Category Archives: Investing

It Started With A K.I.S.S.

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In the year 1982, the band Hot Chocolate churned out a hit called “It started with a kiss”. The number hit the top ten. Whenever this song played during the span of the 80s, entire dance floors used to get the hint.

Well, unfortunately, the K.I.S.S. we speak about is a little different.

Ours is a formula.

Expanded, our formula stands for “Keep It Simple (Stupid)”.

Nevertheless, for us too, it all starts with the formula of K.I.S.S.

In the world of finance, we apply this formula everywhere. We don’t leave home without it. Anything that doesn’t conform to our formula is booted out of our lives.

For example, how diversified are you?

Are you so diversified, that you don’t know where which investment of yours is? That’s like way, way off our formula trajectory. Please lessen your level of diversification, such that you have all your investments on your fingertips.

Or, is your prospective investment product’s math complicated enough for you, such that you are not understanding the product fully? Leave the product alone. Again, it does not lie on the trajectory of our formula.

Then, is some investment officer talking razzle-dazzle lingo, trying to psyche and bulldoze you into an investment? Please show him or her the door. You got it. Eliminated by our formula.

Is some promoter’s lifestyle very sophisticated and complicated? Think twice before buying into his or her company, because the sophistication with all its complications is (with very high probability) being financed by company money, at the cost of all shareholders.

How many financial advisors have you got? Why do you even need financial advisors, when everything is available to you on the Internet? Is a financial advisor going to share the pain of your investment loss? Of course not. You are going to bear that pain fully. Therefore, once you yourself get going, the quality of investments you decide upon for yourself are going to be better than those selected by an investment advisor. You know yourself better than an investment advisor does. He or she doesn’t possess the power to understand and define you better than you do yourself. So, simple, do it yourself. Since any resulting pain is yours, you’ll try to avoid all pain, at any cost, and after a few hits, you’ll eventually start doing it well. You won’t sink, you’ll swim, believe me. Once you get the hang of it, staying above water can be simple. There’s nothing complicated about it.

I mean, we can go on here. Yeah, like we can go on K.I.S.S.ing here…, but I’m gonna stop, because I think you’ve got the message.

On that note, cheers, and here’s looking forward to keeping it simple…and not stupid.

Happy Second Birthday, Magic Bull !!

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Seasons change. So do people, moods, feelings, relationships and market scenarios.

A stream of words is a very powerful tool to understand and tackle such change.

Birthdays will go by, and, hopefully, words will keep flowing. When something flows naturally, stopping it leads to disease. Trapped words turn septic inside the container holding them.

Well, we covered lots of ground, didn’t we? This year saw us transform from being a money-management blog to becoming a commentary on applied finance. The gloom and doom of Eurozone didn’t beat us down. Helicopter Ben and the Fed were left alone to their idiosyncrasies. The focus turned to gold. Was it just a hedge, and nothing but a hedge? Could it replace the dollar as a universal currency? Recently, its glitter started to actually disturb us, and we spoke about exit strategies. We also became wary of the long party in the debt market, and how it was making us lazy enough to miss the next equity move. Equity, with its human capital behind it, still remained the number one long-term wealth preserver cum generator for us. After all, this asset class fought inflation on auto-pilot, through its human capital.

Concepts were big with us. There was the concept of Sprachgefühl, with which one could learn a new subject based on sheer feeling and instinct. The two central concepts that stood out this year were leverage and compounding. We saw the former’s ugly side. The latter was practically demonstrated using the curious case of Switzerland. There was the Ayurvedic concept of Satmya, which helps a trader get accustomed to loss. And yeah, we meet the line, our electrolytic connection to Mrs. Market. We bet our monsters, checked Ace-high, gauged when to go all-in against Mrs. Market, and when to move on to a higher table. Yeah, for us, poker concepts were sooo valid in the world of trading.

We didn’t like the Goldman attitude, and weren’t afraid to speak out. Nor did we mince any words about the paralytic political scenario in India, and about the things that made us go Uffff! We spoke to India Inc., making them aware, that the first step was theirs. We also recognized and reacted to A-grade tomfoolery in the cases of Air India and Kingfisher Airlines. Elsewhere, we tried to make the 99% see reason. Listening to the wisdom of the lull was fun, and also vital. What would it take for a nation to decouple? For a while, things became as Ponzi as it gets, causing us to build a very strong case against investing a single penny in the government sector, owing to its apathy, corruption and inefficiency. We were quite outspoken this year.

The Atkinsons were an uplifting family that we met. He was the ultimate market player. She was the ultimate home-maker. Her philanthropy stamped his legacy in caps. Our ubiquitous megalomaniac, Mr. Cool, kept sinking lower this year, whereas his broker, Mr. Ever-so-Clever, raked it in . Earlier, Mr. Cool’s friend and alter-ego, Mr. System Addict, had retired on his 7-figure winnings from the market. Talking of brokers, remember Miss Sax, the wheeling-dealing market criminal, who did Mr. Cool in? She’s still in prison for fraud. Our friend the frog that lived in a well taught us about the need for adaptability and perspective, but not before its head exploded upon seeing the magnitude of an ocean.

