Category Archives: Common Sense

The Concept of “Sprachgefuehl”

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That’s a German word. And it’s deep.

Literally translated, “Sprachgefuehl” means “feeling for language”. In practical terms it would mean / entail achieving fluency in any language by getting a feel for its structure.

Life has a language.

Everything that makes up life has its own micro-language. All the micros add up to the macro.

Most of the time, we are stuck in the micro. We learn many micro-languages. With some, we experience difficulty. Ultimately, either we swim or we abandon the micro-cause.

Learning and expertise of these micro-languages makes up life for us as a whole. In our current multi-tasking scenario, flexibility and efficiency is required. To tackle this, there’s no better concept to implement than the concept of “Sprachgefuehl”.

Sprachgefuehl involves plunging in, as in immersing oneself into the thick of things without bothering about formal training. For a limited period, one takes in an overdoze of the micro-language. The idea is to allow one’s system to start speaking the language on auto-pilot. If there’s danger of sinking, one can always abort, but, as another German saying goes, “what doesn’t kill only toughens u up”.

The learning process is enhanced by one’s mistakes. Because of not adhering to boring, attention-deficit causing formal rules, many mistakes are made. Believe me, these very mistakes are your best teachers. The learning they impart is priceless and irreplaceable.

Why am I going on and on about this?

What does this have to do with the markets?

In fact, everything.

Sprachgefuehl involves getting into the Zone to be able to anticipate the movement and structure of a language.

Getting into the Zone is what its all about. We are able to reap profits from Mrs. Market because we are able to get into the Zone. If we lose that ability, Mrs. Market manhandles us. Period.

Sprachgefuehl keeps our instincts sharp. It’s great Zone-practice. Whatever you are doing in life, you can use this concept for entry into and proficiency at life in the Zone.

With that, any kind of market-play will also come naturally to you.

Things That Make Me Go Ufff!

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Pot-holes, potty pancakes, speed-breakers without warning, cars parked in the middle of the road…

Ghost-drivers, dangling electricity wires, open garbage piles, spiky iron-rods dangling from trucks…

Power-cuts, red-tape, policy paralysis, red-siren cars…

Politicians, their “Gandhi-mileage” fixation, mass-corruption, and highly selfish lives…

Negligence to the extent of culpable homicide, fire-brigades arriving late due to pathetic infrastructure, lack of facilities in government schools, over-flooded government hospitals…

Aid that doesn’t reach the needy, lack of development in states far away from the capital, mis-reporting of economic figures to paint good numbers, lack of political will to tackle inflation…

Spurious liquour that kills hundreds, a judicial system that makes you want to stay away, police that intimidates you instead of helping, religion that is used as a weapon…

The police-criminal nexus and profit-sharing, political rallies where “supporters” are paid to join the rally, the bullying of private organizations and non-government organizations by governmental agencies, extortion of small businesses by local government bosses…

Curriculums that cause school-going kids to become sick, no stray-animal policy imposition, lack of sewage infrastructure despite imposition of corresponding taxes, the embracing of nuclear power without possessing the precision and attitude to deal with it safely…

Traffic-cops that are fully focused on their own pockets, millions of bottle-necks that induce road-rage, a totally warped sex-ratio due to generations of male-bias in our society, the black-market in cooking-gas cyllinders…

The 440 V electric bursts that annihilate home-appliances despite surge-protection, slap-fixation by the media that makes one slap look like a million slaps, the fact that we Indians still haven’t learnt to queue up, the lack of realization by us that India is neither an oil-rich nor a water-rich nation…

Spurious everything, rotting food-grain, street-lamps burning in broad daylight, never-ending toll-tax even after an infrastructure has paid for itself…

The dizzy figures of each new corruption scam…

The speed at which an epidemic spreads owing to an overall lack of cleanliness…

A burgeoning population and zilch efforts to harness and enjoy its demographic dividend…

The gross misuse of one’s connections that one has to resort to, to beat the system and sometimes, to survive…

The lack of common-sense that prevails in our society…

These are some of the things that make me go ufff!

It’s because of many of the above-stated issues that the chances of India becoming a super-power in the near future are highly unlikely.

What happens after that depends on how well we tackle these and related matters.

Is This Blood?

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When there’s blood on the streets, that’s when you should go out and invest.

That’s an ancient proverb.

The 64 million dollar question is, IS THIS BLOOD?

I’m going to focus on India, because that’s my playground.

So ICICI Bank breached the 700 mark, did it? The 2009 low was around 250 bucks. At 700, it’s not blood. True, the banking sector is down. However, we are nowhere near blood levels. State Bank of India might have fallen around 50 % this year, but it’s still double the price of its 5 year low.

The Sensex shows an average price to earnings ratio of around 14. Remember 2008 and 2009? Average PE of about 9? Well, in my opinion, those are blood levels. These aren’t.

True, the mid-cap segment has taken a hammering. Let’s take Sintex Industries. At 75 levels, this stock has fallen big. Nevertheless, it’s still double the price of it’s 2009 low. At 98 rupees, Jain Irrigation has really fallen too. The PE ratio has come down from 35+ to around 14, and this looks attractive. Even Sintex’s sub-5 PE ratio looks very attractive, also because the company is aggressively pursuing water-purification and “green-innovation”. Agreed, attraction to invest is present, especially in the mid-cap arena, where you’re likely to find quality in management too, as opposed to the small-cap area, where this is less likely. However, to say that there’s overall mayhem here would be going too far.

