Category Archives: Market Psychology

Fine-Tuning the Need for Action : A Dialogue

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It’s a multi-tasking world around us.

Things move.

We grow up with a need for action. Some with less need, some with more. Nevertheless, this need for action is here to stay.

And with this highly individualistic need for action, we enter the market.

So when does the conflict arise?

When one’s innate need for action is lesser or more than one’s market activity. Then, there’s imbalance, leading to market mistakes.

So how does one strike balance?

By fine-tuning one’s market activity with one’s need for action. These two need to be in sync for balance to exist.

And what kind of market mistakes is one looking at if imbalance exists?

Well, overtrading for one. Then there’s missed exits, early entries, missed stops, chart-related over-interpretation etc. to name a few.

And what was the key again, for striking this balance you are talking about?

Experience. There’s no substitute for experience. You’ve just got to go out there, put your money on the line, and trade. Ultimately, after some years, you strike balance.

And that’s it, is it?

Nope. Once you’ve struck balance, you need to maintain this balance.

That must be easy, right.

On the contrary, maintaining balance is one tough cookie. Here, everthing comes into play. Your family situation, relationship tensions, worldly problems…everything’s waiting to throw you off balance.

Man, sounds tough.

Naehhhh, you take it as it comes. One gets knocked off balance at intervals, and then one has to just find it back. It’s called Life.

And what’s your market activity like when you are off balance?

I’ll tell you a secret, listen up. When I’m off balance, I don’t trade.

Must be tough, going cold turkey, just like that?

Naehhh, it’s defintely better than the mistake-laden trading plays that one makes when off balance.

Oh, right.

Off with you, then, I’ve got work to do.

Ok, thanks and bye.

Bye.

Your A-Game and the Broker’s Pitch

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There’s a threat to your A-game.

If you don’t have the proper mechanisms in place, it can get mixed up with your broker’s pitch.

Your broker, poor fellow, is only trying to make two ends meet. His or her salary is coupled to turnover. Therefore, his or her sales pitch is programmed to maximize turnover.

Turnover does not necessarily enhance a good A-game. It figures nowhere in the top three aspects of trading, i.e. entry, management and exit. Please don’t spend any more time thinking about turnover.

Tune out your broker. Just press mute on your trading system. Nowadays, this is easy. You can do this by trading online instead of through the phone.

Even while online, go straight to the trading platform instead of the tips section. Tune out your broker, man. He or she exists in electronic form too. Tune him or her out.

For a better A-game, decouple it from your broker’s pitch.

Face-Off

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Markets are about returns.

Just as many roads lead to Rome, so do multiple paths lead to returns.

The two basic approaches in this game are investing and trading. We are keeping things basic, and are not even going to talk about scalping, arbitrage etc. We are looking at paths taken by most players.

So who has got it better, the investor or the trader?

Markets have this characteristic of collapsing. Unless the investor has bought with a decent margin of safety, he or she can be sitting on a huge loss. This can lead to irritability, sleepless nights, ill-health and family problems. An investor needs to slay these demons before-hand. Allowed to grow, these demons can wreck havoc.

The nimble trader on the other hand treads lightly. Technicals alert him or her well before a collapse, and when the collapse comes, the trader is ideally already fully in cash. Such a trader has no professional reason for a sleepless night.

However, when the bulls roar, the investor’s entire portfolio adds to the roar, and very soon the investor is sitting on huge gains. The trader on the other hands builds up positions slowly, and might miss a large portion of the up-move during the staggered entry process. To be fair, the investor’s exposure (risk) has been large in comparison to the trader, and thus the reward in good times will be proportionately large too. Given a choice, I’d personally take the comfortable nights throughout the year.

Then there’s active and passive playing. Investing is a passive play. One doesn’t need to man one’s portfolio on a daily basis, and can focus on other things instead. Trading, on the other hand, is very much an active play, and needs to be attended to on a daily basis.

So, unless the investor likes action, this is a favourable scenario. Unfortunately, the majority of long-term investors mess up their long-term portfolios owing to the need for action.

