Category Archives: Common Sense

Why Bother with Fine-Tuning?

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He eats his breakfast, but has that something on his mind. Doesn’t chew well, and since the mind is not on the food, he can forget about digesting the food well.

Later at work, something’s still bothering him. What is it?

The evening is spent with the family, but on the inside he’s still trying to pinpoint the root of his worry.

The night is restless. Couple of bad dreams. Nothing soothing about it.

Guess what?

His investment style doesn’t match his personality. The two entities are totally out of whack. His personality pulls him in one direction, but the way he’s invested his money pulls him in the other direction. He’s mentally uneasy because of this, and his investments are not going to do well in the long run, irrespective of market trend, because his opposing personality will make him take wrong decisions as far as the investment style is concerned.

Why didn’t he bother to fine-tune his personality with his investment style, and bring the two in sync?

Nobody told him to, and he was too dumb to realize it himself.

So he’s got 20% of his networth in futures, but he’s conservative on the inside. Hell.

And another 20% in penny stocks.

Make that the next 20 in small-caps.

And the next 20 in mid-caps.

The last 20 being in large-caps.

Pathetic. Obviously he’s not going to be at ease, after having put 80% of his money in relatively risky ventures, which are not in tune with his conservative nature. Till there’s a common meeting grounds between personality and investment style, this or any person who invests without taking basic nature and risk appetite into account is not going to breathe easy.

When I observe him, it gets me thinking.

What are the things that I don’t want from the markets?

Sleepless nights. A nasty visit from the tax authorities. Obsession to the point of not being able to focus on family. Deterioration of eye-sight. Losses. Low long term returns. These are the basics.

Ok, so I make a few rules for myself.

Like, for example, if an investment starts giving sleepless nights, get out of it.

Keep an account of everything. Play with clean, white money. No hanky panky, no money laundering, no nonsense. Thus any visit from the tax authorities will not turn nasty.

To keep the obsession angle out, and to keep vision intact, I can’t be day-trading. Even short-term trading requires too much market involvement. So, I need to formulate a medium to long term strategy.

Losses, well who likes losses. Thus I must be thorough in my research.

And I want high returns. The only conservative investors in History who have achieved high returns have all been focus investors, not diversified investors. Thus, I need to focus on a few areas while investing, and not diversify into many sectors.

See, it’s as simple as that. Identify your basic goals and formulate your basic strategy around these goals. And then breathe easy even when you play hard!

That Secret Ingredient called Gut-Feel

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Birds fly. And, they fly in flocks. When a flock turns, it does so in unison. There seems to be a connection between each bird in the flock. It’s as if each can feel the others in its gut. Each bird is in the “Zone”.

Heard one about a famous artist. He was asked by a rich businessman to paint a rooster for a hefty fee. A year passed. Upon no word from the artist, the businessman got fed up and went to collect the painting. Seeing the artist basking in his lawn with not a care in this world, the businessman enquired about the painting. “Oh, you’ve come to collect your rooster, is it?” asked the artist casually. He then lay out his canvas, painted the perfect rooster, and handed the painting to the businessman, who was stunned and demanded an explanation. Which is when the artist took the businessman into his huge study, the walls of which were laden with hundreds of paintings of roosters, some not so perfect, some nearing perfection, and then, some perfect. In one year’s time, the artist had ingrained the rooster to such a degree into his brush-strokes, that he could dish out the perfect rooster at will.

Remember seeing the opening ceremony of the Beijing olympics. The performing masses were one unit. Such unison was drubbed into each cell of their bodies and minds. It came from practice, practice and more practice. Mind over body.

There’s a particular order of the Samurai where one passes the Master’s final test by first being blind-folded. The Master then stands behind the disciple with a sharp dagger, which he will bring down in a swoop upon the neck of the disciple when he (the Master) pleases. The disciple has to sense his movements, whenever they happen, and has to move out of danger in time. If the disciple succeeds in doing this without injury, he or she passes this ultimate test. And, if my information is correct, all those who have been allowed to take this test by the master have passed till date.

These are a few examples of gut feel. Although logically inexplicible, there’s a mechanism common in all the examples. It is the mechanism of how gut-feel functions at levels of perfection. First, there is repeated failure, whereby there is constant practice going on. Then there is practice, and further practice. Ultimately, the process gets ingrained, and comes naturally. By intuition. That’s gut-feel.

Knowledge is mud if it is not utilized. The battle-hardened market player has been through this process. He or she has seen repeated failure. By hanging on, and learning from mistakes, ultimately, market movements start striking a chord. The overall picture emerges as a whole. After even more practice and experience of market ups and downs, the player enters into the “Zone”, where he or she feels market movements in the gut. The player in the Zone has the capacity to turn with the market.

It’s true. It happens. As surely as the above stories. I’ve seen it happening.

So, be in the market. Fail, fail, and fail again. But do so with small amounts. Then pick yourselves up. Keep hanging on, till you get the hang of things and enter the Zone. And, after you’ve entered the Zone, there’s no better time and place to up your stake.