The BSE small-cap index has halved since late 2010, but is again at double the 2009 low. Many small-cap stocks are bleeding badly, though. Most small-caps haven’t proven their pedigree yet. Thus, people are letting them bleed.

Then there are stocks like Karuturi Global and KS Oils, that have been hammered down to penny-stock levels. One has problems getting into such stocks, because the underlying story can be shady. With penny stocks, there’s always the danger of oblivion, i.e. they might cease to exist down the line. Such stocks need to be traded at best, with small amounts and for the short-term. In their present conditions, they are not investment-grade stocks.

The picture that emerges is that there are selective attractive bets being offered by Mrs. Market. There are good investments to be made for long-term investors, if you possess patience and holding-power. I’m short on patience, so I like to trade India. That should not deter you. If you are a long-termer, and have what it takes, well, then you are a long-termer. And this market is offering you some good bets, so be very selective and go for it, but don’t bet the farm, since we’re not seeing all-out blood on the street yet.

What Are We, Really? (Part 2)

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Negligence to the extent of culpable homicide not amounting to murder…

That’s the charge against the directors of AMRI hospital.

Papers say combustible waste was stored in the basement, which caught fire, resulting in mass carbon-monoxide poisoning through the A/C shaft, apart from the deaths due to fire.

Short cuts and lack of common-sense have become a way of life with us.

What are we, really?

A large bunch of idiot citizens? What kind of a hogwash country do we live in? Is anyone going to take India seriously for a longish period of time?

There are periods of performance, but eventually, the cracks in our system show up.

Negligence. Corruption. Apathy. Policy paralysis. Etc. etc.

What results for India is a volatile performance graph, with back to back upticks for some years in a row, till the cracks erupt. Then there are some big-time back to back downticks. India’s economic performance graph is the epitome of volatility. It is a trader’s dream.

India is not going to be a uniform ball game for a long time, till the India Inc. – Bharat divide is somewhat bridged and till the cracks are tackled intelligently and with resolve.

Till that happens, just sheer trade India, way up, way down. Trade, trade, trade. Treat India as a trade.

We live in a land of contrasts. Its political graph will thus show big contrasts, and so will its business graph.

India might not deserve to be invested in because of the above-mentioned cracks, but it definitely deserves to be traded.

In fact, it is literally screaming to be traded.

Survival Basics – Building a Baseline

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Who are you?

Do you really know that?

What’s your core reaction to stuff, let’s say market stuff?

How do you react to a crisis? Do you freak out? How much do you plan to avoid a crisis? How do you feel after hitting a home run? Do you get over-confident and start doing irresponsible things?

What happens to you when the scenario is dull? Do you get depressed? Can you take it?

If you’ve dealt with these and more of such questions, well, bully for you, because you’ve already gone about building your market baseline. And that’s a really proper / solid approach to Mrs. Market.

A baseline is a basic point of reference. It tells you how you normally react to a particular situation. It also lists the emotions you went through, and the consequences you had to suffer owing to your actions. As experience piles up, the number of situations you can refer for also increases.

So, let’s say something unusual happens in the markets. Hmmm, let’s say Greece officially goes bankrupt, and let’s say that you are net-net long, and have been caught unawares. What do you do with your positions? With all the mayhem around you, right, what do you do?

Basics of survival in the markets – in a crisis, refer to your baseline.

Your baseline takes you back to the Lehman default. You remember being net-net long, being caught unawares. You remember ignoring your stops, waiting for a rally. Futures wiped out your principal, didn’t they, because you answered margin calls and waited? You remember the long period of depression after that. Worth it? Naehhh.

So, after referring to your baseline, you don’t ignore your stops. Taking the immediate loss, you bail out of your positions. A large portion of your principal is still intact, living to fight another day.

What about euphoria? How do you deal with euphoria? A position turns into a winner, and you are sitting on a 25% profit in a few days. You are feeling really kicked, and are walking with a swagger. What do you do next?

Basics of prosperity in the markets – at the onset of euphoria, refer to your baseline.

Your baseline tells you, that your behaviour during your last big-winning trade was far from exemplary. In your euphoric state of mind, you were already imagining all the things you would buy with your notional profits. Then, you panicked at the thought of losing any of those notional profits, and you squared-off the trade, taking those profits home, only to see the scrip soar another 80%.

Right! You snap out of your euphoria because of your baseline memory. Then, you install a trigger-stop 8% below the scrip’s current market price. Good. In an effort to capture even more profits, you have put a small part of your existing profits at stake. That’s exemplary behaviour, because now there’s a good chance of capturing a part of the scrip’s further rise.

And boredom? What do you do when Mrs. Market bores you? As in, stops being hit both ways, going nowhere, no market strategy yielding profits? Happens, sometimes for many months in a row.

Basics of maturity in the markets – when Mrs. Market goes nowhere, refer to your baseline.

Oh how you wished you hadn’t ruined that family holiday, right, by continuing to take pot-shots at Mrs. Market the last time she went nowhere. That’s what your baseline is saying.

You switch off, go on another (this time enjoyable) family holiday, and come back refreshed to see that Mrs. Market is now trending, ready to take you for a drive in one set direction.

There’s no limit to baseline referrals.

Systematic players build a baseline, and keep referring to it.

Later, we remember them as successful players.

A Matter of Pride

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Eurozone this, Eurozone that…

Man, it’s getting irritating.

Can we, for one moment, imagine a world without the Euro? Yes. Why is it so difficult? What would the cost of that scenario be?

Deleveraging, people, that will be required. All of those nations that leveraged themselves into quasi financial extinction will need to deleverage massively, once the Euro is discontinued, for as long as it takes to pay off their debts.

