Category Archives: Risk

A Fall to Remember (Part 2)

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Part 1 was when Silver fell almost 20 $ an ounce within a week. Like, 40%. Swoosh. Remember? Happened very recently.

And now, Gold does a Silver, and falls 20 % in a few days. These are the signs of the times. “Quick volatility” is the new “rangebound move”. Put that in your pipe and smoke it.

The wrong question here is “What’s a good entry level in general?” Why is this question wrong?

When something new becomes the norm, there is too little precedence to adhere to. It becomes dangerous to use entry rules which were established using older conditions as a standard.

I believe there is one way to go here. The correct question for me, were I seeking entry into Gold or Silver, would be “Is this entry level good enough FOR ME?” or perhaps “What’s a good enough entry level FOR ME?”

Let’s define “good” for ourselves. Here, “good” is a level at which entry doesn’t bother YOU. It doesn’t bother you, because you are comfortable with the level and with the amount you are entering. You don’t need this sum for a while. It is a small percentage of what you’ve got pickled in debt, yielding very decent returns. If the underlying slides further after your entry, your “good” level of entry still remains “good” till it starts bothering you. You can widen the gap between “not-bothering” and “bothering” by going ahead with a small entry at your “good” level, and postponing further entry for an “even better” level which might or might not come.

If the”even better” level arrives, you go ahead as planned, and enter with a little more. If, however, your “good” level was the bottom, and prices zoom after that, you stick to your plan and do not enter after that. This would be an investment entry strategy, which sigularly looks for a margin of safety. Entry is all-important while investing, as opposed to when one is trading (while trading, trade-management and exit are more important than entry).

Trading entry strategies are totally different. Here, one looks to latch on after the bottom is made and the underlying is on the rise. Small entries can be made as each resistance is broken. It’s called pyramiding. Trading strategies are mostly the complete opposite of investing strategies. Please DO NOT mix the two.

Sort yourself out. What do you want to do? Do you want to invest in Gold and Silver, or do you want to trade in them? ANSWER this question for yourself. Once you have the answer, formulate your strategy accordingly. U – good level – how much here? U – even better level – how much there? U – no more entry – after which level?

Life is so much simpler when one has sorted oneself out and then treads the path.

Putting it all Together – The View from the Mountain-Top

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Remember getting into the driver’s seat for the first time?

It all seemed so difficult. You got the brake-clutch-accelerator coordination all wrong. Proper gear changes were a far cry. There was no question of looking into the rear-view or the side-view mirrors, since you were looking straight. And the shoulder-glance – just forget about it, you said to the instructor.

Slowly, it all came together, perhaps after a 1,50,000 km behind the wheel. Now, driving is a piece of cake. It’s all there in your reflexes. It’s as if the car is connected to your brain, and is an extension of your limbs.

It took time and effort, didn’t it? And why would it be any different in the markets?

Flash-back to 1988 – high school – our Chemistry teacher Frau Boetticher used to teach us to strive for the “Ueberblick”. Roughly and applicably translated, this analogical German word means “the view from the mountain-top”. In Street lingo, the Ueberblick is about life in the Zone. Frau Boetticher used to push us to get into the Zone. She knew that then, our reflexes would take over. She passed away before our A-levels, after a very fulfilling and successful lifetime of teaching. She was the best teacher to ever have taught me.

When your reflexes make you enter a market, or exit it, or decide on the level of a stop, or a target etc. etc., you’ve managed to put it all together. Doesn’t happen overnight, though. The ball-park figure of 1,50,000 km behind the wheel changes to roughly 7 years of market experience, before one can expect to put it all together on the Street.

Where does that leave you?

As a thumb rule, money-levels at stake in the first 7 years on the Street need to be low. When you’re getting the hang of things, you just don’t bet the farm. That’s common sense, a rare commodity, so I’m underlining it for you.

On the Street, you only learn from mistakes. They are your teachers, and they prepare you to deal with Mrs. Market. No books, or professors or college will make you fit enough to tackle Mrs. Market, only mistakes will. Make mistakes in your first seven years on the Street – make big mistakes. Learn from them. Don’t make them again. Get the big blunders out of the way while the stakes are small. Round up your learning before the stakes get big.

Once your reflexes all come together, you can start risking larger sums of money, not before. Also, in today’s neon age, it’s difficult to stay in the Zone for prolonged periods of time. Something or the other manages to distract us out of the Zone, whether it is internal health or external affairs. When you feel you’re out of the Zone, just cut back your position-size. When you feel you’re back in, you can scale up your position-size again.

