Category Archives: Market Psychology

Waking Up

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It’s a new morning.

What’s changed?

This: last night, we saw self-belief in action.

Even if it was to be seen in a game of cricket. It was still self-belief. A rare commodity.

MS Dhoni walked in to bat, promoting himself up the order. Very brave. If this would back-fire, he’d never hear the end of it.

The singular thing that shone out in his batting was self-belief. He’d been out of form. His style was unique at best. Nothing copy-book. Just raw belief that he could do it. That he could win it for his country.

He just had one thing in mind: to dominate the bowling and not get dominated by it. And he translated that belief into a match and tournament winning innings of a life-time.

What one takes away from this glimpse of brilliance is that one can win if the desire is strong enough.

One is compelled to carry forward such a feat and translate it into one’s own professional pursuits.

Dhoni won a mind-game yesterday.

Whatever one’s profession is, at first it’s a mind-game.

The battle is won in the mind first. Then it is translated into the physical deed.

On that note, congratulations to the nation, and WELL DONE team India!

Why Japan?

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Exactly, why Japan?

Twice in 66 years. Holocaust, and now this.

Ok, there’s the seismic blubla. And the Nostradamus stuff. Don’t know what to believe.

And where does something like this leave one’s portfolio. (Sorry, have to ask this question, even at a time like this. It’s purely professional, and perhaps what I’m writing here will help someone.)

In the doldrums.

Unless one bought with a MARGIN OF SAFETY. That’s when one can sit pretty, even during a crisis.

Or, if u are a trader, and are long Japan before such a crisis, where does that leave u?

Broke.

Unless you trade with a STOP LOSS.

These 2 basic concepts are VERY IMPORTANT. And one only realizes this during a crisis.

I still don’t know why Japan, but am sharing with u what I have learnt.

It’s all a give and take. I have access to so much of free stuff on the web and otherwise in life. So it’s absolutely ok if u get this knowledge for free from me.

However, don’t forget to balance your own equation with nature. Set something solid in motion, for free, for others to benefit from. Balance your equation.

Otherwise, eventually, nature will balance it for you. In a way you might not necessarily like, but will be stuck with.

Don’t wait for that to happen. Balance your equation. Now. 🙂

Are u a Whiner?

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2 quick questions:

Do u play the markets? And r u a whiner?

If your answer to both questions is yes, third question: Do u want to change this condition?

If your answer to this third question is yes, please read on.

Whiners whine. They complain when things don’t go as planned. Also they don’t have any backup strategies. Mostly, they don’t have any front-up strategies either.

So, before moving into any market, formulate your strategy thoroughly. Define acceptable levels of loss. Define a strategy to implement if these levels are hit.

Also define a profit-taking strategy.
Define the tenure of investment.

Basically, define yourself. Have a very clear idea about what your risk-profile looks like.

Play it small initially, till you gain confidence.

And stop whining. 🙂

Flying Asset Class

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What’s an asset?

Ever thought about it?

If not, you need to, if you want to fly asset class.

An asset is something that generates income for you. Even while u r not looking. That’s my understanding.

So is your house an asset?

No! Unless it’s generating a rental. Otherwise it’s generating expenses, and is thus a liability.

Sound investing generates assets.

Over time, the accumulative income of all your assets allows you to fly asset class, i.e. gives you financial independence. Even while u r not looking.

That’s the whole idea.

A Strong Case for Equity (Part 2)

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Scams bother us. We panic, and then start cashing out of our Equities.

Can we stop and reflect?

There was some Jeep scam in ’57. Then Bofors. Fodder. Harshad Mehta scam in the ’90s. Dot cum bust. This century has been chockerblock with scams.

Let’s see how some holdings have performed over all these years. Reliance, ABB, Infosys, Wipro…these companies were microcaps at some stage in their lives. The long-term holders of these shares have raked it in big-time. Wipro has been a 300,000+ bagger over the last 31 years. The other three companies have been 1000+baggers. That’s BIG.

