Category Archives: Risk

Finding the “Switch-Off” Button

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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?

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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)

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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

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Have you actually seen China’s account books?

Has anyone, for that matter?

How does the US pay for its imports from China?

With treasury-note IOUs?

Are Chinese GDP numbers doctored?

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

How many more bailouts is Greece going to require?

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

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

Things are getting murky in the financial world.

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

It’s time to go on high alert.

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

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

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

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

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

So what’s it gonna be?

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

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

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

We are well into the ’10s.

What’s it gonna be?

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

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

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

Where is the product going to be unleashed?

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

Why is the time ripe?

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

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

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

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

Be very, very careful. Do your due diligence.

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

Only the Lonely

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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

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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

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

What if this bully is the government itself?

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

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

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

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

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

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

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

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

We are not a democracy – we are a joke.

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

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

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

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

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

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

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

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

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

Betting Your Monsters and Checking Ace-High

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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

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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.

Moments Before the Plunge

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A very common sight right through school and college was last minute cramming. It was an epidemic. I was more the odd one out, walking around without any books a day before any exam. Reason was, I was convinced that if I was unsure of myself a day before an exam, delving into course-material at that stage would make me feel even more insecure.

“Do you have any coffee?”, whispered someone. This fellow woke me up in the middle of the night, leaving with my entire bottle of instant coffee-powder. He was doing an all-nighter before some board exam. At the cost of not being super-prepared, I preffered to sleep the night.

Interestingly enough, I’ve had the chance to speak to some brides and grooms hours before the knot was tied. Jitters, man. Everyone was jittery, well almost. The most common feeling was “… what if this is the wrong step?” This was followed by “…what if we don’t get along?”

Seriously, people, why moments before the plunge? Why does the human being expose him- or herself to destabilizing thoughts just before pulling the trigger? There’s ample time much, much before, to sort all the destabilizing stuff out while deciding whether one goes ahead with a particular action. Similarly, there’s ample time to study for an exam if one starts from day one. Just an hour a day, throughout the term, and there’s no need for any all-nighters.

If you’re all sorted out and well rested to boot, you then have the best chance of seeing peak-performance emanating from your system.

And that’s what we are looking to be, just before opening a market position.

We’ve sorted out our worries and fears. We know how much risk we can handle, and have systems in place to manage this risk, i.e. we know what we have to do if our trade goes bad. Also, we know how to behave when a trade does well. We are aware about the size of the position we need to put on as an appropriate ratio to our stack-size. We’ve tuned in to the idea of position-sizing, and are practising it as we win more or lose more. Basically, we have our basics in order.

After that, we have to see whether we actually feel like trading. Even when our trading system identifies a set-up, the innate go-ahead to trade might just not come from within. There can be some reason for this. For example, there could be some tension prevailing at home. Sort out the external disturbance to the level of closure if you can, or it might constantly disturb trading.

So, internal sorting out, external sorting out, then comes a trade set-up, and one takes the trade. No jitters, here, there, anywhere. All jitter-causing avenues have been chewed up and digested. That’s when triggers can be pulled when they appear.

When Mrs. Market asks you to ride alongside her, your bag should be packed already. You can then jump on to her motor-bike without worries, for you’ve packed well for the trip.

Moving on to a Higher Table

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You’ve started to rake in regular profits on your poker table, or, if you will, on your regular trade-size.

Common-sense now tells you, that you need to scale it up a bit. After all, you’d still be risking the same percentage of your stack-size per trade. Simultaneously, if your win-ratio remains constant, you’d be allowing your stack to grow at a faster pace.

You move on to a higher table.

Welcome to the concept of position-sizing.

Those who position-size can evolve into huge winners in minimum time. Even though the idea of position-sizing is so central to trading, it is still one of the most under-discussed of topics. We need to thank Dr. Van Tharp for teaching this concept properly.

Think about it. When you win, your principal increases. On the next trade, you then put the same principal percentage at risk like you’ve always done. Because your new principal was more, it allowed you to buy more. Thus, you put yourself on the line to win more.

