And How Are You This 20k?

Posted on January 15, 2013 by Uday Nath

20k’s knocking on our sensory index.

How are you feeling, this 20k?

I remember my trading screen, the first time 20k came. Lots of blue till it came, and when it came, the screen just turned into a sea of red.

Sell orders hit their auto-triggers, as if it were raining sell orders along with cats and dogs.

What is it about round numbers?

Why do they engulf us in their roundness?

I don’t think I am making a mistake in stating that the first person to recognize the significance of round numbers in the game was Jesse Livermore, the legendary trader. Jesse developed a round number strategy that he pulled off repeatedly, with enormous success. It is because of Jesse Livermore that a trader takes round numbers … seriously.

So, what is it about the roundness of 20k?

Plain and simple. The 0s engulf the 2. You don’t see the 2 anymore, and the 0s scare you. Or, they might excite you. Round numbers make the human being emotional.

Big question for me, to understand my own mindset – how am I reacting to 20k?

I would like to share my reaction with you, because it could help you understand your own reaction.

Also, writing about it makes me understand my own reaction better. Thoughts get assimilated.

Yeah, it’s not all social service here, there’s some selfish element involved too.

Besides, I have a bit of a guilty conscience about the amount of research the internet allows me to do, free of cost. I mean, I can get into the skin of any listed company with a few button-clicks. All this writing – is a give-back. You’ll get your calling soon enough. Nature will tell you where you need to give back. When that happens, don’t hold back – give freely. It’s a million dollar feeling!

Back to the topic.

I’ve seen 20k twice before, I think, perhaps thrice. Oh right, between late September and December ’10, it came, was broken, then it came back, to be again broken on the downside, all within a few months.

The aftermath of the first time I saw it (in November ’07) hammered me, though, and taught me my biggest market lessons. I’m glad all this happened in my early market years, because one doesn’t normally recover from huge hammerings at an advanced stage in one’s market career.

The second / third time I saw 20k, I was profiting from it to a small extent. A vague kind of strategy was developing in my mind, and I was trying all kinds of new trading ideas so as to formulate a general strategy for big round numbers.

This morning, I saw 20k for the fourth time, for a few minutes.

By now, I was on auto-pilot.

A human being will have emotions. A successful market player will know how to deal with these emotions.

I bifurcated my emotions into two streams.

One was the fear stream.

The other was the exuberance stream.

The former helped me decide my future investment strategy.

The latter helped me decide my future trading strategy.

In my opinion, a good investment strategy in times of market exuberance would be to not look for fresh investments anymore. This morning, I decided to stop looking for fresh investments, till further notice.

Sometimes, when you’re not looking for an investment, you might still chance upon a company that sparks your investment interest.

If that happened, I would still scrutinize such a company very, very thoroughly, before going ahead. After all, these were times of exuberance.

Yeah, fresh investments would be on the backburner till margins of safety were restored.

Now let’s speak about the exuberance stream.

Market looked ripe for trading. Fresh market activity would take the shape of trading.

Trading is far more active an activity, when compared to investing. We’ve spoken a lot about the difference between trading and investing, in previous posts. Investors enter the market when stocks are undervalued, because the general market is unable to see their intrinsic value. Traders take centre-stage when stocks are overvalued, because the general market is repeatedly attributing more and more value to stocks, much more than should be there. Traders ride the market up, and then short it to ride it down.

Yeah, till further notice, I would be spending my energies trading. After a while, I would re-evaluate market conditions.

That’s what I thought to myself this morning.

Stock-Picking for Dummies – Welcome to the Triangle of Safety

Posted on January 12, 2013 by Uday Nath

Growth is not uniform – it is hap-hazard.

We need to accept this anomaly. It is a signature of the times we live in.

Growth happens in spurts, at unexpected times, in unexpected sectors.

What our economic studies do is that they pinpoint a large area where growth is happening. That’s all.

Inside that area – you got it – growth is hap-hazard.

To take advantage of growth, one can do many things. One such activity is to pick stocks.

For some, stock-picking is a science. For others. it is an art. Another part of the stock-picking population believes that it is a combination of both. There are people who write PhD theses on the subject, or even reference manuals. One can delve into the subject, and take it to the nth-level. On the other hand, one can (safely) approach the subject casually, using just one indicator (for example the price to earnings ratio [PE]) to pick stocks. Question is, how do we approach this topic in a safe cum lucrative manner in today’s times, especially when we are newbies, or dummies?

Before we plunge into the stock-picking formula for dummies that I’m just about to delineate, let me clarify that it’s absolutely normal to be a dummy at some stage and some field in life. There is nothing humiliating about it. Albert Einstein wasn’t at his Nobel-winning best in his early schooldays. It is rumoured that he lost a large chunk of his 1921 Nobel Prize money in the crash of ’29. Abraham Lincoln had huge problems getting elected, and lost several elections before finally becoming president of the US. Did Bill Gates complete college? Did Sachin Tendulkar finish school? Weren’t some of Steve Jobs’ other launches total losses? What about Sir Issac Newton? Didn’t I read somewhere that he lost really big in the markets, and subsequently prohibited anyone from mentioning the markets in his presence? On a personal note, I flunked a Physical Chemistry exam in college, and if you read some of my initial posts at Traderji.com, when I’d just entered the markets, you would realize what a dummy I was at investing. At that stage, I even thought that the National Stock Exchange was in Delhi!

Thing is, people – we don’t have to remain dummies. The human brain is the most sophisticated super-computer known to mankind. All of us are easily able to rise above the dummy stage in topics of our choice.

Enough said. If you’ve identified yourself as a dummy stock-picker, read on. Even if you are not a dummy stock-picker, please still read on. Words can be very powerful. You don’t know which word, phrase or sentence might trigger off what kind of catharsis inside of you. So please, read on.

We are going to take three vital pieces of information about a stock, and are going to imagine that these three pieces of information form a triangle. We are going to call this triangle the triangle of safety. At all given times, we want to remain inside this triangle. When we are inside the triangle, we can consider ourselves (relatively) safe. The moment we find ourselves outside the triangle, we are going to try and get back in. If we can’t, then the picked stock needs to go. Once it exits our portfolio, we look for another stock that functions from within the triangle of safety.