It’s as simple as that. Useful ideas have one characteristic in common – they are simple.

Blowing up Big

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Derivatives are to be traded with stops. Period.

Stops allow you to get out when the loss is small.

Common sense?

Apparently not.

Who has common sense these days?

Also, the human being has embraced leverage as if it were like taking the daily shower. Bankers and high-profile brokers have free flowing and uncontrolled access to humongous amounts of leverage.

Apart from that, the human being is greedy. There’s nothing as tempting as making quick and big bucks.

Combine humongous amounts of leverage with large amounts of greed and brew this mix together with lack of common sense. That’s the recipe for blowing up big.

Every now and then, a banker or a high-profile broker blows up big, and in the process, at times, brings down the brokerage or the bank in question. In the current case at hand, UBS won’t be going bust, but its credibility has taken a sizable hit.

Bankers are to finance what doctors are to medicine. Where doctors manage physical and perhaps mental health, bankers are supposed to manage financial health. Bankers are taught how to manage risk. Something’s going wrong. Either the teaching is faulty, or the world’s banking systems are faulty. I think both are faulty. There exists a huge lack of awareness about the definition of risk, let alone its management.

Trained professionals lose respect when one of them blows up big. Such an event brings dark disrepute to the whole industry. Most or all of the good work to restore faith in the banking industry thus gets nullified to zilch.

A doctor or an engineer is expected to adhere to basics. I mean, the basics must be guaranteed before one allows a surgeon to perform surgery upon oneself. A surgeon must wash hands, and not leave surgical instruments in the body before stitching up. Similarly, an construction engineer must guarantee the water-tightness or perfection of a foundation before proceeding further with the project.

Similarly, a banker who trades is expected to apply stops. He or she is expected to manage risk by the implementation of position-sizing and by controlling levels of leverage and greed. Responsibility towards society must reflect in his or her actions. A banker needs to realize that he or she is a role model.

All this doesn’t seem to be happening, because every few years, someone from the financial industry blows up big, causing havoc and collateral damage.

Where does that leave you?

I believe that should make your position very clear. You need to manage your assets ON YOUR OWN. Getting a banker into the picture to manage them for you exposes your assets to additional and unnecessary stress cum risk.

In today’s day and age, the face of the financial industry has changed. If you want to manage your own assets, nothing can stop you. There exist wide-spread systems to manage your assets, right from your laptop. All you need to do is plunge in and put in about one hour a day to study this area. Then, with time, you can create your own management network, fully on your laptop.

Your assets are yours. You are extra careful with them. You minimize their risk. That’s an automatic given. Not the case when a third party manages them for you. Commissions and kick-backs blind the third party. Your interests become secondary. Second- or third-rate investments are proposed and implemented, because of your lack of interest, or lack of time, or both.

Do you really want all that? No, right?

So come one, take the plunge. Manage your stuff on your own. I’m sure you’ll enjoy it, and it will definitely teach you a lot, simultaneously building up confidence inside of you. Go ahead, you can do it.

The Power of Leverage

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Apart from the D-word, the Street’s got the L-word too.

This L stands for L-E-V-E-R-A-G-E.

So, how much leverage do you enjoy from your spouse?

Or, do you have any leverage on politician so-and-so?

Or, bank so-and-so or brokerage so-and-so is offering a 10:1 or a 16:1 leverage on derivatives.

Just racking up the various uses of the L-word.

In colloquial terms, the amount of leeway your spouse allows you in your marriage is called leverage. Also, the amount of dirt you have on a politician to coerce him into following your wishes – that’s called leverage too. But for now, let’s get back to the Street.

On the Street, The L-word gives the D-word its power to destroy big.

Do you remember what the D-word was? D-E-R-I-V-A-T-I-V-E-S.

A derivative is a stink normal trade without the power of leverage. When brokerages start offering you leverage like 16:1, the stink normal derivative becomes lethal. Then, small amounts of volatility can wipe out the principal put up by you. If a down-turn continues, your loss can become many times your principal. People can go bankrupt like this.

You see, for every market move, your profit or loss is the move times the leverage. On a 5% move, a 16:1 leverage can result in 80% profit or loss. Leverage works on the upside as well as the downside.

The problem arises when the player doesn’t know how to play either side. Most players don’t know.

Leverage can be used to one’s advantage only when the down-side is protected with a stop. Most people don’t use a stop while deploying leverage. That’s why they lose, and lose big.

This singular characteristic of the average market player of not knowing how to use stops results in a spiralling bomb during market down-turns. As losses pile up, selling pressure increases due to dejection or the like as the market heads even lower. What if they’d taken a 2% or a 5% or even an 8% hit when a stop was hit? They’d be out and the market could stabilize near the stop level because of lack of further selling pressure.

