Category Archives: #Fear

Going Legit in the Times of Robber Vodka

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A good, clean, healthy and tension-free life – don’t you want that for your children and families?

Right, people, go legit.

It is possible, despite the Robber Vodkas, the Call Muddies and the Rama Lundgren Rajus of our times.

The first step is going white.

Go white, people. Declare your assets, pay your taxes, just sheer refuse to deal in black money as much as you can, and for heaven’s sake, start cutting out unwanted people dealing in black from your lives.

Second step – avoid people wearing whites. 98%+ of male folk dressed in whites in this country are either inactively or actively politically connected. In the process, you might pass up on the 2% genuinely good ones in whites, but you’ll have avoided all the ones you want to avoid. Political connect in India will not allow you to go legit. People hook up with politicians for favours, and / or because they feel that in their hour of need, their political clout will save them. Did you know, that for the one favour, your political connection will make you do ten illegit things in reciprocation, stuff you’d never dream of doing normally. Ask yourself. Is the trade-off really worth it? No, right?

Then, avoid dealing with people who use body-guards. I mean, use your common-sense. There’s no reason to shun a benevolent, well-known corporate honcho with or without body-guards, like Anand Mahindra for example. You’ll learn to recognize shady honchos. There’s that feel about them, that mafioso vicious vibe. If you can sense that vibe in a honcho, don’t deal with that person. Forget about the profit you’re losing out on, and look at the level of tension and complication you’re avoiding.

Don’t deal with people promising stupendous returns. Nip the Ponzis in the bud. Dealing with a Ponzi will eventually land you in court, to get your money out . Believe me, you don’t want our super-efficient judicial system messing up your life, if you can help it.

Be firm while dealing with any government officer. The government officer will only start to misbehave if there is any weakness from your side. Remember, a government officer is supposed to serve the nation. His or her salary is paid from the taxes you dish out. If your dealing is clean, the official could harass you for refusing to bribe, but that’s about it. Take the harassment, but keep coming back till your work is done. We need to stop bribing. Then, and only then will government officers eventually stop expecting us to bribe.

Right, we’ve pretty much cut ourselves off from a lot of people and things, so where does this leave us?

Don’t worry, we are not alone.

There are like-minded people around, and we need to make these like-minded people a part of our lives. Yeah, and we can lead good, healthy lives with such people surrounding us.

Also, don’t for a moment think we can’t do anything for our country, just because we’ve nixed the political linkage. Private opportunities come along everyday, to help people and society. If you want to still make a difference, grab these opportunities. Poor people come to you for medical aid. Help them. You can contribute privately to social-welfare. Many private citizens are running clean NGOs. As the name suggests, these NGOs have no government involvement, and are less likely to be corrupt. Funds donated to clean NGOs will very likely reach disaster areas on time and in full.

You can make a difference, all by yourself. You don’t need a corrupt government to make a 20-odd% difference for you per unit of currency you trust them with, as tax or whatever. Yeah, only about that %age gets converted into welfare; the rest is nibbled up along the way.

Make a difference – all by yourself.

What are you waiting for?

Clean up your act, go legit.

It’s not going to cut you off from any good, clean and healthy action.

Trust me on this.

The Frog That Lived in the Well

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Once upon a time, there was a frog.

It lived in a well.

Its cousin, however, lived in the ocean, and this particular cousin came to visit.

Cousin froggy was stunned. How could one thrive in such a small space? Our original froggy, however, did not believe that one’s world could get any better. It loved the well, and only after much coaxing did it agree to see what the ocean was like.

Upon seeing the magnitude of an ocean, our original froggy’s head exploded. This story’s from Paramhans Yogananda. 

I’m sure you’ve heard this story from someone. Something similar probably happened to you too, of course on a much smaller scale of magnitude, with no head explosions and all that.

I used to walk around pretty smugly with my Blackberry, thinking that I was like there, connected. Experienced kind of a head explosion upon moving to an Android smartphone.

What is it about us humans?

Why are we so limiting?

Why do we create barriers around our life-experience, around our possibilities?

Market conditions keep changing. Just as we get tied up into a rut and define a market as range-bound and going nowhere, it breaks out. Are you able to cope?

Be honest.

Can you adapt to such changes in conditions?

