Category Archives: Common Sense

Blowing up Big

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Derivatives are to be traded with stops. Period.

Stops allow you to get out when the loss is small.

Common sense?

Apparently not.

Who has common sense these days?

Also, the human being has embraced leverage as if it were like taking the daily shower. Bankers and high-profile brokers have free flowing and uncontrolled access to humongous amounts of leverage.

Apart from that, the human being is greedy. There’s nothing as tempting as making quick and big bucks.

Combine humongous amounts of leverage with large amounts of greed and brew this mix together with lack of common sense. That’s the recipe for blowing up big.

Every now and then, a banker or a high-profile broker blows up big, and in the process, at times, brings down the brokerage or the bank in question. In the current case at hand, UBS won’t be going bust, but its credibility has taken a sizable hit.

Bankers are to finance what doctors are to medicine. Where doctors manage physical and perhaps mental health, bankers are supposed to manage financial health. Bankers are taught how to manage risk. Something’s going wrong. Either the teaching is faulty, or the world’s banking systems are faulty. I think both are faulty. There exists a huge lack of awareness about the definition of risk, let alone its management.

Trained professionals lose respect when one of them blows up big. Such an event brings dark disrepute to the whole industry. Most or all of the good work to restore faith in the banking industry thus gets nullified to zilch.

A doctor or an engineer is expected to adhere to basics. I mean, the basics must be guaranteed before one allows a surgeon to perform surgery upon oneself. A surgeon must wash hands, and not leave surgical instruments in the body before stitching up. Similarly, an construction engineer must guarantee the water-tightness or perfection of a foundation before proceeding further with the project.

Similarly, a banker who trades is expected to apply stops. He or she is expected to manage risk by the implementation of position-sizing and by controlling levels of leverage and greed. Responsibility towards society must reflect in his or her actions. A banker needs to realize that he or she is a role model.

All this doesn’t seem to be happening, because every few years, someone from the financial industry blows up big, causing havoc and collateral damage.

Where does that leave you?

I believe that should make your position very clear. You need to manage your assets ON YOUR OWN. Getting a banker into the picture to manage them for you exposes your assets to additional and unnecessary stress cum risk.

In today’s day and age, the face of the financial industry has changed. If you want to manage your own assets, nothing can stop you. There exist wide-spread systems to manage your assets, right from your laptop. All you need to do is plunge in and put in about one hour a day to study this area. Then, with time, you can create your own management network, fully on your laptop.

Your assets are yours. You are extra careful with them. You minimize their risk. That’s an automatic given. Not the case when a third party manages them for you. Commissions and kick-backs blind the third party. Your interests become secondary. Second- or third-rate investments are proposed and implemented, because of your lack of interest, or lack of time, or both.

Do you really want all that? No, right?

So come one, take the plunge. Manage your stuff on your own. I’m sure you’ll enjoy it, and it will definitely teach you a lot, simultaneously building up confidence inside of you. Go ahead, you can do it.

Baby-Stepping One’s Way Up the Financial Ladder

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Everyday, without fail, I get a few opportunities to make this a slightly better world. I’m sure you do too.

And I’m ok with that. No further ambitions. Just doing what comes my way. I’ve always done what I believe in. Have never followed crowds. Have never joint someone’s battle which I don’t fully understand.

Baby-step contributions are drops in the ocean. Nevertheless, they are contributions. I’m proud of the fact that opportunities to contribute come my way regularly. I don’t act upon all of them. Have become very discerning of late. Don’t want to be involved with any frauds whatsoever. And India is brimming with frauds. For me, the world of contributing is about baby-steps. I’m content with that.

I believe that baby-stepping is the way up the financial ladder too, as far as one’s investing or trading activity is concerned.

In the world of trading, there exists the concept of position-size (developed to the nth level by Dr. Van K. Tharp). In a nutshell, this concept teaches one to scale it up one baby-step at a time as one’s account shows a profit. Also, one learns to scale it down a notch upon showing a loss.

Common-sense? Then why isn’t everyone doing it?