Leverage is something that must not be used if one doesn’t fully understand how to use it. Unfortunately, almost everyone consumes leverage as if it were a bar of Snickers. Leverage is served to customers on a platter. Even a loan, or debt on the credit card is leverage.

Leverage is the driving force of consumerism and the modern industrialized world.

A Hedge is a Hedge is a Hedge

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U guessed it, this is again about Gold.

Why do I keep harping on Gold?

Situations crop up, questions arise, people ask stuff…whatever.

I’ve always treated Gold as a hedge. Luckily, I don’t suffer from any Midas affliction.

There’ll be a time in one’s investing timeline, when there’s no need to hedge. As of now, there is a need to hedge, seeing the uncertainty around us. This does not mean, under any circumstances, that you go around picking up your Gold for hedging at these rates. A hedge is best picked up cheap. Curretly, Gold is 2 or maybe 3 multiplied by cheap.

So, if Gold is your hedge of choice, this is not the time to pick it up. There is absolutely no margin of safety at these levels.

Once you’ve picked up your hedge cheaply, you can turn it into a double whammy and sell it really expensively. That option will always be with you.

You also have the option of not buying your hedge, whatever hedge it might be, if you don’t get a cheap enough price.

Exercise your options. Mrs. Market gives you lots of freedom till you act. Once you do act, you have to bear the consequences, whatever they are.

Don’ be in a hurry to act, especially if you are an investor. For the investor, the entry is of prime importance. Entry is the investor’s singular weapon.

And please, for heaven’s sake, treat Gold as a hedge. In good economic times, it’s going right back where it came from. The 100 year return on Gold has been 1% per annum compounded.

Whenever one gets into any underlying, one needs to be clear about what one is getting into.

Do you buy your car without doing the appropriate due diligence? No, right?

By the same right, investing demands proper due diligence too.

Just 40 $ Away…

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The first signs of greed can be sensed.

We’re talking about Gold.

A few months ago, serious players in Gold had identified Rs. 28,000 / 10 grams as their target for Gold.

This target has been achieved for a while now. Nobody’s booked their Gold.

Instead, the target has been revised to Rs. 30,000 / 10 grams, which is just another 40 $ an ounce away.

Please don’t tell me that nobody is going to book (meaning sell, as in booking profits) their Gold @ Rs. 30,000 / 10 grams. I’ve got this nagging feeling that they’re not.

Hmmm, greed is setting in. Nothing unusual. That’s how a bubble progresses.

Yesterday, an update from Reliance alerted me to the hypothesis that Rs. 40,000 / 10 grams was a real possibility in Gold.

Maybe, maybe not. As of now, Reliance is sounding like that fellow who predicted a Dow level of 36,000 some years ago. Today, 36k on the Dow seems impossible, even in one’s dreams.

Does it matter to you how high Gold can go? Or is your target more important? Both are valid questions.

If your target has been achieved, here’s one scenario. Book the Gold and put the released funds into debt. Debt in India is safe, and is giving excellent returns, especially to the retail investor.

If your stomach is full, do you dream about more food?

Seriously people, playing this by targets is a serious option.

It’s also ok if you wanna play it in a “let’s see how high this can go” manner. That’s just another way of playing it. Fine. In this case, you need to set trailing stops, and you need to stick to these if they get hit.

Either way, identify a booking strategy for Gold and stick to it.

Take greed out of the equation. There’s no room for greed in the career of a market player. There’s no room for fear either.

We’ll talk about taking fear out of the equation some other day, if and when unprecedented gloom and doom abounds.

Endgame

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There, I’ve done it again.

Done what?

Endgame, you know, Samuel Beckett, theatre of the absurd, blah blah blah, siphoned off the title in typical UN style.

I don’t think Beckett was absurd at all. Rather, the absurd mask was absurd, but perhaps absurdly necessary.

Well, isn’t this the Endgame? Physically, politically, and, last but not least, financially.

For me, it is.

If it’s not the Endgame for you, please wake up. Which world are you living in? I mean, are you blind?

Play it like you’d play an Endgame. Give it all you’ve got. If you don’t do justice to this mother of all Endgames, my friend, you really are wasting your incarnation.

And, if Beckett wouldn’t mind that I’ve siphoned off his title, well, neither should you.

What are We, Really?

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One bout of torrential rainfall and our infrastructure comes to a stand-still.

What are we, really?

Is India a golden investment?

Not with the current state of governance.