Our endeavors to understand Mrs. Market’s psychology and Mr. Risk’s point of view were constant and unfailing, during which we didn’t forget our common-sense at home. Also, we were very big on strategy. We learnt to be away from our desk, when Mrs. M was going nowhere. We then learnt to draw at Mrs. M, when she actually decided to go somewhere. Compulsion was taken out of our trading, and we dealt with distraction. Furthermore, we started to look out for game-changers. Scenarios were envisioned, regarding how we would avoid blowing up big, to live another day, for when cash would be king. Descriptions of our personal war in Cyberia outlined the safety standards we needed to meet. Because we believed in ourselves and understood that we were going to enhance our value to the planet, we continued our struggle on the road to greatness, despite any pain.

Yeah, writing was fun. Thanks for reading, and for interacting. Here’s wishing you lots of market success. May your investing and trading efforts be totally enjoyable and very, very lucrative! Looking forward to an exciting year ahead!

Cheers 🙂

Isn’t This Other Party Getting Too Loud?

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We in India have decided to go for gold after the Olympics.

I mean, there’s a whole parallel party going on in gold.

What’s with gold?

Can it tackle inflation?

No.

Is there any human capital behind it?

No.

Meaning, gold has no brains of its own, right?

Correct.

Is there a storage risk associated with gold?

Yes.

Storage volume?

Yes.

Transport inconvenience?

Yes.

Price at an all time high?

Yes, at least for us in India. We’d be fools to consult the USD vs time chart for gold. For us, the INR vs time chart is the more valid one for gold, because we pay for gold in INR.

Getting unaffordable?

Yes.

No parameter to judge its price by, like a price to earning ratio for example?

No.

Then how am I comfortable with gold, you ask?

Right, I’m not.

Can I elaborate, is that what you are requesting?

Sure, it’s exorbitance knocks out its value as a hedge. A hedge is supposed to balance and stabilize a portfolio. Gold’s current level is in a trading zone. It is not functioning as an investor’s hedge anymore.

Why?

Because from a huge height, things can fall big. Law of gravity. And gold’s fallen big before. It doesn’t need to begin it’s fall immediately, just because it is too high. That alone is not a valid reason for a big fall, but the moment you couple the height with factors like improvement in world economics, turnaround in equities (if these factors occur) etc., then the height becomes a reason for a big fall. Something that can fall very big knocks out stability and peace of mind from an investor’s portfolio. The investor needs to bring these conditions back into the portfolio by redefining and redesigning the portfolio’s dynamics.

How?

By selling the gold, for example, amongst other things.

What’s a good time to sell?

Well, Diwali’s a trigger.

Right.

Then, there are round numbers, like 35k.

What about 40k?

Are you not getting greedy?

Yeah – but what about 40k?

Nothing about 40k. Let 35k come first. I like it. It’s round. It’s got a mid-section, as in the 5. It’s a trigger, the more valid one, as of now.

Fine, anything else?

Keep looking at interest rates and equities. Any fall in the former coupled with a turnaround in the latter spells the start of a down-cycle in gold.

Is that it?

That’s a lot, don’t you think?

I was wondering if you were missing anything?

No, I just want to forget about gold max by Diwali, and focus on equities.

Why’s that?

There are much bigger gains to be had in equities. History has shown us that time and again. Plus, there is human capital behind equities. Human capital helps fight inflation. What more do you want? Meanwhile, gold is going to go back to its mean, as soon as a sense of security returns, whenever it does.

And what is gold’s mean?

A 1 % return per annum, adjusted for inflation, as seen over the last 100 years.

That’s it?

Yeah.

And what about equities?

If you take all equities, incuding companies that don’t exist anymore, this category has returned 6% per annum over the last 100 years, adjusted for inflation.

And what if one leaves out loser companies, including those that don’t exist anymore.

Then, equity has returned anything between 12 -15% per annum over the last 100 years, adjusted for inflation.

Wow!

Yeah, isn’t it?

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.

I know a guy who knows another guy who knows this guy…

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Well, congratulations.

So you’re well connected.

You probably play golf with the CEO of Big Balls Incorporated.

We’re not even going into how you wangled the slot.

You probably feel, that because of your connectedness, you can get away with anything in life.

Well, almost anything.

That’s the bottom-line.

You can get away with almost anything in life.

Here are two areas where your connectivity counts jack. As in El Zero. Nadda.

One is before the Almighty (presuming that God exists). Buying a slot with God using connections isn’t gonna cut it with the big guy. You can’t buy personal time with deities using money and / or connections, even if you think you can. Also, that “bought” time, when you shoved everyone else out of line, well, that time’s not going to make your life any better, or richer. You’ve just established yourself as someone who shoves others out of line using connections….that’s how your deity is going to view your performance. So, what you’re going to understand from this space is that before deities – the Almighty – God – the Metaphysical – or whatever you might want to call what I’m talking about, connections don’t work. You only end up scoring negative in your deity’s books.

