Category Archives: Mistakes

US Treasury Bonds, Anyone?

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Panic is something I felt during 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

Wishing you safe investing.

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.

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%.

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.

Strategies for Correcting Silver – One Approach

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Mega rallies are followed by big drawdowns in a bull market.

That’s how it is.

Anyone who doesn’t understand this will be made to understand it. The market doesn’t care about one’s emotions.

In today’s bull markets, a volatile entity like Silver can correct by 9 $ an ounce within a few days. Let’s accept the fact that this has happened, because it has.

So how does one play correcting Silver?

A bull market ceases to be a bull market below a certain price level as per Dow theory. That hasn’t happened yet, so a trader, in my opinion, still needs to play the long side. Of course with a stop. And not any odd stop. A risk-profile tuned stop with trigger activation, and with a large difference between trigger price and limit price. This is because Silver is moving very big either way currently within a very short time span, and if trigger and limit aren’t separated by a huge gap, they can both be overshot and the poor trader can be left hanging in the losing trade, holding on to his pants.

The investor, on the other hand, is waiting patiently for Silver to reach a certain level of correction before buying bullion. Opinions vary what this level should be. My opinion is that a 61.8% Fibonacci correction level should suffice for entry. I think that’s happening now, so if Silver stabilizes at or near the current price (40.84 $ an ounce), that would be my price for a medium term entry.

Of course I could be all wrong.

I like to make mistakes, because they are the best teachers. Better that any professors or theoreticians.

Anatomy of a Ponzi Scheme

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

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

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

Latest famous example of a Ponzi schemer – Bernie Maddoff.

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

So what lures the common investor into a Ponzi scheme?

Simple. It’s called greed.

What triggers the greed?

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

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

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

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

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

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

The Dark Side of Private Equity

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Greed is the investor’s nemesis.

I’ve been guilty of greed at times.

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

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

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

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

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

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

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

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

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

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

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…

That Secret Ingredient called Gut-Feel

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Birds fly. And, they fly in flocks. When a flock turns, it does so in unison. There seems to be a connection between each bird in the flock. It’s as if each can feel the others in its gut. Each bird is in the “Zone”.

Heard one about a famous artist. He was asked by a rich businessman to paint a rooster for a hefty fee. A year passed. Upon no word from the artist, the businessman got fed up and went to collect the painting. Seeing the artist basking in his lawn with not a care in this world, the businessman enquired about the painting. “Oh, you’ve come to collect your rooster, is it?” asked the artist casually. He then lay out his canvas, painted the perfect rooster, and handed the painting to the businessman, who was stunned and demanded an explanation. Which is when the artist took the businessman into his huge study, the walls of which were laden with hundreds of paintings of roosters, some not so perfect, some nearing perfection, and then, some perfect. In one year’s time, the artist had ingrained the rooster to such a degree into his brush-strokes, that he could dish out the perfect rooster at will.

Remember seeing the opening ceremony of the Beijing olympics. The performing masses were one unit. Such unison was drubbed into each cell of their bodies and minds. It came from practice, practice and more practice. Mind over body.

There’s a particular order of the Samurai where one passes the Master’s final test by first being blind-folded. The Master then stands behind the disciple with a sharp dagger, which he will bring down in a swoop upon the neck of the disciple when he (the Master) pleases. The disciple has to sense his movements, whenever they happen, and has to move out of danger in time. If the disciple succeeds in doing this without injury, he or she passes this ultimate test. And, if my information is correct, all those who have been allowed to take this test by the master have passed till date.

These are a few examples of gut feel. Although logically inexplicible, there’s a mechanism common in all the examples. It is the mechanism of how gut-feel functions at levels of perfection. First, there is repeated failure, whereby there is constant practice going on. Then there is practice, and further practice. Ultimately, the process gets ingrained, and comes naturally. By intuition. That’s gut-feel.

Knowledge is mud if it is not utilized. The battle-hardened market player has been through this process. He or she has seen repeated failure. By hanging on, and learning from mistakes, ultimately, market movements start striking a chord. The overall picture emerges as a whole. After even more practice and experience of market ups and downs, the player enters into the “Zone”, where he or she feels market movements in the gut. The player in the Zone has the capacity to turn with the market.

It’s true. It happens. As surely as the above stories. I’ve seen it happening.

So, be in the market. Fail, fail, and fail again. But do so with small amounts. Then pick yourselves up. Keep hanging on, till you get the hang of things and enter the Zone. And, after you’ve entered the Zone, there’s no better time and place to up your stake.

Both Sides of the Coin

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What’s your personal style of investing, UDN?

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

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

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

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

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

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

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

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

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

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

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

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

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

And what are your rules?

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

It can’t be that simple.

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

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

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

Who’s the prime example of your strategy?

Fellow called Jesse Livermore.

Managing an Equity Portfolio

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1). Before getting into equity, pinpoint exactly your appetite for risk.

2). Buy with a margin of safety.

3). Buy with rationale.

4). Spread your buying over time.

5). Hold performance. Reward it with repeated buying, when markets are down.

6). Punish non-performance. Sell your losers when markets are up. Weed them out. Throw them away.

7). Let winners unfold. Be patient with them.

8). When a winner becomes a superstar, ride it till it shows signs of sloth and underperformance.

9). Learn to sit on cash when there’s no value or margin of safety available. VERY IMPORTANT.

10). Know your weaknesses. Be disciplined. Make mistakes, but don’t repeat them. Filter all information, using your common sense. Don’t listen to anyone. Learn to trust yourself.

11). What is your eventual goal? Identify it. I’ll share my goal with you. I would like to hold 20 multibaggers in my portfolio 20 years from now. It’s a tall order. But I’m gonna try anyways. Remember, 1 multibagger is enough to strike it big. I’ll give you 2 examples : Wipro multiplied 300,000 times between 1979 and 2006. Cisco Systems – 75,000 times in I think 12-15 years leading up to the dot-com boom and bust. Before the bust, it gave ample hints of slowing down, so one had enough time to get rid of it. Wipro still hasn’t shown signs of underperformance.

So best of luck, whatever your goals are, but please, know your goals exactly before you play.