What’s essential here is also to down-size your position when you are losing. Taken a few bad beats in a row? Move down to a lower table for a bit, man. Allow your stack to recuperate at this lower level and then some before moving back higher. With that, when you’re losing, you start to risk less. Crucial point.

Of the different methods available to you to position-size, here, we speak about increasing trade-size when a new trade starts.

The advantage you enjoy when you’re doing pure equity is that on each new trade, your position-size can pinpointedly be adjusted according to your stack-size. Scale-up, scale down, trade upon trade, as the situation demands. Beautiful.

Why does this work out so beautifully for you?

You see, your system gives you an edge. You are opening your positions on high-percentage winners only. Period. Simultaneously, you are cutting your losses at your pre-defined maximum. You are also allowing your winners to win more. And, you are taking your stops. Even if your system then gives you a 55:45 edge over Mrs. Market, you’re doing great. Over a large sample-size (many, many trades, or for that matter many, many poker hands), your stack will increase with a high level of probability. As it goes on increasing, you keep turning on the heat by increasing your position-size further and further.

What happens then? What do you see?

Something beautiful happens.

Your trading principal (what we’ve been calling stack-size all the time) starts to increase exponentially. Have you seen the progress of an exponential function as one travels from zero to the right on the x-axis (the x-axis here would stand for sample-size or the number of trades taken)? If not, check it out on the net.

A good system should give you a 60:40 market-edge. In the Zone, you’d probably trade at 70:30 or beyond. That’s 70 winning trades out of every 100 taken, and 30 losing ones. Imagine what that does to your trading principal over 1000 trades, if you adhere to position-sizing, let your winners ride and take your stop-losses.

The numbers will boggle your mind.

Go for it.

Going All-in Against Mrs. Market

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Yeah, yeah, I’ve been there.

And it backfired.

Luckily, my stack-size in those days was small. That’s the good part. The shocking bit was, that back then, I had defined my stack-size as my networth. Biggest mistake I’ve made till date in my market-career, and I was very lucky to escape relatively unhurt.

Wait a minute, why is all this poker terminology being used here, to describe action in the world of applied finance?

Well, poker and market action have so much in common. Specifically, No-Limit Hold-’em is deeply related to Mrs. Market. We’re talking about the cash-game, not tournament poker. It’s as if Hold-’em is telling Mrs. Market (with due respect to Madonna):

i’ve got the moves baby
u got the motion
if we got together
we’d be causing a commotion

A no-limit hold-’em hand is like one trade. Playing 20-50 hands a day is excellent market practice. You’ve got thousands of games available to you online, round the clock, and most of these are with play money. Even though the “line” is missing here because of no money on the line, this is a no-cost avenue for trade practice, and it’s entertaining to boot.

Back to stack-size? What is stack-size, exactly?

Well, your stack size is the sum of all your chips on the table. You play the game with your stack, and on the basis of your stack-size. The first thing you need to do before there’s any market action is to define your stack-size.

A healthy stack-size is one that allows you to play your game in a tension-free manner. My definition, you ask? Well, I’d start the game with a stack-size that’s no more than 5% of my networth. Segregate this amount in an account which is separate from the rest of your networth, and trade from this segregated account. That’s the wiser version of me speaking. Don’t be like the stupid version of yours truly by defining your entire networth as your stack-size.

In this 5% scenario, you have 20 opportunities to reload. It’s not going to come to that, because even if a couple of your all-in bets go bust, you will eventually catch some big market moves if your technical research is sound and if you move all-in when chances of winning are high.

Wait patiently for a good hand. Then move. One doesn’t just move all-in upon seeing one’s hole-cards. If these are strong, like pocket aces, or picture pocket pairs, one bets out a decent amount to build up the pot. Similarly, if a promising trade appears, and the underlying scrip breaks past a crucial resistance, pick up a decent portion of the scrip. Next, wait for the flop (further market action) to give you more information. Have you made a set on the flop? Right, then bet more, another decent amount, but not enough to commit you fully to the pot. Then comes the turn. The scrip continues to move in your direction. You’ve made quads, and you’re holding the nuts. Now you can commit yourself fully to the pot and move all-in. Or, you can do so on the river, checking on the turn to disguise your hand and to allow others to catch up with your nuts somewhat, so that they are able to fire some more bets into the pot on the river. Your quads win you a big pot. You fired all-in when the scrip had shown its true colours, when winning percentages were high. You exhibited patience before pot-commitment. You allowed others to fire up the pot (scrip) further, and you deservedly caught a big market move. Just get the exit right, i.e. somewhere around the peak, and you’re looking at an ideal trade strategy already, from entry to trade management to exit.