Which brings us to the more relevant matter – where else do connections not work?

In the marketplace of course, my friend.

Don’t believe me? Fine, find it out for yourself, the hard way. Or, read on.

You see, in the marketplace, insiders have an agenda. All insiders. They have an agenda.

That agenda is personal. It includes them. It doesn’t include you … … if you’re not connected to the insider. Once you are, and you use that connection to fish for “lucrative” inside information, that’s where the insider’s agenda starts to include you. The information you get is as per the agenda of the insider. If a promoter wishes to off-load huge quantities of stock, you will be told that the stock’s a good buy, because blah-blah-blah-blah-blah. On the other hand, if the promoter wishes to buy back large quantities of stock, because of attractive valuations, you’ll be told to sell the stock owing to tricky prospects in the future. You are not getting quality information when you fish for tips. You’ll only find yourself getting trapped if you follow insider tips.

There are good insiders too … is that what you are saying? Ok, fine, some insiders are good human beings. They are not vicious, and they wish you well. They might even want to do you a favour, wishing that you make some money from the information they are letting out. All true. Question is, does it really work?

No.

Why?

You see, an insider never functions alone. When a company experiences a turnaround or a great quarter comes along with excellent earnings, white-collared people connected to the functioning of the company obviously know this, and they leak this information out (for a price) to smart researchers and investors. These smarties (along with their entire intimate circle of connectivity) buy into the company’s prospects. The money moved is called smart money. Smart money registers / reflects on the traders’ charts. The scrip might show a bounce-back from a low with huge volume, or a resistance might be broken, or a new high could even be made (all coupled with large volume). Traders latch on. Price movers higher. All this is happening before the CEO has announced quarterly results, mind you. Finally, a few days before the results, the corresponding results-file lands on the CEO’s desk. He or she congratulates his or her staff on the spectacular performance, and over a round of golf, the information is shared with you. The CEO is obviously thinking that the market is going to react positively to the earnings surprise that’s going to be announced.

Well, the earnings are not going to be a surprise. The market already knows, and earnings have thus already been factored into the price, before results are announced. Announcement time is generally selling time for traders, who tend to sell all stock upon the first spike after announcement. With no more buying pressure (since traders are out of the scrip), the inflated scrip tanks despite the good news, leaving you stuck with a peak-price buy. Well done, well done indeed.

See, that’s why. Don’t listen to insiders, even if they mean well.

In the marketplace, you really are on your own. Isn’t that exciting? As in challenging?

All the best, my friend. Learn to rely on your own judgement.

Getting Too Comfy For Our Boots, Are We?

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What a party we are having in the debt-market, aren’t we?

Exceptional payouts, day after day, week after week, month after month, it’s almost going to be year after year.

Are you getting too comfortable? Lazy, perhaps?

Meaning to say, that when you can get a 10 % return after tax without having to move your behind for it, it is a very welcome scenario, right?

People, scenarios change.

It isn’t always going to be like it is at the moment.

Are you flexible enough to change with the scenario?

Or will you be lost in the current moment, so lost, that you will not recognize the signs of change?

What would be these signs? (Man, this is like spoon-feeding….grrrrrr&#*!).

Inflation begins to fall.

The country’s central bank announces back to back interest rate cuts.

Too lazy to read the paper? Or watch the news? Ok, if nothing else, your online liquid mutual fund statement should tip you off.

How?

The payout, dammit, it will have decreased.

Also, something else starts performing.

What?

Equity.

Smart investors don’t like the debt payout anymore. They start moving their smart money into value equity picks.

Slowly, media stops reporting about a gloomy economy. The buzz gets around. Reforms are on the way.

Foreign direct investment picks up. The media latches on to it. It starts speaking about inflows as if the world begins and ends with inflows.

Now, the cauldron is hot and is getting hotter.

Debt payouts are getting lesser and lesser. Equity is already trending upwards, and has entered the meat of the move.

If the trend contnues, a medium to long-term bull market can result.

There you have it, the chronology played out till just before the start of a bull market of sorts.

Be alert. Recognize the signs early. Be mentally in a position to move out of the debt market, if the prevailing scenario changes.

Otherwise…

… you miss a first run in equity. Boo-hoo. When stocks cool at a peak, and start falling, you make multiple wrong entries into them.

You get hammered by equity, having caught it on the down-swing.

You missed the correct entry time-point in equity because the debt-market made you too comfortable. You were late to act. When you acted, finally, you caught a correction, and took a hammering.

One or two more hammerings like that, and you’ll be off equity for the rest of your life.

And that, my dear friend, would be a pity.

Why?

Because, in mankind’s history, it is stocks that have given the best long-term returns. Not gold, not debt, not bonds, but stocks.

You need to approach them properly, and timing is key.

The Ugly Side of Leverage

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Not too long a time ago, in an existence nearby, people saved.

Credit was a four letter word, or a six letter word, or whatever you want to all it, as long as you get my point.