Some of today’s microcaps will make it as big or bigger over the very long term. They will be tomorrow’s blue-chips.

All of us want to set something aside for our kids. It’s human nature. So why can’t we think of holding equity for the very long-term, especially for our children?

What makes equity so special? Behind every scrip is human capital, which, if not involved in Scamonomics, fights inflation through innovation. The power to fight inflation is not inherent in other asset classes.

So let’s think seriously about very long-term equity holding.

What remains is the criteria for stock selection. That’s a deep topic, and we’ll delve into it some other day…

Gravity

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Markets correct.

That’s what markets do.

Why do we cry when something does what it’s supposed to do?

And, more importantly, why did we buy at an expensive valuation in the first place?

Are we traders?

If yes, fine, traders are meant to buy at expensive valuations, coz they like to sell at even more expensive valuations.

If we are not traders, then it is not fine.

If we are not traders, then most of us fall in the category “Investors”.

Investors are not meant to buy at expensive valuations.

So let’s not cry over the effect of something we were not meant to do in the first place.

Learning to Fly

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Pilots train in simulators.

No point putting many lives at risk by flying a real aircraft without proper training.

A simulator is next to the real thing. Actually, one up, they make these things worse than the real thing.

No such luck in the markets.

However much one simulates the markets, the real lessons learnt come from actual monetary involvement in the markets.

Books, theories, paper-trading, degrees, etc. don’t have it in them. They prepare you for something else, but not for the markets.

The silver-lining here is, that if we don’t want to, there are no real lives at stake here. We can keep it small in the beginning years, you know what I mean?

Small but real losses, leading to big life-time lessons. This would be the ideal result of one’s first few years in the markets.

Yes, it’s actually harmful to deadly for a newbie trader to make hot-shot profits in the beginning without having learnt the proper lessons.

Let’s see you figure out the why for this. No spoon-feeding here, right?

What Money-on-the-Line does for You

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Your system has a bio-chemistry.

This bio-chemistry is intricately coupled to the mind and the nervous system.

When your money is on the line, your mind and your nervous system start reacting.

Money-on-the-line means automatic emotional involvement. Period.

Many of those who talk about investing / trading do not have their own money on the line.

Thus, they are not qualified to talk about investing / trading. Do not listen to them.

Instead, listen to your own bio-chemistry. It will teach you.

That’s what money-on-the-line does for you.

A Level-Headed Approach to the Markets

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There’s lots to choose from in the market-place.

Many seek a profession in the markets. If you belong to this category, first spend as much time as possible trying out as much as you can from the vast choice this multi-faceted international trading fraternity has to offer. Develop a feel for things. Your first goal is to identify a niche-segment for yourself. It will take as long as it takes. Have patience. Are you more comfortable with equity rather than commodities, which are even more volatile? Are you just happy doing arbitrage? Or, do you prefer options? It’s questions like these you are trying to answer at this stage.

Remember, the markets don’t require an MBA or any other recognized degree qualification for one to be successful. Honestly speaking, degrees are a hindrance, since the teaching is done by professors who are mostly theoretically active.  One out of a hundred market-teachers actually plays the market with his or her own money. Thus most or all one learns about the markets in college is not really relevant.

Wanna learn to be successful at the markets? Then play them. With your own money. Day in, day out. Feel the pain of loss. Feel the pleasure of profit. Make all the mistakes you can at this stage while things are still small. Let’s see you taking small losses and letting profits run, the easiest thing in the world to say but the hardest thing in the world to do. Let’s see you starting to get the basics right at least and then building up from there.

Thus, slowly but surely, identify your A-game, i.e. your niche-segment. This is the area you are most comfortable moving in. And that’s why, when developed properly, this area will give you a regular income very soon. Since you are comfortable in the area you move in now, that’s your next goal: A Regular Income.

More on that some other day…

System Addict & Mr. Cool

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Mr. Cool starts his day.