The Pros and Cons of Digging for Gold – a just-like-that guide for the lay-person

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For starters, many have not been part of the rally in gold. And, many of these many secretly wish that they were. People want to ride a winner. It’s human nature. Before these individuals wager their life-savings on what is being touted as a winner, they need to understand the how-to and the flip-side portion. Investing is as much about human nature and psychology as it is about salting one’s money away. So, people, win half the battle of investing by attuning your investing style to fit your personality and risk-profile. One doesn’t define one’s risk profile, one discovers it over time. Anything that gives one a sleepless night is outside of one’s risk appetite. Don’t put any money in any such product. And, of course, you are not selling your family silver to get your portfolio going, nor are you putting your daughter’s education money on the line. You invest funds that are extra, i.e. funds that you don’t need over x amount of time, and you decide what this x is. Investing is about you, it’s not about fund managers or financial institutions.

Many like to see their gold in physical form. It’s like when you have a girl-friend. You want her physically around you, and not as some long-distance vibration in the ether. The flip-side is, that there is storage risk (gold, not girl-friend, silly). Gold can get stolen, pal. Also, at the time of purchase, there is contamination risk. If you buy coins, you pay about 20% premium for craftsmanship, which you totally lose out on when you try and sell the coins. And there’s tension when there’s gold lying around, just as there’s tension when there’s a girl-friend lying around…

For those who have the ability to connect to long-distance vibrations in the ether, holding gold in non-physical form is a beautiful option. No contamination risk at time of purchase. No storage risk at the end of the investor. It’s just that there’s no gold to hold onto, just a paper-certificate. If that’s ok with you, go ahead and buy into a gold ETF (exchange traded fund). In India, these are still quite illiquid, so there’s a huge bid-ask difference while buying and again while selling, causing massive slippage on both transactions, so for Indians, this is not a good option. On the plus side, the gold units are puchased in demat form and rest in your demat account until you decide to sell them, just like equity, and what’s more, you can transact online, giving you full power over your investment. Also, the unitary size is of half gram gold, so each unit is very affordable. Over time, as this avenue catches on, the illiquidity will go away. There’s a small management fee of about 1% per annum that’s deducted to compensate for storage of the actual gold and to insure it. A remote flip-side could be that if the fund-house promoting the investment is shady, they could hold spurious metal, and if a scam ensues and the fund-house goes under…….actually this has never happened, so let’s not talk about it. In an ETF investment like this, there is no leverage. If gold gains some, your investment gains a corresponding some. If gold loses some, you lose some. A 1:1 win-loss correlation to gold.

There’s another avenue which offers indirect leverage while investing in gold. We’re talking about gold mutual funds. These buy equity of gold mining companies. When gold moves x units in either direction, the NAV of such a fund moves x + y in the same direction, because the underlying gold mining companies have a huge inventory of gold in their corpus, and are also hugely hedged into the future. I’ve actually seen such an NAV jump 60% when gold had moved up 35%. Careful, same goes for the down-side. Leverage is a double-edged sword. On the plus side, if there’s a mad rush for gold, gold mining companies are going to be quoting off the charts on the upside because of this leveraged correlation. For those who are comfortable with leverage, this is a great option. In India, selling one’s gold mutual fund holding for profit within 1 year of investing can result in a 30% short-term capital gains tax though for this asset class, since the underlying assets are held overseas.

And then there are some who’d prefer to buy equity of specific gold-mining companies, not a whole mutual fund. Here, one needs to differentiate between companies holding mines which yield gold, and companies holding mines where gold has not yet been discovered or where operations will need lots of infrastructure to actually yield gold, but this is not an area for the lay-person, so let’s leave it at that.

Well, happy investing, and you’ll also need to identify whether you are comfortable putting your money on the line when an asset class is at an all-time high, or whether you prefer to wait for a dip. But that’s another discussion, for another time and another place. Bye 🙂

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.

The Difference between Investment & Speculation

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Investment is the low to medium risk art of conserving capital and protecting it against inflation, such that in the long run, capital appreciates. Speculation is the high risk art of trying to turn a small amount of money into a large amount.

Investment banks upon the power of compounding. It is an amalgamation of human, monetary and product capital, a combination that favours appreciation in the long run, not linear, but exponential appreciation, owing to the power of compounding. The key requirements are intelligence during scrip selection, patience and tolerance to allow multi-baggers to develop and blossom, and common-sense in handling one’s portfolio. Also, one needs to weed one’s portfolio at times, to remove poisonous scrips.

Speculation banks upon the power of leverage. This construct of finance is a double-edged sword. It can compound one’s profits, but also one’s losses. The speculator tries to cut losses and let profits run. This is easier said than done, because it goes against our natural instincts.

In the end, there are both successful and unsuccessful investors and speculators.

The key to deciding what line one should pursue here is a recognition of one’s own risk profile and appetite. What gives one sleepless nights? What is one’s pain threshold? How much loss can one bear without any effect on family life?

Such questions need to be answered before embarking upon either investment or speculation.