago.]

ULIPs in India allowed at least 4 switches per annum that were totally free of cost. After that, switches would be charged at a very nominal flat rate of typically about the value of 2-9 USD per switch, which, frankly, is peanuts. I was suspecting that the Zurich fellows were knocking off upto 1% of the corpus per switch, but as I said, I didn’t see the math on paper. Even if I was wrong, their yearly deductions were too large to be ignored. Also, was I making a mistake in furthermore deducing that Zurich was deducting another 1% from the corpus each time the corpus changed its currency? I mean, there was no doubt in my mind that the Indian ULIP industry was winning hands-down as far as transparency was concerned.

In India, people in ULIP company-offices were accessible. You got a hearing. Yeah. Zurich International Life, on the other hand, was registered in the Isle of Man. Alone the time difference put an extra day (effectively) between your query and action. Anyways, all action enjoyed a T+2 or a T+3 at Zurich’s end, and the extra day made it a T+4 if you were unlucky (Indian ULIPs moved @ T+0, fyi & btw). Apart from the T+x, one could only access officials at Zurich through the concerned private bank, and as luck would have it, ownership at this private bank changed. The new owners were not really interested in pursuing dead third-party investments made by their predecessors, and thus, reaching Zurich could have become a huge problem for me, were it not for my new relationship manager at this private bank, who was humanitarian, friendly and a much needed blessing.

By now, I had decided to take a hit and exit. It would, however, be another story to get officials at Zurich to cooperate and see the redemption through. On her own level, and through her personal efforts, my diligent relationship manager helped me redeem my funds from Zurich International Life.  I am really thankful to her. Due to her help, my request for redemption was not allowed to be ignored / put-off till a day would dawn where really bad exit NAVs would apply. Zurich did have the last laugh, knocking off a whopping 30 odd percent off my corpus as exit penalty (Arghhh / Grrrrr)! Since I had managed to stay afloat at break-even despite all deductions made in the four years I was invested, I came out of the investment 30% in the hole. The moment it returned, the remaining 70% was quickly shifted to safe instruments yielding 10%+ per annum. In a few years, my corpus would recover. In less than 4 years, I would recover everything. In another two, I would make up a bit for inflation. Actually, the main thing I was gaining was 6 remaining years of no further tension because of my Zurich International Life policy. This would allow me to approach the rest of my portfolio tension-free.

The Zurich International Life policy had been the only thorn in my portfolio – it was my only investment that was disturbing me.

I had taken a hit, but I had extracted and destroyed the thorn.

It was a win for the rest of my portolio, i.e. for 90%+ of my total funds. Tension-free and full attention heightens the probability of portfolio prosperity.

Yeah, sometimes a win comes disguised as a loss.

When I look back, I admire the Indian financial authorities, who ensure that the Indian retail customer is treated like a king.

Retail customers in other parts of the world receive very ordinary treatment in comparison.

I know this from first-hand experience.

I don’t plan to invest overseas as long as our financial authorities continue to push such discipline into our financial industry.

I don’t often praise too much in India, but where it is due, praise must emanate from the mouth of a beneficiary. We are where we are because of our fantastic financial sentinels!

Three cheers for the Securities and Exchange Board of India, for the Insurance Regulatory and Development Authority, and, of course, three cheers and a big hurray for the Reserve Bank of India.

A Chronology of Exuberance

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The biggest learning that the marketplace imparts is about human emotions.

Yeah, Mrs. Market brings you face to face with fear, greed, exuberance, courage, strength, arrogance … you name it.

You can actually see an emotion developing, real-time.

Today, I’d like to talk about the chronology of exuberance.

In the marketplace, I’ve come face to face with exuberance, and I’ve seen it developing from scratch.

When markets go up, eventually, fear turns into exuberance, which, in turn, drives the markets even higher.

What is the root of this emotion?

The ball game of exuberance starts to roll when analysts come out with a straight face and recommend stocks where the valuations have already crossed conservative long-term entry levels. As far as the analysts are concerned, they are just doing their job. They are paid to recommend stocks, round the year. When overall valuations are high, they still have to churn out stock recommendations. Thus, analysts start recommending stocks that are over-valued.

Now comes the warp.

At some stage, the non-discerning public starts to treat these recommendations as unfailing cash-generating  opportunities. Greed makes the public forget about safety. People want a piece of the pie. With such thoughts, the public jumps into the market, driving it higher.

For a while, things go good. People make money. Anil, who hadn’t even heard of stocks before, is suddenly raking in a quick 50Gs on a stock recommendation made by his tobacco-seller. Veena raked in a cool 1L by buying the hottest stock being discussed in her kitty party. Things are rolling. Nothing can go wrong, just yet.

Thousands of Anils and Veenas make another 5 to 6 rocking buys and sells each. With every subsequent buy, their capacity increases more and more. Finally, they make a big and exuberant leap of faith.

There is almost always a catalyst in the markets at such a time, when thousands make a big and exuberant leap of faith into the markets, like a really hot IPO or something (remember the Reliance Power IPO?).

Yeah, people go in big. The general consensus at such a time is that equity is an evergreen cash-cow. A long bull run can do this to one’s thinking. One’s thinking can become warped, and one ceases to see one’s limits. One starts to feel that the party will always go on.

Now comes the balloon-deflating pin-prick in the form of some bad news. It can be a scandal, or a series of bad results, or some political swing, or what have you. A deflating market can collapse very fast, so fast, that 99%+ players don’t have time to react. These players then rely on (hopeful) exuberance, which reassures them that nothing can go wrong, and that things will soon be back to normal, and that their earnings spree has just taken a breather. Everything deserves a breather, they argue, and stay invested, instead of cutting their currently small losses, which are soon going to become big losses, very, very big losses.

The markets don’t come back, for a long, long time.

Slowly, exuberance starts dying, and is replaced by fear.

Fear is at its height at the bottom of the markets, where maximum number of participants cash out, taking very large hits.

Exuberance is now officially dead, for a very long time, till, one day, there’s a brand new set of market participants who’ve never seen the whole cycle before, supported by existing participants who’ve not learnt their lessons from a past market-cycle. With this calibre of participation, markets become ripe for the re-entry of exuberance.

Wiser participants, however, are alert, and are able to recognize old wine packaged in a new bottle. They start reacting as per their designated strategies for exactly this kind of scenario. The best strategy is to trade the markets up, as far as they go. Then, you can always trade them down. Who’s stopping you? Shorting them without any signals of weakness is wrong, though. Just an opinion; you decide what’s wrong or right for you. The thing with exuberance is, that it can exercise itself for a while, a very long while – longer than you can stay solvent, if you have decided to short the markets in a big way without seeing signs of weakness.

At market peaks, i.e at over-exuberant levels, long-term portfolios can be reviewed, and junk can be discarded. What is junk? That, which at prevailing market price is totally, totally overvalued – that is junk.

Formulate your own strategy to deal with exuberance.

First learn to recognize it.

Then learn to deal with it.

For success as a trader, and also as an investor, you will not be able to circumvent dealing with exuberance.

Best of luck!