Category Archives: Cash

So, … … , When’s Judgement Day?

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The “fiscal cliff” thingie has come and gone…

Gone?

People, nothing’s gone.

If something is ailing, it needs to heal, right?

What is required for healing?

Remedial medicine, and time.

Let’s say we take the medicine out of the equation.

Now, what’s left is time.

Would the ailing entity heal, given lots of time, but no medicine?

If disease is not so widespread, and can be expunged over time, then yes, there would be healing, provided all disease-instigating factors are abstained from.

Hey, what exactly are we talking about?

It is no secret that most first-world economies are ailing.

Specifically, the US economy was supposed to be injected with healing measures, which were to take effect from the 1st of Jan., ’13. Financial healing would have meant austerity and a more subdued lifestyle. None of that seems to be happening now. The healing process has been deferred to another time in the future, or so it seems.

You see, people, no one wants austerity. The consumption story must go on…

So now, since the medicine’s been taken out of the equation, is there going to be any healing?

No. Disease-instigating lifestyles are still being followed. Savings are low. Debt with the objective of consumption is still high. How can there be any healing?

Under the circumstances, there can’t.

So, what’re we building up to?

We’re all clear about the fact that consumption makes the world go round. What is the hub of the world’s consumption story? The US. That part of the world which does save, and where there is real growth, well, that part rushes to be a part of the consumption story. It produces cheaply, to sell where there’s consumption, and it sells there expensively. Yeah, like this, healthy economies get dragged into an equation with ailing economies. Soon, the entanglement is so deep, that there’s no turning back for the healthy economy. It catches part of the ailment from the diseased economy. Slowly, non-performing assets of banks in such healthy economies start to grow. The disease is spreading.

Hold on, stay with me, we’re not there yet. Yeah, what are we building up to?

Healthy economies take time to get fully diseased. Here, savings are big, domestic manufacturing is on the rise, and there a healthy demographic dividend too. Buffers galore, the immune system of a healthy economy tries to fight the contagion for the longest time. As entanglement increases, though, buffers deplete, and health staggers. Non-performing assets of banks grow to disturbing levels.

That’s what we are looking out for, when we are invested in a healthy economy which has just started to ail. Needless to say, we pulled out our funds from all ailing economies long back. Our funds are definitely not going back to economies which refuse to take medicine, i.e. which don’t want to be healed. Now, the million dollar question is …

… what’s to be done with our funds in a healthy economy which has just started to become diseased due to unavoidable contagion?

Nothing for now. Watch your investments grow. Eventually, since no one is doing enough to stop the damage and the spread, big-time ailment signs will invariably appear in the currently “healthy” economy, signs that appeared a while back in currently ailing economies. Savings will be disappearing, manufacturing will start to go down, and bad-debt will increase. Define your own threshold level, and go into cash once this is crossed. You might not need to take such a step for many years in a row. Then again, you might need to take such a step sooner than you think, because the ailing mother-consumer economy is capable of pulling everyone down with it, if and when it collapses. And it just stopped taking its medicine…

Let’s get back to your funds. In the scenario that you’ve gone into cash because you weren’t confident about the economy you were invested in, well, what then?

Option 1 is to look for an emerging economy that gains your confidence, and to invest your funds there.

Not everyone is comfortable investing abroad. What if you want to remain in your own economy, which you have now classified as diseased. There’s good news for you. Even in a diseased economy, there are pockets of health. You need to become a part of such pockets, just after a bust. So, remain in cash after a high and till after a bust. Then, when there’s blood on the streets, put your money into companies with zero-debt, a healthy dividend-payout record and a sound, diligent and honest management. Yeah, at a time like that, Equity is an instrument of choice that, over time, will pull your funds out of the gloom and doom.

You’ve put your funds with honest and diligent human capital. The human capital element alone will fight the circumstances, and will rise above them. Then, you’ve entered at throwaway prices, when there was blood on the streets. Congrats, you’ve just set yourself up for huge profit-multiples in the future. And, the companies you’ve put your money with, well, every now and then, they shower a dividend upon you. This is your option 2. Just to share with you, this is my option of choice. I like being near my funds. This way, I can observe them more closely, and manage them properly. I suffer from a case of out of sight, out of mind, as far as funds are concerned. Besides, when funds are overseas, time-differences turn one’s life upside down. This is just a personal choice. You need to take your own decision.

At times like this, bonds are not an option, because many companies can cease to exist in the mayhem, taking your investment principal out with them.

Bullion will give a return as long as there is uncertainty and chaos. Let there be prolonged stability, and you’ll see bullion tanking. Yeah, bullion could be option 3 at such a time. You’ll need to pull out when you see signs of prolonged stability approaching, though.

One can use a bust to pick up cheap real-estate in prime localities. Option 4.

You see, you’ve got options as long as you’re sitting on cash. Thus, first, learn to sit on cash.

Before that, learn to come into cash when you see widespread signs of disease.

Best part is, widespread disease will be accompanied by a big boom before the bust, so you’ll have time to go into cash, and will be ready to pick up quality bargains.

You don’t really care when judgement day is, because your investment strategy has already prepared you for it. You know what to do, and are not afraid. If and when it does come, you are going to take full advantage of it.

Bring it on.

Can We Please Get This One Basic Thing Right? (Part III)

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Yeah, we’re digging deeper.

How does an investor arrive at an investment decision?

It’s pretty obvious to us by now that traders and investors have their own rationales for entry and exit, and that these rationales are pretty much diametrically opposite to each other.

So, what’s the exact story here?

The seasoned investor will look at FUNDAMENTALS, and will exhibit PATIENCE before entering into an investment.

The versatile trader will look at TECHNICALS, and will NOT BE AFRAID of entry or exit, any time, any place. He or she will be in a hurry to cut a loss, and will allow a profit to blossom with patience.

What are fundamentals?

Well, fundamentals are vital pieces of information about a company. When one checks them out, one gets a fair idea about the valuation and the functioning of the company, and whether it would be a good idea to be part of the story or not.

A good portion of a company’s fundamental information is propagated in terms of key ratios, like the Price to Earnings Ratio, or the Debt to Equity Ratio, the Price to Book Value ratio, the Enterprise Value to EBITDA Ratio, the Price to Cash-flow Ratio, the Price to Sales ratio, etc. etc. etc.

What a ratio does for you is that in one shot, it delivers vital info to you about the company’s performance over the past one year. If it’s not a trailing ratio, but a projected one, then the info being given to you is a projection into the future.