People worked hard, and enjoyed the sweet taste of their labour.

They knew their networth on their fingertips, and there was no question of extending oneself beyond.

People were happy. They had time for their families. Words like sophistication, complicated and what have you had simpler meanings.

At the end of the month, as large a chunk as possible was pickled away.

For what?

Safety. Steady growth. For building a lifetime’s corpus. For the future generation.

Life was straight-forward.

Then came leverage.

At first, leverage was an idea that was looked down upon. People were slow to leave their safety zones.

Then they saw what leverage could do.

It could make possible a lifetime of fun. One could do things which were well out of one’s financial reach currently. Leverage could even buy out billion dollar companies.

All one had to do was to pledge one’s incoming for many, many years. If that didn’t suffice to fulfill one’s fun-desires, one could even pledge the house. The money borrowed would eventually be paid up, along with the compound interest, right? After all, one had a steady job that promised regular income.

What use was a lifetime of sweat if one didn’t get to enjoy oneself? One couldn’t really live it up after retirement, could one? That’s when one would eventually possess enough free funds to do what one was doing now, with the advent of leverage.

The do-now-pay-later philosophy soon took over the world.

Without being able to afford even a meaningful fraction of their expenditure, people began to go beserk.

What people didn’t know, and what they are now finding out the hard way, is that leverage is a double-edged sword. Since people didn’t know this, and since they didn’t bother to read the fine-print of the documents they were signing while leveraging their monthly salary or their home, well, financiers didn’t bother to educate them any further. No hard feelings, it was just business strategy, nothing personal.

Today, we know more. Much much more. Hopefully we have learnt. We are not going to make the same mistakes again.

So, when you buy into a company, look at the leverage on the balance-sheet. A debt : equity ratio of 1 : 1 is healthy. It promises balanced growth. If the ratio is lower, even better. We’ll talk about debt : equity ratios that are below 0.5 some other day.

Most companies do not have a healthy debt : equity ratio. Promoters like to borrow, and borrow big. You as an investor then need to judge. What exactly is the promotor using these funds for? Is he or she using these funds to finance a hi-fi lifestyle, with flashy cars, villas and company jets? Or is the promoter using these funds for the growth of the company, i.e. for the benefit of the shareholders? Use your common-sense. Look into a company’s management before buying into any company.

As regards your own self, reason it out, people. Save. As long as you can avoid taking that loan, do so. Loaned money comes with lots of hidden fees. If I’m not mistaken, now you’ll even need to pay service tax and education cess on a loan, but please correct me if I’m wrong. There’s definitely a loan-activation fee. Then there’s the huge interest, that compounds very fast. Ask someone who has borrowed on his or her credit card. There’s the collateral you’re promising against the loan. That’s your life you’re putting on the line. All for a bit of leveraged fun? How will your children remember you?

Also, when you invest with no leverage on your own balance-sheet, your mind is relaxed. There is no tension, and your investment decisions are solid. Furthermore, if you’re invested without having borrowed, there’s no question of having an investment terminated prematurely because of a loan-repayment date maturing coupled with one’s inability to pay.

How does the following sentence sound?

” Then came leverage, and common-sense disappeared.”

Not good, right?

The Thing with the Goldman Attitude

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The Goldman attitude is making me puke.

My reaction to it is similar to that of Louis de Funes in this link.

Numbers make the world go round. The human being will do anything to bring home the right numbers.

Investment banks, normal banks, brokers…are lining up for your account. So that their company’s balance sheets look presentable, they have one thing in mind – brokerage generation. Your prospereity is no longer their foremost thought.

So, to be fair, it’s not exactly a “Goldman attitude” only, it’s fairly universal. Lately, it’s gotten publicity after an ex-Goldman employee spilled the beans.

The thing is, where does that leave you? You used to depend upon sound advice from your trusted broker, right?

Well, not happening anymore. You’re in this on your own. Sink, or swim.

The thing with successful business over the long-term is that it needs to be practised with a “win-win”
ideology. If one party loses, one time too many, it then rightly backs off from the business. Brokers and investment bankers worldwide are noticing this backlash.

Why should I be someone who grudges a broker his or her brokerage?

Nope, I’m not such a person. A broker can make all the brokerage he or she wants as long as business remains ethical. The line for me gets drawn when lousy, synthetic, losing investments start to get touted.

And now we come to the public. Frankly and ultimately, it’s the public’s fault. People want to invest their money, but many don’t know the first thing about investing. That’s when they start throwing their hard-earned money at Mrs. Market, and that’s when they make big mistakes.

How long does it take a brain-surgeon to master his or her art? A good 10 – 12 years, right? Similarly, playing the markets successfully over the long term also takes a long time to master. Markets are complicated too. The difference between brain-surgery and Mrs. Market is, that anyone can take a pot-shot at Mrs. Market without the least bit of preparation. This anyone still has a coin-flip (50:50) chance of success. Early, unqualified, lucky success lures this unfortunate person into huge and back-breaking losses later.