Fold your weak hands. If something’s not working out, give it up cheaply. Ten small losses against a mega-win is enough to cover you and then some.

Often, a promising trade just doesn’t take off after you enter. The underlying might even start to move below your entry price after having been up substantially. You had great hole cards, but didn’t catch a piece of the flop, and now there are two over-cards staring at you from the flop. Give up your trade. Muck your hand.

At other times, you move all-in and the underlying scrip tanks big against you in a matter of hours. Before you can let your trade go, you’re already down big. You’ve suffered a bad beat, where the percentages to win were in your favour, but the turn-out of events still caused the trade to go against you. Happens. That’s poker.

Welcome to the world of trading. Pick yourself up. Dig out another stack from your networth. Don’t allow the bad beat to affect your future trades. If you are thinking about your bad beat, leave the table till you are fresh and can focus on the current trade at hand.

And then, give the current trade at hand the best you’ve got.

The Line

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And at that level, trading becomes an art.

Things That Make Me Go Ufff!

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Pot-holes, potty pancakes, speed-breakers without warning, cars parked in the middle of the road…

Ghost-drivers, dangling electricity wires, open garbage piles, spiky iron-rods dangling from trucks…

Power-cuts, red-tape, policy paralysis, red-siren cars…

Politicians, their “Gandhi-mileage” fixation, mass-corruption, and highly selfish lives…

Negligence to the extent of culpable homicide, fire-brigades arriving late due to pathetic infrastructure, lack of facilities in government schools, over-flooded government hospitals…

Aid that doesn’t reach the needy, lack of development in states far away from the capital, mis-reporting of economic figures to paint good numbers, lack of political will to tackle inflation…

Spurious liquour that kills hundreds, a judicial system that makes you want to stay away, police that intimidates you instead of helping, religion that is used as a weapon…

The police-criminal nexus and profit-sharing, political rallies where “supporters” are paid to join the rally, the bullying of private organizations and non-government organizations by governmental agencies, extortion of small businesses by local government bosses…

Curriculums that cause school-going kids to become sick, no stray-animal policy imposition, lack of sewage infrastructure despite imposition of corresponding taxes, the embracing of nuclear power without possessing the precision and attitude to deal with it safely…

Traffic-cops that are fully focused on their own pockets, millions of bottle-necks that induce road-rage, a totally warped sex-ratio due to generations of male-bias in our society, the black-market in cooking-gas cyllinders…

The 440 V electric bursts that annihilate home-appliances despite surge-protection, slap-fixation by the media that makes one slap look like a million slaps, the fact that we Indians still haven’t learnt to queue up, the lack of realization by us that India is neither an oil-rich nor a water-rich nation…

Spurious everything, rotting food-grain, street-lamps burning in broad daylight, never-ending toll-tax even after an infrastructure has paid for itself…

The dizzy figures of each new corruption scam…

The speed at which an epidemic spreads owing to an overall lack of cleanliness…

A burgeoning population and zilch efforts to harness and enjoy its demographic dividend…

The gross misuse of one’s connections that one has to resort to, to beat the system and sometimes, to survive…

The lack of common-sense that prevails in our society…

These are some of the things that make me go ufff!

It’s because of many of the above-stated issues that the chances of India becoming a super-power in the near future are highly unlikely.

What happens after that depends on how well we tackle these and related matters.

Is This Blood?

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When there’s blood on the streets, that’s when you should go out and invest.

That’s an ancient proverb.

The 64 million dollar question is, IS THIS BLOOD?

I’m going to focus on India, because that’s my playground.

So ICICI Bank breached the 700 mark, did it? The 2009 low was around 250 bucks. At 700, it’s not blood. True, the banking sector is down. However, we are nowhere near blood levels. State Bank of India might have fallen around 50 % this year, but it’s still double the price of its 5 year low.