What kind of a promotership / management does a company have? Are these people share-holder friendly, or are they crooks? Do they create value for their investors? Do they give decent dividend payouts? Do they like to borrow big, and not pay back on time? Do they juggle their finances, and tweak them around, to make them look good? Do they use company funds for their personal purposes? Researching the management is a paramount fundamental exercise.

Then, the company’s product profile needs to be looked into. The multibagger-seeking investor looks to avoid a cyclical product, like steel, or automobiles. For a long-term investment to pan out into a multibagger, the product of a company needs to have non-cyclical scalability.

After that, one needs to see if one is able to pick up stock of the particular company at a decent discount to its actual value. If not, then the investor earmarks the company as a prospective investment candidate, and waits for circumstances to allow him or her to pick up the stock at a discount.

There are number-crunching investors too, who use cash-flow, cash allocation and other balance-sheet details to gauge whether a coveted company with an expensive earnings multiple can still be picked up. For example, such growth-based investors would not have problems picking up a company like Tata Global Beverages at an earnings multiple of 28, because for them, Tata Global’s balance-sheet projects future earnings that will soon lessen the current multiple to below sector average, for example.

Value-based investors like to buy really cheap. Growth-based investors don’t mind spending an extra buck where they see growth. Value-based investors buy upon the prospect of growth. Growth-based investors buy upon actual growth.

The trader doesn’t bother with fundamentals. He or she wants a management to be flashy, with lots of media hype. That’s how the trader will get volatility. The scrips that the trader tracks will rise and fall big, and that’s sugar and honey for the trader, because he or she will trade them both ways, up and down. Most of the scrips that the trader tracks have lousy fundamentals. They’ve caught the public’s attention, and the masses have sprung upon them, causing them to generate large spikes and crashes. That’s exactly what the trader needs.

So, how does a trader track these scrips? Well, he or she uses charts. Specifically, price versus time charts. The trader doesn’t need to do much here. There’s no manual plotting involved. I mean, this is 2012, almost 2013, and we stand upon the shoulders of giants, if I’m allowed to borrow that quote. Market data is downloaded from the data-provider, via the internet and onto one’s computer, and one’s charting software uses the data to spit out charts. These charts can be modified to the nth degree, and transformed into that particular form which one finds convenient for viewing. Modern charting software is very versatile. What exactly is the trader looking for in these charts?

Technicals – the nitty-gritty that emerges upon close chart scrutiny.

How does price behave with regard to time?

What is the slope of a fall, or the gradient of a rise? What’s the momentum like?

What patterns are emerging?

How many people are latching on? What’s the volume like?

There are hundreds of chart-studies that can be performed on a chart. Some are named after their creators, like Bollinger bands. Others have a mathematical name, like stochastics. Names get sophisticated too, like Williams %R, Parabolic SAR and Andrew’s Pitchfork. There’s no end to chart  studies. One can look for and at Elliott Waves. Or, one can gauge a fall, using Fibonacci Retracement. One can use momentum to set targets. One can see where the public supports a stock, or where it supplies the stock, causing resistance. One can join points on a chart to form a trendline. The chart’s bars / candle-sticks will give an idea about existing volatility. Trading strategy can be formulated after studying these and many more factors.

Where do stops need to be set? Where does one enter? Exit? All these questions and more are answered after going through the technicals that a chart is exhibiting.

One needs to adhere to a couple of logical studies, and then move on. One shouldn’t get too caught up in the world of studies, since the scrip will still manage to behave in a peculiar fashion, despite all the studies in the world. If the markets were predictable, we’d all be millionaires.

How does the trader decide upon which scrips to trade? I mean, today’s exchanges have five to ten thousand scrips that quote.

Simple. Scans.

The trader has a set of scan criteria. He or she feeds these into the charting software, and starts the scan. Within five minutes, the software spits out fifty odd tradable scrips as per the scan criteria. The trader quickly goes through all fifty charts, and selects five to six scrips that he or she finds best to trade on a particular day. Within all of fifteen minutes, the trader has singled out his or her trading scrips.

Do you now see how different both games are?

I’m glad you do!

🙂

Can We Please Get This One Basic Thing Right?

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Pop-quiz, people – how many of us know the basic difference between investing and trading?

The logical follow-up question would be – why is it so important that one is aware of this difference?

When you buy into deep value cheaply, you are investing. Your idea is to sell high, after everyone else discovers the value which you saw, and acted upon, before everyone.

When you’re not getting deep value, and you still buy – high – you are trading. Your idea is to sell even higher, to the next idiot standing, and to get out before becoming the last pig holding the red-hot scrip, which would by now have become so hot, that no one else would want to take it off you.

The above two paras need to be understood thoroughly.

Why?

So that you don’t get confused while managing a long-term portfolio. Many of us actually start trading with it. Mistake.

Also, so that you don’t start treating your trades as investments. Even bigger mistake.

You see, investing and trading both involve diametrically opposite strategies. What’s good for the goose is poison for the gander. And vice-versa.

For example, while trading, you do not average down. Period. Averaging down in a trade is like committing hara-kiri. What if the scrip goes down further? How big a notional loss will you sit upon, as a trader? Don’t ignore the mental tension being caused. The thumb rule is, that a scrip can refuse to turn in your direction longer than you can remain solvent, so if you’re leveraged, get the hell out even faster. If you’re not leveraged, still get the hell out and put the money pulled out into a new trade. Have some stamina left for the new trade. Don’t subject yourself to anguish by sitting on a huge notional loss. Just move to the next trade. Something or the other will move in your direction.

On the other hand, a seasoned investor has no problems averaging down. He or she has researched his or her scrip well, is seeing  deep-value as clearly as anything, is acting with long-term conviction, and is following a staggered buying strategy. If on the second, third or fourth buy the stock is available cheaper, the seasoned investor will feel that he or she is getting the stock at an even bigger discount, and will go for it.

Then, you invest with money you don’t need for the next two to three years. If you don’t have funds to spare for so long, you don’t invest …

… but nobody’s going to stop you from trading with funds you don’t need for the next two to three months. Of course you’re trading with a strict stop-loss with a clear-cut numerical value. Furthermore, you’ve also set your bail-out level. If your total loss exceeds a certain percentage, you’re absolutely gonna stop trading for the next two to three months, and are probably gonna get an extra part-time job to earn back the lost funds, so that your financial planning for the coming months doesn’t go awry. Yeah, while trading, you’ve got your worst-case strategies sorted out.

The investor doesn’t look at a stop-loss number. He or she is happy if he or she continues to see deep-value, or even value. When the investor fails to see value, it’s like a bail-out signal, and the investor exits. For example, Mr. Rakesh Jhunjhunwala continues to see growth-based value in Titan Industries at 42 times earnings, and Titan constitutes about 30% of his billion dollar portfolio. On the other hand, Mr. Warren Buffett could well decide to dump Goldman Sachs at 11 – 12 times earnings if he were to consider it over-valued.