The first vital stat that we are going to work with is – you guessed it – the ubiquitous price to earnings ratio, or the PE ratio. If we’re buying into a stock, the PE ratio needs to be well under the sector average. Period. Let’s say that we’ve bought into a stock, and after a while the price increases, or the earnings decrease. Both these events will cause the PE ratio to rise, perhaps to a level where it is then above sector average. We are now positioned outside of our triangle of safety with regards to the stock. We’re happy with a price rise, because that gives us a profit. What we won’t be happy with is an earnings decrease. Earnings now need to increase to lower the PE ratio to well below sector average, and back into the triangle. If this doesn’t happen for a few quarters, we get rid of the stock, because it is delaying its entry back into our safety zone. We are not comfortable outside of our safety zone for too long, and we thus boot the stock out of our portfolio.

The second vital stat that we are going to work with is the debt to equity ratio (DER). We want to pick stocks that are poised to take maximum advantage of growth, whenever it happens. If a company’s debt is manageable, then interest payouts don’t wipe off a chunk of the profits, and the same profits can get directly translated into earnings per share. We want to pick companies that are able to keep their total debt at a manageable level, so that whenever growth occurs, the company is able to benefit from it fully. We would like the DER to be smaller than 1.0. Personally, I like to pick stocks where it is smaller than 0.5. In the bargain, I do lose out on some outperformers, since they have a higher DER than the level I maximally want to see in a stock. You can decide for yourself whether you want to function closer to 0.5 or to 1.0. Sometimes, we pick a stock, and all goes well for a while, and then suddenly the management decides to borrow big. The DER shoots up to outside of our triangle of safety. What is the management saying? By when are they going to repay their debt? Is it a matter of 4 to 6 quarters? Can you wait outside your safety zone for that long? If you can, then you need to see the DER most definitely decreasing after the stipulated period. If it doesn’t, for example because the company’s gone in for a debt-restructuring, then we can no longer bear to exist outside our triangle of safety any more, and we boot the stock out of our portfolio. If, on the other hand, the management stays true to its word, and manages to reduce the DER to below 1.0 (or 0.5) within the stipulated period, simultaneously pushing us back into our safety zone, well, then, we remain invested in the stock, provided that our two other vital stats are inside the triangle too.

The third vital stat that we are going to work with is the dividend yield (DY). We want to pick companies that pay out a dividend yield that is more than 2% per annum. Willingness to share substantial profits with the shareholder – that is a trait we want to see in the management we’re buying into. Let’s say we’ve picked a stock, and that in the first year the management pays out 3% per annum as dividend. In the second year, we are surprised to see no dividends coming our way, and the financial year ends with the stock yielding a paltry 0.5% as dividend. Well, then, we give the stock another year to get its DY back to 2% plus. If it does, putting us back into our triangle of safety, we stay invested, provided the other two vital stats are also positioned inside our safety zone. If the DY is not getting back to above 2%, we need to seriously have a look as to why the management is sharing less profits with the shareholders. If we don’t see excessive value being created for the shareholder in lieu of the missing dividend payout, we need to exit the stock, because we are getting uncomfortable outside our safety zone.

When we go about picking a stock for the long term as newbies, we want to buy into managements that are benevolent and shareholder-friendly, and perhaps a little risk-averse / conservative too. Managements that like to play on their own money practise this conservatism we are looking for. Let’s say that the company we are invested in hits a heavy growth phase. If there’s no debt to service, then it’ll grow much more than if there is debt to service. Do you see what’s happening here? Our vital stat number 2 is automatically making us buy into risk-averse managements heading companies that are poised to take maximum advantage of growth, whenever it occurs. We are also automatically buying into managements with largesse. Our third vital stat is ensuring that. This stat insinuates, that if the management creates extra value, a proportional extra value will be shared with the shareholder. That is exactly the kind of management we want – benevolent and shareholder-friendly. Our first vital stat ensures that we pick up the company at a time when others are ignoring the value at hand. Discovery has not happened yet, and when it does, the share price shall zoom. We are getting in well before discovery happens, because we buy when the PE is well below sector average.

Another point you need to take away from all this is the automation of our stop-loss. When we are outside our safety zone, our eyes are peeled. We are looking for signs that will confirm to us that we are poised to re-enter our triangle of safety. If these signs are not coming for a time-frame that is not bearable, we sell the stock. If we’ve sold at a loss, then this is an automatic stop-loss mechanism. Also, please note, that no matter how much profit we are making in a stock – if the stock still manages to stay within our triangle of safety, we don’t sell it. Thus, our system allows us to even capture multibaggers – safely. One more thing – we don’t need to bother with targets here either. If our heavily in-the-money stock doesn’t come back into our safety zone within our stipulated and bearable time-frame, we book full profits in that stock.

PHEW!

There we have it – the triangle of safety – a connection of the dots between our troika PE…DER…DY.

As you move beyond the dummy stage, you can discard this simplistic formula, and use something that suits your level of evolution in the field.

Till then, your triangle of safety will keep you safe. You might even make good money.

PE details are available in financial newspapers. DER and DY can be found on all leading equity websites, for all stocks that are listed.

Here’s wishing you peaceful and lucrative investing in 2013 and always!

Be safe! Money will follow! 🙂

Can We Please Get This One Basic Thing Right?

Posted on December 27, 2012 by Uday Nath

Pop-quiz, people – how many of us know the basic difference between investing and trading?

The logical follow-up question would be – why is it so important that one is aware of this difference?

When you buy into deep value cheaply, you are investing. Your idea is to sell high, after everyone else discovers the value which you saw, and acted upon, before everyone.

When you’re not getting deep value, and you still buy – high – you are trading. Your idea is to sell even higher, to the next idiot standing, and to get out before becoming the last pig holding the red-hot scrip, which would by now have become so hot, that no one else would want to take it off you.

The above two paras need to be understood thoroughly.

Why?

So that you don’t get confused while managing a long-term portfolio. Many of us actually start trading with it. Mistake.

Also, so that you don’t start treating your trades as investments. Even bigger mistake.

You see, investing and trading both involve diametrically opposite strategies. What’s good for the goose is poison for the gander. And vice-versa.

For example, while trading, you do not average down. Period. Averaging down in a trade is like committing hara-kiri. What if the scrip goes down further? How big a notional loss will you sit upon, as a trader? Don’t ignore the mental tension being caused. The thumb rule is, that a scrip can refuse to turn in your direction longer than you can remain solvent, so if you’re leveraged, get the hell out even faster. If you’re not leveraged, still get the hell out and put the money pulled out into a new trade. Have some stamina left for the new trade. Don’t subject yourself to anguish by sitting on a huge notional loss. Just move to the next trade. Something or the other will move in your direction.

On the other hand, a seasoned investor has no problems averaging down. He or she has researched his or her scrip well, is seeing deep-value as clearly as anything, is acting with long-term conviction, and is following a staggered buying strategy. If on the second, third or fourth buy the stock is available cheaper, the seasoned investor will feel that he or she is getting the stock at an even bigger discount, and will go for it.