Trading can lead to action overload. A bad day’s result can cause mood swings. The trader needs to be in control of emotional machinery and ready to withstand a pre-determined level of loss. Unfortunately, most traders fail badly in the emotional and stop-loss department. On the whole, I feel this particular round is won the by the investor. So, it’s 1 round each.

The last round in today’s discussion is about life-style. The bored investor can either use the spare time for constructive activities, which is a great scenario, or for useless ones, like surfing adult sites. The point I’m trying to make is that a bored investor is a prime candidate for sowing wild oats.

The sensible trader uses non-market hours to finish research for the next day and then to give the mind and body relaxation and rest. However, all the action makes most traders less sensible and more flambuoyant, and equally likely candidates for sowing wild-oats during non-market hours. I think this round is a tie.

So who’s got it better, the trader or the investor?

This is actually a trick question.

What’s the proper answer?

The answer is that YOU have got it better if you fit into the profile of a sensible trader or a balanced investor, and that YOU have got it bad if you fit into the profile of a reckless / flambuoyant trader or a bored and thus trigger-happy investor.

Both investing and trading are about YOU.

You need to see how good or bad YOU have it, and forget about the rest.

Street’s got the D-word

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There seems to be an X-word in every avenue of life.

The Street has its own – the D-word.

It spells D-e-r-i-v-a-t-i-v-e-s.

Whatever reasons there are for a crisis to develop become secondary at the peak of the crisis, because derivatives take over. The crisis is driven to the nth level because of massive institutional leveraging in derivatives in the direction the crisis is unfolding. Recipe for disaster.

The human instinct is to maximize profit, irrespective of any consequences. When masses start shorting the stock of a company that’s already in trouble, its stock price can well go down to zero (and lead to bankruptcy), even if the company’s mistakes are not deserving of such a price / destiny.

Similarly, when masses start going long the futures of a company’s stock, the resulting stock price overshoots fair-value in a major way. Then come along some fools and buy the scrip at an extreme over-valuation. They are the ones that get hammered.

That’s the way this game has unfolded, time and again.

Does it need to be this way for you?

No.

Firstly, as a long-term investor, don’t buy into over-valuation. Make this a thumb rule. Control your animal instinct that wants a piece of the action. Leave the action to the traders. You need to buy into under-valuation. Period.

Unfortunately, most long-term investors (myself included) miss action. Then they fool around with their long-term holdings to get some, and in the process mess up their big game.

The animal instinct in the long-term investor can be channelized and thus harnessed. One way to get action is to play the D-game. Of course with rules. The benefit can be huge. Action focuses elsewhere and doesn’t mess up your big game.

So, play the D-game if you wish, but play it small.

Secondly, be aware that you’re only doing this to take care of the action-instinct. Any profits are a bonus.

Thirdly, keep the D-game cordoned off from long-term investment strategies. No mixing, even on a sub-conscious level.

Then, take stop-losses. DO NOT ignore them.

Also, when anything is disturbing you, DO NOT play the D-game. It DOES NOT matter if you are out of the D-game for months. Remember, this is your small game. What matters is your big game.

Categorically DO NOT listen to tips.

If you are down a pre-defined level within a month, press STOP for the rest of the month.

Make your own rules for yourself. To give you some kind of a guide-line, I’ve listed some of mine above.

A D-game played with proper rules can even yield bombastic profits. 95% lose the D-game. 5% win. Derivatives are a zero-sum play-out. 5% of all players cash in on the losings of the other 95%.

So, play in a manner that you belong to the winning 5%.

Financial Academia and the Street – A Comprehensive Disconnect

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1994 AD.

My friends in the Physics Department of the University of Konstanz, Germany, were busy trying to increase the number of holes on a silicon strip.

This was nanotech research in its advanced stage.

Nanotech saw successful implementation in the real world, though the explosion is yet to come. Nevertheless, the key words here are successful implementation.

Successful implementation on the street is only possible when a research model is practical.

Financial academia time and again delivers impractical models and is then surprised when they meet with failure on the street.

Let’s take the case of the Long Term Capital Management hedge fund. Nobel laureates ran it. They did not incorporate the possibility of a sovereign debt default in their model. So sure were they of themselves, that they went on to buy billions of dollars worth of derivatives, leveraging themselves to the hilt. Their total leverage in the end stood at 250:1. The sovereign debt default by the Russian government in 1998 triggered the LTCM fund to go belly up, and with it disappeared the life-savings of thousands of trusting investors. The ripple effects of this disaster almost knocked the world’s financial system off its platform. Talk about disconnect.