Why does everyone around me behave as if he or she is gunning for the big hit? The bringing down of institutions. Of governments. The desire to make it big and in the limelight in one shot. The desire to bring about sweeping change within a week’s time. Ever heard of speed of digestion and incorporation? Metabolism? Assimilation? Speed of evolution?

Life takes time to happen. Let’s give it that time. Let’s not hurry it up with our over-ambition. Do we want life to blow up on our faces because of over-ambition?

Frankly, I want to evolve with equilibrium. Really, really not in one shot. My system will explode if it tries to evolve in one shot. Many people are going to find that out the hard way on their own systems.

And I’m really satisfied with baby-stepping it up the financial ladder, using the concept of position-sizing. Slow and easy, little by little, tangible progress, day by day. No nuclear blasts, no tense situations or mood-swings, lots of time for the family, small quantums of realistic progress and its assimilation… what more can one ask for?

You should try it too.

US Treasury Bonds, Anyone?

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Panic is something I felt during 2008.

It was actually good that I did, because now I know what it feels like.

Meaning that if a similar situation starts to arise again, now there are internal warning signals in my system.

Investors learn from mistakes. That’s the good thing about mistakes.

It will not take a Moody’s rating agency to tell even an average investor that US treasury bonds don’t deserve a AAA rating. Most investors I know have shunned any investment product with US treasury bond exposure since 2008.

Didn’t such ratings agencies give CDOs a AAA rating? Frankly, I don’t even feel like acknowledging the existence of ratings agencies. I’d much rather just use my common sense.

So, one’s learning curve freed one up from dangerous exposure after 2008. Are one’s investments still going to be unaffected from the ongoing and critical developments in the US?

Globalization is in. Decoupling seems to be out for the moment. If the US economy crumbles, investments worldwide are going to be affected for the worse. To lessen such shocks, God created hedges.

The best known hedge to mankind over the last 100 years has been Gold. After 2008, central banks worldwide started scrambling to find an alternative to the USD to hold their wealth in. Only Gold is standing their test. More and more central banks have started converting their USD holding to Gold.

Much as I don’t feel like acknowledging the existence of ratings agencies, unfortunately, I have to. If there’s a ratings downgrade in the US, Gold purchases by central banks are going to escalate. The astute investor will need to position him- or herself accordingly if he or she has not done so yet, starting right now.

As we bathe in the glory of Gold, let’s not forget that it is just a safe haven, a crisis-hedge. If economic stability returns to the world this or next decade (or whenever), Gold is going right back to where it came from.

Something else used to enjoy the safe-haven status till a few years ago. I think one calls them US treasury bonds.

Seasons change. If Gold is the flavour now, it’s possibly a temporary flavour.

Keep your eyes open, and keep using your common sense.

Wishing you safe investing.

Investing in the Times of Pseudo-Mathematics

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First, there was Mathematics.

Slowly, Physics started expressing itself in the language of Mathematics with great success. Chemistry and Biology followed suit.

The subject of Economics was feeling left out. Its proponents wanted the world to start recognizing their line of study as a natural science. So they started expressing their research results in the language of Mathematics too.

Thousands of research papers later, it was pointed out that what mathematical Economics was describing was an ideal world without any anomalies factored in.

The high priests of Economics reacted by churning out a barrage of research papers which factored in all kinds of anomalies in an effort to describe the real world.

Where there’s money, there’s emotion. The average human being is emotionally coupled to money.

Either Economics didn’t bother to factor in the anomaly called emotion, or it couldn’t find the corresponding matrix in which it could fit human emotions like greed and fear.

And Economics started getting it wrong in the real world, big time. The Long-Term Capital Management Fund (run by Economics Nobel laureates as per their pansy and sedantry office-table cum computer-programmed understanding of finance) collapsed in 1998, with billions of investor dollars evaporating and the world’s financial system coming to a grinding halt but just about managing to keep its head above water. It was a close brush with comprehensive disaster.

The human being forgets.

The last leg of the surge in dotcoms in 1999 and the first quarter of 2000 did just that. It made people forget their investing follies.

What people did remember though was the high of the surge. Investors wanted that feeling again. They wanted to make a killing again. Greed never dies.