Is India an investment?

Yes, but only at single-digit price to earnings ratios.

Why?

Because while investing in India, one needs to factor in very bad governance, terrorism, and fragile infrastructure. That’s why the margin of safety required is huge.

Is India a good trade?

Yes.

Why?

Because of the pull and push between the shining private sector versus the apathetic government sector. This contrast causes big moves, both up and down. Ideal for trading.

So how should one play India?

Again, up to you. Invest in it at single digit PEs. Cash out when PEs hit the early 20s. Or, just sheer trade it. Suit yourself.

And Gold Overshoots Platinum

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For me, this is a pivotal event.

It signals to me the beginning of the last stage of the bubble in Gold.

The last stages of bubbles are the most eventful.

The basic message being broadcast here is that the ornamental value of the yellow metal is no longer a consideration during its purchase. The whole-hearted focus of Gold-purchase now is its safe-haven value. There is absolutely no question about it anymore.

For the sticklers, I believe we are well on our way to reaching the pinnacle of Wave 3 with the last burst to come in the coming weeks. Wave 3s are normally followed by a correcting Wave 4, and then those who missed Wave 3 latch on to make Wave 5. I also believe that it will be a subdued Wave 4, with perhaps a 23.6% or a 38.2% Fibonacci level correction, before Wave 5 takes over.

For heaven’s sake, if you are entering Gold now, do so only to trade. There is no question of investing in Gold at this level. Where are you seeing the margin of safety to be making such an investment decision?

So, it’s passing the hot-plate from this level onwards. The last donkey standing with the hot-plate still in hand will get burnt, whenever that happens. Just forget about time-frames and focus on the tape.

As someone said, the “devil takes the hind-most”.

Doofenschmirz Evil Incorporated Finds No Takers

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The Government of India has been just about getting everything wrong. It’s been a long time since they did anything right. Have they gotten anything right since coming to power? Don’t remember.

Confidence in India as an investment is sinking, perhaps temporarily. My gut feel says that fund managers worldwide are dumping India for the time being, till some semblance of sanity returns to stay on the political front.

Today, there is danger of riots and looting breaking out, if Doofenshmirz Evil Incorporated (the Government of India has earned that name, hasn’t it?) doesn’t tackle the current impasse properly.

To say the Rahul G was off the mark is an understatement. Apart from that, the husky delivery of his words added to the ridiculousness of the situation. He might as well have delivered his words in Doofenschmirz’s German accent.

I don’t think this is the right time to buy India. Of course I might be wrong.

Going by the goofy deeds of Doofenschmirz Evil Incorporated, there might be a huge buying opportunity setting up in the weeks to come.

Crowds Eventually Start Behaving in a Deluded Manner

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We’re human beings.

The majority of us likes forming a crowd.

Our crowd-behaviour eventually goes warped. History has shown this time and again.

In the market-place, I make it a point to identify crowds. The biggest money is to be made by capitalizing upon the folly of a crowd. That’s why.

So first let’s gauge very broadly, what the main aspects of market-study are, and then let’s see where crowd-behaviour fits in.

Market-study encompasses three broad areas. These are:

1). Fundamentals,
2). Technicals and
3). Sentiment.

You guessed it, crowd behaviour falls under “Sentiment”. Well, sentiment can knock the living daylights out of the best of “Fundamentals”. And, sentiment makes “Technicals”. Thus, for me, the most important factor while understanding market moves is sentiment.

A stock can exhibit the choiciest of fundamentals. Yet, if a crowd goes delusional, it can drive down the price of even such a stock for longer than we can remain solvent. Let’s write this across our foreheads: Delusional Crowds can Maraude Fundamentals.

Since we are now writing on our foreheads, let’s write another thing: Delusional Crowds can cause Over-Bought or Over-Sold conditions to Exist for longer than we can remain Solvent. There go the technicals.

A crowd thinks in a collective. All that’s required is a virus to infect the collective. A virus doesn’t have to be something physical. It can even be an idea. The space that we exist in is laden with disease-causing energies. Once a crowd latches on to a virus-like idea, its behaviour goes delusional.

Here are some examples of such behaviour. At the peak of the dot-com boom, in March 2000, a crowd of rich farmers from the surrounding villages walks into a friend’s office. They are carrying bags of cash. They tell my friend that they want to buy something called “shares”. They ask where these can be purchased, and if they are heavy (!). Since they are carrying their life-savings with them in cash, and plan to spend everything on this purchase of “shares”, they want to also effetively organize the transport of the “shares” to their homes in the villages. Thus they want to know if “shares” are heavy to transport!