Then there’s taxes.

In India, short-term capital gains tax amounts to 15%  of the profits. Losses can be carried forward for eight years, and within that time, they must be written off against profits. As a trader, if you buy stock and then sell it within one year, you must pay short term capital gains tax. Investors have it good here. Long-term capital gains tax is nil (!!). Also, all the dividends you receive are tax-free for you.

Of course we are not going to forget brokerage.

Traders are brokerage-generating dynamos. Investors hardly take a hit here.

What about the paper-work?

An active trader generates lots of paper-work, which means head-aches for the accountant. Of course the accountant must be hired and paid for, and is not going to suffer the headaches for free.

Investing involves much lesser action, and its paper-work can easily be managed on your own, without any head-aches.

Lastly, we come to frame of mind.

Sheer activity knocks the wind out of the average trader. He or she has problems enjoying other portions of life, because stamina is invariably low. Tomorrow is another trading day, and one needs to prepare for it. Mind is full of tension. Sleep is bad. These are some of the pitfalls that the trader has to iron out of his or her life. It is very possible to do so. One can trade and lead a happy family life. This status is not easy to achieve, though, and involves mental training and discipline.

The average investor who is heavily invested can barely sleep too, during a market down-turn. The mind constantly wanders towards the mayhem being inflicted upon the portfolio. An investor needs to learn to buy with margin of safety, which makes sitting possible. An investor needs to learn to sit. The investor should not be more heavily invested than his or her sleep-threshold. The investor’s portfolio should not be on the investor’s mind all day. It is ideal if the investor does not follow the market in real-time. One can be heavily invested and still lead a happy family life, even during a market down-turn, if one has bought with safety and has even saved buying power for such cheaper times. This status is not easy to achieve either. To have cash when cash is king – that’s the name of the game.

I’m not saying that investing is better than trading, or that trading is better than investing.

Discover what’s good for you.

Many do both. I certainly do both.

If you want to do both, make sure you have segregated portfolios.

Your software should be in a position to make you look at only your trading stocks, or only your investing stocks at one time, in one snapshot. You don’t even need separate holding accounts; your desktop software can sort out the segregation for you.

That’s all it takes to do both – proper segregation – on your computer and in your mind.

Why Emergency Fund?

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Why do you wear a seat-belt while driving?

Why do you purchase medical insurance?

Why does one carry two parachutes while jumping off a plane?

Why do you keep your spouse happy?

So you can live in peace, right?

Peace of mind – so important…

Without peace of mind, market decisions are warped. Disturbing factors cause you to take wrong decisions.

Once faced with a market decision, it is extremely easy to go wrong. There are many telling you what to do. Some have agendas, others speak wthout an agenda, for the sake of speaking. Topping that, Mrs. Market starts playing tricks on you. She’s almost always catching you on the wrong foot. You needs to be mentally alert to identify your initial error and correct it as per your outlined strategy. If your mind-control is compromised, you step deeper into the delusive web of Mrs. Market by not being able to identify your initial error, and then the error can get bigger, and bigger, and even bigger, till it has the capability to consume you.

That’s why emergency fund!

You are not bigger than Mrs. Market. No one is bigger than Mrs. Market. You might start thinking you are, because of a few successes. As a result, you might start to play bigger. Over-confidence will first cause you to make a small mistake. Because you will not have identified the mistake as a mistake, owing to delusional conditions, the small mistake might get bigger and bigger, till it becomes bigger than you, and your market career is over.

That day, your emergency fund will feed your family.

So, firstly, make sure that an emergency fund exists for you.

It needs to be accessible, i.e. liquid.

It needs to be sufficiently large.

Its contents should be safely parked.

If it is generating some income of itself, even better, but the emergency fund should not be locked-in. If it is locked-in, you should be able to access it in a maximum of 24 hours, even if you need to pay a small monetary penalty for full and irreversible access.

Your spouse, who you’ve kept happy, should know about the emergency fund, and how to access its contents. If you’ve not kept him or her happy, he or she might access this fund anyhow, and blow it up beforehand. So, keep him or her happy and in a responsible state of mind. It is possible that he or she is just not interested in finance, right, so then what do you do? Wait for your child to grow up, wishing that he or she has an interest in finance! Anyways, someone you trust should know how to access the emergency fund. If nothing else, write out all details in a file, and inform the person you trust of the file’s existence.

Why am I being so extreme about all this?

I’m big on safety. I don’t like seeing a market player blowing up, because I wouldn’t want that to happen to myself. Have you been to a circus?

The acrobats do have a safety line, don’t they? I mean, they practice all their lives, and pull of the most amazing stunts, again and again, day after day, but at the back of their mind, they know it’s over if they make just one mistake. Unless they have a safety line. If and when a mistake occurs, their safety line will save them. The existence of a safety line allows them to perform with peace of mind, and perform well.

It is exactly like that in the markets. One big mistake, and it’s all over.

Unless there’s an emergency fund.

It’ll allow you to survive, recuperate, and get back on track. When you’re back, you’ll most definitely not repeat the big mistake you made. Also, the first thing you’ll do is regenerate the emergency fund, before you get back to proper market action.

Here’s wishing that you never need to access your emergency fund, but also wishing that it exists in the first place.

Here’s wishing that its presence gives you the necessary peace of mind to perform better.

A Tool By The Name of “Barrier”

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Come into some money?

Just don’t say you’re going to spend it all.

Have the decency to at least save something.

And all of a sudden, our focus turns to the portion you’ve managed to save.

If you don’t fetch out your rule-book now, you’ll probably bungle up with whatever’s left too.

Have some discipline in life, pal.

The first thing you want to do is to set a barrier.

Barrier? Huh? What kind of barrier?

And why?

The barrier will cut off immediate and direct access to your saved funds. You’ll get time to think, when hit by the whim and fancy to spend your funds.

For example, a barrier can be constructed by simply putting your funds in a money-market scheme. With that, you’ll have put 18 hours between you and access, because even the best of money market schemes take at least 18 hours to transfer your funds back into your bank account.

Why am I so against spending, you ask?

Well, I’m not.

Here, we are focusing on the portion that you’ve managed to save.

Without savings, there’s nothing. There can be no talk about an investment corpus, if there are no savings. Something cannot grow out of nothing. For your money to grow, a base corpus needs to exist first.

Then, your basic corpus needs a growth strategy.