The Sensex shows an average price to earnings ratio of around 14. Remember 2008 and 2009? Average PE of about 9? Well, in my opinion, those are blood levels. These aren’t.

True, the mid-cap segment has taken a hammering. Let’s take Sintex Industries. At 75 levels, this stock has fallen big. Nevertheless, it’s still double the price of it’s 2009 low. At 98 rupees, Jain Irrigation has really fallen too. The PE ratio has come down from 35+ to around 14, and this looks attractive. Even Sintex’s sub-5 PE ratio looks very attractive, also because the company is aggressively pursuing water-purification and “green-innovation”. Agreed, attraction to invest is present, especially in the mid-cap arena, where you’re likely to find quality in management too, as opposed to the small-cap area, where this is less likely. However, to say that there’s overall mayhem here would be going too far.

The BSE small-cap index has halved since late 2010, but is again at double the 2009 low. Many small-cap stocks are bleeding badly, though. Most small-caps haven’t proven their pedigree yet. Thus, people are letting them bleed.

Then there are stocks like Karuturi Global and KS Oils, that have been hammered down to penny-stock levels. One has problems getting into such stocks, because the underlying story can be shady. With penny stocks, there’s always the danger of oblivion, i.e. they might cease to exist down the line. Such stocks need to be traded at best, with small amounts and for the short-term. In their present conditions, they are not investment-grade stocks.

The picture that emerges is that there are selective attractive bets being offered by Mrs. Market. There are good investments to be made for long-term investors, if you possess patience and holding-power. I’m short on patience, so I like to trade India. That should not deter you. If you are a long-termer, and have what it takes, well, then you are a long-termer. And this market is offering you some good bets, so be very selective and go for it, but don’t bet the farm, since we’re not seeing all-out blood on the street yet.

Survival Basics – Building a Baseline

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Who are you?

Do you really know that?

What’s your core reaction to stuff, let’s say market stuff?

How do you react to a crisis? Do you freak out? How much do you plan to avoid a crisis? How do you feel after hitting a home run? Do you get over-confident and start doing irresponsible things?

What happens to you when the scenario is dull? Do you get depressed? Can you take it?

If you’ve dealt with these and more of such questions, well, bully for you, because you’ve already gone about building your market baseline. And that’s a really proper / solid approach to Mrs. Market.

A baseline is a basic point of reference. It tells you how you normally react to a particular situation. It also lists the emotions you went through, and the consequences you had to suffer owing to your actions. As experience piles up, the number of situations you can refer for also increases.

So, let’s say something unusual happens in the markets. Hmmm, let’s say Greece officially goes bankrupt, and let’s say that you are net-net long, and have been caught unawares. What do you do with your positions? With all the mayhem around you, right, what do you do?

Basics of survival in the markets – in a crisis, refer to your baseline.

Your baseline takes you back to the Lehman default. You remember being net-net long, being caught unawares. You remember ignoring your stops, waiting for a rally. Futures wiped out your principal, didn’t they, because you answered margin calls and waited? You remember the long period of depression after that. Worth it? Naehhh.

So, after referring to your baseline, you don’t ignore your stops. Taking the immediate loss, you bail out of your positions. A large portion of your principal is still intact, living to fight another day.

What about euphoria? How do you deal with euphoria? A position turns into a winner, and you are sitting on a 25% profit in a few days. You are feeling really kicked, and are walking with a swagger. What do you do next?

Basics of prosperity in the markets – at the onset of euphoria, refer to your baseline.

Your baseline tells you, that your behaviour during your last big-winning trade was far from exemplary. In your euphoric state of mind, you were already imagining all the things you would buy with your notional profits. Then, you panicked at the thought of losing any of those notional profits, and you squared-off the trade, taking those profits home, only to see the scrip soar another 80%.

Right! You snap out of your euphoria because of your baseline memory. Then, you install a trigger-stop 8% below the scrip’s current market price. Good. In an effort to capture even more profits, you have put a small part of your existing profits at stake. That’s exemplary behaviour, because now there’s a good chance of capturing a part of the scrip’s further rise.