Then, you invest with money you don’t need for the next two to three years. If you don’t have funds to spare for so long, you don’t invest …

… but nobody’s going to stop you from trading with funds you don’t need for the next two to three months. Of course you’re trading with a strict stop-loss with a clear-cut numerical value. Furthermore, you’ve also set your bail-out level. If your total loss exceeds a certain percentage, you’re absolutely gonna stop trading for the next two to three months, and are probably gonna get an extra part-time job to earn back the lost funds, so that your financial planning for the coming months doesn’t go awry. Yeah, while trading, you’ve got your worst-case strategies sorted out.

The investor doesn’t look at a stop-loss number. He or she is happy if he or she continues to see deep-value, or even value. When the investor fails to see value, it’s like a bail-out signal, and the investor exits. For example, Mr. Rakesh Jhunjhunwala continues to see growth-based value in Titan Industries at 42 times earnings, and Titan constitutes about 30% of his billion dollar portfolio. On the other hand, Mr. Warren Buffett could well decide to dump Goldman Sachs at 11 – 12 times earnings if he were to consider it over-valued.

Then there’s taxes.

In India, short-term capital gains tax amounts to 15% of the profits. Losses can be carried forward for eight years, and within that time, they must be written off against profits. As a trader, if you buy stock and then sell it within one year, you must pay short term capital gains tax. Investors have it good here. Long-term capital gains tax is nil (!!). Also, all the dividends you receive are tax-free for you.

Of course we are not going to forget brokerage.

Traders are brokerage-generating dynamos. Investors hardly take a hit here.

What about the paper-work?

An active trader generates lots of paper-work, which means head-aches for the accountant. Of course the accountant must be hired and paid for, and is not going to suffer the headaches for free.

Investing involves much lesser action, and its paper-work can easily be managed on your own, without any head-aches.

Lastly, we come to frame of mind.

Sheer activity knocks the wind out of the average trader. He or she has problems enjoying other portions of life, because stamina is invariably low. Tomorrow is another trading day, and one needs to prepare for it. Mind is full of tension. Sleep is bad. These are some of the pitfalls that the trader has to iron out of his or her life. It is very possible to do so. One can trade and lead a happy family life. This status is not easy to achieve, though, and involves mental training and discipline.

The average investor who is heavily invested can barely sleep too, during a market down-turn. The mind constantly wanders towards the mayhem being inflicted upon the portfolio. An investor needs to learn to buy with margin of safety, which makes sitting possible. An investor needs to learn to sit. The investor should not be more heavily invested than his or her sleep-threshold. The investor’s portfolio should not be on the investor’s mind all day. It is ideal if the investor does not follow the market in real-time. One can be heavily invested and still lead a happy family life, even during a market down-turn, if one has bought with safety and has even saved buying power for such cheaper times. This status is not easy to achieve either. To have cash when cash is king – that’s the name of the game.

I’m not saying that investing is better than trading, or that trading is better than investing.

Discover what’s good for you.

Many do both. I certainly do both.

If you want to do both, make sure you have segregated portfolios.

Your software should be in a position to make you look at only your trading stocks, or only your investing stocks at one time, in one snapshot. You don’t even need separate holding accounts; your desktop software can sort out the segregation for you.

That’s all it takes to do both – proper segregation – on your computer and in your mind.

How To Nip A Ponzi In The Bud

Posted on December 12, 2012 by Uday Nath

Mirror Mirror on the wall…

Who’s most prone of them all?

As in, most prone to Ponzis…

Frankly, I think it is us gullible Indians.

Everyday, there’s some report of a Ponzi scheme being busted, with thousands already duped.

Charles Ponzi’s is a case of the tip of the iceberg – maximum recognition came posthumously. If Charlie would have received a cut every time his scheme was used by mankind, he would probably have become the richest man in the world. Unfortunately for him, he popped it before reaping the full rewards of his crookedness.

What Charlie did leave behind was a legacy. Yeah, Charlie did an Elvis, meaning that many have tried to emulate Charles Ponzi since he departed. Maybe I’ve gotten the chronology wrong, but you know what I mean…

Chances are, a Ponzi will eventually cross your path sooner or later. More sooner than later.

How do you recognize a Ponzi? Yeah, that’s the first step here – identification.

A Ponzi will talk big – he or she will flash. There will be a small track record to back up what is being said, and this will almost be blown into your face, after you’ve been dazzled by the Ponzi’s fancy car, expensive clothes and gold pen. The Ponzi will be a good orator, and his words will have a hypnotic effect on you (ward this off with full strength). The Ponzi will show off, making you feel awkward. You will feel like being “as successful” as what is being projected before you, right there, right then. When all these symptoms match, and such feelings well up inside of you, you are, with very high probability, talking to a Ponzi, who is trying to suck you in with a promise of stupendously high returns.

After you have identified the Ponzi, the next step is to not get sucked in. This is going to take all your self-control. Remember, the grass is not greener elsewhere. Take charge of your emotions. You’ve identified a Ponzi, man, that’s big. Now you need to follow through and see to it that a minimum number of people come to harm.

Hear the Ponzi out. Don’t react. In fact, don’t say a word. Don’t commit a penny. Keep reminding yourself, that you have it in you to succeed. You don’t need the Ponzi’s help to get good returns on your money. You certainly don’t want to lose all your money. With that thought in mind, block the Ponzi and his promises out. Leave politely and inconspicuously.

After you’ve left securely, without having committed a penny and without having left your details with the Ponzi, you now need to sound the alarm. Tell all your friends of the lurking danger. Forewarn them, so that no one you know gets sucked in. Ask everyone to spread the word. The whole town needs to know within no time.

Identify – Control – Alarm – this is a three step programme to nip the Ponzi In the bud – try it out, it works!

Cheers! 🙂

Why Emergency Fund?

Posted on December 5, 2012 by Uday Nath

Why do you wear a seat-belt while driving?

Why do you purchase medical insurance?

Why does one carry two parachutes while jumping off a plane?

Why do you keep your spouse happy?

So you can live in peace, right?

Peace of mind – so important…

Without peace of mind, market decisions are warped. Disturbing factors cause you to take wrong decisions.