Why, people?

When we’ve decided to do something, why can’t we do it well? And, why can’t we take the time to do it ourselves?

Too busy, you say?

Well, there’s no excuse for lack of that minimum threshold involvement in an investment, even if it’s being handled for you by your bankers or brokers.

Let’s say someone really close to you is receiving critical medical treatment. Don’t you get involved? As in, surf the net, find the best doctor, hospital, clinic, keep yourself updated about the progress of the treatment etc. etc. Why do you not behave in the same manner when your own money goes out to earn?

What makes you hand it over to a third party blindly?

Enough said already.

The thing with the “Goldman attitude” is, that it is a wake-up call.

For all of us.

To get our act together.

This is Getting Murky

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Have you actually seen China’s account books?

Has anyone, for that matter?

How does the US pay for its imports from China?

With treasury-note IOUs?

Are Chinese GDP numbers doctored?

If yes, for how many years have the Chinese cooked their books?

How many more bailouts is Greece going to require?

Isn’t the amount of financial maneuvering increasing from bailout to bailout?

It feels as if real debt is being made to “go away” synthetically.

Things are getting murky in the financial world.

When that happens, the stage is set for tricky synthetic products to be offered.

It’s time to go on high alert.

You see, for the longest time, banks in the “developed” world have not been clocking actual business growth. However, their balance sheets are growing on the basis of trading profits. In almost all cases, the “float” is not increasing significantly from clients’ savings, or from new business. Instead it is increasing from good trading.

However, trading can go wrong for a bank. All that is required is one rogue trader. Blow-ups keep happening. For banks, good trading is at best a bonus. It is not something solid and everlasting to fall back on for eternity.

Well, that’s what most or all “developed” international banks are doing. They are relying on their international trading operations to see them through these times. (((Compare this to an emerging market like India, where an HDFC Bank generates 30%+ QoQ growth, for the last 8 quarters and counting, on the basis of actual business profits from new accounts, savings and fresh real money that increases the float))).

While the scenario lasts, what kind of synthetic products can one expect from the plastic composers of financial products?

And we are going to get something plasticky soon, since “developed” international banks have gotten into the groove of trading, and since trading is their ultimate bread and butter now.

So what’s it gonna be?

The conceivers of plastic in the ’80s still had a conscience. For example, Michael Milken’s “Junk Bonds” still had actual underlying companies to the investment. That the companies were ailing, and could probably go bust, was a different issue. In lieu of that, junk bonds were giving returns that beat the cr#p out of inflation twice over, and then some. Though investors knew that these underlying companies were ailing, greed closed their eyes, as crowds lapped up the product. We know how the story ended.

In the ’90s, anything with the flavour of IT ran like an Usain Bolt. The conceivers of plastic products here were tech enterpreneurs, coupled with bankers that pushed through their IPOs. One had a lot of shady dotcoms with zero or minus balance-sheets clocking huge IPOs, apart from being driven up to dizzy heights by greedy public, from where their fall began.

By the ’00s, whatever 2 pennies of conscience that remained were now out the window. Products like CDOs did the rounds. These had no actual underlying entity, like a bond or a debenture. They were totally synthetic, mathematical products, assembled by bundling together toxic debt. The investment bankers that conceived these products knew that the debt was toxic, and were cleverly holding the other end of the line, i.e. they sold these products to their clients as AAA, and then shorted these very products, knowing that they were bound to go down in value because of their toxic contents.

We are well into the ’10s.

What’s it gonna be?

I think it’s probably going to be a “Structure”.

There is going to be an underlying. The world is wary about “no underlyings”.

The catch is going to come from the quality of the underlying, as in when it’s ailing badly and the world thinks otherwise (in the ’80s, the junk value of the underlying was no secret. Here, it probably will be).

Where is the product going to be unleashed?

Emerging markets. That’s where money has moved to. Also, investors there are not as savvy, since they’ve not been properly hit.

Why is the time ripe?

Interest rates are kinda peaking. Investors have gotten used to sitting back and raking in 10%+ returns, doing nothing. When interest rates start to move down, that would be the stage for the unleashing of the product in question.

Lazy, spoilt investors would probably lap up such products offering something like 13%+ returns, with “certified” AAA underlying entities to the investment.

So watch out. Don’t be lazy or greedy. As and when interest rates start to move down, move your money into appropriate products that are not shady and that have safe underlyings. From knowledge, not from hearsay.

Be very selective about who you let in to give investment advice. Even someone you trust could be pushed by his or her employer institution to aggressively sell you something synthetic with a shady underlying.

Be very, very careful. Do your due diligence.

Don’t get into the wrong product, specifically one with a lock-in.

Don’t Cry for Chris Atkinson

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Chris Atkinson is terminal.

You couldn’t tell that by looking at him.

He’s happy. Most of his physical pain gets subdued by medicine. The remaining portion gets subdued by the harmonious environment he’s created around himself all his life.

Whatever’s left of his life is still a pleasure. He looks forward to it.