Are you quick on your feet? Or are you lethargic, and full of inertia?

What’s that song by The Black Eyed Peas?

“don’t…don’t…don’t … … don’t-stop-the-party!”

I know you’ve been humming this song during your continuing debt market party, but there is more to the scene than just the debt market. The debt market is not where things start and end in the world of investing. There’s more.

The world of investing is like an ocean.

The next buzzing market will make itself known. It’s only a matter of time. Be ready for it. Don’t remain clogged up within the claustrophobic walls of one market only, out of sheer laziness and a false sense of security.

Get out there.

Experience the ocean, without your head needing to explode.

Mentally Speaking

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The trader’s biggest enemy is…

…his or her own mind.

The good news is, that one’s mind can be trained … to become one’s friend.

Between these two sentences lies a path.

Some never make it.

For some, this path is arduous.

Other, more disciplined ones make it through.

However, that’s not the end.

Once there, one needs to stay there.

Emotions get in the way.

Fear. Greed. Hubris. Hope. Impatience. Insecurity. Despair …

… you got the drift.

Knock them out, people. Once in the market, stamp all emotion out of your (market) life.

Listen to your system. First make your system.

It doesn’t matter if it’s a technical one, or a fundamental one, or whether it is techno-fundamental, or for that matter funda-technological.

It is your system.

You have spent time putting it together.

You have lost money recognizing its pitfalls, and have tweaked these pitfalls away after they were recognized by you.

Since it has reaped you rewards, you have begun to trust it.

Stay with the trust. Don’t let your mind play tricks on you. It likes to.

Once your trusted system identifies a setup, take it. Period.

Your mind will suddenly switch on. What if this, and what if that?

Ignore.

Only use the mind’s intellect portion to perfect your system. That’s the friendly part for you. Together with it, you construct a system that is capable of identifying setup after setup, from one properly executable trade to another.

You see a setup, and you take it. No ifs, no buts, no what-ifs.

Similary, when your system identifies a stop or a target, and when this is hit, you are out of the trade. Period.

No procrastination. No waiting. No fear. No hoping. No greed.

No mind …

… from entry to trade management to exit.

Switch your mind back on when you have wound up your market activities for the day.

Switch your mind on amidst family. It’ll be fresh.

That’s the path between the two sentences at the top.

Here’s wishing that it’s an easy one for you.

Just 40 $ Away…

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The first signs of greed can be sensed.

We’re talking about Gold.

A few months ago, serious players in Gold had identified Rs. 28,000 / 10 grams as their target for Gold.

This target has been achieved for a while now. Nobody’s booked their Gold.

Instead, the target has been revised to Rs. 30,000 / 10 grams, which is just another 40 $ an ounce away.

Please don’t tell me that nobody is going to book (meaning sell, as in booking profits) their Gold @ Rs. 30,000 / 10 grams. I’ve got this nagging feeling that they’re not.

Hmmm, greed is setting in. Nothing unusual. That’s how a bubble progresses.

Yesterday, an update from Reliance alerted me to the hypothesis that Rs. 40,000 / 10 grams was a real possibility in Gold.

Maybe, maybe not. As of now, Reliance is sounding like that fellow who predicted a Dow level of 36,000 some years ago. Today, 36k on the Dow seems impossible, even in one’s dreams.

Does it matter to you how high Gold can go? Or is your target more important? Both are valid questions.

If your target has been achieved, here’s one scenario. Book the Gold and put the released funds into debt. Debt in India is safe, and is giving excellent returns, especially to the retail investor.

If your stomach is full, do you dream about more food?

Seriously people, playing this by targets is a serious option.

It’s also ok if you wanna play it in a “let’s see how high this can go” manner. That’s just another way of playing it. Fine. In this case, you need to set trailing stops, and you need to stick to these if they get hit.

Either way, identify a booking strategy for Gold and stick to it.

Take greed out of the equation. There’s no room for greed in the career of a market player. There’s no room for fear either.

We’ll talk about taking fear out of the equation some other day, if and when unprecedented gloom and doom abounds.

Defining one’s Dragons and Kissing them Goodbye

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The final impediments between you and successful trading are your dragons.

Define them, and kiss them goodbye.