Once faced with a market decision, it is extremely easy to go wrong. There are many telling you what to do. Some have agendas, others speak wthout an agenda, for the sake of speaking. Topping that, Mrs. Market starts playing tricks on you. She’s almost always catching you on the wrong foot. You needs to be mentally alert to identify your initial error and correct it as per your outlined strategy. If your mind-control is compromised, you step deeper into the delusive web of Mrs. Market by not being able to identify your initial error, and then the error can get bigger, and bigger, and even bigger, till it has the capability to consume you.

That’s why emergency fund!

You are not bigger than Mrs. Market. No one is bigger than Mrs. Market. You might start thinking you are, because of a few successes. As a result, you might start to play bigger. Over-confidence will first cause you to make a small mistake. Because you will not have identified the mistake as a mistake, owing to delusional conditions, the small mistake might get bigger and bigger, till it becomes bigger than you, and your market career is over.

That day, your emergency fund will feed your family.

So, firstly, make sure that an emergency fund exists for you.

It needs to be accessible, i.e. liquid.

It needs to be sufficiently large.

Its contents should be safely parked.

If it is generating some income of itself, even better, but the emergency fund should not be locked-in. If it is locked-in, you should be able to access it in a maximum of 24 hours, even if you need to pay a small monetary penalty for full and irreversible access.

Your spouse, who you’ve kept happy, should know about the emergency fund, and how to access its contents. If you’ve not kept him or her happy, he or she might access this fund anyhow, and blow it up beforehand. So, keep him or her happy and in a responsible state of mind. It is possible that he or she is just not interested in finance, right, so then what do you do? Wait for your child to grow up, wishing that he or she has an interest in finance! Anyways, someone you trust should know how to access the emergency fund. If nothing else, write out all details in a file, and inform the person you trust of the file’s existence.

Why am I being so extreme about all this?

I’m big on safety. I don’t like seeing a market player blowing up, because I wouldn’t want that to happen to myself. Have you been to a circus?

The acrobats do have a safety line, don’t they? I mean, they practice all their lives, and pull of the most amazing stunts, again and again, day after day, but at the back of their mind, they know it’s over if they make just one mistake. Unless they have a safety line. If and when a mistake occurs, their safety line will save them. The existence of a safety line allows them to perform with peace of mind, and perform well.

It is exactly like that in the markets. One big mistake, and it’s all over.

Unless there’s an emergency fund.

It’ll allow you to survive, recuperate, and get back on track. When you’re back, you’ll most definitely not repeat the big mistake you made. Also, the first thing you’ll do is regenerate the emergency fund, before you get back to proper market action.

Here’s wishing that you never need to access your emergency fund, but also wishing that it exists in the first place.

Here’s wishing that its presence gives you the necessary peace of mind to perform better.

Who Told Who So?

Posted on November 22, 2012 by Uday Nath

Nobody’s in a position to tell anyone so.

That’s the marketplace for you in a nutshell.

There are times when you’re sure a scrip has peaked, and it just keeps on going higher, and higher, and then even higher.

At other times, a scrip might show tremendous valuations, but it just refuses to rise. 9 years in a row. Just refuses to rise.

Welcome to a world where if you’re able to watch your own back, you’re good.

In the world we are speaking about, a Rakesh or a Warren are what they are because that’s what suits them particularly. What suits them might most definitely not suit you. What makes you think you can emulate someone in the marketplace?

That’s the whole point, people.

You need to carve out your own unique niche in the marketplace. Something that suits you, and just you. If you do that, you’ll be happy. Satisfied from within. And that’s when you’ll start doing well.

Your best performances will come when you start being … … yourself.

Playing someone else’s game? Well, try to. Don’t be surprised if you lose your pants.

Your biochemistry is unique. So are your reactions to subtle changes around you. Thus, your interactions and dialogues with Mrs. Market need to be unique. These need to cater to your needs, your queries, your tendencies and your idiosyncrasies.

We try to follow rules. We want to master Mrs. Market. Frankly, what a joke!

Firstly, we need to make our own rules, for ourselves.

Secondly, Mrs. Market needs to be understood, even if for short spans, and she most definitely doesn’t need to be mastered. She’ll master you rather than you her. Be wary of her, win from her, but why do you wish to conquer? Fool’s paradise. Stick to the script, pal. Take your winnings and go. Why do you bet the farm, in an effort to make a killing? You’re not proving any point to anyone. Everyone’s busy doing their own thing with Mrs. M. No one’s looking at you. You don’t need to prove anything to anyone. Don’t bet the farm. Stick to the script. Take your winnings and go.

So, what’s the real learning in this world we speak about?

When you go wrong. That’s when real learning begins. How do you handle yourself? How do you come back? How do you start winning again? How do you then keep winning, again, and again, and again.

That’s the learning.

I didn’t tell you so.

You discovered it for yourself.

Remember that.

Discover it for yourself.

What’re you waiting for?

Happy Second Birthday, Magic Bull !!

Posted on September 12, 2012 by Uday Nath

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

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

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

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

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

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

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

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

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

Cheers 🙂

Your Personal War in Cyberia

Posted on September 7, 2012 by Uday Nath

Are you illiterate?

Literacy is not just alphabetical.

The meaning of literacy has expanded itself into your cyber world and also into your financials.

I mean, can you call yourself literate without knowing computer and financial basics?

I don’t think so. Not anymore. Times have changed, and so must you, in case you want to be called literate.

One of the first things one learns during one’s quest for financial literacy is the operation of one’s netbanking.

Once you are logged in, you soon realize, that your assets are under attack, and must be appropriately secured.

Login password, secure login, phishing filter, security questions, transaction password…you are learning fast. Your vocabulary is changing. Your defences are up. Yes, you are at war.

What kind of a war is this?

More of a cold war, till it gets hot for you, which can happen, but is not a must.

Worst-case scenario is that someone cleans you out. As in, a cyber thief steals all your money that was reflecting in your netbanking.

Your common-sense should tell you that your netbanking password is the all-important entity. Tell it to no one. Store it in a password safe. Keep changing it regularly. Don’t forget to update it in your safe. The safe of course opens with its own password, and is in sync between your mobile and your desktop. On both your mobile and your desktop, internet security prevails. Meaning, don’t use an el cheapo antivirus. Use a good one. Pay for it.

If there is a large amount reflecting in your account for a number of days without being used, secure it. Even if someone hacks in, available amounts should be as minimal as possible. Let the hacker first deal with unsecuring a secured amount. This gives you a time-window, during which you read and respond to any sms sent by your bank, that a secured amount has now been unsecured. The shot has been fired, your watchman has alerted you, and you now need to respond.

