Category Archives: Risk

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.

This is what it sounds like, When Kings Whine

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Back in the ’80s, musician genius Prince released the multi-generation blockbuster hit “When Doves Cry”. The song was unusual for its time, in that it gave R&B and rapping a pop twist. When something makes an impact, it sticks. The masses latch on.

The sound of whining coming out of Washington at S&P downgrading the US is something new. One’s not heard them whine before. It’s sounding unusual, but it’s provoking anger and dismay worldwide, and these feelings are catching on. S&P’s indication of further future downgrades are making the whining worse.

When Kings whine, their public loses faith in them. This new sound from Washington is dangerous for world markets. One likes to believe that one’s King has backbone. With that, one’s willing to die for one’s King. Which is something one is not willing to do for a spineless King. In that case, one would rather change one’s King.

If some resemblance of “spinefulness” doesn’t emerge from Washington very soon, the move from the Dollar to Gold is going to escalate even more.

The Towering Value of Decisive Action

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Decisive action can’t just come outta nowhere.

There has to be a build-up to it, a kinda revving up of engines and stuff.

Point is, this category of action generates a lot of force, and is required to do away with situations that cause panic. As in not let a situation become panic-causing to you. As in the current situation. As in the Dow falling 512 points last night. Will they have a name for it, Black Thursday perhaps? I don’t think so. Because I don’t think we’re done just yet. Situation might get blacker.

Back in December 2007, there were those who were taking decisive action, i.e. they were booking profits. These were people who had been taught by the market to do so. Unfortunately, I didn’t belong to this category at that time. On the contrary, I was busy topping up my portfolio with more investments at the time.

Mayhem in the market should teach you for the next time. If it doesn’t, there’s something wrong with you.

By the fall of 2008, the new market players of the millenium had gone through with their first piece of decisive action – an oath to never be in a situation again that causes them to panic or to spend another sleepless night. The events of the first nine months of 2008 were more that enough to drive them to this.

An important part of peace in the market is hedging. Serious players chose Gold as their hedge, and started building up large positions in Gold. The world around them was screaming “how could they?” Gold was already touching a high back then. They possessed the spine to take this decisive action, because 2008 had taught them to hedge. That’s how they could.

Many worked their way towards zero US exposure. When the cracks in the Euro appeared in 2009-2010, they worked their way towards zero Europe exposure. People around them were screaming that the USD would continue forever as the world currency, and that Europe was under-valued and thus a screaming buy. All to no avail. These decisive players had started to mistrust Alan Greenspan from the moment he started urging his people to take loans against their homes and to put the borrowed money in the market. For me, the icing on the cake or the snapping moment was when Ben Bernanke had the cheek to announce more stimulus one day after the “debt deal”. That’s when I gave up on the US market. Very late, I admit. Yeah, yeah, I’m a real slow learner.

Then, serious new players started to buy on lows. And they got some big-time lows, especially the ones of October 2008 and March 2009. The world around them was screaming “how could they?” and that “we weren’t done yet” and that “economies would get bleaker”. They had the courage to buy. The market had taught them to.

And, finally, they started succumbing lesser and lesser to greed. They would finally book profits. They learnt to sit on cash for long periods of time. They learnt not to listen to tips. They learnt to have their own market outlook and to be self-reliant as far as the chalking of their own path was concerned. They decoupled themselves from their bankers and their market advisors. They got tech-savvy to a point when they could control their entire market operation from their laptops. Basically, they took control.

And, they slept peacefully last night.

US Treasury Bonds, Anyone?

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Panic is something I felt during 2008.

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

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

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

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

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

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

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

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

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

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

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

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

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

Wishing you safe investing.

Fine-Tuning the Need for Action : A Dialogue

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It’s a multi-tasking world around us.

Things move.

We grow up with a need for action. Some with less need, some with more. Nevertheless, this need for action is here to stay.

And with this highly individualistic need for action, we enter the market.

So when does the conflict arise?

When one’s innate need for action is lesser or more than one’s market activity. Then, there’s imbalance, leading to market mistakes.

So how does one strike balance?