Currently, we are seeing the effects of another disconnect in action.

The Euro was conceived on the basis of hundreds of PhD theses and tons of post-doctoral research. What the researchers couldn’t possibly incorporate in their models were some basic human and emotional facts.

For starters, let’s try the Greeks. They like to retire early and work lesser than their Eurozone colleagues. Their bankers are gullible and not too street-smart, and have made some really bad bets.

Italians like to take short-cuts. They like to over-price and under-cut.

Germans like to go the whole hog. They are punctual and more environment-conscious. They do not like subsidizing those who don’t work for it.

French farmers want to sell their milk for its proper price. They and the majority of their nation dislikes subsidizing others who might not deserve subsidy.

One could go on. The list is endless.

How does one incorporate such realistic “human” stuff in mathematical models?

One can’t.

Mathematics doesn’t possess the language to reflect such human and emotional factors.

So what do these theses contain, upon which the Euro has been built. Other, disconnected stuff, no realistic, street-related emotional / human factors of value.

What we’re seeing is real disconnect in action. Financial academia is way out of its depth on the European street or for that matter on any other street. It should lay off from the street so that further disasters are prevented.

Let’s hope and pray that the Euro-chapter does not meet with a harmful end.

A Balancing Act Called Time

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Why am I so obsessed with the phenomenon called time?

Because time is the long-term investor’s secret weapon.

I believe that a portfolio comes into its own after 7 years of being built drop by drop.

In this initial period, the portfolio tries to find balance. Losers get established, but so do winners.

Once it has been established that a scrip is a loser, the portolio tells you to get rid of it every time you look at the portfolio. It’s the red ink on the losing portion of the porfolio that speaks to you. And the passage of time can even give you the opportunity to sell a loser for a lucrative price.

Eventually, winners stand out. Their black ink on the winning side of the portfolio asks you to buy into them again. And once again your dear friend time gives you the opportunity to buy into a winner at a reasonable price.

Finally, the portfolio has excreted all losers and now consists of candidates you’d consider rebuying into at the right price during the passage of time.

This is called a balanced winning portfolio. It is balanced because some winners are cheaply priced in it and some are expensive. You currently want to be buying into the cheap winners.

The moment your criteria point out that a winner is turning into a loser, you look for the next exit opportunity for this scrip. And time will give you this, i.e. a chance to sell this scrip at a great price.

So, use your secret weapon. Everyone knows about time but almost nobody uses it like a weapon. That’s why it’s a secret weapon. Use it.

While building up your portfolio and navigating it through, take your time.

Is the Middle-person History?

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Motivations…

are the propellors of life.

One can’t be an expert at everything. So one hires others to do stuff for one.

Of course one has to make it worth the other person’s while.

And the person you’ve hired needs to do the best possible job for you.

This used to be the pattern in the business of money. After the turn of the century, things started going haywire.

The middle-person in the business of money used to be a long-term wealth enhancer. His or her primary motivation was the creation and appreciation of your wealth.

Now, his or her focus is on the commissions generated by maximal short-term churning of your portfolio. This is dangerous for you.

I don’t know any wealth-manager who will share your loss with you. If earlier the loss would be felt only emotionally / morally by your wealth manager, even that is gone. So now, there’s nothing that’s stopping investment advice from becoming a function of the commission offered to the wealth manager. If a product offers more commission, that’s the product being recommended.

Where does that leave you?

Frankly, I feel that one is better off without an investment advisor. The web offers enough information on any and every investment product in existence. All you need to do is invest your time.

No time, you say? Who’s money is it? Yours, right? Then you need to jolly well take out the time. Only you can do justice to the proper, balanced and judicious investment of your funds.

So come on, snap out of any laziness. One hour a day to carve out a trajectory for your hard-earned money is all that’s required. If for nothing else, do it for your kids.

Are you a Pig?

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Pigs get slaughtered.

Are you a pig?

Don’t know the answer?

See if you fit into what the market defines as a pig. Be honest to yourself.