And Economics rose to the occasion. This time it was not only pseudo, but it had gotten dirty. Its proponents were not researchers anymore, they were investment bankers, who had hired researchers to develop investment products based on complex pseudo-mathematical models that would lure the public.

Enter CDOs.

For just a few percentage points more of interest payout, investors worldwide were willing to buy this toxic debt with no underlying and a shady payout source. People got fooled by the marketing, with ratings agencies joining the bandwagon of crookedness and giving a AAA rating to the poisonous products in question.

All along, the Fed (with the blessing of the White House) had been encouraging citizens to “tap their home equity”, i.e. to take loans against their homes and then to invest the funds in the market. (The Fed creates bubbles, that’s what its real job is). And the Fed, the White House, the leading investment banks, the ratings agencies and the toxic researchers were all joint at the hip, a very powerful conglomerate creating financial weather.

So, from 2003 to 2007, there was liquidity in the world’s financial system, and a lot of good money was invested in CDOs. Nobody really understood these products properly, except for the researchers who came up with them. Common sense would have said that something with no base or underlying will eventually collapse as the load on top increases. And there was no dearth of load, because the same investment banks that sold the CDOs to the public were busy shorting those very CDOs (!!!!!), with Goldman Sachs taking the lead. So a collapse is exactly what happened.

This time around, the now pseudo and very, very dirty economics (almost)finished off the world’s financial system as it stood. It was revived from death through frantic financial-mathematical jugglery and a non-stop note-printing-press, with the Fed looking desperately to bury the damage by creating the next bubble which would lure good money from new investors in other parts of the world which were less affected for whatever reason.

That’s where we stand now. Certain portions of the world’s finance system are still on the respirator. Portions are off it, and are trying to act as if nothing happened, shamelessly getting back to their old tricks again.

I get calls reguarly from Merrill Lynch, Credit Suisse, StanChart and other investment banks. The only reason why Goldman hasn’t called is probably because my networth is below their cold-call limit. Anyways, it doesn’t matter who let the dogs out. Point is, they are out. And they are trying to sell you swaps, structures, forwards, principal protected products, what-have-yous, you name it. I remain polite, but tell them in no uncertain terms to lay off.

As a thumb rule, I don’t invest in products I don’t understand.

As another thumb rule, I don’t even invest in products which I might eventually understand after making the required effort.

As the mother of all thumb rules, I only invest in products that I understand effortlessly.

That’s the learning I got in the 2000s, and I’m happy to share it with you.

Anatomy of a Ponzi Scheme

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Charles Ponzi came up with the brilliant idea of paying early investors dividends from the investment money put in by later investors.

It’s as simple as that, and it’s called a Ponzi scheme.

After the first few dividends, promoter disappears, having lured many investors into a fake scheme with no underlying business.

Latest famous example of a Ponzi schemer – Bernie Maddoff.

Or, if you’ve not seen Damages – Season III, that’s about a Ponzi scheme too.

So what lures the common investor into a Ponzi scheme?

Simple. It’s called greed.

What triggers the greed?

The Ponzi schemer concocts a scheme that promises a rather too lucrative return. This return does not look unrealistic, so the average investor’s alarm signals don’t go off. Nevertheless, it’s more than high enough to make the average investor’s mouth water.

And what’s normally promised is a quick return, mind you. The average investor buys smoothly into the idea of doubling his or her money fast.

Then there’s lots of advertisment. Billboards everywhere. The Ponzi schemer wants to hit the public with ads about the tremendous returns.

The sales-people who sell the scheme are glib-talkers. They are smart, wear expensive stuff, basically exuding sophistication. They want to rub it in that they’ve made it big in life.

A Ponzi scheme’s documentation generally cracks under close scrutiny. I mean, when something is being sold to you without any underlying business, all you have to do is your dose of due diligence. Just pick up the phone and start asking questions.

What works for the Ponzi schemer is human nature. The first investors (who get paid dividends from newbie investor money) start talking. Actually, they start bragging. The human being likes to show off. And, the human being hates missing the boat, even if the boatman is a disciple of Charles Ponzi.

The Dark Side of Private Equity

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Greed is the investor’s nemesis.