As a trader, your workplace is the Zone. We’ve spoken about the Zone before. The Zone is not a physical workplace. It is a mind-space where your nervous system tunes into the market, and starts moving with its rhythm, so much so, that when the market turns, you turn with it. It’s like a flock of birds turning in mid-flight. Nobody cares who turned first. Bottom-line is that the flock turned. In the Zone, you become one with the market. If the market turns, it takes you with it. It’s called connection.

Dragons keep your system from getting into the Zone.

There’s the dragon of ill-health. The other day I was running a fever and forgot my wallet, keys etc. etc. in my friend’s car. When have I ever in my life forgotten my wallet, like, anywhere? See? Ill-health makes you commit critical blunders. It’s the real world, people. Ill-health happens. So when this dragon appears, don’t initiate a fresh trade. If you’ve got any open positions, just play them according to the rules you defined when your system was not diseased, i.e. when you were in the Zone and initiated the positions. You have to understand this: the dragon of ill-health knocks you out of the Zone.

Then there’s the powerful and magnetic media-dragon. See, first there’s the market. Then there are people who report about the market, with all their biases and their opinions. As a trader, are you about to listen to the media dragon’s second- or third-hand opinion about the market? Or would you much rather build a first-hand opinion by connecting to the market yourself? Though the answer to this question is rhetorical, the magnetism of the media-dragon is so powerful that even the strongest of traders gets sucked into it. What’s to be done? OK, indulge in media, but tell yourself that this is your time-off, and that you are indulging / amusing yourself. Don’t take any media report at face-value, because there are vested interests. By the time news arrives in print, the market has already factored it in the price long back. Basically, you need to try hard to not let the media dragon bias you against your trading strategy which you formulated while connected in the Zone.

We move on to the dragon of emotions. This one can knock you out of the Zone in the flash of a second, without you even knowing it. That’s why it’s so dangerous. Other dragons take time to knock you out, they build up to it. This one’s effect is instantaneous. Balance, balance, where art thou? As a trader, balance is your biggest friend. Balance keeps this dragon away. If it still manages to surface, balance keeps it under control till it goes away. As a trader, one has to learn to balance oneself; am working on this myself. Perhaps you could teach me a trick or two here.

Lastly, today, I’ll speak about a fourth dragon. It’s called the dragon of indiscipline. It’s connected to the dragon of emotions, but is important enough to get dragon-status. When the dragon of indiscipline strikes, one initiates disproportionately large-sized positions because of greed, or one cuts perfectly profitable positions because of fear. Or, one fails to initiate a normal-sized position because of fear, even after seeing a perfect setup. The learning curve of a trader forces him or her towards defined discipline. Discipline demands from the trader to always open positions that are proportionately sized to the portfolio size. Furthermore, if a position turns profitable, it should only be cut by the market itself, when a trailing stop is hit. Then, no matter what, if a perfect setup is identified, a normal-sized position needs to be initiated. To the trader, that’s the definition of discipline. And, the dragon of indiscipline causes the trader to act otherwise. Want to deal with this one? Here’s a trick. When the dragon of emotions has appeared, ultimately you will realize it. When you do, just repeat the magic words “I am NOT going to allow the dragon of emotions to summon his ally called the dragon of indiscipline!” At this stage, you need to remember: 1). No opening of disproportionately large-sized positions, 2). No manual cutting of perfectly profitable trades and 3). No let-up in the opening of a normal-sized position once a perfect setup has been identified. That’s all I know about this one.

Maybe some other day we’ll take about more dragons! Till then, good luck taming those you have identified!

One More Lollipop

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

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

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

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

What do ultra-low interest rates mean?

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

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

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

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

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

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

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

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.

Time after Time

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I know, I know, the title of this blogpost is also a hit-song by Cyndi Lauper from the ’80s. As a kid and entering my teens, a rainbow-coloured Cyndi made an impression.

So, as fragile Miss Lauper with her multi-coloured hair was crooning the song to the top of the pops, the world was coming to terms with the aftermaths of the Iran hostage crisis, the Falklands war etc. etc.

Cyndi didn’t know it at the time, but the track “Time after Time” would go on to become a huge, huge hit, appearing in the sound-tracks of many movies and basically becoming an all-time song.