He won’t be sorry to go, though, for he carries with him a huge sense of accomplishment.

For starters, he’s had a flawless marriage. Neither of them have felt the need to fight.

He has been faithful to her and has given her everything he possibly could.

She has supported him selflessly in every venture of his. She has never abused the financial freedom he’s given her. Also, she’s never been jealous of his intelligence.

She has not nagged. That’s a huge one, and he knows the value of his good fortune.

Furthermore, she has overlooked the “too-much proximity” clause, and has allowed him to work from home in peace. She has even added to the harmony of his work-sphere at home.

He’s not told her he’s terminal. In fact, no one else knows, except him and his doctor.

He has always wanted to work till his last day. Also, she should see his smiling side till the end.

What about after that?

Will she be safe?

After all, before her marriage, Jane Atkinson was probably the most tech-unsavvy woman alive.

Forty something years with him have completely turned that around.

She is financially independent today. More importantly, she’s able to access and manage her personal funds and investments independently. She doesn’t need to contact any fund-managers, brokers, bankers or the like. All her accounts are online, and their logins and passwords are sorted, stored, and accessible only to her. She is able to move her personal funds worldwide with a few button-clicks.

He has taught her fantastically.

She has learnt very well.

Initially, it was a slow going.

The most important thing was, there was no ego from her side while learning. She knew he was teaching her something really important. Though she was not the least bit interested in it, she respected his seriousness and intensity, and decided to learn as diligently as she could, without insulting his earnest attitude.

Slowly, she’s gotten the hang of it. Slowly, her interest in money matters has awakened.

It’s also worked because he has been very patient with her. He’s never blown up.

His monthly “lectures” on saving have converted her from a champion spendthrift to a slightly serious saver. She still spends a lot, but has been managing to save a bit every month. Since his monthly allowance to her has been huge since the beginning, the bit she saves equates to a lot of money in her personal account at the end of every month, money that’s waiting to be invested.

And now comes the kicker. She knows how to handle idle funds. Her knowledge on investing comes purely from watching him in action. She has watched in bits and pieces over forty plus years. She has shared his professional tensions, allowing him to speak freely about what has bothered him. Her mind has soaked in all this information. Because of the long time-span involved, she has digested the information and transformed it subconsciously into a usable form. Today, she is not only financially independent, but also financially capable.

So, no, he’s not worried about her on the financial front.

What’s eating him a bit is the emotional side of life. How will she take it?

He knows she’s strong. She’ll be shattered, though. They share a bond that most people don’t have. They don’t need to speak in each other’s presence. There’s so much mutual love, that life is telepathic. Her mental strength will pull her through, he tells himself. Their happy memories will sooth her feelings.

If you ask him, he’ll want her to move on. As in, he’ll want her to find a new and suitable relationship. She won’t, though. They have something a new relationship will not be able to replace.

He knows she’ll plunge further into her charity work, and will keep busy.

She’ll remember and miss him every day. That very thought takes away any of his pain that remains, physical or mental. He feels wanted, and will do so till his last day and beyond. Feeling wanted is a tremendously satisfying state of mind.

He has always been aware that she is emotionally dependent on him, and has never abused this knowledge. Over the last four decades, he has made her aware of her emotional dependence, asking her to work on it.

Today, he feels she’s capable of handling his permanent physical absence. It’ll hurt her, but she’ll handle it. She’ll cry, but joyful memories will pull her through.

Don’t cry for Chris Atkinson.

When he goes, he’ll go on a happy and fulfilled note. He’s had a great life.

Many couples wish they would live their lives like Chris and Jane Atkinson have done.

Dealing With a Bully

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I know a way of dealing with a bully – sock the bully a real tight one in the solar plexus. Inside, there’s only air, and that one tight punch is going to burst the balloon and reduce the bully to his real self, i.e. a meek failure.

What if this bully is the government itself?

Let’s just caste a very quick glance at the track-records of the governments of independent India till date.

Education has been a total failure. Whatever meaningful education is being imparted in India is being done so mostly by private institutions, at least till high school level, if not even after that.

Healthcare – another very big failure. The government’s hospitals, just like its schools, are a disgrace.

Left to the government, infrastructure would have been a massive failure too, which it was, till the private sector stepped in.

Let’s not even start speaking about the governmental airline carrier, Air India. Words fail me here.

You want to avoid the police lest they stick you one at a time when you have other problems.

You want to settle any disputes out of court, because the semi-dysfunctional judicial system will, in all probability, stretch the issue over decades, with much ensuing harassment.

I mean, I could go on and on. Point of the matter is, governance in independent India has been an overall and disastrous failure.

We are not a democracy – we are a joke.

Over the last few years, these and more blunders are coming to light. They are being flashed over the papers and on television, nationally and internationally. People are getting to see and know the quality of people that has been governing the country. Citizens are disgusted.

Instead of charting a course of rectification, what does the bully do?