In the aftermath of the dot-com bust, Pentasoft is down more than 90% from its peak. I think this legend is from 2001. A crowd of rich businessmen collects the equivalent of 20 million USD and buys the down-trodden shares with all of the money. The scrip goes down to zilch and today, one’s not even able to find a quote for it.

In the 17th century, people actually spend more than the price of a house for the purchase of one TULIP, for God’s sake.

You get the drift.

The current crowd is building around Gold. It’s behaviour as of now is still rational. In due course, it has high chances of going irrational.

Whenever that happens, we’ll definitely be able to see the signs, because both our eyes are OPEN.

And what was Mr. Fibonacci thinking?

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0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… , … , …

What’s this?

A random set of numbers?

Nope.

It’s the Fibonacci series.

How is it derived?

Start with 0 and 1, and just keep adding a number to the one on its right to get the next number, and so on and so forth.

What’s so peculiar about this series?

As we keep moving from left to right, the result of dividing any number by the one on it’s immediate right starts converging towards 0.62.

Also, as we keep moving from left to right, the result of dividing any number by the second number on its right starts converging towards 0.38.

The series starts with a 0.

Another number to note is 0.5.

So, in a nutshell, these are the important figures to note, which this series generates: 0, 0.38, 0.5, 0.62. There are more, but these are the most important ones.

I’ve always wondered why the 0.5 is important. Actually, “half-way” is big with mankind.

What’s the significance of this series?

In any activity involving a large number of units, these Fibonacci ratios are said to be observed.

It is said that crowds behave as per these ratios.

It is said, that for example when many leaves fall from a tree over a long period of time, a Fibonacci pattern can be determined in their falling.

It is said that these ratios are ingrained in nature.

True or false?

Don’t know.

What I do know is that the trading fraternity has taken these numbers to heart, and looks for Fibonacci levels in anything and everything. Most commonly, entry into a sizzling stock is planned after the stock has corrected past a Fibonacci level and has once again started to rise.

In simpler terms, aggressive traders who buy on dips will look for a 38% correction of pivot to peak before entering.

Less aggressive traders will wait for a 50% correction and then enter upon the rise of the underlying.

Traders who like to value-buy will wait for a 62% correction, which might or might not come.

If the underlying goes on correcting past 62%, it is best left alone, because the correction can well continue beyond 0, the starting point of the prior rise.

A current example where you’ll most definitely see Fibonacci ratios in action is with Gold.

The million dollar question I have been hearing around me today is when to enter Gold now, especially because it is correcting heavily.

The immediate answer for me would be to enter at a Fibonacci level of correction.

Which level?

That depends upon your risk profile.

Understanding Loss and Reacting to it in a Winning Manner

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In the world of trading, we deal with loss everyday.

We have no option but to deal with it.

If we want our performance to improve, we need to deal with it in a winning manner.

What is loss? I mean, apart from its monetary ramifications…

A loss has the propensity to suck the living daylights out of you.

That’s if you allow it to.

You see, in the world of trading, losses have the propensity to grow.

You need to cut them when they are still bearable. Period.

If you don’t, they can become unbearable.

You then still have the option of cutting the unbearable loss as opposed to letting the loss eat into your gut and cause insolvency. Choice is yours. I’ve seen it happening with my own eyes.

You see, losses not only suck out money, they also suck out emotional energy from your system. Your mind loses focus, and instead of concentrating on your A-game, your mind focuses on the loss. The result is that your A-game becomes a B- or a C-game. Unacceptable.

Health deteriorates and one is snappy around the family. Totally unacceptable. Just cut the loss, stupid.

In FY ’08 – ’09, my senior partners walked into my office. I was being consulted, hurrah, a winning moment by itself for me.

Our company was entered into a derivative USD hedge at the time. The trade had turned sour, and was showing a loss of half a million USD. I was being asked what to do.

In a situation like this, a trader does not dilly-dally. I advised my senior parners strongly to cut the loss as it stood, no ifs, and no buts. That’s what we did.

Two other companies in our town were involved in a similar hedge. They chose not to cut their losses at this stage, but to hope, pray and wait for a recovery.

Well, recovery did happen ultimately. This was that swing when the USD first went up to INR 38 and then down all the way to INR 52.50. Before recovery occured, let’s see what else happened.

One company declared insolvency, because it could not repay the 22 milllion USD loss in the hedge, because that’s the amount the loss had ballooned to at a later stage, before recovery even started. The other company, I believe, settled its losses at 25 million USD, and enjoys a cash-strapped existence today.