A pig is a crowd-follower. He (for convenience purposes, I’m using “he”) doesn’t use his God-given brain. A pig generally enters into an investment in the late stages of a trend. What pushes him into entering is that nagging feeling of missing the bus.

The pig is most interested in knowing what others are doing, and gets swayed by flashy headlines. He doesn’t have a market outlook and blindly follows tips. He panics at the bottom and sells for maximum loss. The pig doesn’t exercise any holding power, even if he might possess it.

If you find yourself fitting into any of these patterns, please get a grip on the situation before it’s too late. Slow down. Start getting to know yourself. Do your own research. Slowly build a market-view. And then invest according to this newly found but solid perspective.

There are many ways to limit risk. The stop-loss and the systematic investment plan are two, for starters. Incorporate such risk-limiting factors into your trading style. Slowly build up an indestructable approach through trial and error.

Yes, make mistakes, because they are the only teachers in this game. Make mistakes with small amounts. A mistake should not be able to slaughter you, because now you are not a pig anymore.

Zoning in on the Zone

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What’s your favourite sport?

Baseball?

Ok, let’s say we were watching Babe Ruth hitting a home run. I know, I’ve got this habit of running up and down the axis of time. A little annoying, but please bear with it.

To hit home runs like a Babe Ruth, or for that matter to paddle sweep like Sachin Tendulkar, or to serve an ace like Roger Federer, a player needs to be in the Zone.

So what is this “Zone”?

Imagine a space where you are one with your environment. From within this space, your heightened senses are able to engulf any stimulus and respond appropriately to it as if on auto-pilot. Your reactions to your situation are “ideal”. If a ball is thrown at you, your nervous system motors your bat with perfect angle and speed to respond to the ball in a winning fashion. It’s as if your system is one with the trajectory of the ball and is anticipating its angle and speed. Such a mind-body space is called the Zone.

The Zone is multi-dimensional in nature. Beyond length, breadth and height, the Zone spans the dimension of potential. The Zone is capable of whizzing your mind-body continuum up and down the axis of time in a flash to select the best possible response to any and every given stimulus.

So how does one get into this Zone? If it were that easy, each one of us would be a Babe Ruth, or a Sachin Tendulkar, or a Roger Federer or for that matter a Warren Buffett. Obviously, getting into the Zone is privileged.

Practice helps. Immense practice. Of course talent has to be there. But what is talent? Nothing but the expression of latent potential accumulated by the mind-body continuum at an earlier point in its existence. And when the mind-body continuum accumulates potential, it has to work very hard for it. Nothing comes for free.

And is someone who has entered the Zone able to stay in it forever? Nope. Entering the Zone takes a build-up. Then in a flash one is in till external circumstances disturb one’s focus, which is when one is out of the Zone.

So what’s this got to do with the markets?

Well, try trading the markets from inside the Zone and you’ll see.

Enemies of the State

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What’s with me?

Why am I coming up with titles of songs or movies as headings for my blogposts?

Well, I need to grab your attention. It’s the age of minute attention-spans. I need to catch whatever window I have to make u interested in reading this stuff.

If investing is your territory, then hurry (which spoils the curry) is the enemy of your state. Innately, you will feel an urge to get into a winning investment. If you can overcome this urge, you’ll have come a long way. You’ll actually make proper investments, at pivotal points on the price versus time axis.

If trading is your territory, the enemy of your state is to be found within too. Here, it’s the lack of willingness to get out of a losing trade. If you can train yourself to cut a losing trade after a stop is hit, again you’ll have come a long way, and your account will reflect good trading profits soon enough.

Slowly, it’s becoming clear that trading and investing are two ends of a spectrum, mirror images with opposite domain rules.

Please don’t mix trading with investing, or vice-versa, or you’ll ruin whatever you are doing.

I’m not saying don’t do both. It’s a free world. Do both. Fine. But confined within separate portfolios please, both physically and in the mind. And slowly, one after the other, till you can handle both ends of the spectrum simultaneously.

Or do you think that you can build Rome in one day?

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.

Uncharted Territory : The Tough get Going

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These are unprecedented times.

I mean, you’ve got 10-Sigma events occuring at a frequency that’s nobody’s business.