What does deleveraging mean? It means not using leverage for as long as it takes. It means paying off one’s debts by working overtime and saving.

Do you think the Italians or the Greeks et al. are liking such suggestions. Of course not. That’s the thing with debt. If you can’t pay it off, you’re in deep sh*t. Nobody thinks of that while taking on debt.

When the Eurozone was formed, sovereign debt of financially weaker countries was sold worldwide using the Eurozone tag. As in “C’mon, it’s all Eurozone now, and these Greek bonds give a premium return as compared to German ones!” Ingenious way to market junk bonds. Meanwhile, citizens of these financially weaker Eurozone countries borrowed left, right and centre to build houses and to consume. As 2008 approached, many lost the earning power to pay back their monthly installments. Now, as more and more of this debt matures, these financially weaker Eurozone countries need to conjure up billions of Euros they do not have.

You’ve got to hand it to the marketeers. Pure genius. They always get you, don’t they.

The reason things are not really working is the looming idea of uncalled for hard work that the process of deleveraging requires. Even if one wants to put in hard work, where does one put it in, if there’s no work.

Thus, the only option remaining involves massive cutbacks, like you’re seeing in Greece just now. Consumer spending down to zero. Pension cuts. Medicare cuts. All-round cuts. To one level above slowdown, till the deleveraging process is over. Scenario will take long to smoothen.

After enjoying a penthouse suite, a 1-BHK feels pathetic.

Eurozone wants to remain alive financially, but are they willing to pay the harsh price?

What you’ve been seeing since this crisis exploded is infinite artificial maneuvering. This might stall the situation. The goal is to stall long enough so that the deleveraging process is over before the stalling process can be weaned off. And that’s a fatal error. Nobody understands deleveraging properly, because the world has never done it properly before, at least in modern financial times. Correct me if I’m wrong.

Deleveraging is going to take longer than all the stalling moves put together. That is my opinion. Stalling results in a false sense of security because of all the maneuvering to show that the economy is doing well. Owing to this false sense of security, people continue to consume. Instead of deleveraging, people leverage. Instead of decreasing, debt increases.

What’s the deal here? You see, pride and egos are at stake. Eurozone doesn’t want to become the laughing stock of the world, the focus of all jokes. Thus, for the sake of their pride, and to fan their egos, European leaders feel the need to keep the Euro alive, even if it costs them their elections, and their financial survival.

First Step is Yours, India Inc.

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Is this the end for Mama & Papa stores?

Foreign direct investment in retail. Tier II and Tier III cities gearing up for multi-brand big-ticket retailers, round 2. Upto 40 % discounts due to deals between manufacturer and retailer. Retailer operates on a 7-month payment cycle. Can Mom & Pop stores compete? Possibly not.

Broadly speaking, we live in two Indias. There’s India Inc., and there’s Bharat. No secret.

Citizens of India Inc. encounter Bharat at every second step. You’ve got bullock-carts, cycles and / or auto-rickshaws slowing down the spanking new highway. Do these bullock-cart fellows pay any road-tax? Power cuts. Countered with generators. Mosquitoes, flies. Long live repellents. Heat. Air-conditioners. Red-tape. Go with the flow. Corruption. Cut a deal. Movie at the mall. Call the manager and reserve the best tickets, away from the locals / villagers. The new fly-pass over your city congests traffic in the side-lanes, adding to the chaos in your city, while providing immense benefits to highway traffic. It’s under-area, which was meant to solve the parking woes of your city, is one long garden. It’s not being used for parking due to the threat of terrorism, as in someone might park a car with a bomb in it. The 10 km long fly-pass might have like 4 cross-to-the-other-side cuts for pedestrians / locals / villagers / labour. Net result is that pedestrians / locals / villagers / labour cross from anywhere, anytime.

You see India Inc., Bharat doesn’t want to be left behind, in any manner. Bharat counters every move of yours with its own unique formula. No cut to cross to the other side of the highway? No problem. Bharat just crosses through the highway. See? You can’t side-step Bharat. There’s only one long-term formula for your success, and that involves the incorporation of Bharat into the scheme of things.

As of now, Bharat is rushing for really cheap goods that look exactly like their expensive originals. As in a 50 $ Blackberry replica. Or a 100 $ i-phone duplicate. Cheap tablets. Dirt-cheap watches that look like Rolexes, Tags and Breguets. There’s no end to it. China will make sure of that. See, Bharat doesn’t want to be left behind. It wants to move with you, but at its own price.

While India Inc. shops with credit cards, Bharat runs a parallel economy. Strictly cash. Come and go. Zilch savings, so no need for banks. If there are savings, there’s some brother in need and will borrow on interest. It’s a bristling parallel economy with unique dynamics.

Does one see a common trajectory between India Inc. and Bharat?

Fortunately, yes. Both are consumers. Also, both are producers. Bharat’s big on agriculture. India Inc. is about tech, innovation, management and competence. Bharat can’t afford most of what India Inc. produces, so it lives on duplicates, or on its own agricultural produce. And India Inc. needs to realize this.

Nobody’s expecting India Inc. to live the life of Bharat more than it needs to. But, and this is a big but, the need of the hour is to incorporate Bharat more and more into India Inc.’s supply chain.