By fine-tuning one’s market activity with one’s need for action. These two need to be in sync for balance to exist.

And what kind of market mistakes is one looking at if imbalance exists?

Well, overtrading for one. Then there’s missed exits, early entries, missed stops, chart-related over-interpretation etc. to name a few.

And what was the key again, for striking this balance you are talking about?

Experience. There’s no substitute for experience. You’ve just got to go out there, put your money on the line, and trade. Ultimately, after some years, you strike balance.

And that’s it, is it?

Nope. Once you’ve struck balance, you need to maintain this balance.

That must be easy, right.

On the contrary, maintaining balance is one tough cookie. Here, everthing comes into play. Your family situation, relationship tensions, worldly problems…everything’s waiting to throw you off balance.

Man, sounds tough.

Naehhhh, you take it as it comes. One gets knocked off balance at intervals, and then one has to just find it back. It’s called Life.

And what’s your market activity like when you are off balance?

I’ll tell you a secret, listen up. When I’m off balance, I don’t trade.

Must be tough, going cold turkey, just like that?

Naehhh, it’s defintely better than the mistake-laden trading plays that one makes when off balance.

Oh, right.

Off with you, then, I’ve got work to do.

Ok, thanks and bye.

Bye.

Financial Academia and the Street – A Comprehensive Disconnect

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1994 AD.

My friends in the Physics Department of the University of Konstanz, Germany, were busy trying to increase the number of holes on a silicon strip.

This was nanotech research in its advanced stage.

Nanotech saw successful implementation in the real world, though the explosion is yet to come. Nevertheless, the key words here are successful implementation.

Successful implementation on the street is only possible when a research model is practical.

Financial academia time and again delivers impractical models and is then surprised when they meet with failure on the street.

Let’s take the case of the Long Term Capital Management hedge fund. Nobel laureates ran it. They did not incorporate the possibility of a sovereign debt default in their model. So sure were they of themselves, that they went on to buy billions of dollars worth of derivatives, leveraging themselves to the hilt. Their total leverage in the end stood at 250:1. The sovereign debt default by the Russian government in 1998 triggered the LTCM fund to go belly up, and with it disappeared the life-savings of thousands of trusting investors. The ripple effects of this disaster almost knocked the world’s financial system off its platform. Talk about disconnect.

Currently, we are seeing the effects of another disconnect in action.

The Euro was conceived on the basis of hundreds of PhD theses and tons of post-doctoral research. What the researchers couldn’t possibly incorporate in their models were some basic human and emotional facts.

For starters, let’s try the Greeks. They like to retire early and work lesser than their Eurozone colleagues. Their bankers are gullible and not too street-smart, and have made some really bad bets.

Italians like to take short-cuts. They like to over-price and under-cut.

Germans like to go the whole hog. They are punctual and more environment-conscious. They do not like subsidizing those who don’t work for it.

French farmers want to sell their milk for its proper price. They and the majority of their nation dislikes subsidizing others who might not deserve subsidy.

One could go on. The list is endless.

How does one incorporate such realistic “human” stuff in mathematical models?

One can’t.

Mathematics doesn’t possess the language to reflect such human and emotional factors.

So what do these theses contain, upon which the Euro has been built. Other, disconnected stuff, no realistic, street-related emotional / human factors of value.

What we’re seeing is real disconnect in action. Financial academia is way out of its depth on the European street or for that matter on any other street. It should lay off from the street so that further disasters are prevented.

Let’s hope and pray that the Euro-chapter does not meet with a harmful end.

A Balancing Act Called Time

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Why am I so obsessed with the phenomenon called time?

Because time is the long-term investor’s secret weapon.

I believe that a portfolio comes into its own after 7 years of being built drop by drop.

In this initial period, the portfolio tries to find balance. Losers get established, but so do winners.

Once it has been established that a scrip is a loser, the portolio tells you to get rid of it every time you look at the portfolio. It’s the red ink on the losing portion of the porfolio that speaks to you. And the passage of time can even give you the opportunity to sell a loser for a lucrative price.