And boredom? What do you do when Mrs. Market bores you? As in, stops being hit both ways, going nowhere, no market strategy yielding profits? Happens, sometimes for many months in a row.

Basics of maturity in the markets – when Mrs. Market goes nowhere, refer to your baseline.

Oh how you wished you hadn’t ruined that family holiday, right, by continuing to take pot-shots at Mrs. Market the last time she went nowhere. That’s what your baseline is saying.

You switch off, go on another (this time enjoyable) family holiday, and come back refreshed to see that Mrs. Market is now trending, ready to take you for a drive in one set direction.

There’s no limit to baseline referrals.

Systematic players build a baseline, and keep referring to it.

Later, we remember them as successful players.

A Matter of Pride

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Eurozone this, Eurozone that…

Man, it’s getting irritating.

Can we, for one moment, imagine a world without the Euro? Yes. Why is it so difficult? What would the cost of that scenario be?

Deleveraging, people, that will be required. All of those nations that leveraged themselves into quasi financial extinction will need to deleverage massively, once the Euro is discontinued, for as long as it takes to pay off their debts.

What does deleveraging mean? It means not using leverage for as long as it takes. It means paying off one’s debts by working overtime and saving.

Do you think the Italians or the Greeks et al. are liking such suggestions. Of course not. That’s the thing with debt. If you can’t pay it off, you’re in deep sh*t. Nobody thinks of that while taking on debt.

When the Eurozone was formed, sovereign debt of financially weaker countries was sold worldwide using the Eurozone tag. As in “C’mon, it’s all Eurozone now, and these Greek bonds give a premium return as compared to German ones!” Ingenious way to market junk bonds. Meanwhile, citizens of these financially weaker Eurozone countries borrowed left, right and centre to build houses and to consume. As 2008 approached, many lost the earning power to pay back their monthly installments. Now, as more and more of this debt matures, these financially weaker Eurozone countries need to conjure up billions of Euros they do not have.

You’ve got to hand it to the marketeers. Pure genius. They always get you, don’t they.

The reason things are not really working is the looming idea of uncalled for hard work that the process of deleveraging requires. Even if one wants to put in hard work, where does one put it in, if there’s no work.

Thus, the only option remaining involves massive cutbacks, like you’re seeing in Greece just now. Consumer spending down to zero. Pension cuts. Medicare cuts. All-round cuts. To one level above slowdown, till the deleveraging process is over. Scenario will take long to smoothen.

After enjoying a penthouse suite, a 1-BHK feels pathetic.

Eurozone wants to remain alive financially, but are they willing to pay the harsh price?

What you’ve been seeing since this crisis exploded is infinite artificial maneuvering. This might stall the situation. The goal is to stall long enough so that the deleveraging process is over before the stalling process can be weaned off. And that’s a fatal error. Nobody understands deleveraging properly, because the world has never done it properly before, at least in modern financial times. Correct me if I’m wrong.

Deleveraging is going to take longer than all the stalling moves put together. That is my opinion. Stalling results in a false sense of security because of all the maneuvering to show that the economy is doing well. Owing to this false sense of security, people continue to consume. Instead of deleveraging, people leverage. Instead of decreasing, debt increases.

What’s the deal here? You see, pride and egos are at stake. Eurozone doesn’t want to become the laughing stock of the world, the focus of all jokes. Thus, for the sake of their pride, and to fan their egos, European leaders feel the need to keep the Euro alive, even if it costs them their elections, and their financial survival.

Game-Changers

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Change.

The one factor that keeps us evolving.

Adapt or get left behind. Seems to be the Mantra of the times.

The management of money has seen some big game-changers over the last few decades. We want to speak about them today.

In the ’90s, Bill Gates wrote about business at the speed of thought. We’re kinda there, you know. Let’s say you have an idea. From idea to framework, it’s mostly about a few button-clicks, with the web being full of idea-realizing resources. See, we’re already discussing the biggest game-changer, which is the flow of information. Today, we live in a sea of information. It’s yours to tap. Delivered to you on a platter. Such information flow changes everything, from lead-time to middle-men. Best part is, almost all of the information available is free!