If you’ve chalked out your strategy already, great, go ahead and implement it.

You might find, that the implemetation opportunities you thought about are not there yet.

Appropriately, your corpus will wait for these opportunities in a safe money market fund. Here, it is totally fine to accept a low return as long as you are liquid when the opportunity comes. There is no point blocking your money in lieu of a slightly higher return, only to be illiquid when your investment opportunity comes along. Thus, you’ve used your barrier to park your funds. Well done!

Primarily, this barrier analogy is for these who don’t have a strategy. These individuals leave themselves open to be swept away into spending all their money. That’s why such individuals need a barrier.

An online 7-day lock-in fixed deposit can be a barrier.

A stingy spouse can be a barrier.

Use your imagination, people, and you’ll come up with a (safe) barrier. All the best! 🙂

Power of Compounding II – The Curious Case of Switzerland

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What comes to mind when one thinks of Switzerland?

– Blood Money – world’s haven for,

– “Neutralness” – has never fought a war in modern times,

– Beauty – it is God’s own country, with its mountains, meadows, valleys, lakes, trails…,

– Discipline – blessed with the works, punctuality, law and order, you name it,

– Technological supremacy – for example their watch-technology, or their advances in heavy mechanical engineering,

– Culinary supremacy – as in their chocolates, or for that matter their herbal know-how, superior quality of their milk, and of course, their cheese,

– Love for their country – the Swiss really look after their country, are loyal to it, and would probably die for it willingly.

Only the first factor has a negative sound.

Well, they do provide a safe-haven. I mean, look at all the other factors. People feel that their money’s safe in a swiss bank. You can’t blame a country for being a safe country.

Most of the world is not safe today. So, most of the world’s money flows to locations that are considered safe. A good percentage of the world’s money is blood money, but that’s how it is. When foreign funds flow into a country, a country doesn’t ask questions. Do we in India ask questions? No. For all we know, it is Mafia money flowing into our country, inflating our markets. Nobody cares as long as it is coming in.

When foreign funds flow into a country excessively, as is the case with Switzerland, such a country can dictate the interest-rate it pays out for such funds. For many, many decades, Swiss banks have been in demand because of the safe-haven quality of their country, and the interest-rate doled out is a pittance, something like 0.5 % or perhaps 1% per annum, something in that range. I could be making a mistake of an odd 1 % here or there, but, you see, people don’t store their money in Switzerland so that it accumulates to an even bigger amount. They store it there so that the principal stays safe. Switzerland doesn’t participate in wars. Thus, wealth is not destroyed. In fact, during wars elsewhere, fund-flow towards safe-havens heightens.

And that’s the game. Almost unlimited inflow, pittance of a payout, loan the money further on 6%, 7%, 8%, huge differential, year upon year, decade upon decade, humungous compounding, enough to spark-off, inculcate and fully support massive all-round development – couple this with all the other factors given above about Switzerland, and you have a hugely positive n-th loop. A hugely positive n-th loop is the exact opposite of a hugely negative vicious cycle. Switzerland sets the framework for the all-round blossoming of life, and the inflow provides lubrication and fuels development. After a while, they don’t depend upon the inflow anymore. In fact, the Swiss were probably self-sufficent even before the inflow began. That’s how they were able to provide a stable system. The inflow is just a bonus. Due to the power of its compounding, all the other diamond qualities of CH sparkle even more brightly.

Living in India, with its legacy of corrupt leaders who have siphoned off most of our wealth towards safe-havens, how should one react?

It is not the fault of the safe-haven. We need to evolve and make our own citizens feel comfortable with keeping their funds here. Our system needs to provide that safety.

Only then will the funds stay here. If our funds are not staying in our own country, it is our own fault.

Going All-in Against Mrs. Market

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Yeah, yeah, I’ve been there.

And it backfired.

Luckily, my stack-size in those days was small. That’s the good part. The shocking bit was, that back then, I had defined my stack-size as my networth. Biggest mistake I’ve made till date in my market-career, and I was very lucky to escape relatively unhurt.

Wait a minute, why is all this poker terminology being used here, to describe action in the world of applied finance?

Well, poker and market action have so much in common. Specifically, No-Limit Hold-’em is deeply related to Mrs. Market. We’re talking about the cash-game, not tournament poker. It’s as if Hold-’em is telling Mrs. Market (with due respect to Madonna):

i’ve got the moves baby
u got the motion
if we got together
we’d be causing a commotion

A no-limit hold-’em hand is like one trade. Playing 20-50 hands a day is excellent market practice. You’ve got thousands of games available to you online, round the clock, and most of these are with play money. Even though the “line” is missing here because of no money on the line, this is a no-cost avenue for trade practice, and it’s entertaining to boot.

Back to stack-size? What is stack-size, exactly?

Well, your stack size is the sum of all your chips on the table. You play the game with your stack, and on the basis of your stack-size. The first thing you need to do before there’s any market action is to define your stack-size.

A healthy stack-size is one that allows you to play your game in a tension-free manner. My definition, you ask? Well, I’d start the game with a stack-size that’s no more than 5% of my networth. Segregate this amount in an account which is separate from the rest of your networth, and trade from this segregated account. That’s the wiser version of me speaking. Don’t be like the stupid version of yours truly by defining your entire networth as your stack-size.

In this 5% scenario, you have 20 opportunities to reload. It’s not going to come to that, because even if a couple of your all-in bets go bust, you will eventually catch some big market moves if your technical research is sound and if you move all-in when chances of winning are high.

Wait patiently for a good hand. Then move. One doesn’t just move all-in upon seeing one’s hole-cards. If these are strong, like pocket aces, or picture pocket pairs, one bets out a decent amount to build up the pot. Similarly, if a promising trade appears, and the underlying scrip breaks past a crucial resistance, pick up a decent portion of the scrip. Next, wait for the flop (further market action) to give you more information. Have you made a set on the flop? Right, then bet more, another decent amount, but not enough to commit you fully to the pot. Then comes the turn. The scrip continues to move in your direction. You’ve made quads, and you’re holding the nuts. Now you can commit yourself fully to the pot and move all-in. Or, you can do so on the river, checking on the turn to disguise your hand and to allow others to catch up with your nuts somewhat, so that they are able to fire some more bets into the pot on the river. Your quads win you a big pot. You fired all-in when the scrip had shown its true colours, when winning percentages were high. You exhibited patience before pot-commitment. You allowed others to fire up the pot (scrip) further, and you deservedly caught a big market move. Just get the exit right, i.e. somewhere around the peak, and you’re looking at an ideal trade strategy already, from entry to trade management to exit.