Eventually, winners stand out. Their black ink on the winning side of the portfolio asks you to buy into them again. And once again your dear friend time gives you the opportunity to buy into a winner at a reasonable price.

Finally, the portfolio has excreted all losers and now consists of candidates you’d consider rebuying into at the right price during the passage of time.

This is called a balanced winning portfolio. It is balanced because some winners are cheaply priced in it and some are expensive. You currently want to be buying into the cheap winners.

The moment your criteria point out that a winner is turning into a loser, you look for the next exit opportunity for this scrip. And time will give you this, i.e. a chance to sell this scrip at a great price.

So, use your secret weapon. Everyone knows about time but almost nobody uses it like a weapon. That’s why it’s a secret weapon. Use it.

While building up your portfolio and navigating it through, take your time.

Is the Middle-person History?

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Motivations…

are the propellors of life.

One can’t be an expert at everything. So one hires others to do stuff for one.

Of course one has to make it worth the other person’s while.

And the person you’ve hired needs to do the best possible job for you.

This used to be the pattern in the business of money. After the turn of the century, things started going haywire.

The middle-person in the business of money used to be a long-term wealth enhancer. His or her primary motivation was the creation and appreciation of your wealth.

Now, his or her focus is on the commissions generated by maximal short-term churning of your portfolio. This is dangerous for you.

I don’t know any wealth-manager who will share your loss with you. If earlier the loss would be felt only emotionally / morally by your wealth manager, even that is gone. So now, there’s nothing that’s stopping investment advice from becoming a function of the commission offered to the wealth manager. If a product offers more commission, that’s the product being recommended.

Where does that leave you?

Frankly, I feel that one is better off without an investment advisor. The web offers enough information on any and every investment product in existence. All you need to do is invest your time.

No time, you say? Who’s money is it? Yours, right? Then you need to jolly well take out the time. Only you can do justice to the proper, balanced and judicious investment of your funds.

So come on, snap out of any laziness. One hour a day to carve out a trajectory for your hard-earned money is all that’s required. If for nothing else, do it for your kids.

Are you a Pig?

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Pigs get slaughtered.

Are you a pig?

Don’t know the answer?

See if you fit into what the market defines as a pig. Be honest to yourself.

A pig is a crowd-follower. He (for convenience purposes, I’m using “he”) doesn’t use his God-given brain. A pig generally enters into an investment in the late stages of a trend. What pushes him into entering is that nagging feeling of missing the bus.

The pig is most interested in knowing what others are doing, and gets swayed by flashy headlines. He doesn’t have a market outlook and blindly follows tips. He panics at the bottom and sells for maximum loss. The pig doesn’t exercise any holding power, even if he might possess it.

If you find yourself fitting into any of these patterns, please get a grip on the situation before it’s too late. Slow down. Start getting to know yourself. Do your own research. Slowly build a market-view. And then invest according to this newly found but solid perspective.

There are many ways to limit risk. The stop-loss and the systematic investment plan are two, for starters. Incorporate such risk-limiting factors into your trading style. Slowly build up an indestructable approach through trial and error.

Yes, make mistakes, because they are the only teachers in this game. Make mistakes with small amounts. A mistake should not be able to slaughter you, because now you are not a pig anymore.

Investing in the Times of Pseudo-Mathematics

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First, there was Mathematics.

Slowly, Physics started expressing itself in the language of Mathematics with great success. Chemistry and Biology followed suit.

The subject of Economics was feeling left out. Its proponents wanted the world to start recognizing their line of study as a natural science. So they started expressing their research results in the language of Mathematics too.

Thousands of research papers later, it was pointed out that what mathematical Economics was describing was an ideal world without any anomalies factored in.

The high priests of Economics reacted by churning out a barrage of research papers which factored in all kinds of anomalies in an effort to describe the real world.

Where there’s money, there’s emotion. The average human being is emotionally coupled to money.

Either Economics didn’t bother to factor in the anomaly called emotion, or it couldn’t find the corresponding matrix in which it could fit human emotions like greed and fear.