It tries to hide its own failures by passing on the responsibility to private institutions. Governments and governments have robbed common citizens of their basic rights to education, healthcare etc. over decades. Now, when the deprivation has become too glaring, they want private institutions to accomodate the deprived, and that too quasi-free of cost. I’m talking about the current developments in the education sector. Rest assured, other sectors will be affected too, if one goes by the governmental mind-set.

The government is bullying private schools into reserving 25% (number could vary for different states) of their capacities for kids from backward classes. The government says it’s going to pay for this partly, but knowing the value of its words, this money is never going to come. Basically, it wants want private schools to lift this burden and pay for it too. Unbelievable.

The government’s massive failure in the field of education has caused downtrodden classes to finally start asking, “What have you done for us?” and “Where is our education?” and “Why is the quality of the schools built for us by you so pathetic?” and “Where does the education cess go, which you charge along with every monetary transaction in the country?” and again, “Where is our education?”

Now the government gets really cute, and says, “You see those private educational institutions over there, look at them, they are doing so well, they will make your kids rise, we will steam-roll them into admitting your kids, there is your education!”

Laws in India are basically stacked up against private institutions and in favour of the government. One false move here or there, and you could be breaking a law as a private player. Hence, as a private player, you are always in the government’s grip. To function smoothly and not show a loss, you could end up slightly bending a rule or two. The government agrees to look the other way, and lets you function, but then you have to mutually agree to get bullied by it every now and then. Sometimes, the bullying takes on ridiculous levels, like it has for the education sector. My remedy to deal with a bully (given at the top) like the government is not going to work, because I just wouldn’t know how to implement it. I wouldn’t even know what to implement.

And that’s the story, people. India Inc. is heavily burdened by its failure watchdogs. You need to incorporate this fact into any investment strategy that concerns India Inc. Right within its purchase price, any investment in India needs to discount for the governmental failure that will inevitably be patched onto the private institution that you are planning on buying into.

What does that mean for governmental institutions as investments? Frankly, looking at the mess, one can’t even think of buying into these, unless one wants to own companies with Ph.D.s in inefficiency and mismanagement.

The Line

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In the world of applied finance, you will meet the “line”.

Though the line is an abstract phenomenon, it is very real.

Whenever you connect to Mrs. Market, you do so through the line, which comes into existence (you guessed it) when you put your money “on the line”.

Please be aware of the capabilities of the line. If you allow it to, it grabs hold of the emotional switches of your brain. When the price of the scrip you’re trading plunges, the line can turn on your depression switch. As the loss multiplies, the line makes you go into freeze mode. On the other hand, it can also make you go on a spending spree with your notional profits, if your scrip is doing well. If you allow it to, the line then controls how you interact with your family and for that matter with everyone else.

Why give it so much power? Let’s keep the line in its boots. When you’re flying a kite with strong winds prevailing, and the kite plunges downwards and out of control towards some electricity wires, what do you do? Obvious answer, let the string go. Well, not so obvious when you’re holding the string (substitute string for “line” if you wish). You could try and save your kite, or for that matter, your trade, at the cost of being electrocuted, or, in trading jargon, burnt.

When you’re holding the line, common-sense often goes out the window. You start thinking emotionally. Our society doesn’t teach us to embrace failure. We are taught to win. Thus, we want to turn every trade into a winning trade. Big mistake. We are not able to let the line go while any loss is still bearable.

Wins come. The fact remains, that in applied finance, many transactions will be failures. You’ve won if you can then let your line go at a digestible failure level.

When a win does come along, again one is completely misled by the teachings of modern society. “Book your success now, put it on your resume”. An even bigger mistake in applied finance.

A winning trade needs to be allowed room to win some more. After struggling with failures, you’ve finally identified a winning horse. Aren’t you going to let it win more (races)? Aren’t you going to continue holding the line to let a multibagger emerge, instead of letting the line go while you’re showing a small profit which doesn’t even cover your failed trades?

The line is an enigma concerning the discernment of befitting moments for attachment and detachment.

We need to let it go when it threatens to burn us. Also, we need to hold on to it, contrary to any public opinion, that “XYZ can’t possibly go any higher”.

There’s no way we’re playing the line according to public opinion or society rules.

Also, there are times when it doesn’t make sense to get a line going, because the kite just doesn’t take off. At other times, you need to put out one line after another into the sky, because your kites start to soar, one after another.

In the world of applied finance, you need to put your money on the line. There’s no other way to connect to Mrs. Market.

The “when” is up to you, when to get it going, when to let it go, when to hold on, when to scale it up.

And at that level, trading becomes an art.

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.

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.

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.

Is Commodity Equity Equal to Commodity?

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Rohit likes Aarti, but has no access to her.

Priya wants to be friends with Rohit. Priya looks a bit like Aarti and behaves like her too, at times.

Rohit and Priya become friends.

Is Priya = Aarti?

Can this question be answered with a resounding yes or no?

Of course Priya is not equal to Aarti. Priya is Priya and Aarti is Aarti. Ask Rohit about it during one of Priya’s temper tantrums.