Fold your weak hands. If something’s not working out, give it up cheaply. Ten small losses against a mega-win is enough to cover you and then some.

Often, a promising trade just doesn’t take off after you enter. The underlying might even start to move below your entry price after having been up substantially. You had great hole cards, but didn’t catch a piece of the flop, and now there are two over-cards staring at you from the flop. Give up your trade. Muck your hand.

At other times, you move all-in and the underlying scrip tanks big against you in a matter of hours. Before you can let your trade go, you’re already down big. You’ve suffered a bad beat, where the percentages to win were in your favour, but the turn-out of events still caused the trade to go against you. Happens. That’s poker.

Welcome to the world of trading. Pick yourself up. Dig out another stack from your networth. Don’t allow the bad beat to affect your future trades. If you are thinking about your bad beat, leave the table till you are fresh and can focus on the current trade at hand.

And then, give the current trade at hand the best you’ve got.

When Cash is King

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I don’t like crowds.

The last thing I ever want to do is to conform to crowd behaviour.

That’s one goal defined.

What does this mean?

Very clearly, for starters, it means singing one’s own tune, i.e. defining one’s own path.

It also means not listening to anyone. That requires mental strength, and the power to resist. Very tough.

In life, generally, one likes to be in tandem with the Joneses. And then, smart cookies that we are, we like to go one up on the Joneses, which would be the cue for the Joneses to catch up and then overtake us. Hypothetically, this is how the Joneses and the Naths could blow up all their cash.

It doesn’t stop there. To keep up, the average citizen doesn’t think twice before leaping into debt.

Bottomline is, when cash is king, hardly anybody has cash. In fact, most people owe money at that time.

This is the age of black swans. Crisis after crisis, then a bit of recovery, then another crisis, then some recovery, followed by a mega-crisis.

When a master-blaster crisis ensues, cash becomes king. Quality stuff on the Street starts to sell so cheap, that one needs to pinch oneself to believe the selling prices. Margins of safety are unprecedented. Now’s the time one can salt away a part of one’s cash in Equity, for the long-term.

That’s if one has cash to spare. This is report card time. How have you done in your REAL investment exam? Have you learnt to sit on cash? Have you learnt to buy with margin of safety? The Street doesn’t care for your college degree, in fact, it vomits on your college degree. Your college degree has no value on the Street, it’s just a piece of paper.

Learning on the Street happens everyday, with every move, every investment, every trade, every observation. Unless and until your own money is on the line, this learning is ineffective.

Get real, wake up, so that when cash is king, you feel like an emperor!

What are We, Really?

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One bout of torrential rainfall and our infrastructure comes to a stand-still.

What are we, really?

Is India a golden investment?

Not with the current state of governance.

Is India an investment?

Yes, but only at single-digit price to earnings ratios.

Why?

Because while investing in India, one needs to factor in very bad governance, terrorism, and fragile infrastructure. That’s why the margin of safety required is huge.

Is India a good trade?

Yes.

Why?

Because of the pull and push between the shining private sector versus the apathetic government sector. This contrast causes big moves, both up and down. Ideal for trading.

So how should one play India?

Again, up to you. Invest in it at single digit PEs. Cash out when PEs hit the early 20s. Or, just sheer trade it. Suit yourself.

Crowds Eventually Start Behaving in a Deluded Manner

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We’re human beings.

The majority of us likes forming a crowd.

Our crowd-behaviour eventually goes warped. History has shown this time and again.

In the market-place, I make it a point to identify crowds. The biggest money is to be made by capitalizing upon the folly of a crowd. That’s why.

So first let’s gauge very broadly, what the main aspects of market-study are, and then let’s see where crowd-behaviour fits in.

Market-study encompasses three broad areas. These are:

1). Fundamentals,
2). Technicals and
3). Sentiment.

You guessed it, crowd behaviour falls under “Sentiment”. Well, sentiment can knock the living daylights out of the best of “Fundamentals”. And, sentiment makes “Technicals”. Thus, for me, the most important factor while understanding market moves is sentiment.

A stock can exhibit the choiciest of fundamentals. Yet, if a crowd goes delusional, it can drive down the price of even such a stock for longer than we can remain solvent. Let’s write this across our foreheads: Delusional Crowds can Maraude Fundamentals.

Since we are now writing on our foreheads, let’s write another thing: Delusional Crowds can cause Over-Bought or Over-Sold conditions to Exist for longer than we can remain Solvent. There go the technicals.

A crowd thinks in a collective. All that’s required is a virus to infect the collective. A virus doesn’t have to be something physical. It can even be an idea. The space that we exist in is laden with disease-causing energies. Once a crowd latches on to a virus-like idea, its behaviour goes delusional.

Here are some examples of such behaviour. At the peak of the dot-com boom, in March 2000, a crowd of rich farmers from the surrounding villages walks into a friend’s office. They are carrying bags of cash. They tell my friend that they want to buy something called “shares”. They ask where these can be purchased, and if they are heavy (!). Since they are carrying their life-savings with them in cash, and plan to spend everything on this purchase of “shares”, they want to also effetively organize the transport of the “shares” to their homes in the villages. Thus they want to know if “shares” are heavy to transport!

In the aftermath of the dot-com bust, Pentasoft is down more than 90% from its peak. I think this legend is from 2001. A crowd of rich businessmen collects the equivalent of 20 million USD and buys the down-trodden shares with all of the money. The scrip goes down to zilch and today, one’s not even able to find a quote for it.

In the 17th century, people actually spend more than the price of a house for the purchase of one TULIP, for God’s sake.

You get the drift.

The current crowd is building around Gold. It’s behaviour as of now is still rational. In due course, it has high chances of going irrational.

Whenever that happens, we’ll definitely be able to see the signs, because both our eyes are OPEN.

Understanding Loss and Reacting to it in a Winning Manner

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In the world of trading, we deal with loss everyday.

We have no option but to deal with it.

If we want our performance to improve, we need to deal with it in a winning manner.

What is loss? I mean, apart from its monetary ramifications…

A loss has the propensity to suck the living daylights out of you.

That’s if you allow it to.

You see, in the world of trading, losses have the propensity to grow.

You need to cut them when they are still bearable. Period.

If you don’t, they can become unbearable.

You then still have the option of cutting the unbearable loss as opposed to letting the loss eat into your gut and cause insolvency. Choice is yours. I’ve seen it happening with my own eyes.

You see, losses not only suck out money, they also suck out emotional energy from your system. Your mind loses focus, and instead of concentrating on your A-game, your mind focuses on the loss. The result is that your A-game becomes a B- or a C-game. Unacceptable.