For the amount to be actually transferred out of your account, one more thing needs to happen. The hacker needs to set up a new payee under third party funds transfer. Some banks take three days for this, during which they coordinate with you whether or not you really want this payee to be set up. Other banks have a one-time password (OTP) system, where a transfer can only be activated by an OTP sent by sms to the registered mobile number linked to the account. Works.

Nevertheless, hackers seem to be getting around these systems, because one hears and reads about such cyber thefts all the time. However, the window created by your systems in place gives you crucial time to respond.

What is your first response, after becoming aware that you are under cyber attack?

Relationship manager (RM) – call him or her. After you’ve alerted your RM, login if you can, and secure any unsecured amount. Change your login and transaction passwords, along with security images, words, questions and answers. Delete all payees. Logout. Close all windows on your desktop. Clear all history, cache, temporary files, cookies and what have you. Run a virus cum spyware scan. Clean any viruses, then shut your computer.

How does one go about securing unsecured amounts?

Make a 7 day fixed deposit with your unsecured amount. Or, configure your mutual fund operations through your Netbanking itself, and transfer the unsecured amount to a trusted liquid scheme offering 18-20 hour liquidity, all through your netbanking. Pretty straight-forward.

After you’re done, join your RM in finding the loophole. If you’ve incurred a loss, file a police report along with an application for reimbursal, citing all security measures you undertake as a given while also outlining the chronology of your actions after you realized that you were under attack.

That’s about it, I can’t think of anything else that you could do. If you can, please comment.

Right then, all the best!

Isn’t This Other Party Getting Too Loud?

Posted on September 6, 2012 by Uday Nath

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

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

What’s with gold?

Can it tackle inflation?

No.

Is there any human capital behind it?

No.

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

Correct.

Is there a storage risk associated with gold?

Yes.

Storage volume?

Yes.

Transport inconvenience?

Yes.

Price at an all time high?

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

Getting unaffordable?

Yes.

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

No.

Then how am I comfortable with gold, you ask?

Right, I’m not.

Can I elaborate, is that what you are requesting?

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

Why?

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

How?

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

What’s a good time to sell?

Well, Diwali’s a trigger.

Right.

Then, there are round numbers, like 35k.

What about 40k?

Are you not getting greedy?

Yeah – but what about 40k?

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

Fine, anything else?

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

Is that it?

That’s a lot, don’t you think?

I was wondering if you were missing anything?

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

Why’s that?

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

And what is gold’s mean?

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

That’s it?

Yeah.

And what about equities?

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

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

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

Wow!

Yeah, isn’t it?

Getting Too Comfy For Our Boots, Are We?

Posted on August 22, 2012 by Uday Nath

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

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

Are you getting too comfortable? Lazy, perhaps?

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

People, scenarios change.

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

Are you flexible enough to change with the scenario?

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

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

Inflation begins to fall.

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

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

How?

The payout, dammit, it will have decreased.

Also, something else starts performing.

What?

Equity.

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

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

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

Now, the cauldron is hot and is getting hotter.

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

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

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

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

Otherwise…

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

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

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

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

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

Why?

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

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

The Ugly Side of Leverage

Posted on August 16, 2012 by Uday Nath

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

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

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

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

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

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

For what?

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

Life was straight-forward.

Then came leverage.

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

Then they saw what leverage could do.

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

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

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

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

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

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

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

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

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

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

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

How does the following sentence sound?

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

Not good, right?

Finding the “Switch-Off” Button

Posted on August 6, 2012 by Uday Nath

Gadgets have a switch-off button, right?

Whatever for, have you ever wondered?

Do we have one too?

If we do, is it clearly marked, i.e. is it easy to find?

If we do, and if it isn’t clearly market, where and how can we find it?

Why is it essential to find it?

What if we don’t have a switch-off button?

First, let’s observe the Master. Sherlock Holmes. Master at the art of switching off.

Observe Holmes when the next obvious lead will take a day to obtain. Since the case is going nowhere, Holmes will take the day off. He will play his violin, trip on some coke to study its effects on mind and body (he’s Holmes), go to the art gallery, or what have you. The case at hand has gone into oblivion. Attenuated. What happens when it is time to pursue the case again? Holmes switches on. He is fresh. Alert. The switching-off really helped.

Remember the “attenuate” button on your car’s stereo?

Why do you think it is there?

So you can take that call without getting disturbed by the music. The music is still there, but upon pressing this button, it becomes really soft. So soft, that you don’t get affected by it. You conduct your business on the phone, and then press this button again, and the music comes back on in its full glory.

Same goes for the markets.

Once you are in a trade, market-forces are connected to you.

If you cannot attenuate them during off-market hours, you can ruin your evenings, nights, weekends, health and family life

Big, big price to pay.

Not worth it, so get busy and learn to attenuate the market’s connecting force once you switch your terminal off. Rest assured, it will come blaring back at you when you switch your terminal back on, but that time between terminal off and terminal on is oh so precious. That time belongs to you, and not to Mrs. Market. Don’t allow her that extra privilege. Use that time for things that you wish to do in life. Use it for your family. Mrs. M will be getting your undivided attention during the next market session anyways. Let her be content with that. Keep her in her place.

Just as any gadget needs rest, so do you.

Sometimes, the markets go nowhere, and / or are choppy. It doesn’t pay to trade. Switch off from the markets. Take a holiday. Do something else, till conditions become better for trading.

Yes, we do have a switch-off button. It is not clearly marked. It is located in the mind. One activates it indirectly. By switching on to some other relaxing activity that has the ability to grab the mind’s interest.

Switching off is a skill, and this skill needs to be developed. We don’t necessarily come with it. Most of us need to learn it. Otherwise, we’ll become tired, erratic, irritable etc. etc., scale up to commit big blunders, and then we will eventually burn out. That’s if the Street doesn’t throw us out as paupers before a looming burn-out. Also, our family lives will have gone for a toss. Our children will remember us as dreadful parents. Yes people, we need to find the switch-off button asap, and then we need to learn to activate this button at will. Essential.

And please don’t worry about not having such a button. After all, it was the human being who put such a button into all gadgets. Well, the idea must have come from somewhere. From inside our own mind, perhaps, where our own button exists?

What Exactly is a Decent Trade?

Posted on July 31, 2012 by Uday Nath

A decent trade should yield you money, right?

Not necessarily so.

Am I crazy?

No.

So why am I saying this?

Am I not in the business to be in the green?

Of course I am, so let’s delve a little deeper.

As is slowly becoming clear to you, Mrs. Market is a schizophrenic. Her behaviour is mostly looney, and more often that not, she traverses an unexpected trajectory.

In the business of trading, there lie before you a set of circumstances, and your trading decisions are based upon these.

