Category Archives: Cash

Street’s got the D-word

Posted on by
Reply

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

Posted on by
Reply

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!

Posted on by
Reply

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)

Posted on by
Reply

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!

Posted on by
Reply

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

Posted on by
Reply

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.