World makets recovered to the dotcom boom of the 90s. Investors were making the mistake of greed, again, time after time. Scrips with no earnings were selling for hundreds of times the book-value.

Bubbles burst. That’s what bubbles do. In the ensuing mayhem and the fear that engulfed investors, the share prices of capital-gains generating zero-debt companies with regularly increasing dividends and impeccable managements fell drastically too. That’s what fear does, time after time.

As time passes, investors forget their old mistakes. A horde of newbies joins the fray, ready to make the same mistakes of human nature, again, time after time.

Cyndi’s was a love song. It had nothing to do with finance cycles.

It’s title is so compelling though. And, of course, I just love the song.

Both Sides of the Coin

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What’s your personal style of investing, UDN?

Well, if you must know, and now that you ask, I like putting my money on the line when the underlying has hit an all-time high.

Um, isn’t that risky, a huge gamble, actually?

Well, what isn’t risky in life? Marriage is a gamble. So is business. And the farmer gambles on the weather when he sows his seeds.

You could invest in a more cautious fashion, like buying on a dip, you know.

Sonny, you asked about my personal style of investing, not the crowd’s personal style of investing. I’ve fine-tuned my personal style as per the threshold level of my personal risk-appetite, and risk-appetite is something one discovers after being in the market for a while, and after making mistakes and learning from them.

Fine. And what’s so good about investing at an all-time high?

Good, now you are asking some right questions. Ok, investing in something which has broken out and hit an all-time high, albeit risky, comes with a few advantages. First and foremost, there’s no resistance from top, i.e. there are no old sellers waiting to sell as the underlying heads higher and higher. This means that there is nobody stuck at these new levels waiting to off-load. There can be bouts of profit-booking of course, but a real resistance level doesn’t exist as yet, because the underlying has never entered these areas before.

Then, as the nay-sayers grow, and the crowd joins them to short-sell the underlying, there can be bouts of short-covering if the underlying’s climb is not stopped decisively by the bouts of short-selling. Any short-covering propels the underlying’s price even higher.

Before you go on, why is all this better than buying on a dip?

Oh, so you want to look at both sides of the coin, do you? Not bad, you learn fast. Well, buying on a dip offers a margin of safety to the investor, no doubt about that. Nevertheless, the main point is that a dip is happening. Supply is high, demand is less. The underlying’s price is falling as per the demand and supply equation. What’s to tell you that the fall will convert into a rise very soon? Nothing. Nothing at all. For all you know, the underlying might continue to fall another 20%, or 30, or 40 for that matter. It’s a fall, remember? People are off-loading. When something falls, professionals off-load huge chunks to the crowds waiting to buy on dips. If the dip persists, the crowd gets stuck at a particular entry level.

Not the case in the all-time high scenario. Here, there is demand, and supply can barely meet it. Something makes the underlying very interesting. Then, as the story spreads, demand grows, making the price surge further. Add to this short-covering – further surges. Interesting, right? You just need to make sure that your entry is done and over with soon after the all-time high is broken, and not later.

And what if you get burnt? I mean, what if the price doesn’t rise any further after the all-time high, but dips nefariously?

Well, one does get burnt quite often in the world of investing. Fear will make one freeze. I’ve devised a set of rules for this strategy, and then I just go ahead with the strategy, no second-guessing. No risk, no gain.

And what are your rules?

Firstly, I only put that money on the line which I don’t need for at least a few years. Then, I don’t put more than 10 % of my networth in any single underlying entity. Also, after entry, I don’t budge on the position for a few years. I only enter stories which have the potential to unfold over several years. And I only close the position when the reason for entry doesn’t exist anymore, irrespective of profit or loss. Over the long run, this works for me.

It can’t be that simple.

It’s not. I’ve come to these personal conclusions after making many, many blunders, and after losing a lot of money. This knowledge can’t be bought in a bookshop, nor can it be learnt in a university. It can only be learnt by doing, and by putting real money on the line.

Well, I’d much rather still buy on a dip.

Go ahead, a few people are making money while buying on dips. But they wait for the real big dips. They’ve got one big quality that qualifies them for this strategy, and separates them from the crowd. It’s called patience. Prime example is Warren Buffett.

Who’s the prime example of your strategy?

Fellow called Jesse Livermore.