Thus, you outline your trade.

You plan the entry.

You plan the exit.

You define the reward : risk ratio.

You draw up a trade management plan, as outlined by your system. You preplan your response to all possible movements of Mrs. Market.

Can you do more?

No.

Can you predict Mrs. Market’s future behaviour?

No.

You have an idea about what she might do, based upon past behaviour, but does that make her future path certain?

No.

So that’s it, you enter a trade offering a high reward : risk ratio, based upon information from the past and a probabilistic idea about the future. A high reward : risk means that if there is a payout, it will be high in comparison to the loss you might bear if the trade goes against you. Something like 2 : 1 (possible profit : possible loss), or at least more than 1 : 1.

So what’s going to make your trade decent?

Just stick to your systematic plan, and you’ll have traded well.

Notice, no talk of any money here.

We’ve only spoken of sticking to our system-outlined trading plan.

We are not focusing on money. We are focusing on trading well.

Money is a side-effect to decent trading.

Trade decently, do the right thing, and money will follow as a side-effect, seen over the long run.

If your trade-management plan says you are cutting the trade below point X, and if point X is pierced by Mrs. M as she moves against you, well, the right thing to do would be to cut the trade.

So what if the trade didn’t yield you money?

It was a trade well executed, AS PER YOUR SYSTEM-OUTLINED TRADING PLAN.

What would have made this trade an indecent one would be if you hadn’t cut the trade below point X, irrespective of where Mrs. M went after that.

Why would the trade then be “bad”?

Because you didn’t follow your system’s advice.

You second-guessed yourself.

That means that you don’t have faith in your trade-management abilities, and / or that you succumbed to your emotions. You begun to hope that Mrs. M would start to move your way after piercing point X during her move against your trade direction.

If you did follow your system, you actually didn’t let any hope enter the equation.

Decent.

You had faith in your system, and did not second-guess yourself.

Very decent.

Such faith in one’s system is absolutely essential, and you’ll realize that as you start to scale up in trade-size.

Let’s look at the other part of your trade-management plan.

Let’s say that you decided that if Mrs. M moved in your directon, then you would stay in the trade till you saw the scrip giving at least one sign that it was stagnating. Only then would you book profits, upon such a signal from Mrs. M.

Assume then, that after entry there’s a spike in your direction, and you are in the money.

What do you do now?

Do you get greedy, forget about your trade-management plan, and book the trade? Would such a money-yielding trade be considered decent?

No.

Firstly, you got greedy.

Indecent.

Then, you forgot about your system-outlined trading plan.

Very indecent.

So what if you made money?

Sticking to your system’s advice would have given you the chance to make more, perhaps much more.

It is difficult enough to pinpoint a scrip which is about to explode.

Then, when you land such a scrip, the last thing that you want to be doing to yourself is nipping the explosion in the bud.

You nipped potential profits, even if you took a portion home.

Very, very indecent.

There you have it, people.

Use your common-sense, and, trade decently.

What Are We, Really? (Part 3)

Posted on March 16, 2012 by Uday Nath

Heinous crimes … happen in India.

For example the recent Gurgaon r#pe case.

What are we, really?

We were supposed to be reaping a demographic dividend. What happened?

A society that mistreats its women-folk is a sick society.

At its core, the ideology of India is spiritual. And, the driving force of our spiritualism is “Shakti”. The “Shiva” portion is more like a rock of stability. The activity bit is left to Shakti, to rise, purify, and reach Shiva. Shakti is about action. She is the driving spiritual force of India.

So, when from deep inside, our driving force is feminine in nature, and when on the outside, we find ourselves in a male-dominated society, this is a huge paradox that we are forced to deal with.

China has dealt with a similar paradox – with force. Chinese governments, over the ages, have suppressed China’s mandarin-spiritual nature so heavily, that today, it is buried deep, deep down, and is not able to surface. Thus, their paradox is not able to feed off itself, since one pole is out of action. It’s not a solution, but that’s what they’ve done.

In India, spiritualism and basic life go hand in hand. Shakti is beyond suppression. Simultaneously, male domination makes itself felt, in pockets. At every moment, we are faced with our paradox. We need to deal with it, properly, peacefully.

Though the average Indian is dramatic in nature, let’s just get realistic for a while. Which portion of a society is responsible for its continued existence? As in, who bears children?

Bob Marley got his lyrics wrong in one song. “No woman…no KIDS” is what the scene is. No kids … no continued existence … end of your civilization.

A society can only be deemed healthy and fit for continued existence, if it provides a safe and harmonious environment to its women and children. Period.

How are women in India dealing with the paradox?

There is rebellion. Some are able to express themselves. They rebel openly, in their speech, their way of life, dressing-sense, etc. etc. Many others are not able to rebel openly, because of suppression. They rebel in their minds. At the first opportunity, their rebellion will break out.

How is the average dominating male reacting?

There is resentment. Jealousy. Anger. Frustration. Etc. etc. Evolved males are not showing these symptoms. They are dealing with the rebellion peacefully. Unevolved, unemployed, raw / young males are showing the above negative symptoms. They are not able to deal with this new expression of freedom. Their domination is threatened, and their hormones play havoc, which is when they commit heinous crimes, for example r#pe. Unforgivable. Yet, committed.

That’s where we are, people. A two-tier society in every respect. Spiritually (evolved-unevolved divide), structurally (male-female divide), and economically (rich-poor divide). We are still finding ourselves. Please don’t treat us as a mature society.

Specifically, please don’t invest your money here with the idea of steady growth. There will be growth, but it will be hap-hazard, as and when we keep finding ourselves. Many set-backs. Then proper trajectory again. Then road-bumps. And so on, and so forth, till we find ourselves once and for all.

Your money here is set for a volatile ride, till India’s out-of-whack pockets begin to heal.

This is Getting Murky

Posted on March 15, 2012 by Uday Nath

Have you actually seen China’s account books?

Has anyone, for that matter?

How does the US pay for its imports from China?

With treasury-note IOUs?

Are Chinese GDP numbers doctored?

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

How many more bailouts is Greece going to require?

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

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

Things are getting murky in the financial world.

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

It’s time to go on high alert.

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

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

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

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

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

So what’s it gonna be?

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

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

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

We are well into the ’10s.

What’s it gonna be?

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

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

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

Where is the product going to be unleashed?

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

Why is the time ripe?

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

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

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

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

Be very, very careful. Do your due diligence.

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

Only the Lonely

Posted on February 29, 2012 by Uday Nath

You are unique.

Are we still debating this?

No, right?