He wants to know what other people are doing. To be more exact, what they are trading. He listens to tips. Actually, “listens” is an understatement. He’s hungry for tips. He shorts strong stocks, and goes long those that have corrected. He wants to be Mr. Johny-on-the spot where the action is.

Mr. Cool gets up late. Of course no preparation for the trading day is on the agenda. In fact, he has no agenda other than the format stated above. The day starts off with a call to the broker. What’s moving? What are the news projections? Any hot tips? What’s this analyst saying?

Mr. Cool doesn’t live long in the markets. His “strategy” of trading long into correcting stocks and shorting strong ones pays off 80% of the time, but when it goes wrong, it goes wrong big, in fact so big, that Mr. Cool doesn’t feel so cool anymore. He holds on to his losses. He’s scared of taking the hit. He hopes that prices will reverse to his entry price and then he wants to exit. This time around, it doesn’t happen, and his cheap options expire worthless, leaving him broke. By now the markets have scared him so much, that he nevers trades again.

Mr. System Addict is everything Mr. Cool is not. He has a system, and he sticks to it. No tips, no news, no rumours, no non-sense. If the system indicates a buy, he goes long. If it indicates a sell, he goes short. If an exit, he exits. No looking here and there. Belief in the system. Trade to trade system development and enhancement. Solid pre-market preparation and after-market analysis. The works.

Mr. System addict has been around in the markets and he’s going to stay. He’s doing well. Initially, he used to be Mr. Cool, but then he went bust. The only difference was, that he had the strength to lift himself up and become Mr. System Addict.

Holy Grail, Anyone?

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What’s the big secret, anyways?

Secret to what?

You know, making big bucks and all…!

Why are you asking me?

You look like you know things, and you talk the talk, so I presumed you walk the walk too.

Well, now don’t be surprised, but there’s no secret.

What?

You wanna make big bucks?

Yes, yes, of course I do.

Ok, then first define your risk profile. Know how much loss you can stomach.

Oh.

Then trade.

That’s it?

When you trade, your money goes on the line. And that’s a game-changer.

Why?

Coz when your money’s on the line, your emotional framework switches on.

So?

That’s when you get to know yourself. That’s when you can define your risk-profile.

And then?

Just manage your trades properly, according to the rules of your trading system.

That’s it?

Yup, just stick to your system. Cut losses when they are small. Let profits run.

I’ve heard that one.

Then have you also heard that it’s very easy to say, and most dificult to follow?

Why’s that?

Because when your money’s on the line, it is most difficult to take any loss.

Right!

And when you show a small profit, you badly want to book it.

True!

Our natural instincts go against what we need to do to succeed as a trader.

I see now.

That’s why most traders are unsuccessful, and they eventually go bust, or quit.

Hmmm, dunno if I want to be a trader.

You could try your hand at investing, though. There, one proceeds in an opposite manner.

Hey, why don’t you tell me about it, like right now?

Maybe some other day. First digest all of this, ok?

And Now for the Most Useless Question

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For the trader, the most useless question regarding the markets is … …

“The Why of the Markets.”

Why is there a spike or a crash?

Frankly, who cares?

Just forget about it. The “Why” of the markets is baggage, it’s a load, and exactly this particular load needs to be abandoned.

When a trade is on, one’s got enough emotional overload to deal with anyways. Let the pundits bother themselves with this “Why”. It’s their bread and butter. Your bread and butter is the trade. Focus on the trade. Focus on entry. Focus on trade management. Focus on exit. Don’t focus on anything else. Blank the whole world out while you trade.

Then, when you reach home, focus on your family.

The Most Bugging Questions

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Where is this market going?

Should one buy xyz?

What kind of volume do you trade?

What are your predictons?

Frankly, wrong questions.

One doesn’t exactly go to watch Formula 1 to then ask how many runs someone needs to make to win, right? Similarly, all the above questions are irrelevant to a trader’s success in the markets.

It doesn’t really matter where the market is going. A successful trade can still be found.

It doesn’t matter what one buys. If one manages the trade well, ultimately and overall, one will make money.

It doesn’t matter what volume you trade, as long as you have a system and stick to it.