So that’s what. My training as a small-time trader came in handy, and I was able to help our family run export business in a major way.

This was also a big test for me. It showed me that I had understood loss as a trader, and was able to react to it in a winning manner.

And that’s the prequisite required to understanding winning and reacting to it like a champion. More on that when I’ve mastered this myself!

Baby-Stepping One’s Way Up the Financial Ladder

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Everyday, without fail, I get a few opportunities to make this a slightly better world. I’m sure you do too.

And I’m ok with that. No further ambitions. Just doing what comes my way. I’ve always done what I believe in. Have never followed crowds. Have never joint someone’s battle which I don’t fully understand.

Baby-step contributions are drops in the ocean. Nevertheless, they are contributions. I’m proud of the fact that opportunities to contribute come my way regularly. I don’t act upon all of them. Have become very discerning of late. Don’t want to be involved with any frauds whatsoever. And India is brimming with frauds. For me, the world of contributing is about baby-steps. I’m content with that.

I believe that baby-stepping is the way up the financial ladder too, as far as one’s investing or trading activity is concerned.

In the world of trading, there exists the concept of position-size (developed to the nth level by Dr. Van K. Tharp). In a nutshell, this concept teaches one to scale it up one baby-step at a time as one’s account shows a profit. Also, one learns to scale it down a notch upon showing a loss.

Common-sense? Then why isn’t everyone doing it?

Why does everyone around me behave as if he or she is gunning for the big hit? The bringing down of institutions. Of governments. The desire to make it big and in the limelight in one shot. The desire to bring about sweeping change within a week’s time. Ever heard of speed of digestion and incorporation? Metabolism? Assimilation? Speed of evolution?

Life takes time to happen. Let’s give it that time. Let’s not hurry it up with our over-ambition. Do we want life to blow up on our faces because of over-ambition?

Frankly, I want to evolve with equilibrium. Really, really not in one shot. My system will explode if it tries to evolve in one shot. Many people are going to find that out the hard way on their own systems.

And I’m really satisfied with baby-stepping it up the financial ladder, using the concept of position-sizing. Slow and easy, little by little, tangible progress, day by day. No nuclear blasts, no tense situations or mood-swings, lots of time for the family, small quantums of realistic progress and its assimilation… what more can one ask for?

You should try it too.

Is it Over for the Long-Term Investor?

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Long-term portfolios are getting bludgeoned.

I can feel the pain of the long-term investor.

Is it over for this niche segment?

I really wouldn’t say that.

It’s not over till the fat lady sings, as somebody said.

What if someone trained hard so as to not allow the fat lady from starting her performance in the first place?

Well, for this breed, it’s not over by a long way. In fact, things are just getting started.

And what are the areas of training?

First and foremost, for the millionth time, one needs to understand what margin of safety is. In this era of black swans, one can fine-tune this area with the word “large”. So, simple and straight-forward: the long-term investor needs to buy with a large margin of safety.

This is a game of PATIENCE. Patiently wait for entry. Entry is the most important act while investing. If you cannot learn to be patient, change your line. Be a trader instead.

However scarce the virtues of honesty and integrity have become, keep looking. When you finally find them in a company, ear-mark the company for a buy. For you, managements need to be intelligent and shareholder-friendly too. They need to be evolved enough to take you into account as a shareholder. Keep looking for such managements, and you’ll be amazed at the unfolding potential of diligent human capital.

Before you enter this arena, answer another question please? Have you learnt to sit? If you don’t even know what this question means, you are by no means ready for the game.

So, when is one capable of sitting through some serious knocks, like now? If the money you’ve put on the line is not required for the next 5 to 10 years, you’ve totally helped your cause. Then, your risk-profile should fit the pattern. If a knock causes you an ulcer, just forget about the game and look for another game that doesn’t cause you an ulcer. Your margin of safety will help you take the knock. Knowing that your money has bought a stake with honest and diligent people who can work their way around inflation will help your cause even more.

If you are taking a very serious hit right now, you need to decide something. Are you gonna sit it out? Can you afford to, age-wise and health-wise? Yes? Fine, go ahead. I sat it out in 2008. If I could do it, so can you. It did take a lot. Taught me a lot too. I now know so much more about myself. Was a rough ride, is all I can say. Nevertheless, it’s a good option if age and health support you. If you decide to sit it out, please train yourself, from this point onwards, to do it right. Needless to say, don’t make the same mistakes again. Let’s be very clear about this point. If you are feeling pain at this point, it’s because you have made one or more investing mistakes. Don’t blame the market, or the times. This is your pain, because of your mistakes. Take responsibity for your actions. Do it right from here onwards.