And Economics started getting it wrong in the real world, big time. The Long-Term Capital Management Fund (run by Economics Nobel laureates as per their pansy and sedantry office-table cum computer-programmed understanding of finance) collapsed in 1998, with billions of investor dollars evaporating and the world’s financial system coming to a grinding halt but just about managing to keep its head above water. It was a close brush with comprehensive disaster.

The human being forgets.

The last leg of the surge in dotcoms in 1999 and the first quarter of 2000 did just that. It made people forget their investing follies.

What people did remember though was the high of the surge. Investors wanted that feeling again. They wanted to make a killing again. Greed never dies.

And Economics rose to the occasion. This time it was not only pseudo, but it had gotten dirty. Its proponents were not researchers anymore, they were investment bankers, who had hired researchers to develop investment products based on complex pseudo-mathematical models that would lure the public.

Enter CDOs.

For just a few percentage points more of interest payout, investors worldwide were willing to buy this toxic debt with no underlying and a shady payout source. People got fooled by the marketing, with ratings agencies joining the bandwagon of crookedness and giving a AAA rating to the poisonous products in question.

All along, the Fed (with the blessing of the White House) had been encouraging citizens to “tap their home equity”, i.e. to take loans against their homes and then to invest the funds in the market. (The Fed creates bubbles, that’s what its real job is). And the Fed, the White House, the leading investment banks, the ratings agencies and the toxic researchers were all joint at the hip, a very powerful conglomerate creating financial weather.

So, from 2003 to 2007, there was liquidity in the world’s financial system, and a lot of good money was invested in CDOs. Nobody really understood these products properly, except for the researchers who came up with them. Common sense would have said that something with no base or underlying will eventually collapse as the load on top increases. And there was no dearth of load, because the same investment banks that sold the CDOs to the public were busy shorting those very CDOs (!!!!!), with Goldman Sachs taking the lead. So a collapse is exactly what happened.

This time around, the now pseudo and very, very dirty economics (almost)finished off the world’s financial system as it stood. It was revived from death through frantic financial-mathematical jugglery and a non-stop note-printing-press, with the Fed looking desperately to bury the damage by creating the next bubble which would lure good money from new investors in other parts of the world which were less affected for whatever reason.

That’s where we stand now. Certain portions of the world’s finance system are still on the respirator. Portions are off it, and are trying to act as if nothing happened, shamelessly getting back to their old tricks again.

I get calls reguarly from Merrill Lynch, Credit Suisse, StanChart and other investment banks. The only reason why Goldman hasn’t called is probably because my networth is below their cold-call limit. Anyways, it doesn’t matter who let the dogs out. Point is, they are out. And they are trying to sell you swaps, structures, forwards, principal protected products, what-have-yous, you name it. I remain polite, but tell them in no uncertain terms to lay off.

As a thumb rule, I don’t invest in products I don’t understand.

As another thumb rule, I don’t even invest in products which I might eventually understand after making the required effort.

As the mother of all thumb rules, I only invest in products that I understand effortlessly.

That’s the learning I got in the 2000s, and I’m happy to share it with you.

Uncharted Territory : The Tough get Going

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These are unprecedented times.

I mean, you’ve got 10-Sigma events occuring at a frequency that’s nobody’s business.

It’s time for the tough to get going.

All other investors are gonna get slaughtered.

So what makes one a tough investor, someone who can take hits and still remain standing?

Firstly, there’s holding power. If you don’t possess holding power, don’t enter the markets.

Then there’s patience. A rare commodity.

Discipline. Play to a strategy. Pick a strategy that’s in sync with your risk profile.

That brings us to the most important point. Know yourself. Know your risk profile. Your strengths and weaknesses. Invest accordingly. This one might take a while.

With time comes the power to pinpoint buying opportunities. Just as the exit strategy is crucial for the trader, the entry point is all-important for the investor.

Wins give confidence to double up on one’s position size.

Sight of one’s goal keeps one away from noise and a dangerous thing called tips.

An otherwise balanced life keeps one occupied elsewhere so that one’s not tempted to try other stunts in the market.

You can complete this list. It’s really not rocket-science.

It’s time for the tough to get going.