And, a successful trader doesn’t predict the market. To succeed in the market, one needs to ask the market where it wants to go, and then one needs to go along with it.

The critically important part about trading is to put one’s money on the line, and to feel the emotional stress in one’s system that goes along with this. One needs to do this again, and again, and again, and that’s how one learns trade management. No books can really teach this. One really needs to go out there and do it.

A Time for Things

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You don’t normally have dinner at breakfast time, do you?

Of course not.

Similarly, you don’t buy into a State Bank of India with a 5 year horizon when 6 years of earnings growth has already been factored into the price.

There’s a time for things.

You do buy into the same State Bank of India with a 2 week horizon when it’s shooting off the table and giving clear-cut up-moves as it makes its way into no-resistance territory.

And that’s about it. You’re in it for the short-term because that’s how the environment has defined itself. It’s a trading environment, not really meant for investors, whether conservative or unconservative. Thus, you have a stop-loss mechanism in place, in case there’s a down-swing, because up-moves can go hand in hand with down-moves. Where there’s a big money to be made, there’s chances of making a big loss too.

Oh, are you asking why you can’t enter into such stocks at this time with a long-term perspective? I see. Do you fly first class? No? Why not? Because it’s expensive, right? Similarly, such stocks are expensive just now. That’s not to say they won’t rise further. What you need to understand is that when you wake up five years from now, such a stock will have peaked and could possibly be heading for its trough. So your net returns over the long-term could even be negative.

Really wanna be a successful investor? Then you need to learn to buy cheap, with a margin of safety. You need to be patient enough to wait for lucrative entry levels.

Not getting your margins of safety anywhere in the markets just now?

Ok, just trade till you get them. Then you can stop trading, and start investing. Fine?

The Thing with Gold

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Equity has a human face behind it. Gold does not.

The human face with its human mind is capable of the best and the worst, the highest and the lowest.

The intelligent investor selects Equity with benevolent and diligent human faces and minds behind it to garner multibagger returns.

Gold is a metal. Period. It doesn’t have a brain. It is not able to find a way around inflation. Its prices fluctuate as per demand and supply. In times of uncertainty, it goes up and up. In times of economic and financial stability, it goes down and down. The net result of Gold’s price fluctuations over the past 100 years has been a 1% annually compounded return, adjusted for inflation.

What you should not expect from Gold is more than a 2- or 3-bagger return over the medium term. If things go really sour for world economy, you might get a 5- or even a 10 bagger return (looking at a kind of a doomsday scenario). If you are hoping for anything more from Gold, dream on.

2-, 3-, 5- and even 10-bagger returns are quite common in Equity over the medium term, and over the long-term, there’s no limit. Wipro’s been a 300,000-bagger over 25 years. There are hundreds of examples of 1000-baggers, and thousands of examples of 20+-baggers in Equity. Meanwhile, over the long-term, Gold goes back to the median.

Why Equity behaves like this is because of the human capital behind Equity. We’ll go into the details of this some other time.

Bottomline remains that, realistically speaking, Gold functions best as a hedge. In case 80% of our portfolio goes for a toss, that 20% which is in Gold for example can save the portfolio with its 5-bagger return.

If we enter Gold with the desire to make a killing, we either have unrealistic expectations, or we need to play Gold futures or Gold Equity. These have their own nuances, about which, again, we’ll talk another day.

Investing is not about building a Consensus

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We are what we eat, as an ancient proverb goes.

Another one says that we reap what we sow.

And from what little I’ve seen, eventually, we fall in line and invest as per the wiring of our mental framework. Till we don’t do this, we are following someone. Eventually there’s a clash of personalities. This is a clash between the one leading us and our own beliefs. We now have to make a choice to either go it alone, or to keep following the leader.

Each day after this clash has taken place, the rift deepens. More of our beliefs are being violated. That’s because the leader is investing according to his or her own beliefs. Investment is a projection of one’s personality. Such an evnironment full of conflict leads us to wrong decisions, which result in losses.