Then there’s technology. Cutting-edge software, everywhere. Now, there’s even a software to smoothly organize your contract notes and calculate profit or loss, and taxes due. It’ll give you the appropriate print-out, whichever way you want it. You don’t need to hire an accountant to audit your market play. You just click the contract note and the software extracts all relevant information from it, organizing it beautifully. Actually, that’s nothing. Market-play software is what we should be speaking about. Cut to the movie “A Good Year”. Just picture Russell Crowe motivating his “lab-rats” to go for the kill and short an underlying, only to short-cover a few points below. The technical software follow-up of the underlying’s price on the wall-panels is the image embedded in my mind, as the price gets beaten down, and then starts to rise again.

Market software allows you to run scans too. A common exercise I do at the beginning of a trading day is to narrow down the 4,537 active stocks on the BSE and the NSE to about 10 tradable ones. I do this with 2 back to back scans. Each scan takes a minute. Then, I study the charts of the tradable stocks and select two or three to follow. That’s another 5 minutes. Putting on trigger buys or sells for these stocks takes 2 minutes. So, assuming that a trade gets triggered in the first minute, I have arrived from scratch to active trade in 10 bare minutes, with no prior market preparation. That’s what technology can do for you, and more. Software is expensive. It’s mostly a one-time cost with a life-time of benefit. Worth it. The management of money is a business, and each business needs initial investment.

Numbers have changed the game. Volumes have grown for many underlying entities that were illiquid earlier. When volumes are healthy, the bid-ask spread is very tradable. Thus, today, you can choose to trade in almost any avenue of your choice and you are almost certainly going to get a liquid trade.

Our attitudes and lifestyles have changed too. Today, we want more. No one is satisfied with mediocricity or being average. We have tasted the fruit that’s to be had, and are willing to get there at any cost, because we are hungry. Luxurious lifestyles lure us to rush into the game, which we play with everything we’ve got, because as I said, we’ve tasted the fruit, and we want more. Our approach has made the stakes go up. We need to adapt to the high stakes with proper risk-management.

It’s never been easier to access funds, even if you don’t have them. Leverage is the order of the day. Of course that changes the game, leading to higher volumes and increasing the frequency of trading. We need to keep debt-levels under control. It’s never been easier to go bust. Just takes a few button-clicks and a few missed stops. The leverage levels take care of the rest.

Game-changers will keep coming our way. As long as we keep adapting and evolving, our game will not only survive, but also blossom.

Watch Out for Bottomless Pits

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A shareholder-friendly management?

Forget about it.

Very difficult to find, nowadays.

Gone are the days where you’d see an Azim Premji driving his 800, or a Narayana Murthy travelling economy class.

These legends believed in increasing the shareholder’s pie. And this they did, big time. Ask any Wipro or Infosys shareholder. These legends were very clear about one thing: there was no question of pumping in useless expenditure into their public limited company at the cost of the shareholder.

The norm, btw, is totally opposite. Public limited company managements live it up at the cost of the shareholder. Very few promoters are actually bothered about their shareholders. It is the norm to put medical bills, day to day living / wining / dining / entertainment costs, personal property purchases etc. into the company. Why should the promoter bear such costs when there is the public limited company to put these and such costs into? Logical?

Don’t expect too much from your average promoter. He’s not in the game for you.

Where does all this leave you, by the way?

Firstly, you need to look out for, and avoid bottomless pits. These are companies that bear huge amounts of expenditure emanating from the whims and fancies of the promoter. For example, the total sports sponsorship bill for Kingfisher Airlines is staggering. Then there’s this huge red flag in their balance sheet – the company is in under a mountain of debt. On top of that, this company just reported almost a 100 million USD Q2 loss. Math doesn’t add up for you to be investing in such bottomless pits, does it?

In your search for idealistic and shareholder-friendly managements, you might come up with a handful of names. Next you’ll find that it’s no secret. If there’s an idealistic and shareholder-friendly promoter around, people can see this in his or her deeds and of course in the balance sheet of his or her company. Savvy early investors make a beeline for such companies, with the result that by the time you get there, the concerned share-price is already quite inflated. You’ve identified a good investment, but you are not going to enter at an expensive price. If you do, you’ll not be able to sit on your investment for the long-term. Even slight volatility will shake you out of it.