If you can’t take the hit anymore, age-wise or health-wise, then you need to reflect. It’s none of my business to tell you to sell out. That would be inappropriate. All the same, as a friend, I would like you to ask yourself if you feel you are cut out for this niche segment. There are other very successful niche-segments. I know highly successful traders who started out as miserable long-term investors. So, just this one thing, get the questioning process started. Now. Then, listen to your inner voice and decide what you want to do.

There’s this one other point. Some people feel they can focus on both these segments simutaneously. You know, trade in one portfolio and maintain another long-term portfolio. Possible. People are doing it. I’m not about to start a discussion on focus versus diversification just now, because I’m leaving it for another day. Not because I don’t possess the mettle, but because I’m a little tired just now.

Wish you safe investing! 🙂

One Step Closer to the Gold-Standard?

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The gold-standard is an extreme scenario.

Imagine the world’s top currencies collapsing. For lack of a better alternative, the world resorts to gold for conducting international trade.

Probably a situation that’s not going to occur.

But then, are we doing anything to stop it from occuring?

Q: Is the US doing anything concrete to reduce its debt?

A: No.

Interpretation: USD will lose its stronghold as global currency at this rate.

Q: Does Europe have any concrete ideas about its financial future?

A: No.

Interpretation: Euro is nowhere near toppling USD from its global currency status.

Q: Is China doing anything concrete to increase transparency?

A: No.

Interpretation: Doesn’t make the Yuan a strong contender for top post.

Q: Is India doing anything concrete to reduce corruption?

A: Er…blah blah blah… No.

Interpretation: I’m not even trying to interpret the eyewash going on here.

Let’s move on to a country called Venezuela.

President Hugo Chavez just called all his gold home…!

Even if this is to taunt the US, it still is HOARDING.

Hoarding is infectious. The start of hoarding can trigger a “Domino-Effect”.

Whatever his ulterior motives were, Big Boy Hugo has taken the world one step closer to the gold standard.

To prevent hoarding from escalation, a counter statement needs to come, like NOW, from the major economic players of the world, something confidence-boosting. Don’t see that happening anytime soon. Seems that hoarding might escalate.

The gold-standard seemed to be a myth a few months ago. Now, at this stage, we seriously need to educate ourselves with regard to the gold-standard and position ourselves accordingly.

Did Europe Forget the Exit Clause?

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It’s the early to mid ’90s. Reunification is getting set in Germany. Europe is slowly moving towards the Euro. Meanwhile, Yugoslavia disintegrates into smaller states.

My friend Jerome prepares his tuna salad to take to work. This pround Frenchman from Lyon then passes a remark that causes me to reflect. He says something to the tune of “Look at them, falling apart like this, while the rest of Europe comes closer.”

Europe, on the whole, is excited about the upcoming Euro. It adds to their identity on the world stage. The economic implications of the Euro look promising on paper. Europe goes ahead with the Euro soon after the turn of the millenium.

The “All for one, one for all” idea is an ideal. It’s utopic. Unfortunately, we live in the real world. The real human being is a selfish animal. In this real world, ideals have a tough time existing.

In its excitement, Europe probably forgets to add an exit clause. If there is an exit clause, we are not hearing about, and now would be the time to hear about it.

A decision taken while one is excited causes one to overlook the flip-side. This flip-side is emerging now. Certain nationals are more industrious and believe in paying their taxes. Others are lazy, corrupt and believe in cutting corners. Certain Euro nations are more economically astute and clued in. Others are perhaps not so intelligent or don’t want to be, and have made disastrous economic and financial choices.

The lack of an exit clause allows parasite nations (the truth is harsh) to stooge off the diligent ones till infinity, or till time does them apart.

Though it’s very late to say these words, one doesn’t see enough people saying them already. Not treating the financial disease at its root is causing it to spread. Unfortunately, everyone’s affected, at least for now. Whenever decoupling sets in, decoupled nations won’t be affected, but decoupling doesn’t seem to be happening anytime soon.

Would you like it if someone took your hard-earned cheese away? No, right? Well, nor do the Germans, or the French. Why would one expect them to like it, or pretend to keep lilking it?

Thus, why would one expect the Euro to remain intact till infinity?

One More Lollipop

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And another lollipop emerges from the stables of Bernanke et al.

Though this particular lollipop is stimulus-flavoured too, it is packaged a bit differently, in a “low interest rate regime till mid 2013” manner. This old-wine-new-bottle packaging is making it taste good to the public. A psychological distortion of reality? Yes.