Investment isn’t about building a consensus. It’s really not about x number of people coming together, agreeing upon an opinion, putting money on the line and making a killing. That’s an approach that may be part of a trading strategy, but it is far removed from comfortable and healthy investing.

Investing 1.0.1 is about understanding one’s own personality, because this is going to interfere with every decision and thought process one will make in this line. The identification of any investment target needs to be in line with one’s personality, otherwise the acquired target will continue to disturb one’s thought process and everyday life. Who’s best suited to bring about an alignment between investment targets and personality? You are, not a third party. An outsider can only second guess how your mental framework functions. You know yourself much better than anybody else.

Once a basic alignment between personality and investment strategy has been achieved, things start to fall in place, with investments yielding satisfaction and profits.

One doesn’t need to form a consensus with anyone to identify a successful investment and make money in it.

A Beautiful Concept called Margin of Safety

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The most beautiful, genius things in life are simple.

And therefore, they are difficult to implement.

We like complications. Sophistication. When something appears simple, our first impulse is that of rejection.

We get our families insured, our car insured, house, properties etc. etc. all insured, in fact, we are busy buying protection everywhere. During winter we wear protective clothing. Our children swim with protective gear. Our cars have seat-belts and airbags. The list of how mankind protects itself is endless.

Then why is it that when it comes to putting one’s hard-earned money on the line, all thoughts of protection go out the window, and one becomes malleable enough to jump into the next hot story at even seventy or eighty times earnings?

Why is it that here we are not clinging on to protection? Basic question – are there any protective measures prevalent in the world of investing? The answer is yes, and many. In this article, I’ll name two and address one.

There’s the protective stop-loss (to be differentiated from the trigger-stop). Let’s talk about this one some other day. Right now, let’s focus on the other major avenue for protection, called margin of safety.

Basically, what margin of safety says is “Buy Cheap”. Period. What it’s not saying is that one should buy any odd-ball, cheap stock. It’s referring to quality stocks and telling us to buy them as cheaply as we can. The result will be a buffer price-band, which in case of a major market-crash will still limit our losses and save us from the urge to abandon our investment at rock-bottom prices. So, this concept asks us to have patience and wait for opportunity, and not to be impulsive and plunge blindly.

Margin of safety is applicable while trading also. One can buy into market leaders upon dips. The dip gives one a short-term margin of safety.

The primary advocate of margin of safety is none other than Warren Buffett himself, from an investment point of view.

So, to implement this simple and beautiful concept, one requires the virtues of patience and discipline.

Wishing for you safe and lucrative investing!

Cheers!

Asset Management is as important as ABC, or Multiplication, or Calculus for that matter…

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Imagine having lunch with a legendary investor like Warren Buffett. The first think he’ll talk to you about is the power of compounding. And when you say “Huh, what’s that?”, he’ll ask “Did nobody teach you about money management?”

And that’s the whole conundrum. Nobody teaches us how to manage money in school. Nor is this subject taught in college. We are left high and dry to face the big bad world without having the faintest clue about how to make our assets grow into something substantial.

Now why is this so? Is it that parents, teachers and professors worldwide have decided that no, we are, under no circumstances, going to teach our children how to manage their assets. No, that’s not the case. What is far truer is the fact that most parents, teachers and professors don’t know how to manage their own assets in the first place, so there’s no scope of teaching this art to others.

And do you know why that’s sad? Because youth is a prime time to sow seeds of investment that will grow into mountains later. When one is young, time is on one’s side. Salting away pennies at this stage puts into motion the power of compounding, a prime accelerator of growth. The time factor gives one tremendous leverage to deal with meltdowns, crises, calamities, catastrophes, recessions, depressions and what have you. As one grows up, one’s intelligently invested money has a very high chance of coming away unscathed and compounded into a substantial amount.