Those are the magic words. If you’re innovative, show it now, India Inc. Your country’s progress is proportional to the progress of Bharat, because Bharat’s numbers are far larger than yours. Slowly, you’ll see, that Bharat will stop slowing you down, as it progresses. The bullock-cart fellow will progress to a tractor. Your cinema-going villager will be more civilized. Bharat will clean-up, and mosquitoes and flies will reduce. A random Bharat citizen will be satisfied enough to not want to bomb his own country. Etc. etc. etc. It’s a process. Yours is the initiation part. Get on with it. Stop cribbing. Incorporate Bharat into your master-plan as much as you can, and sooner than you think, you’ll be enjoying the then EDUCATED and CONSUMING demographic dividend.

Learning to Be

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Mrs. Market becomes an enigma, at times.

At such times, she’s very difficult to understand. She’s erratic and jumps around in an exaggerated fashion. She defies all logic, and flushes all analyses down the toilet.

I like such times.

Mrs. Market is not the only one who knows how to dump others. Over the years, she’s taught me the art of dumping. So, during incomprehensible stretches, I dump Mrs. Market.

The key to dumping her is learning to be. You need to be comfortable in just being. You roll out a few novels, or surf around, or even catch a few movies on your laptop. Or, you can close your eyes, envision something beautiful, focus on your breath, and listen to some music. At these times, there’s no need for any market- activity, and you’re not going to give her any.

Mostly, during these stretches, the rate of return in the debt segment is great. So, you identify safe debt instruments, park your funds, and go into hibernation mode. She’ll come around soon enough. Remember, you’re calling the shots and are not going to let her get into control mode. Otherwise, you’re fried.

Hibernation mode is a beautiful time. Your system recuperates. You even, perhaps, go on a holiday. Your off-spring enjoy the extra attention from you. And just because you’re not pushing Mrs. Market’s buttons for a bit does not mean you can bug your spouse that much more!

So, market people, learn to be. Nobody made a rule saying that one has to be market-active all the time. Do away with the norms, as long as you don’t injure anyone’s fundamental rights. Norms were made for average citizens. Are you satisfied being average?

The enemy of just being is boredom. You’re not going to get market-active just out of boredom. You’d rather wait for a conducive time to enter the market again.

In today’s world, there’s so much happening, that there’s no room for boredom. Thousands of hobbies are waiting to be tapped. Do something good for society. Help other people. Live life in a manner that you feel good about yourself. There are many ways to “just be”.

Or, just get acquainted with your inner-self and you’ll be amazed at the kind of avenues that open up.

Get with it people, dump your 24x7x365 market-activity compulsion, and just learn to be.

Burn-Out Notice

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Information overload.

Short circuit in the brain.

Black-out.

You want to move your left hand, but the right one reacts.

Your body needs re-wiring, and rest.

This set of circumstances comes with the territory of trading. Often.

Imagine plugging into the complex matrix of erratic market play. That’s what happens when your trade gets triggered. Your poor nervous-system then deals with a lot of load, which doesn’t recede till well after the trade. Joy at profits, sorrow at losses, life is one big emotional pendulum. And this is just one trade. A sluggish trader might take one trade a week. The over-active one could trade many times in a single day.

What are we dealing with here?

Basically, the writing on the wall is quite clear. If you’re not able to regularly offset the damage to your system due to trading, you’re looking at early burn-out. As in, very early burn-out.

Your method of recuperation needs to bring your system back to its base-line, and then some. Your recuperation savings account needs to be in the black, as much as possible. That’ll ensure longevity in the trading arena.

What happens if you are drained, and the next trading opportunity comes? For me, the answer is crystal clear. Don’t take the trade. Rest. Recuperate. You would have played it wrong anyway. You were drained even before the trade, remember?

Sometimes, periods of recuperation can be long. At these times you need to stop comparing yourselves to other traders who find unlimited energy to keep trading, from God knows where. You are you. They are they. Who gave you the right to compare? Why are you judging others playing to a different plan with different energy and time-set parameters. If you really want to judge, then judge yourself. That’s it.

So, if a prolonged recuperative time-frame announces itself, respect it.

Your system will last longer in the game.

Trading is about sticking to the ground-rules, and then lasting. Your market-edge plays out only over a large number of trades taken over a long time-frame. Over the long run, your market-edge makes you show winning numbers, because the sample-size is big enough, and the time-frame under consideration is sufficient for many big-hitter trades to occur. Your big-hitter trades give a tremendous impetus to your numbers.

Even the best of edges can show a loss over a small sample-size (i.e. number of total trades taken in one’s trading career). It’s statistically very possible to suffer ten losses in a row, for example. You can call a coin-flip wrong ten times in a row. Possible. And that’s a 50:50 shot per flip. Your market-edge gives you a 60:40 shot, or maybe even a 70:30 shot. Still not good enough to not suffer a losing streak.

Winning streaks occur with time, and with supportive sample-sizes. Because of your edge, the winning streaks outnumber the losing streaks.

In the world of trading, if you want to win, you need to last.

Game-Changers

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Change.

The one factor that keeps us evolving.

Adapt or get left behind. Seems to be the Mantra of the times.

The management of money has seen some big game-changers over the last few decades. We want to speak about them today.

In the ’90s, Bill Gates wrote about business at the speed of thought. We’re kinda there, you know. Let’s say you have an idea. From idea to framework, it’s mostly about a few button-clicks, with the web being full of idea-realizing resources. See, we’re already discussing the biggest game-changer, which is the flow of information. Today, we live in a sea of information. It’s yours to tap. Delivered to you on a platter. Such information flow changes everything, from lead-time to middle-men. Best part is, almost all of the information available is free!