It’s time for the tough to get going.

All other investors are gonna get slaughtered.

So what makes one a tough investor, someone who can take hits and still remain standing?

Firstly, there’s holding power. If you don’t possess holding power, don’t enter the markets.

Then there’s patience. A rare commodity.

Discipline. Play to a strategy. Pick a strategy that’s in sync with your risk profile.

That brings us to the most important point. Know yourself. Know your risk profile. Your strengths and weaknesses. Invest accordingly. This one might take a while.

With time comes the power to pinpoint buying opportunities. Just as the exit strategy is crucial for the trader, the entry point is all-important for the investor.

Wins give confidence to double up on one’s position size.

Sight of one’s goal keeps one away from noise and a dangerous thing called tips.

An otherwise balanced life keeps one occupied elsewhere so that one’s not tempted to try other stunts in the market.

You can complete this list. It’s really not rocket-science.

It’s time for the tough to get going.

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.

Pieces of the Pie

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When profits are made, everybody involved wants a piece of the pie.

That’s ok, human nature.

And what’s wrong in distributing profits proportional to efforts?

Well, it’s not an ideal world. In today’s real world, investment banks have started billing clients for research and have used the money for prostitution and other recreation instead (see the docufilm “Inside Job”).

Your private equity executive will travel business or first class. He or she will stay in the executive suite. Hmmm, borderline, but still bearable if the fund generates an above market-average profit for you.

What’s unbearable is the high-roller life exhibited by disgraced Lehman ex CEO Fuld for example. You know, as in fool the public, eat their pie, and pull out personal funds before the ship sinks with an overload of public stake. Inexcusable behaviour. Deserving of extremely deterring punishment.

If a listed company regularly raises its dividend and generates steady capital gains for its share-holders, I frankly couldn’t care less if the CEO zips around in a company jet, pitches his tent in the presidential suite and orders in from the most expensive restaurant in town.

On the other hand, I do take serious exception to above behaviour on company expense if the company dishes out a meagre dividend and generates no capital gains. If I’m invested in such a company by mistake, with above CEO behaviour, I’d seriously look to exit at the next opportunity. If I see the CEO downsizing on lifestyle and if I still believe in the prospects of the company, I might still stay invested, but first I want to see some humility in the CEO’s living habits.

An exit is an ultimate thumbs-down a long-term investor can give to a loser CEO and his listed company. If a business is not generating profits and the management is living it up, such a business deserves the boot from its investors.

Learning to Sit

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One of the first things a baby learns is to sit.

And sitting is probably the last thing that an investor learns. Some investors never learn to sit. Their long-term returns are disastrous.

Wanna make a killing? All right, first learn to sit.

To be able to sit, one needs to create proper conditions. One needs to take “jumpiness”, or volatility, out of the equation. This is done by buying with a margin of safety.

Having bought with a margin of safety, market blow-ups affect your bottom-line lesser. You can sit thru them.

And that’s all you need to do, to allow a multi-bagger to unfold.

Wish you lucrative investing!

Noose Just Tightened

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Petrol’s up 5 bucks.

This is gonna pinch the public.

Are we now clear on the fact that a beast is on the loose? And the fact that this beast has been active to hyper-active since World War I ?

This beast is called inflation. The number 1 infectious disease that inflicts modern financial society.

We are going to have to live with inflation. Period.

What is required is long-term policy-making that will minimize the affliction. That’s not happening.

Modern financial policy seeks to avoid an existence where inflation becomes hyper. That would be when food on the table costs more that a cart-load of cash. See Argentina during its currency collapse, or Germany after the first World War.

Let’s assume that human-kind is not capable of making better policies, ones that minimize (let alone eradicate) the disease. Where does that leave us?

What do we do with our money, that’s being eaten away at 8 to 9%, year upon year?

Avenues like fixed deposits pay out lesser after tax than what inflation eats away. The 100 year return in Gold has been 1% per annum compunded, after tax. Only two investment avenues have yielded more after tax than what inflation has consumed over the very long term. These are 1). Property, and 2). Equity.

The writing on the wall becomes clear. To immunize one’s money against the disease, one needs to be invested in one or both these avenues over the long-term. Both avenues come with pitfalls, where one can lose much more than what inflation eats away.