And, at other times, Priya is just like Aarti. At still other times, Priya is as calm as the Pacific Ocean. Even calmer than Aarti. At those times, Rohit feels he is even better off with Priya than he would have been with Aarti.

After this short diversion into human relationships, let’s study the correlation between commodities and commodity equity.

The average working individual does not have access to commodities as an asset class. He or she is not a farmer, and doesn’t have the time or the nerve to play futures and options, in an effort to put some money in commodities.

Is there any avenue such a person can access, to invest a piece of his or her pie in commodities.

It’s time to study the world of commodity equity.

For example, we are talking about agriculture stocks, precious and non-precious metal mining stocks, oil and natural gas stocks etc. etc.

Do such stocks always behave as their underlying commodity?

Can one put one’s money in commodity equity, and then feel as if one has put the money in commodities?

These questions can be answered in terms of correlation.

There are times when Gold moves x%, and Gold equity also moves x%, in the same direction. At such times, the correlation between Gold and Gold equity is 1:1.

At other times, the levels of movement can be mismatched. For example, the correlation can be 0.8:1, or 1.2:1. Sometimes, there is even a negative correlation, when Gold moves in one direction, and Gold equity in the other. At still other times, one moves, and the other doesn’t move at all, i.e. there is no correlation.

You see, Gold equity first falls under the asset class of equity. It is linked to the mass psychology of equity. When this mass psychology coincides with the mass psychology towards commodities, here specifically Gold, there is correlation. When there is no overlap between these psychologies, there is no correlation. When the public just dumps equity in general and embraces commodities, or vice-versa, there is negative correlation. These relationships can be used for all commodities versus their corresponding commodity equity.

What does this mean for us?

Over the long-term, fundamentals have a chance to shine through, and if there is steady and rising demand for a commodity, this will reflect in the corresponding commodity equity. Over the long term, the discussed correlation is good, since truth shines forth with time. That’s good news for long-term investors.

Over the medium-term, you’ll see correlation at times. Then you’ll see no correlation. You’ll also see negative correlation. Position traders can utilize this information to their benefit, both in the long and the short direction.

Over the short-term, things get very hap-hazard and confusing. It would be wrong to look for and talk in terms of correlation here. In the short-term, for trading purposes, it is better to treat commodity as commodity and commodity equity as equity. If you are trading equity, a gold mining stock or any other commodity equity stock might or might not come up in your trade scan. When such a stock does get singled out for a trade as per your scan, well, then, take the trade. Don’t be surprised if at the same time your friend the commodities trader is trading oil futures instead, or is just sitting out. That’s him or her responding to his or her scan. You respond to your scan. In the world of short-term trading, it is hazardous to mix and correlate commodities with commodity equity.

Phew, that’s it for now. It’s taken me a long time to understand commodity equity, and I thought that I’d share whatever I understood with you.

A Fall to Remember (Part 2)

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Part 1 was when Silver fell almost 20 $ an ounce within a week. Like, 40%. Swoosh. Remember? Happened very recently.

And now, Gold does a Silver, and falls 20 % in a few days. These are the signs of the times. “Quick volatility” is the new “rangebound move”. Put that in your pipe and smoke it.

The wrong question here is “What’s a good entry level in general?” Why is this question wrong?

When something new becomes the norm, there is too little precedence to adhere to. It becomes dangerous to use entry rules which were established using older conditions as a standard.

I believe there is one way to go here. The correct question for me, were I seeking entry into Gold or Silver, would be “Is this entry level good enough FOR ME?” or perhaps “What’s a good enough entry level FOR ME?”

Let’s define “good” for ourselves. Here, “good” is a level at which entry doesn’t bother YOU. It doesn’t bother you, because you are comfortable with the level and with the amount you are entering. You don’t need this sum for a while. It is a small percentage of what you’ve got pickled in debt, yielding very decent returns. If the underlying slides further after your entry, your “good” level of entry still remains “good” till it starts bothering you. You can widen the gap between “not-bothering” and “bothering” by going ahead with a small entry at your “good” level, and postponing further entry for an “even better” level which might or might not come.

If the”even better” level arrives, you go ahead as planned, and enter with a little more. If, however, your “good” level was the bottom, and prices zoom after that, you stick to your plan and do not enter after that. This would be an investment entry strategy, which sigularly looks for a margin of safety. Entry is all-important while investing, as opposed to when one is trading (while trading, trade-management and exit are more important than entry).

Trading entry strategies are totally different. Here, one looks to latch on after the bottom is made and the underlying is on the rise. Small entries can be made as each resistance is broken. It’s called pyramiding. Trading strategies are mostly the complete opposite of investing strategies. Please DO NOT mix the two.

Sort yourself out. What do you want to do? Do you want to invest in Gold and Silver, or do you want to trade in them? ANSWER this question for yourself. Once you have the answer, formulate your strategy accordingly. U – good level – how much here? U – even better level – how much there? U – no more entry – after which level?

Life is so much simpler when one has sorted oneself out and then treads the path.

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.