Then there’s technology. Cutting-edge software, everywhere. Now, there’s even a software to smoothly organize your contract notes and calculate profit or loss, and taxes due. It’ll give you the appropriate print-out, whichever way you want it. You don’t need to hire an accountant to audit your market play. You just click the contract note and the software extracts all relevant information from it, organizing it beautifully. Actually, that’s nothing. Market-play software is what we should be speaking about. Cut to the movie “A Good Year”. Just picture Russell Crowe motivating his “lab-rats” to go for the kill and short an underlying, only to short-cover a few points below. The technical software follow-up of the underlying’s price on the wall-panels is the image embedded in my mind, as the price gets beaten down, and then starts to rise again.

Market software allows you to run scans too. A common exercise I do at the beginning of a trading day is to narrow down the 4,537 active stocks on the BSE and the NSE to about 10 tradable ones. I do this with 2 back to back scans. Each scan takes a minute. Then, I study the charts of the tradable stocks and select two or three to follow. That’s another 5 minutes. Putting on trigger buys or sells for these stocks takes 2 minutes. So, assuming that a trade gets triggered in the first minute, I have arrived from scratch to active trade in 10 bare minutes, with no prior market preparation. That’s what technology can do for you, and more. Software is expensive. It’s mostly a one-time cost with a life-time of benefit. Worth it. The management of money is a business, and each business needs initial investment.

Numbers have changed the game. Volumes have grown for many underlying entities that were illiquid earlier. When volumes are healthy, the bid-ask spread is very tradable. Thus, today, you can choose to trade in almost any avenue of your choice and you are almost certainly going to get a liquid trade.

Our attitudes and lifestyles have changed too. Today, we want more. No one is satisfied with mediocricity or being average. We have tasted the fruit that’s to be had, and are willing to get there at any cost, because we are hungry. Luxurious lifestyles lure us to rush into the game, which we play with everything we’ve got, because as I said, we’ve tasted the fruit, and we want more. Our approach has made the stakes go up. We need to adapt to the high stakes with proper risk-management.

It’s never been easier to access funds, even if you don’t have them. Leverage is the order of the day. Of course that changes the game, leading to higher volumes and increasing the frequency of trading. We need to keep debt-levels under control. It’s never been easier to go bust. Just takes a few button-clicks and a few missed stops. The leverage levels take care of the rest.

Game-changers will keep coming our way. As long as we keep adapting and evolving, our game will not only survive, but also blossom.

Watch Out for Bottomless Pits

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A shareholder-friendly management?

Forget about it.

Very difficult to find, nowadays.

Gone are the days where you’d see an Azim Premji driving his 800, or a Narayana Murthy travelling economy class.

These legends believed in increasing the shareholder’s pie. And this they did, big time. Ask any Wipro or Infosys shareholder. These legends were very clear about one thing: there was no question of pumping in useless expenditure into their public limited company at the cost of the shareholder.

The norm, btw, is totally opposite. Public limited company managements live it up at the cost of the shareholder. Very few promoters are actually bothered about their shareholders. It is the norm to put medical bills, day to day living / wining / dining / entertainment costs, personal property purchases etc. into the company. Why should the promoter bear such costs when there is the public limited company to put these and such costs into? Logical?

Don’t expect too much from your average promoter. He’s not in the game for you.

Where does all this leave you, by the way?

Firstly, you need to look out for, and avoid bottomless pits. These are companies that bear huge amounts of expenditure emanating from the whims and fancies of the promoter. For example, the total sports sponsorship bill for Kingfisher Airlines is staggering. Then there’s this huge red flag in their balance sheet – the company is in under a mountain of debt. On top of that, this company just reported almost a 100 million USD Q2 loss. Math doesn’t add up for you to be investing in such bottomless pits, does it?

In your search for idealistic and shareholder-friendly managements, you might come up with a handful of names. Next you’ll find that it’s no secret. If there’s an idealistic and shareholder-friendly promoter around, people can see this in his or her deeds and of course in the balance sheet of his or her company. Savvy early investors make a beeline for such companies, with the result that by the time you get there, the concerned share-price is already quite inflated. You’ve identified a good investment, but you are not going to enter at an expensive price. If you do, you’ll not be able to sit on your investment for the long-term. Even slight volatility will shake you out of it.

Instead, you choose to wait for the right price to arrive, and then you enter. Well played.

The deal is, that more than 90% – 95% of managements don’t play it like an Azim Premji, or a Narayana Murthy, or an Anu Aga for that matter. However, shareholder-unfriendly promoters sometimes own companies that are lucrative investments. This can be due to niche, cycles, technology, crowd mentality, whatever. When do you buy into such companies?

As a long-term investor, you wanna be buying such companies at a deep discount to real value. My thumb-rule is a single-digit price to earnings ratio. You can have your own thumb-rule. You might have to wait a long time to get this kind of a price, but that’s what long-term investing is about.

As a trader, you buy into such a company with the momentum. You can buy after a resistance is broken. Or after a high is taken out. Or upon a substantial dip after the first burst of momentum. As a trader, what is far more important for you is to know when to let such a company go. Know the level by heart below which or at which you will exit such a company. In trading, exits are far more important than entries.

The mistake you don’t want to be making is to invest in a bottomless-pit, no matter how cheap the share price is.

So, … What Made Peter Jump?

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The buck generally stopped with Peter Roebuck in the world of Cricket journalism.

Professionally speaking, Peter was cutting edge.

Though he was described as a complex person outside of his professional sphere, the only blip that seemed to punctuate his 55 years was a 2001 common assault charge on some 19 year old cricketers he was coaching.