So, one first learns how to deal with the pitfalls, and perhaps one can specialize in either of these avenues, since it is not easy to focus on both.

Then, after having learnt the ropes, one can slowly start salting one’s money away.

A Fall to Remember

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Ok, these are big drops in the values of commodities. Especially Silver.

Actually, I’m liking it.

No, I am not short Silver, or short Oil, or short Gold.

As far as commodities go, I don’t trade in them, I invest in them.

And as Silver falls big time, I am buying shares of Silver mining companies. Small amounts, nothing big. One needs to tread carefully. Because one doesn’t know when prices will stabilize.

Prices were way too high earlier to go ahead with these purchases. But, as Silver falls, one starts getting a margin of safety in Silver mining companies. I feel this has just started happening. Which is not to say that Silver won’t fall more.

Which is when I’ll buy more.

This is long-term investing. Here, the ideology is the complete opposite of trading.

Where are u going, Mrs. Market?

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Mrs. Market follows no one’s rules.

She’s got a mind of her own.

We need to understand that.

She likes attention. We need to keep asking her where she’s going.

The wrong thing is to ask each other where she’s going. Why not ask the source?

So how does one ask her?

By putting one’s money on the line and getting into a trade.

You’ll get your answer all right.

She’ll tell you where she’s going. If it’s a winning trade, she’s going where you think she’s going.

If it’s a losing trade, she’s got other plans.

And you’ve got your job cut out: i.e. to get out of the losing trade and to move in her direction.

You must be Joking, Mr. Nath!

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Ok, so there are aliens, so what?

I mean, is that so hard to believe? Which law says that Earth is the centre of activity in this universe?

Look around you. The horizon is full of scams. An honest management is most difficult to find. Honesty and integrity have become alien virtues. Scarce, don’t bump into them in normal life, and you might read an odd story about them in the papers.

So where does this leave you as an investor?

In a dishonest world, one needs to think in a warped manner to make money. You know, “two steps away from the norm” kinda thinking. So if the norm is to buy on a dip, in Kalyuga one waits to buy on a mega-dip. And these have started occuring more often than they used to. 10-Sigma or Black Swan events happen every now and then.

The thing I like about scams is that eventually, they explode. The one scam that is exposed (against the 20 that go unexposed) is enough to hit mass psychology. The common investor starts selling everything, even stuff that’s not affected by the scam. The market as a whole falls, sometimes cracking big.

Since we’re mostly down to buying scam-artist run corporations as investors, above-mentioned crack is the time to buy them, i.e. when they are hit badly. That’s when you are getting good value for your money. That’s when you are getting your margin of safety.

So, wait for the explosion. Buy in its aftermath. The interim period between explosions is to be used to pinpoint what you want to buy with a margin of safety, whenever that margin of safety abounds.

It is entirely within the realm of possibilities to live at peace with aliens. And it is equally possible for an investor to learn to live honestly but lucratively in a world full of corporate criminals.

Managing Loss & Coming Back to Zero – 2 Star Qualities of a Successful Trader

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Heads or tails?

Theoretically, it’s a 50:50 chance.

And over a large number of coin flips, it works out to be 50:50.

On the other hand, over a relatively smaller number of coin flips, one can have many heads (or for that matter tails) in a row. Let’s say you flip a coin ten times. Chances are, you might get heads eight times in a row. I mean, it actually happens.

For a market participant without any edge, a given trade is like a coin-flip. It can go either way. So, eight losses in a row can happen. Losing trade after losing trade can come, longer than one can remain solvent. This needs to be understood.

Therefore, the need arises to cut losses when they are very small.

Also, one needs to understand, that the next trade has nothing to do with the last trade. The outcome of a new trade is fully independent of the past. There is no rule saying that the 8th trade after 7 losses has to be a winning trade.

The successful trader comes back to zero after each closed trade. He or she let’s go of any baggage from the last trade, and starts a fresh one with new and full focus. There are no expectations from the new position. If it doesn’t work, the loss will be cut very small, and the savvy trader will bring his or her mind back to zero-point, and then will initiate a fresh position.

It’s really not rocket-science.