If we are, then sit yourself down.

Alone.

Reflect.

Please see how you are… unique, and that you are… unique.

Moving on, what does that mean for you?

Specifically, what does it mean for your market strategy?

A newbie starts off with very generalized market strategies.

What’s good for the goose, is good for the gander types.

Ones that treat donkeys and horses alike, to literally translate from Hindi.

Slowly but surely, you realize that you don’t want donkey treatment anymore. Mrs. Market has kicked you around and converted you from a donkey into an intelligent market player.

An intelligent market player requires a fine-tuned, risk-profile specific strategy.

That’s where you either step in or you don’t.

Choice is, as they say, now yours.

Do you want to continue with generalized, text-book level donkey strategies, or do you want to spiral up to the level of exclusive strategy tailoring and fine-tuning.

People who approach the market as a secondary or tertiary activity don’t generally spiral up. Most of them are unhappy with their returns, but since they already have primary (and probably successful) professions going for themselves, they choose to remain where they are as far as the markets are concerned, and they don’t aspire to rise any higher.

You see, they don’t have the time to take this spiral plunge.

Now it’s decision time for you, buddy.

Do you wish to remain at the average donkey level all your life as far as the markets are concerned? If not, read on.

You need to spend some alone-time, as long as it takes.

Go over all your market activity till date.

Develop a feel for your risk-taking ability.

What bothers you? What do you like? What kind of a “line” are you capable of stomaching? For how long? How do you react to a loss? To a profit? Are you emotionally stable? Can you remain stable for long? How long? What gets you on tilt? Once you make a rule for yourself, are you able to follow it? Or, do you keep second-guessing yourself? What kind on income are you looking for from the markets? Have you learnt to sit on cash? Can you stay invested for long periods? Can you let your profits run? Do you respect your stop? Do you know what a stop is? Do you know how to manage a trade? Have you fully understood basic money-management? After what level of income do you start functioning smoothly?

Etcetera, etcetera, etcetera.

Ask yourself these and many more such questions.

Let the answers come from within.

Listen to those answers.

Understand who you are.

Then, devise a unique and fine-tuned market strategy for yourself.

Keep working on this strategy, fine-tuning it till it is in tandem with your unique self.

At that point, it will become a successful strategy, and will yield above-average results.

Being above-average in the markets is a winning scenario.

Cool & the Bean-Counters

Posted on February 25, 2012 by Uday Nath

Cheer up, people, it’s another Mr. Cool story, yayyyy!!

We need to catch up on his life, especially because that’s Mr. Cool there, pulling in to the parking in his spanking new X5!

And oh, that hot, blonde babe seated next to him must be his new girl-friend.

Who are those suited blokes in the back?

Well, they are his bean-counters. You’ve met one before, his broker, Mr. Ever So Clever. The other two are his accountant and his banker, respectively.

Why are they called bean-counters?

Well, they count the beans he spends on them, through them and with them.

Why weren’t they there before?

Because he didn’t have any beans? In fact, he owed beans to his very bean-counters.

So what happened?

You see that hot blonde over there?

Yup, can’t miss her.

Well, she’s not only hot, she’s got brains too.

Really?

Yeah, she’s an analyst with Sax.

Wow! I thought she was his girl-friend.

Ya, that too, but only after he hit the bean-fountain.

So how did he do that?

The story revolves around Miss Sax. She gets around. She is privy to a lot of inside info, but is intelligent enough to not get caught, yet.

How does she get the inside info?

You’ll need to use your imagination. What’s she got that a holder of inside info might want?

I see. And then?

Well, she sells the info to the highest bidder. For the last one month, that’s been our friend Mr. Cool.

How did he manage to assemble funds in the first place? I mean, the last time we saw him, he was in the dumps, out of money, heavily in debt, and contemplating suicide for all we know.

Which is when he was approached by the bean-counters. They had easy access to funds for hours at a stretch without anyone noticing, provided they’d put the funds back before someone would look. They needed an external face to deal with Miss Sax and to place their trades.

Ingenious. This way, they’d never be in trouble if something went wrong.

Correct. The only risk they took was for the first few hours that they embezzled funds. It was very necessary for that principal to be put back in time.

So that must have obviously gone off well, huh?

Yeah, their first trade based on Miss Sax’s inside info clocked two million in an hour. They cashed out, put the principal back into banks, trading accounts and other private accounts where it was embezzled from, and from there onwards, they pulled all their future trades on the back of their profits.

And it’s all been going good, is it?

Well, Miss Sax is dishing out million dollar tips week after week.

What if they get caught?

Hmmm, actually, I’m only worried about Mr. Cool.

Why?

She’ll get out of any jam. She’s too smooth to get caught. Even if she’s implicated, she’s capable enough to get herself off the hook. Then, the bean-counters don’t even have a trail leading to them. All the dealing is in Mr. Cool’s name. The four of them needed a front-runner who will take the hit if their scheme is busted.

And that’s our dear friend Mr. Cool, right?

Yeah, and he’s dumb enough not to realize it.

How does he pay them their share?

In cash. There’s no paper or electronic trail. They spend it in an inconspicuous manner. These are highly intelligent people with crooked minds.

Yeah, the only one flashing red flags is our friend Mr. Cool. The new X5, Armani suits, expensive holidays, plus the grapevine says he’s planning to buy a new penthouse.

Yup, he’s never heard of saving when times are good. Because of these red-flags, he’s eventually going to get caught. The authorities keep scanning for insider-trading, and the very people they scrutinize are the ones making quick and big expenditures, as our candidate is doing.

So are you saying that, very soon, we’ll be seeing Mr. Cool in the dumps again?

There’s a very high chance of that.

With no bean-counters and no Sax around?

Oh, they’ll be long gone, looking for their next front-runner.

Dealing With a Bully

Posted on February 24, 2012 by Uday Nath

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

What if this bully is the government itself?

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

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

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

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

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

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

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

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

We are not a democracy – we are a joke.

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

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

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

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

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

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

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

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

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

Betting Your Monsters and Checking Ace-High

Posted on February 22, 2012 by Uday Nath

Blah, blah, blah, I know, poker terminology yet again…

Can’t help it, people, it’s just so valid…

When you’re holding a monster hand, you bet out on the next street to build up the pot. Similarly, when a trade starts to run, you’re looking to load up some more on the scrip at the appropriate point.

When you’re holding air, or a mere bluff-catching hand like ace-high, you check it down through the river. Likewise, if the scrip you’ve just bought into stagnates, or moves a bit down, you do not double up on your trade. Instead, you just wait for your stop to be hit, or if before that your time-stop has run out, you square-off the trade.