As per the media, Peter’s is a confirmed suicide; he jumped six floors to his death, from his hotel window. Just before he jumped, he was being questioned by the South African police on a sexual assault charge. A police officer was in the room when he jumped.

Was it extreme shame over something he’d done? Perhaps just one big blunder in an otherwise good, successful and recognized life? If that’s really the case, one needs to reflect on things.

Sometimes a good human being can make a huge blunder. Let’s cite excruciating circumstances that drive the person to such an act. For example, extreme loneliness can result in a moment of madness, in which one loses self-control and crosses the line between decent and indecent behaviour. Let’s please not behave as if this does not happen. Don’t know if this was the case with Peter. As of now I’m just looking at the general applicability and the consequences of such moments of madness in our normal arena of life. Also, I’m gonna try and apply this to market play.

Before I do that, let’s stay with Peter for a bit. If it turns out that Peter was pushed over the ledge, this whole discussion will need to be discarded and the investigation of match-fixing will come into play, since Peter had just finished reporting on arguably the most unusual Test match in the History of the game. As of now, murder is being ruled out, so let’s stay with our original discussion.

Who feels shame? A human being with a conscience does. Who feels so much shame, that he or she can’t face society, family, spouse, kids etc. anymore? A human being who has probably committed a grave folly and who has a conscience that is now powerfully confronting him or her.

The media has not reported any History of sexual assaults in Peter’s case, so we are probably looking at one grave act in a moment of madness that became the complete undoing of an acknowledged soul called Peter Roebuck.

How many of us are in the same boat, where one grave act can become our complete undoing? All of us are. Please be very clear about it. That’s how unpredictable life can be.

As of now, I’m going to focus on this one grave act unfolding during one’s career in the markets. All you have to do is to activate huge amounts of leverage (= few button-clicks), and then ignore a few stop-loss levels (= 0 button-clicks) while you answer the margin-calls, and you have already committed the grave act that is potentially life-threatening. If the resulting losses clean you out, that’s one thing, but if they put you deeply into debt, contemplation of suicide can well be on the cards if yours is even a slightly melancholy personality.

See, that’s a very short route to where someone like Peter Roebuck ends up, irrespective of one’s arena in life.

All I can say is (and I’m saying this to myself as well) that please let’s take that smug look off our faces, and let’s please reflect, because a moment of madness can trap and terminate the existence of any human being, no one excluded.

Moments of madness occur in everyone’s life. We need to train ourselves to not react to them. That’s easier said than done, but it’s better to say it out loud and activate one’s system to become aware of such moments of madness when they are happening.

Only if one is aware that such a moment is unfolding can one actively choose not to react.

As Ponzi as it Gets

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Charles Ponzi didn’t dream that he’d become one of the most copied villains in the History of mankind.

Ponzi was a financial villain. His ideology was so simple, that it was brilliant.

Lure the first set of investors with promises of huge returns. Transfer the first few return payouts. Lure more and more investors as the news spreads about the scheme with great returns. Transfer few more return payouts to old investors from the investment principal of new investors. Lure a peak level of investors ultimately. Then vanish with all the collections.

As Ponzi as it gets.

I hardly read the financial newspapers. Technical trading finds news to be more of a burden. Earlier, I used to gauge sentiment from the news. Now, my Twitter-feed is an excellent gauge for sentiment. Also, with time, one starts to gauge sentiment in the technicals. Candlesticks are a great help here.

Yesterday, in a loose moment, I picked up the Economic Times. Normally, it’s not delivered to our house. Yesterday, a supplement of the ET was included in our normal newspaper. Probably a sales gimmick. Anyways, I glanced through it. Was shocked to find that 25 recent Ponzi schemes had been unearthed in India alone.

What is it about us? Can we not understand what greed means?

The sad fact was that all the investors who were trapped were retail small timers.

Education, people, education. Are you financially literate? If not, please don’t enter the markets. No amount of regulation can save you from being duped if you are financially illiterate.

When you’re putting your money on the line for the long term, you’re looking for quality of management. A track record is something you want to see. Average returns are great returns if they promise safety of the principal.

Where there’s promise of huge rewards, there are also proportionate risks. If you really want the thrill of very high returns, all right, fine, go ahead and risk a miniscule percentage of your portfolio size in a risky, high yielding scheme. Tell yourself that the principal might or might not come back, and for heavens sake, don’t bet the farm here.

These financial times are as Ponzi as it gets, people, so TREAD CAREFULLY.

What U Gonna Do When They Come For U?

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“Bad Boys Bad Boys, what u gonna do…

what u gonna do…

… when they come for you?”

Lots of bad boys floating around.

They make a beeline for an underlying, for example Gold. Hike up its price. Entice you to enter at a peak. They cash out. You, the slow poke, are left high and dry.

Then the bad boys gang up and short the underlying simultaneously. Price tanks. From one day to the next, you are sitting on a large loss. You get out, disgusted.

Don’t make yourself vulnerable to such bad boys. Get your strategy right.

Buy at strategic points. If you are buying at dips, do so at pinpointed levels, like Fibonacci ones. You can also buy when a resistance is broken. Or, you can buy when a high is taken out with volume. Don’t buy above that. Meaning to say, that’s the vulnerability cut off. After that, you expose yourself to the bad boys, because you don’t have any margin of safety after that point. Through your actions, you activate bad boy zone.

On the short side, go short at strategic points in a rally. That’s where margin of safety is maximum. You can also short when a support is broken. Or, you may go short when a low is taken out with volume. Below that is bad boy zone.