Instead, you choose to wait for the right price to arrive, and then you enter. Well played.

The deal is, that more than 90% – 95% of managements don’t play it like an Azim Premji, or a Narayana Murthy, or an Anu Aga for that matter. However, shareholder-unfriendly promoters sometimes own companies that are lucrative investments. This can be due to niche, cycles, technology, crowd mentality, whatever. When do you buy into such companies?

As a long-term investor, you wanna be buying such companies at a deep discount to real value. My thumb-rule is a single-digit price to earnings ratio. You can have your own thumb-rule. You might have to wait a long time to get this kind of a price, but that’s what long-term investing is about.

As a trader, you buy into such a company with the momentum. You can buy after a resistance is broken. Or after a high is taken out. Or upon a substantial dip after the first burst of momentum. As a trader, what is far more important for you is to know when to let such a company go. Know the level by heart below which or at which you will exit such a company. In trading, exits are far more important than entries.

The mistake you don’t want to be making is to invest in a bottomless-pit, no matter how cheap the share price is.

So, … What Made Peter Jump?

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The buck generally stopped with Peter Roebuck in the world of Cricket journalism.

Professionally speaking, Peter was cutting edge.

Though he was described as a complex person outside of his professional sphere, the only blip that seemed to punctuate his 55 years was a 2001 common assault charge on some 19 year old cricketers he was coaching.

As per the media, Peter’s is a confirmed suicide; he jumped six floors to his death, from his hotel window. Just before he jumped, he was being questioned by the South African police on a sexual assault charge. A police officer was in the room when he jumped.

Was it extreme shame over something he’d done? Perhaps just one big blunder in an otherwise good, successful and recognized life? If that’s really the case, one needs to reflect on things.

Sometimes a good human being can make a huge blunder. Let’s cite excruciating circumstances that drive the person to such an act. For example, extreme loneliness can result in a moment of madness, in which one loses self-control and crosses the line between decent and indecent behaviour. Let’s please not behave as if this does not happen. Don’t know if this was the case with Peter. As of now I’m just looking at the general applicability and the consequences of such moments of madness in our normal arena of life. Also, I’m gonna try and apply this to market play.

Before I do that, let’s stay with Peter for a bit. If it turns out that Peter was pushed over the ledge, this whole discussion will need to be discarded and the investigation of match-fixing will come into play, since Peter had just finished reporting on arguably the most unusual Test match in the History of the game. As of now, murder is being ruled out, so let’s stay with our original discussion.

Who feels shame? A human being with a conscience does. Who feels so much shame, that he or she can’t face society, family, spouse, kids etc. anymore? A human being who has probably committed a grave folly and who has a conscience that is now powerfully confronting him or her.

The media has not reported any History of sexual assaults in Peter’s case, so we are probably looking at one grave act in a moment of madness that became the complete undoing of an acknowledged soul called Peter Roebuck.

How many of us are in the same boat, where one grave act can become our complete undoing? All of us are. Please be very clear about it. That’s how unpredictable life can be.

As of now, I’m going to focus on this one grave act unfolding during one’s career in the markets. All you have to do is to activate huge amounts of leverage (= few button-clicks), and then ignore a few stop-loss levels (= 0 button-clicks) while you answer the margin-calls, and you have already committed the grave act that is potentially life-threatening. If the resulting losses clean you out, that’s one thing, but if they put you deeply into debt, contemplation of suicide can well be on the cards if yours is even a slightly melancholy personality.

See, that’s a very short route to where someone like Peter Roebuck ends up, irrespective of one’s arena in life.

All I can say is (and I’m saying this to myself as well) that please let’s take that smug look off our faces, and let’s please reflect, because a moment of madness can trap and terminate the existence of any human being, no one excluded.

Moments of madness occur in everyone’s life. We need to train ourselves to not react to them. That’s easier said than done, but it’s better to say it out loud and activate one’s system to become aware of such moments of madness when they are happening.

Only if one is aware that such a moment is unfolding can one actively choose not to react.