Health deteriorates and one is snappy around the family. Totally unacceptable. Just cut the loss, stupid.

In FY ’08 – ’09, my senior partners walked into my office. I was being consulted, hurrah, a winning moment by itself for me.

Our company was entered into a derivative USD hedge at the time. The trade had turned sour, and was showing a loss of half a million USD. I was being asked what to do.

In a situation like this, a trader does not dilly-dally. I advised my senior parners strongly to cut the loss as it stood, no ifs, and no buts. That’s what we did.

Two other companies in our town were involved in a similar hedge. They chose not to cut their losses at this stage, but to hope, pray and wait for a recovery.

Well, recovery did happen ultimately. This was that swing when the USD first went up to INR 38 and then down all the way to INR 52.50. Before recovery occured, let’s see what else happened.

One company declared insolvency, because it could not repay the 22 milllion USD loss in the hedge, because that’s the amount the loss had ballooned to at a later stage, before recovery even started. The other company, I believe, settled its losses at 25 million USD, and enjoys a cash-strapped existence today.

So that’s what. My training as a small-time trader came in handy, and I was able to help our family run export business in a major way.

This was also a big test for me. It showed me that I had understood loss as a trader, and was able to react to it in a winning manner.

And that’s the prequisite required to understanding winning and reacting to it like a champion. More on that when I’ve mastered this myself!

One More Lollipop

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And another lollipop emerges from the stables of Bernanke et al.

Though this particular lollipop is stimulus-flavoured too, it is packaged a bit differently, in a “low interest rate regime till mid 2013” manner. This old-wine-new-bottle packaging is making it taste good to the public. A psychological distortion of reality? Yes.

The last lure, i.e. the actual stimulus lollipop, had stopped having its usual effect of doing away with panic. If you have the same lollipop ten times in a row, it starts tasting stale.

How many lollipops can one possibly have up one’s sleeve? How is one able to fool the public for soooo long? Is the public totally low IQ?

What do ultra-low interest rates mean?

Well, they don’t encourage you to save. You’d rather put your money in more speculative ventures that promise to yield more. Low interest rates thus create liquidity in the market and suitable policies push this liquidity towards speculation and spending. This in turn fuels markets and consumerism. The US financial think-tank seems to think that this formula is going to get them out of the woods.

When markets are fueled well enough with liquidity, investment banks make eye-catching short-term trading profits. Their quarterly balance sheets look good, because the short-term trading profits hide the lack of fundamentals (savings) and the non-performing assets. The public is made to believe that their economy is doing well because their large banks have performed “well”.

Question is: Where are the fundamentals? Long-term growth without the cushion of savings??? No excess fat on one’s body to cushion one from shocks??? You know it, and I know it, and so does the black swan, whose population has reached a record high. This is the age of crises and shocks. If you’re not adequately cushioned, the next shock might get you. And the next quake will occur soon enough, because this era has defined itself as the age of shocks. That doesn’t need to be proven anymore.

Thing is, El Helicoptro Ben Bernanke isn’t bothered about savings presently. His primary concern is to revive a failed / dying economy. He’s willing to try anything to achieve this, however drastic the method might be. And he’s chosen to enhance consumerism. It’s a short-term remedy. Unfortunately, it makes the long-term picture even worse.

The flip side of consumer spending gone overboard dulls the mind into believing that one can spend as if there’s no tomorrow, even if one has to borrow after spending one’s own excess cash. This might fuel an economy over the short-term, but over the long-term, the burgeoning debt will make the system implode.

The US economy is not changing its course owing to fear that if it does, it might face the inevitable right away. It has chosen a path of postponing the inevitable. Over the course of time between now and looming debt-implosion, more and more of the world is getting entangled into this web, since globalization is in and decoupling is out. This is what pilots of the US economy are banking upon, that if the entire world might be devastated by a US debt implosion, the entire world might choose to live with the current financial hierarchy for the longest time rather than reject it right now.

If nothing else, what this one more lollipop does do, is that it buys a little more time to breathe. That’s it, nothing more.

The Towering Value of Decisive Action

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Decisive action can’t just come outta nowhere.

There has to be a build-up to it, a kinda revving up of engines and stuff.

Point is, this category of action generates a lot of force, and is required to do away with situations that cause panic. As in not let a situation become panic-causing to you. As in the current situation. As in the Dow falling 512 points last night. Will they have a name for it, Black Thursday perhaps? I don’t think so. Because I don’t think we’re done just yet. Situation might get blacker.

Back in December 2007, there were those who were taking decisive action, i.e. they were booking profits. These were people who had been taught by the market to do so. Unfortunately, I didn’t belong to this category at that time. On the contrary, I was busy topping up my portfolio with more investments at the time.

Mayhem in the market should teach you for the next time. If it doesn’t, there’s something wrong with you.

By the fall of 2008, the new market players of the millenium had gone through with their first piece of decisive action – an oath to never be in a situation again that causes them to panic or to spend another sleepless night. The events of the first nine months of 2008 were more that enough to drive them to this.

An important part of peace in the market is hedging. Serious players chose Gold as their hedge, and started building up large positions in Gold. The world around them was screaming “how could they?” Gold was already touching a high back then. They possessed the spine to take this decisive action, because 2008 had taught them to hedge. That’s how they could.

Many worked their way towards zero US exposure. When the cracks in the Euro appeared in 2009-2010, they worked their way towards zero Europe exposure. People around them were screaming that the USD would continue forever as the world currency, and that Europe was under-valued and thus a screaming buy. All to no avail. These decisive players had started to mistrust Alan Greenspan from the moment he started urging his people to take loans against their homes and to put the borrowed money in the market. For me, the icing on the cake or the snapping moment was when Ben Bernanke had the cheek to announce more stimulus one day after the “debt deal”. That’s when I gave up on the US market. Very late, I admit. Yeah, yeah, I’m a real slow learner.

Then, serious new players started to buy on lows. And they got some big-time lows, especially the ones of October 2008 and March 2009. The world around them was screaming “how could they?” and that “we weren’t done yet” and that “economies would get bleaker”. They had the courage to buy. The market had taught them to.

And, finally, they started succumbing lesser and lesser to greed. They would finally book profits. They learnt to sit on cash for long periods of time. They learnt not to listen to tips. They learnt to have their own market outlook and to be self-reliant as far as the chalking of their own path was concerned. They decoupled themselves from their bankers and their market advisors. They got tech-savvy to a point when they could control their entire market operation from their laptops. Basically, they took control.

And, they slept peacefully last night.

Face-Off

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Markets are about returns.

Just as many roads lead to Rome, so do multiple paths lead to returns.