The last lure, i.e. the actual stimulus lollipop, had stopped having its usual effect of doing away with panic. If you have the same lollipop ten times in a row, it starts tasting stale.

How many lollipops can one possibly have up one’s sleeve? How is one able to fool the public for soooo long? Is the public totally low IQ?

What do ultra-low interest rates mean?

Well, they don’t encourage you to save. You’d rather put your money in more speculative ventures that promise to yield more. Low interest rates thus create liquidity in the market and suitable policies push this liquidity towards speculation and spending. This in turn fuels markets and consumerism. The US financial think-tank seems to think that this formula is going to get them out of the woods.

When markets are fueled well enough with liquidity, investment banks make eye-catching short-term trading profits. Their quarterly balance sheets look good, because the short-term trading profits hide the lack of fundamentals (savings) and the non-performing assets. The public is made to believe that their economy is doing well because their large banks have performed “well”.

Question is: Where are the fundamentals? Long-term growth without the cushion of savings??? No excess fat on one’s body to cushion one from shocks??? You know it, and I know it, and so does the black swan, whose population has reached a record high. This is the age of crises and shocks. If you’re not adequately cushioned, the next shock might get you. And the next quake will occur soon enough, because this era has defined itself as the age of shocks. That doesn’t need to be proven anymore.

Thing is, El Helicoptro Ben Bernanke isn’t bothered about savings presently. His primary concern is to revive a failed / dying economy. He’s willing to try anything to achieve this, however drastic the method might be. And he’s chosen to enhance consumerism. It’s a short-term remedy. Unfortunately, it makes the long-term picture even worse.

The flip side of consumer spending gone overboard dulls the mind into believing that one can spend as if there’s no tomorrow, even if one has to borrow after spending one’s own excess cash. This might fuel an economy over the short-term, but over the long-term, the burgeoning debt will make the system implode.

The US economy is not changing its course owing to fear that if it does, it might face the inevitable right away. It has chosen a path of postponing the inevitable. Over the course of time between now and looming debt-implosion, more and more of the world is getting entangled into this web, since globalization is in and decoupling is out. This is what pilots of the US economy are banking upon, that if the entire world might be devastated by a US debt implosion, the entire world might choose to live with the current financial hierarchy for the longest time rather than reject it right now.

If nothing else, what this one more lollipop does do, is that it buys a little more time to breathe. That’s it, nothing more.

El Helicoptro’s not able to Smell the Coffee

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Helicopter Ben Bernanke just doesn’t get it, does he?

People have lost confidence in the Fed and its “stimulus”.

That’s why, when Benny Boy announced more stimulus a day after the “debt deal”, the Dow along with broader markets tanked even further.

The Dow only encompasses 30 stocks. Let’s look at the broader US market. For example, the Russell 2000 fell 9 % yesterday.

Now if that’s not a vote of no-confidence, then what is?

If we observe Bernanke’s dealings of yesterday, he heightened his stimulus announcement from one-week ago to “even more stimulus”. This is a death-trap.

How does El Helicoptro plan to finance his stimulus? By printing notes. Such free printing of notes leads to more and more currency in circulation, which ultimately leads to devaluation of the currency in question.

The devaluation process of anything financially connected to the US has been set in motion. Ben Bernanke is still not smelling the coffee.

Where does that leave you?

Ideally, one should have asked this question back in 2008, but if one didn’t, one will be forced to ask it now.

That’s what Mrs. Market does, it forces you to keep questioning your basics till you get her groove.

For the newbie investor who’s caught in the current fall and is taking his or her share of hits, well, the silver lining is the learning effect. He or she will buy with a margin of safety as an investor in the future, or will learn to respect a stop-loss as a trader. Mrs. Market will either force him or her to learn these basics, or will throw him or her out of her game forever.

What about more experienced players, who saw 2008, or perhaps older crises? If they are still taking a hit just now, well, they too need to get back to the basics. Mrs. Market does not discriminate between who is making the mistake. She’s universal in doling out her punishment to the non-performers, but also universal in doling out her reward to the diligent learners.

So what are these basics?

Mrs. Market 1.0.1 teaches two basic lessons.

Lesson numero 1 is for investors. They need to BUY WITH A MARGIN OF SAFETY. This allows them to sit tight during such a crisis, because they aren’t taking much of a hit.

Lesson numero 2 is for traders. They need to TAKE A STOP-LOSS once it is hit. With that they are out of the market and she can’t hurt them anymore.

That’s it. 2 lessons, people. No way around them. They need to be incorporated into one’s DNA before one can move on to second base with Mrs. Market.