At times, the human being likes the thrill of being in bad boy zone. Got me there, I like it too. Only sometimes. In bad boy territory, you need to be light. Don’t carry too much cash in your pockets when they come for you. In bad boy territory, do options. Options are your best friends here.

The advantage of operating in bad boy territory is that every now and then, there’s a jackpot for the taking. There’s no telling how far bad boys take an underlying in a particular direction. Where there’s risk, there’s reward. Out of ten option trades you put on, at least two or three should hit the pot if your research is good. That’s all you need.

In bad boy territory, the only position you want to be in is about showing the jackpot in the one hand and the finger from the other. By default, your losses must be small here, and they are, because you are doing options. Period. With that, you’ve shown the necessary aggression that is required in this territory, and you’ve also shown proper backfoot (defence) strategy. That is winning behaviour in bad boy territory. That’s the language understood by bad boys, telling them to lay off. Now, even if they try to come for you, they’ll not get you. Ever.

The Sweetest Spot

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In the markets, we often lose our balance.

Then we find it. Only to lose it again.

The key is maintaining this balance over long periods of time.

There’s a spot, where everything, suddenly, goes into balance. I like to call it the sweetest spot. What are its characteristics?

Firstly, at the sweetest spot, health is intact, on the physical as well as on the mental level. Then, one has identified a trade, entered it, and the trade is in the money. At this spot, the spouse respects you and your profession, because neither you nor your profession are bothering him or her for space. Relationship with him or her is harmonious. At the sweetest spot, you find time for your children. You’ve got a rapport going. Your off-spring learns from your every word and action.

Phew, sounds amazing!

Wait, there’s more!

At the sweetest spot, one is debt-free. Neither is one under-trading, nor is one over-trading. Reactions to market events are sharp, and one turns with the market, i.e. one is in the Zone. As profit levels increase, so does position-size, proportionately. You are getting your strategy basics right, one after the other.

At the sweetest spot, goodness wells inside the human being, and he or she does an extra bit for the benefit of society.

Life, profession, existence…it’s all one smooth, harmonious, automatic flow.

Then, in a flash, the spot is gone. One or more of the many factors mentioned tend to go haywire. That’s quite normal.

Which only means, that you start looking for the sweetest spot again.

Whenever you find it once more, your primary goal is to maintain it as long as possible, again, and again and again (to the power of n, with n > 1).

Before you realize it, you are then staring at financial freedom. You are there, financially independent of any other factor or being. You have arrived.

Some things in life are really sweet, and worth striving for.

Jesus and the Atkinsons

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The Atkinsons were a nouveau riche upper middle-class couple. He was a finance geek. She liked to spend.

Wait, I think I’m forgetting something. At least twenty times a day, each of them would call out to Jesus. Not because of spiritual or religious reasons. Just as an exclamation. As in, “Jesus, what a beautiful dress!” Or, “Jesus, a 4% drop in the Dow!” At least they didn’t abuse.

Neither wanted kids. He was happy putting in 14 – 16 hours a day, sometimes more, tapping world markets. Jesus would be called upon for a wide range of underlying entities ranging from Uranium to Gold to Soy Beans to Lean Hogs to Goldman Sachs. He was thorough, meticulous, systematic and successful.

She was a by-word in the local malls. Upon her foot-fall, shop-keepers would scurry to put their most expensive exhibits forward. He once sat her down and gave her a 20 minute lecture on saving. “Jesus, we need to save…” were his opening words. It had an effect, and she started to save 10% of his now 7-figure income. She would listen to her man.

As long as she adhered to the 10% savings cut-off, he would never deny her anything. The sheer words “Jesus, I love those shoes!” just needed to escape from her, and he would get her those shoes. No matter how ridiculous or how expensive her desires were, they would be fulfilled.

He would work from home. At times, when he was working on mergers and acquisitions, he would wake up with New Zealand, and shut shop with New York. That left just one and a half hours for sleep. At these times, she would serve the best coffee every few hours. “Jesus, what amazing coffee!”, he would exclaim now and again. She would bribe the pesky neighbour kid with a bar of chocolate to make as little noise as possible. This is when the Atkinson kitchen would go gourmet. She would sense his stress levels and would up the ante in hospitality notch by notch. Was it surprising when words like “Jesus, what mind-blowing food!” boomed through the Atkinson corridors at every meal?

Her worst of spending habits did not make her a bad human being. On the contrary, she was a faithful, doting wife and a very large-hearted donor. Most of last year’s purchases would be donated. She derived pleasure from making others happy.

The Atkinsons had an excellent balance going. They were careful with their words, and with the company they kept. Slowly, she learnt how to cut cheques and keep books. He would fool around in the kitchen now and then and dish up a pasta. He made it to Fortune 500. She became the head of one of the world’s largest charity organizations.

Of course they’re still together. I wish for every couple that they find the happiness and balance enjoyed by Chris and Jane Atkinson.

Making the 99% See Reason

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Hey 99%,

Fine, fine, #OccupyWallStreet and all…

To be honest, this needs to be more about brains than brawn. The 1% are where they are because they’ve used their devious and canniving brains to become super-rich. Now you need to use yours to first extract yourself from your debt-trap situation and then to work towards financial freedom. Something like this can only work long-term. Using brawn, you’ll probably break the law and land up in jail, simultaneously exacerbating your predicament.

The first step is to SAVE. That’s what your forefathers did. They saved. They made your country a super-power because of their SAVINGS. If you’re not in a position to save, please get yourself into such a position. There’s no way out. To attain financial freedom, you have to start saving.