An aggressive-passive style?

Who cares?

Recipe for winning in the long run?

Yes.

Right, then we’re taking it.

Two out of ten trades may start to run big. It’s taken you time, money and effort to identify those two. You are in the trade. You can feel the adrenaline pumping. Now’s not the time to sit passively. Spade-work’s all done. Right, put some more money on the winning scrip. Point is, when?

Additional points of entry are tricky.

I prefer a little margin of safety here. I like to double up at a point where there’s been some correction, and possibly when a Fibonacci level has been hit. After that, I want to see the scrip going up back through the level, and I’d like to see volume go up simultaneously. That’s my point of second entry.

You can be more aggressive, no one’s stopping you.

You can even choose to enter the second time above some kind of a previous high or above the breaking of a resistance with volume.

Risky?

Yes.

You do, however, stand a good chance of catching a big move in a very short time.

You see, at this particular point, where you’re choosing to enter, the scrip is pretty hot. People are plunging in. There is no resistance from above. Upward movement is smooth.

Downside is, that those who’ve been sitting on notional profits might start to book these anytime. When that happens, the scrip might plunge well below your high entry and hit your stop. That’s a risk you have to take, since you have decided to enter above a high.

No risk, no gain.

At my more conservative second entry point, the scrip is not as hot. It is meeting with overhead resistance from recent entrants who entered high to then find the scrip correcting, and who are now happy to exit at their entry points as the scrip retraces its upward move. So, I will have to wait longer for a possible second run of the scrip to develop, and this might or might not develop. That’s a chance I have to take. That’s the price of being conservative during second entry. I’m comfortable.

Staying in your comfort-zone at all times adds a lot of value to the rest of your life, even after you shut down your computer. One does carry over one’s emotions, and it’s best if these are under control when you reach home. By trading in your comfort-zone at all times, you make sure that you come home in an emotionally balanced state.

If you can take the second entry above a high or above a resistance while still remaining in your comfort-zone, by all means, please do so. It’s an exciting play, capable of yielding large and quick rewards. I’ve tried it at times, but cannot get a grip on the excitement levels. Thus, I normally choose the more conservative play mentioned above. It’s just a personal choice.

Similarly, I’m very comfortable checking my ace-high trades down through the river. If I’m in a trade and it’s not running, I don’t jump about trying to pull stuff out of a hat in an effort to make the trade run.

If it’s not running, it’s not running. Feed in a trigger stop and shut the computer.

Once you are alerted that the stop’s been hit, look for a new trade.

Keep it simple. That’s another recipe for winning.

Recognizing and Reacting to A-Grade Tomfoolery

Posted on February 21, 2012 by Uday Nath

Air India and Kingfisher Airlines (KFA) … can you name two things these two have in common?

They’re both loss-making airlines.

Furthermore, there’s lack of will-power to make them profit-making, from the very top.

The problem with a government job is that you can’t kick the government servant out. The government servant thus enjoys complete job-safety and total lack of accountability. That’s been India’s recipe for ineffectivity and loss-making government institutions for decades. In Air India’s case, add to this massive subsidization by the government. Whenever the Maharaja can’t pay his bills, which is like every month, the government of India chips in with tax-payer money. There’s no real policy being pushed through to effectively earn something. Government servants travel free, big-time. If there’s a shortage of seats, honest, real-money paying citizens are off-loaded and left stranded to accommodate the highly evolved souls that rule our country.

Seriously, why do you still travel Air India? Because it’s cheap? Don’t you see through the tomfoolery? Are you blind? They might wake up upon sensing a complete lack of interest amongst travellers. Until that happens, and until they start performing with no ad-hoc cancellations and off-loading, travellers need to give them that wake-up call by using other airlines and by not subscribing to any money-raising gimmicks or IPOs that the company might come out with.

Cut to KFA. What’s wrong with Mr. Mallya? Unpaid pilots, unpaid fuel bills, unpaid taxes, seriously!?!

Vijay Mallya’s story is not about lack of efficiency. It’s about flamboyance. At the cost of his shareholders? Perhaps.

His liquor business is performing well. A little hand-holding through initial turbulence would have seen KFA through. One pays one’s pilots. Period. You don’t just hire scores of great pilots and buy a huge fleet of aircraft, and then stop paying your pilots. Such flamboyance is going to result in a loss-making enterprise for a few years, isn’t that common-sense? In that period, the hand-holding comes into play from the promoter’s other profit-making enterprises, right? Does that seem to have happened here? Unlikely, looking at the current status of KFA’s balance-sheet. Quarterly losses of 100 million USD and growing coupled with a burgeoning debt, Jesus Christ…

The airline industry involves a very precarious vicious-cycle. If you can avoid falling into it from the start, you are through. Prime example is Indigo Airlines.

The first signs of letting up tighten the noose one more notch. Unpaid pilots result in strikes leading to delays and cancellations. A traveller who has been bitten once decides to travel with the competition. Numbers fall. Now, fuel bills can’t be met. More problems, more delays and cancellations. Finally, you can’t pay your taxes. That’s when the tax department steps in. Headlines go ballistic. Huge bad publicity. Twitter battles. What was that? You want the same mollycoddling as Air India? You want government subsidization? Which world do you live in? Not happening!

Money needs to flow into KFA, not loaned money, but clean money, out of the parent-group’s own coffers. Any usage of KFA revenues to fund the parent-group’s activities is a strict no-no. For example, if the Kingfisher Formula 1 team or the group’s IPL Cricket team were even partly funded by KFA revenues, that would be a huge, huge red flag, given the financial condition of KFA. As of now, shareholders need to see some will-power emanating from the top to control the bleeding. The Street can even short the KFA stock down to zero if the promoter’s attitude does not change. Perhaps such an image-beating would be a wake-up call for the promoter.

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Category Archives: Risk

And How Are You This 20k?

Can We Please Get This One Basic Thing Right?

How To Nip A Ponzi In The Bud

Why Emergency Fund?

Who Told Who So?

Happy Second Birthday, Magic Bull !!

Your Personal War in Cyberia

Isn’t This Other Party Getting Too Loud?

Getting Too Comfy For Our Boots, Are We?

The Ugly Side of Leverage

Finding the “Switch-Off” Button

What Exactly is a Decent Trade?

What Are We, Really? (Part 3)

This is Getting Murky

Only the Lonely

Cool & the Bean-Counters

Dealing With a Bully

Betting Your Monsters and Checking Ace-High

Recognizing and Reacting to A-Grade Tomfoolery

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