I’ve been guilty of greed at times.

Luck has been on my side, and I’ve been saved from losing money. I’d like to tell you about it.

In my experiences with private equity over the last four years, the one thing that stood out was the pitch of each scheme proposed. The average pitch just sucked one in by describing a world that would appear utopic to somebody in a balanced frame of mind. When greed sets in, balance and common sense go out the window. One gets taken in by the pitch, and without doing any due diligence, one is willing to bet the farm.

The private equity teams of today have a tool up their sleeve that creates pressure on the investor, and leaves little time for due diligence. It’s called the time-window. Most schemes are proposed to the investor with a very short time-window. Either the investor is in within the window, or he or she can sit out. Lesson learnt: if one’s due diligence is taking longer than the time-window, then the scheme can go out the window rather than putting one’s hard-earned money on the line.

One of the worst starts a newbie investor can make is a good one. This happened to me as a newbie private equity investor. I got involved with the Milestone group in the middle of the financial crisis, and I invested in their REITs (Real Estate Investment Trusts). These people were honest, and the investments have yielded steady quarterly dividends since, apart from the property appreciation. I started thinking private equity was the holy grail, and that all forthcoming institutions and schemes would be like Milestone.

Big mistake. When Edelweiss knocked on my door with an 8 year lock-in real-estate scheme, I was lapping it up. One thing kept going around in my mind – the 8 year cycle they were trying to make me believe in. Wasn’t convincing, but I wanted the profits they were promising. Before signing on, it occured to me to do at least some due diligence. I insisted on a conference call with the management. During the concall, I became aware of one wrongful disclosure. The pitch had spoken of a large sum of money from overseas, already invested in the scheme. In the concall, it became apparent that these funds were tentative and had not arrived yet.

A wrongful disclosure is a big alarm bell for me. I have programmed myself in such a way that when I come across wrongful disclosure during due diligence, I axe the investment. Luckily, the mind was not totally taken in, and I stuck to this rule.

Then came Unitech. Second generation real-estate magnate. Big money. Big leverage. In a joint venture with CIG, Unitech was redeveloping the slums of Mumbai, we were told in the pitch. Each slum-dweller would be relocated with ample compensation, we were told. The scheme had a multi-page disclaimer protecting the promoters against anything and everything. Alone that should have been an alarm bell. Of course I wasn’t thinking straight when I signed the documents.

In the next few months this scheme got a few investors interested, but its corpus wasn’t enough for the first leg of investments planned. Then, Adarsh exploded. I’m talking about the Adarsh real-estate scam. CIG / Unitech could not find a single new investor for their scheme. Everyone was scared of real-estate. Then there was another explosion: the 2G scam. Sanjay Chandra, CEO of Unitech, was one of the prime accused. What would happen to my money? Was it gone?

I got together with my bankers, and for more than a month, we steam-rolled the CIG / Unitech office in Delhi with emails and phone-calls, asking for the money to be returned with interest, since the scheme had not gotten off the ground. Luck was on our side, and after a thorough documentation process from their end, I received my entire amount with interest, one day before Sanjay Chandra was sent to jail.

Moral of the story: double your due diligence when you feel greed setting in. Don’t get taken in by fancy pitches. Don’t get pressurized into time-windows. Tackle the dark-side of private equity with a clear mind and full focus.

Is Silver in a Bubble?

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When the chauffeur or even the doorman has an opinion, the underlying asset-class is in a bubble.

That’s my definition of a bubble.

And that’s not the case for Silver yet.

A bubble is something psychological. The mind gets twisted into believing that one’s found the holy grail. And then one can’t get enough of it.

Bill Bonner predicted in the year 2000, that Silver and Gold would be the trades of then commencing decade. What a prediction! He went on to say that in the last stages of its run, Gold would rise at the rate of 100$ an hour. You can proportionate that for Silver. That’s how a real bubble behaves. Just go back to first quarter of 2000 and observe the financial behaviour of dotcoms.

This is not a bubble yet. We are nowhere near bubble behaviour. The common households have not started selling off their household Silver. The man on the streets is not obsessed with Silver as of now. (I still look at common-man behaviour, even for Silver, because in a bubble, one forgets affordability. Apart from that, Silver can be bought by the gram).