Tear your credit cards into two. Don’t consume. Don’t use and throw. Use, repair and reuse. Eat less if you have to, but extract yourself from the debt-cycle at any cost. There’s no other way.

Once you’ve started to save, you’ll need to learn how to manage your savings. Don’t ask the 1% to manage them for you. Instead, learn how to manage them on your own. With that, you’ll be putting yourself into the business of money- and asset-management, and then you can truly and totally boycott the 1%. That would be a message to the 1% that could make them scramble for survival. Believe me, to survive, they’ll be forced to change their ways. They don’t understand your brawn. It just aggravates them.

There’s enough material on the web available, that’ll get you going. The best thing is, most of it is free of cost. Go for it. Learn how to manage your savings on your own and make them grow. You can start by reading this very blog.

Continuous savings, over years and years, and the intelligent and independent management of these savings – these two acts will lead you towards financial freedom. Perhaps you will be too old to fully benefit at that time, but your children will benefit.

There’s no point beating about the bush – this is a long-term pursuit. No short-term effort or remedy is going to solve it.

Do it for your children.

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!

An Elliott-Wave Cross-Section through a Crowd Build-Up

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At first, there’s smart money.

Behind this white-collared term are pioneering investors who believe in thorough research, and who are willing to take risks.

Smart money goes into an underlying, and the price of this underlying moves up. Wave 1.

At the sidelines, there are those who have been stuck in this underlying. As the price moves above their entry level, they begin to off-load. There’s a small correction. Wave 2.

By now, news of the smart money has perforated through the markets. Where is it moving? What did it pick up? Who is behind it? Thus, more investors following news or fundamentals (or both) enter. The price moves past the very recent short-term high of Wave 1, accompanied by a surge in volume.

This is picked up on the charts by those following technicals, who enter too. By now, there are analysts speaking in the media about the turn-around in company so and so, and a large chunk of people following the media do the honours by entering. Wave 3 is under way.

Technical trend-followers latch on, and soon, we are at the meat of Wave 3, i.e. the middle off the trend.

Analysts on the media then speak about buying on dips. All dips are cut short by a surge of entrants seeking to be part of the crowd.

The first feelings of missing the bus register. The pangs of these cause more people to enter.

Meanwhile, the short community has been getting active. Large short positions have been in place for a while, and they are bleeding. Eventually, the short community throws in the towel, and there’s massive short-covering, causing a further surge in price.

Short-covering is sensed by gauging buying pressure despite very high price levels. It is the ideal time for smart money to exit. That’s exactly what it does, without any dip in the price of the underlying whatsoever.

Short-covering is over. Smart money starts boasting about its returns of X% in Y days, openly, at parties, in the media, everywhere. This causes pangs of jealousy and intense feelings of missing the bus in those still left out. Some enter, throwing caution to the wind.

The price has reached a level at which no one has the guts to enter. Demand dries up. With no buying pressure, the price dips automatically. Bargain hunters emerge, and so do shorters. The shorters sell to the bargain hunters right through a sizable dip. This dip happens so fast, that most of the crowd still remains trapped. Wave 3 has ended, and we are now looking at the correcting Wave 4 in progress.

At this stage, technical analysts start advising reentry upon Fibonacci correction levels. Position traders buying upon dips with margin of safety enter, and so does the second-last chunk of those feeling they’d missed the bus. The price edges up to the peak of Wave 3 and past it. That’s the trigger for technical traders to enter.

We now see a mini-repeat of Wave 3. This is called Wave 5. Once Wave 5 crosses its meat, the last chunk of those still feeling they’d missed the bus makes a grand entry with a sharp spike in the price. These are your Uncle Georges, Aunt Marthas and Mr. Cools who know nothing about the underlying. They cannot discern a price to earnings ratio from an orangutan. They desperately want to be a part of the action, since everyone is, at whatever the price. And these are the very people that traders sell to as they exit. With that, the crowd is at its peak, and so is the price. There are no more buyers.

What’s now required is a pin-prick to burst the bubble. It can be bad news in the media, the emergence of a scandal, a negative earnings report, anything.

The rest, they say, is History.

Dealing with Distraction

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I’m a huge Sherlock Holmes fan.

The stand-out quality I admire about Holmes, apart from his mastery in observation and deduction, is his ability to switch off.

In the midst of the most engrossing case, Holmes will switch off for half a day or more, and will visit the museum, or will play the violin. While having switched off, there will not be a single thought on his mind concerning the ongoing investigation. He will be fully and totally involved in the recreational activity. Of course he switches off at a juncture where he knows that nothing of consequence is happening for the next so many hours, but that’s not the point.

The ability to switch off is a huge asset to the trader. It allows the trader’s mind and body to recuperate. Also, it does away with overtrading. If a position is showing good profit, the trader who installs a trailing stop, and then switches off, opens the window for still larger profits.

At many times, one is distracted. It is potentially dangerous to trade while distracted, just as it is dangerous to drive while communicating on the cellphone. While distracted, the trader needs to switch off. As long as it takes. Till the source of distraction is nullified, at least in the trader’s mind.

Just a minute, forget about the trader. Investors need to be experts at switching off too, after having entered into an investment. If they don’t have this ability, they’ll be thinking about their investment day in, night out, for years at a stretch. The investment will eat into their life. If we’re looking at the average investor with 10 to 20 investments and without the ability to switch off, we’re also looking at a mental and emotional wreck.

Traders and investors both need to learn how to switch off from Sherlock Holmes.