The two basic approaches in this game are investing and trading. We are keeping things basic, and are not even going to talk about scalping, arbitrage etc. We are looking at paths taken by most players.

So who has got it better, the investor or the trader?

Markets have this characteristic of collapsing. Unless the investor has bought with a decent margin of safety, he or she can be sitting on a huge loss. This can lead to irritability, sleepless nights, ill-health and family problems. An investor needs to slay these demons before-hand. Allowed to grow, these demons can wreck havoc.

The nimble trader on the other hand treads lightly. Technicals alert him or her well before a collapse, and when the collapse comes, the trader is ideally already fully in cash. Such a trader has no professional reason for a sleepless night.

However, when the bulls roar, the investor’s entire portfolio adds to the roar, and very soon the investor is sitting on huge gains. The trader on the other hands builds up positions slowly, and might miss a large portion of the up-move during the staggered entry process. To be fair, the investor’s exposure (risk) has been large in comparison to the trader, and thus the reward in good times will be proportionately large too. Given a choice, I’d personally take the comfortable nights throughout the year.

Then there’s active and passive playing. Investing is a passive play. One doesn’t need to man one’s portfolio on a daily basis, and can focus on other things instead. Trading, on the other hand, is very much an active play, and needs to be attended to on a daily basis.

So, unless the investor likes action, this is a favourable scenario. Unfortunately, the majority of long-term investors mess up their long-term portfolios owing to the need for action.

Trading can lead to action overload. A bad day’s result can cause mood swings. The trader needs to be in control of emotional machinery and ready to withstand a pre-determined level of loss. Unfortunately, most traders fail badly in the emotional and stop-loss department. On the whole, I feel this particular round is won the by the investor. So, it’s 1 round each.

The last round in today’s discussion is about life-style. The bored investor can either use the spare time for constructive activities, which is a great scenario, or for useless ones, like surfing adult sites. The point I’m trying to make is that a bored investor is a prime candidate for sowing wild oats.

The sensible trader uses non-market hours to finish research for the next day and then to give the mind and body relaxation and rest. However, all the action makes most traders less sensible and more flambuoyant, and equally likely candidates for sowing wild-oats during non-market hours. I think this round is a tie.

So who’s got it better, the trader or the investor?

This is actually a trick question.

What’s the proper answer?

The answer is that YOU have got it better if you fit into the profile of a sensible trader or a balanced investor, and that YOU have got it bad if you fit into the profile of a reckless / flambuoyant trader or a bored and thus trigger-happy investor.

Both investing and trading are about YOU.

You need to see how good or bad YOU have it, and forget about the rest.

Street’s got the D-word

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There seems to be an X-word in every avenue of life.

The Street has its own – the D-word.

It spells D-e-r-i-v-a-t-i-v-e-s.

Whatever reasons there are for a crisis to develop become secondary at the peak of the crisis, because derivatives take over. The crisis is driven to the nth level because of massive institutional leveraging in derivatives in the direction the crisis is unfolding. Recipe for disaster.

The human instinct is to maximize profit, irrespective of any consequences. When masses start shorting the stock of a company that’s already in trouble, its stock price can well go down to zero (and lead to bankruptcy), even if the company’s mistakes are not deserving of such a price / destiny.

Similarly, when masses start going long the futures of a company’s stock, the resulting stock price overshoots fair-value in a major way. Then come along some fools and buy the scrip at an extreme over-valuation. They are the ones that get hammered.

That’s the way this game has unfolded, time and again.

Does it need to be this way for you?

No.

Firstly, as a long-term investor, don’t buy into over-valuation. Make this a thumb rule. Control your animal instinct that wants a piece of the action. Leave the action to the traders. You need to buy into under-valuation. Period.

Unfortunately, most long-term investors (myself included) miss action. Then they fool around with their long-term holdings to get some, and in the process mess up their big game.

The animal instinct in the long-term investor can be channelized and thus harnessed. One way to get action is to play the D-game. Of course with rules. The benefit can be huge. Action focuses elsewhere and doesn’t mess up your big game.

So, play the D-game if you wish, but play it small.

Secondly, be aware that you’re only doing this to take care of the action-instinct. Any profits are a bonus.

Thirdly, keep the D-game cordoned off from long-term investment strategies. No mixing, even on a sub-conscious level.

Then, take stop-losses. DO NOT ignore them.

Also, when anything is disturbing you, DO NOT play the D-game. It DOES NOT matter if you are out of the D-game for months. Remember, this is your small game. What matters is your big game.

Categorically DO NOT listen to tips.

If you are down a pre-defined level within a month, press STOP for the rest of the month.

Make your own rules for yourself. To give you some kind of a guide-line, I’ve listed some of mine above.

A D-game played with proper rules can even yield bombastic profits. 95% lose the D-game. 5% win. Derivatives are a zero-sum play-out. 5% of all players cash in on the losings of the other 95%.

So, play in a manner that you belong to the winning 5%.

Noose Just Tightened

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Petrol’s up 5 bucks.

This is gonna pinch the public.

Are we now clear on the fact that a beast is on the loose? And the fact that this beast has been active to hyper-active since World War I ?

This beast is called inflation. The number 1 infectious disease that inflicts modern financial society.

We are going to have to live with inflation. Period.

What is required is long-term policy-making that will minimize the affliction. That’s not happening.

Modern financial policy seeks to avoid an existence where inflation becomes hyper. That would be when food on the table costs more that a cart-load of cash. See Argentina during its currency collapse, or Germany after the first World War.

Let’s assume that human-kind is not capable of making better policies, ones that minimize (let alone eradicate) the disease. Where does that leave us?

What do we do with our money, that’s being eaten away at 8 to 9%, year upon year?

Avenues like fixed deposits pay out lesser after tax than what inflation eats away. The 100 year return in Gold has been 1% per annum compunded, after tax. Only two investment avenues have yielded more after tax than what inflation has consumed over the very long term. These are 1). Property, and 2). Equity.

The writing on the wall becomes clear. To immunize one’s money against the disease, one needs to be invested in one or both these avenues over the long-term. Both avenues come with pitfalls, where one can lose much more than what inflation eats away.

So, one first learns how to deal with the pitfalls, and perhaps one can specialize in either of these avenues, since it is not easy to focus on both.

Then, after having learnt the ropes, one can slowly start salting one’s money away.

This one’s for You, Jesse!

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Jesse Livermore – market legend.

Not with us anymore. Killed himself in a bout of depression.

Jesse’s life will be remembered. He was a pioneer, establishing the basic rules of trading for modern mankind. In the process he won many fortunes, and lost back a big part of what he won because of the hit and trial process he had to go through, to establish a basic trading map for mankind.