So, where does one go from here?

Simple.

The trader keeps trading with the flow and an appropriate, risk-profile-tuned stop. For heavens sake, he or she needs to be long.

And the investor keeps buying small stakes on dips.

Nothing fancy or complicated. A simple, common-sense strategy is all that’s required.

Of Kalyuga and the Skewed Nature of Growth

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Once or twice a day, I need to remind myself that this is Kalyuga. Gone are the times when people were honest in general, and the human mind was not corruptible. In Kalyuga, one refers to the price at which a human mind is corruptible. That it is corruptible in the first place is a given.

One of the economic characteristics of Kalyuga is the fact that wherever there is growth, it is skewed in nature, and not uniform. Nations claiming uniform growth are often surprised by a black swan event which nullifies years of financial penance by the founding fathers of such nations. Few examples are the Iceland bankruptcy, the sub-prime crisis, a near default by Greece on its sovereign debt, with possible defaults brewing in Portugal, Spain and Ireland in the near financial future of world economics. Even 9/11 was an event that was triggered due to skewed growth. Of course that is no justification for such an event.

What meets the naked eye in developed nations on the surface is – development. Showers, telephones, infrastructure, emergency services – everything functions. So where are the anomalies that skew the path of uniform growth in such nations? These anomalies are found beneath the surface, in the corruptible minds of those in power. Whether it is the nexus between high-level politicians and bankers, or that between the former and the armed forces, such examples successfully dupe the low-level but honestly functioning majority of the population in developed countries. Ask the pensioner in Greece, who suddenly finds his pension reduced by half due to no fault of his. Or the 9/11 rescue worker, who then contracted complications and died a dog’s death because he wasn’t entitled to healthcare due to no health insurance, which he couldn’t afford. These are example of growth going skewed, that very growth that first seemed uniform in nature.

Emerging nations have never boasted uniform growth. The definition of an emerging market that you won’t find in the text-books speaks of high economic growth at the cost of a segment of the population or a culture. In India for example, 500 million citizens are enjoying growth at the cost of 645 million others, who a UN study has found to be devoid of the very basics in life. Here, corruption from the top has sickered through to the bottom, and the 500 million concerned are able to grow at about 9 % per annum. The crafters of this growth plan believe that the growing millions will pull up the stagnant and deteriorating millions ultimately; i.e. growth will sicker through. Of course that can only happen if it is allowed to by the corruptible minds in-charge.

In Russia, high growth is enjoyed by those who’ve joined hands with the Mafia. Those who take the plunge commit all kinds of crimes from murder to child pornography. Those who choose not to, lead endangered, poor and suffocating lives in their efforts to stay clean.

China has a labour portion of its population and an entrepreneur portion of its population that are growing economically. The former has no time to enjoy the USD 750 – 1000 salary per month because of a 12 hour working day and perhaps 2 or 3 free days a month. Mostly, man and woman both are working, and due to non-overlap in free days, they rarely see each other. Their economic growth will be enjoyed by their children perhaps. The entrepreneur portion is of course splurging. What of the farmers? They haven’t really grown economically. And the vast and spiritual Chinese culture of olden days, i.e. the Mandarin essence of China? Gone into hiding, where it cannot be prosecuted or finished off by the mad-men in-charge. And what of Tibet? Suppressed and destroyed. Some parts of it filled with nuclear waste. And what of freedom of speech and expression? Never existed, and when it started to exist, was finished off from the root in the Tiananmen Square massacre. Heights of skewed growth.

So where does one put one’s money to work? After all, there are problems everywhere. Good question, and one that needs to be sorted out by everyone on a personal level. One thing is certain though. These are times of uncertainty, and in such times, Gold gives superlative returns. So, one needs to get into Gold on dips. There’s no point leaving money in fixed deposits, because inflation will eat it up. Also, one can start identifying debt-free companies with idealistic and economically capable managements, who can boast of uniform and clean growth within their companies (yes, there are encapsulated exceptions to skewed growth on the micro-level). It’s these exceptions one needs to be invested in.

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.