Don’t take my word for it. Just look around you. If you’ve been invested in the indices in India since 1980, your assets have grown 180 times in 30 years. That’s so huge that one is lost for words. This is despite all issues Indian and world markets have faced in these 30 years. All political crises, all wars, all scams, all corruption, everything. And, these returns are being generated by a simple index strategy. More advanced mid- and small-cap investment strategies have yielded many times more than these returns over this 30 year period. So just forget about meltdowns and crises, invest for the long-term, invest for your children, do it intelligently, and involve them in your investment process. Teach your children how to invest rather than making them cram tables or rut chemical formulae. Get them to take charge of their financial futures. Make them financially independent.

God has given the human being brains, and the power to think rationally. Let’s use these assets while investing. We’re looking for quality managements. We want their human capital to be working for us while we do other things with our time. We want them to figure a way around inflation, so that our investment doesn’t get eaten into by this monster. We don’t want them to involve our money in any scams. We want them to create value for us, year upon year. We want them to pay out regular dividends. Let’s inscribe this into our heads: we are looking for QUALITY MANAGEMENTS.

We are not looking for debt. The company we are investing into needs to be as debt-free as possible. During bad times, and they will come, mountains of debt can make companies go bust. There are many, many companies available for investment with debt to equity ratios which are lesser than 1.0. These are the companies we want to invest into.

We are also looking for a lucrative entry price. Basically, we want to buy debt-free quality scrips, and we want to buy them cheap. For that, we need to possess the virtue of patience. We just can’t get into such investments at any given time, but must learn to patiently wait for them. Also, we must learn to be liquid when such investments become available. Patience and timely liquidity are virtues that more than 99% of investors do not possess.

Of Kalyuga and the Skewed Nature of Growth

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

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

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

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

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

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

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

Why Bother with Fine-Tuning?

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He eats his breakfast, but has that something on his mind. Doesn’t chew well, and since the mind is not on the food, he can forget about digesting the food well.

Later at work, something’s still bothering him. What is it?

The evening is spent with the family, but on the inside he’s still trying to pinpoint the root of his worry.

The night is restless. Couple of bad dreams. Nothing soothing about it.

Guess what?

His investment style doesn’t match his personality. The two entities are totally out of whack. His personality pulls him in one direction, but the way he’s invested his money pulls him in the other direction. He’s mentally uneasy because of this, and his investments are not going to do well in the long run, irrespective of market trend, because his opposing personality will make him take wrong decisions as far as the investment style is concerned.

Why didn’t he bother to fine-tune his personality with his investment style, and bring the two in sync?

Nobody told him to, and he was too dumb to realize it himself.

So he’s got 20% of his networth in futures, but he’s conservative on the inside. Hell.

And another 20% in penny stocks.

Make that the next 20 in small-caps.

And the next 20 in mid-caps.

The last 20 being in large-caps.

Pathetic. Obviously he’s not going to be at ease, after having put 80% of his money in relatively risky ventures, which are not in tune with his conservative nature. Till there’s a common meeting grounds between personality and investment style, this or any person who invests without taking basic nature and risk appetite into account is not going to breathe easy.

When I observe him, it gets me thinking.

What are the things that I don’t want from the markets?

Sleepless nights. A nasty visit from the tax authorities. Obsession to the point of not being able to focus on family. Deterioration of eye-sight. Losses. Low long term returns. These are the basics.

Ok, so I make a few rules for myself.

Like, for example, if an investment starts giving sleepless nights, get out of it.

Keep an account of everything. Play with clean, white money. No hanky panky, no money laundering, no nonsense. Thus any visit from the tax authorities will not turn nasty.

To keep the obsession angle out, and to keep vision intact, I can’t be day-trading. Even short-term trading requires too much market involvement. So, I need to formulate a medium to long term strategy.

Losses, well who likes losses. Thus I must be thorough in my research.

And I want high returns. The only conservative investors in History who have achieved high returns have all been focus investors, not diversified investors. Thus, I need to focus on a few areas while investing, and not diversify into many sectors.

See, it’s as simple as that. Identify your basic goals and formulate your basic strategy around these goals. And then breathe easy even when you play hard!