His was a colourful life. Pioneers, however, cannot be judged by the average person. An average human being doesn’t have the powers to comprehend the conditions under which a pioneer functions.

There were times when Jesse would swing a leveraged line worth several million dollars, and this is the first quarter of the 20th century we are talking about. He established the need and the rules for a stop-loss by losing money big time. He also won big, very big.

Jesse was the king of shorting. In the mega-crash of 1929, his unswerving short line won him a 100 million dollars. In 1907, JP Morgan (the man, not the investment firm) personally requested him to square off his shorts asap, or the US financial industry would go bankrupt. Jesse loved America, and the American way of life. He squared off his shorts.

Jesse had an eye for big market moves. He would watch a stock and get into its nervous system. Then, he would preempt its big move and would make a killing. He observed that stocks fulcrum around pivotal points, shooting up or down many notches from there within a short span of time. Making use of this insight was not enough for Jesse. He shared his knowledge with the world, so that others could benefit.

Then, another very lucrative trading insight – buying above highs – comes from Jesse. People are making serious money today in Gold and Silver for example, using this very knowledge. Others have used this strategy to their advantage by latching on to the runs of Cisco Systems, Walmart, Wipro etc. in the past. Above a high, there is no resistance, coz there is no presence of old buyers wanting to sell. Jesse was the first to recognize this.

In the early part of life, JL was impulsive. He would lose everything he made by not sticking to his own principle of stops, for example. Later, as he matured, he developed the principle of letting a winning trade run. His way of putting it was that the biggest money in the markets was made by sitting.

In his later years, Jesse started treating cash as king. When the opportunities would come, JL’s line with the bank was as deep as the pockets of Fort Knox.

I’ve shared four principles with you which Jesse Livermore actively used in his trading. These principles are priceless. I admire Jesse Livermore, and wish that he hadn’t fallen to the disease of depression.

Thanks so much, Jesse.

A Strong Case for Equity (Part 2)

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Scams bother us. We panic, and then start cashing out of our Equities.

Can we stop and reflect?

There was some Jeep scam in ’57. Then Bofors. Fodder. Harshad Mehta scam in the ’90s. Dot cum bust. This century has been chockerblock with scams.

Let’s see how some holdings have performed over all these years. Reliance, ABB, Infosys, Wipro…these companies were microcaps at some stage in their lives. The long-term holders of these shares have raked it in big-time. Wipro has been a 300,000+ bagger over the last 31 years. The other three companies have been 1000+baggers. That’s BIG.

Some of today’s microcaps will make it as big or bigger over the very long term. They will be tomorrow’s blue-chips.

All of us want to set something aside for our kids. It’s human nature. So why can’t we think of holding equity for the very long-term, especially for our children?

What makes equity so special? Behind every scrip is human capital, which, if not involved in Scamonomics, fights inflation through innovation. The power to fight inflation is not inherent in other asset classes.

So let’s think seriously about very long-term equity holding.

What remains is the criteria for stock selection. That’s a deep topic, and we’ll delve into it some other day…

Wake up Uday!

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Wake up Uday!

It’s a whole new world out there. Correction. It’s a whole new financial world out there.

Institutions Finshtitutions. As a retail investor, you have unprecedented rights today, man, so wake up. Nobody can bully you any more. And no one can sell you crap anymore. But only if you wake up to your rights and possibilities.

Gosh, look at the information flow available to you. It’s the same as to your banker, or to your financial analyst. In real time. Whooaahhh. Butterfly flutters wings in New York, you get the resulting price fluctuation on your currency live feed.

And private investment opportunities, they’re available to you now, on a chicken-shit ticket size. And you don’t have to go through any bankers for such investments, you can deal one on one with the private equity house concerned, who’ll gladly reimburse you 2% mobilization fees on your investment, because you’re doing it yourself. Man, times have changed. This is amazing.

Not so long ago, such private investments were available only upon invitation, through some hot-shot banker, for a multi-crore ticket-size. The banker cashed in on a huge deal fees. So, the more the banker sold, the more his bank account burgeoned. Thus, the banker began to sell only for the sake of selling, not for the sake of your portfolio, or for its further diversification, or what have you. Basically, the banker lost focus on you, and increased focus on himself. He didn’t care anymore if what he was selling to you was a bullshit investment. If you weren’t waking up, you were going to get slaughtered because of a weedy portfolio.

Well, you didn’t wake up in time, this time. It took a financial crisis to wake you up. But you’re awake now.

And you’re still lucky, for time is on your side. Not so for the retirees who woke up alongside of you. They don’t have any time left to win their money back and then some. Their financial game is over. And they’ve lost. Badly. Butchered.

Also, when the going gets tough, the tough get going.

The financial crisis was one thing, but there have emerged tremendous opportunities in its aftermath. People with liquidity have made a killing. Those who weren’t liquid but simply reallocated their portfolios have recuperated their losses of 2008. And those who have learnt their lessons have started to use their common-sense again while investing their money. And they’re not listening to bankers anymore.

But, alas, human nature is numan nature. People will forget 2008. There will be more financial crises. But for you, these will be opportunities. Because you will not forget 2008. Never. Because you are awake now!

Managing an Equity Portfolio

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1). Before getting into equity, pinpoint exactly your appetite for risk.

2). Buy with a margin of safety.

3). Buy with rationale.

4). Spread your buying over time.

5). Hold performance. Reward it with repeated buying, when markets are down.

6). Punish non-performance. Sell your losers when markets are up. Weed them out. Throw them away.

7). Let winners unfold. Be patient with them.

8). When a winner becomes a superstar, ride it till it shows signs of sloth and underperformance.

9). Learn to sit on cash when there’s no value or margin of safety available. VERY IMPORTANT.

10). Know your weaknesses. Be disciplined. Make mistakes, but don’t repeat them. Filter all information, using your common sense. Don’t listen to anyone. Learn to trust yourself.

11). What is your eventual goal? Identify it. I’ll share my goal with you. I would like to hold 20 multibaggers in my portfolio 20 years from now. It’s a tall order. But I’m gonna try anyways. Remember, 1 multibagger is enough to strike it big. I’ll give you 2 examples : Wipro multiplied 300,000 times between 1979 and 2006. Cisco Systems – 75,000 times in I think 12-15 years leading up to the dot-com boom and bust. Before the bust, it gave ample hints of slowing down, so one had enough time to get rid of it. Wipro still hasn’t shown signs of underperformance.

So best of luck, whatever your goals are, but please, know your goals exactly before you play.