Tag Archives: Equity

Miners

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Hey.

We’re miners.

We mine for…

…margin of safety.

Surprised?

As in, can one mine for…

…something abstract?

Sure, no biggie.

Ok, bear with me on this.

Entry quantum = shovel.

Wedge it in deep enough = Good Till Traded (GTT) Order = Poise.

Emotional sell most likely on open or on close = mined material falling into basket.

GTT executed = margin of safety mined successfully.

All the time?

No. In times like this, specifically, when there’s blood on the streets.

Isn’t margin of safety already available in times like this?

Yes it is. However, we want to mine for extra on top of what is available.

Like your yesterday’s experience with the HDFC Bank GTT hit well below trigger, a couple of seconds after open?

Exactly like that. Oh, there’s another add on.

Tell me.

We buy with a lag.

Meaning?

Let’s say something’s fallen big, and has come on our radar owing to levels broken.

With you. Then?

We let it fall for the whole session, setting up GTT only after the session, and placing GTT around 4 to 5% below close. Time and price lag.

Isn’t that way below?

That’s the whole point. An emotional sell will hit, and then price will stabilize.

What if no hit?

Possible. Good with that. What’s also possible is, there could be no hit for two or three sessions, and then there might result a soft execution. We’ve still mined the extra margin of safety, even though it’s taken us a few more sessions.

What was your experience with the recent HDFC bank buy?

GTT was set up on 2nd March, for 809, when price was at 887.

Just fishing in the air or what?

Didn’t want it at 887. Wanted it at 809. That’s all there is to it.

So, 78 points were mined, that’s almost 8.8%, wow!

Hold on. There was so much emotion in play, that scrip opened at 770, a massive 72 points below previous close, order triggered at 773 a second or two later, and was executed at 778 after some more seconds. So that’s about 12.3% mined. It took 17 days and 13 trading sessions. By the way, the extra 12.3% mined goes a very long way.

Explain.

In 25 years, at 15% per annum compounded, it compounds to 4 times plus the entire sum that’s gone in just now.

Tremendous!

Welcome to the world of compounding, and that of…

… mining.

Specialization

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Hey.

Calls have started coming in.

Am I doing ok?

Is the panic getting to me?

Am I going under?

I was waiting for this.

Calls of this nature, coming in, are a fantastic guage for the onset of panic.

You see…

…I specialize in guaging panic. You could call me a fall-specialist. A crash is my field of action.

During the crash in CoViD wave 1, I categorized two levels of panic.

Level I was classified as middling panic and identified at the point when calls were coming in asking if people should cancel their systematic investment plans. Aversion to invest with blood beginning to flow on the streets. Noted.

Level II was classified as grave panic, and identified at the point when calls were coming in of the nature, that now that all companies would be bankrupt, why was I still putting in money, into the markets? Questioning the whole financial system. Noted too.

In current scenario, questions about my health followed by queries about which stocks to invest into, after I had answered with a ‘never been better’ reply, for me, corresponds to level I of panic, identified.

Am still waiting for those other calls, asking why I’m putting in money when everything was going bankrupt anyway. Probably coming soon.

So, what’s the course of action, now that level I prevails.

We take it up a notch.

Meaning?

Look harder for entries.

Weren’t you already entering?

Yes, but wasn’t trying very much. Was letting the market punch me hard into an entry.

Meaning?

I’ll give you an example to drive this point home.

Ok.

HDFC Bank, right?

Right.

I had a GTT on for the last many sessions for entry at 809. Wasn’t coming. GTT remained. Either the market socked me into this position, or I wasn’t entering. Happened this morning. Triggered during open, at 773, executed at 778. Market pushed me into the position with force. I let it.

And now?

Will leave myself open to a lesser force push. Will put nearer GTTs, let’s say ~3% away.

If such prices don’t come?

Then not interested in entries.

What happens at level II of panic?

Even lesser force required to enter. Only GTTs lesser than 1 to 2% away perhaps. Many entries.

How come you are so liquid?

This approach creates liquidity during good times. Entering with small quanta now, as compared to networth. Can go on buying for more than one year from this point, if required. Such is the strategy.

Good to know, thanks for sharing.

Mind you, buying during panic does take a toll on one’s psyche. One needs to recuperate and regenerate. It’s not as easy as it sounds. I try very hard though, to recover mentally before the next session. Wish to last very long in the markets, …

…successfully.

Cared to Rewire?

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Hey.

From this point onwards…

…it all boils down to…

…stamina.

Theories for market success have been out there, in abundance, since eternity.

Everybody can read how the richest man in Babylon…

…got rich.

Or how compounding works.

Position-sizing.

Entry quantum.

Margin of safety.

Profit run.

Multibaggers.

Engines of income generation.

Entry into the territory of wealth.

Generational wealth-creation. Etc.

Yes. Everybody can read. Or listen. Or both.

Question is…

…how many can follow through?

Of those who set out, how many can remain grounded and focused when the heat is turned up, like now?

Most importantly, how many can finish?

I would estimate that a low single digit percentage walks the talk to successful culmination.

Why?

You see, heat does something critical.

Once it is turned up, it burns out all nervous systems that haven’t been rewired.

Given that we are not born with nervous systems programmed towards market success, we need to rewire them over the years and over the knocks. Once fully rewired, our nervous systems can withstand, pivot, and generate wealth over prolonged strife.

As this crisis continues, more and more players will start to cave in.

Capitulation at lows.

Others will stop all activity owing to fear, but might not sell. They’ve frozen. Better than capitulation.

There will be some who cash out with the intent of getting in lower, cannot then find the courage when the lows come, and then join their frozen compatriots as the reversal arrives and accelerates.

Still others, with funds safely picked away in fixed deposits, will be afraid to bring them over to Equity. Fine. They are behaving as per their risk-pr0file. At least they are in control of their behaviour.

Rewired market entities will be acting. They know what to buy. Markets give ample time to study, and all kinds of preparation will have been done, like, yesterday. These folks will have started buying upon the arrival of their levels. Clockwork. Small entry quanta. Position-sized as per their risk profile. Programmed to keep entering for a long period. That’s how they will have positioned themselves and their liquidities. These entities will show stamina and will outlast everyone to still be buying at market bottoms and slightly beyond. They will emerge with the lowest buying averages, and will make the quickest multiples upon reversal, after which some will pull their principles out, while others will ride their holdings to multibaggers.

Who do you want to be?

It’s ok if you don’t identify with any of these categories. Find your passion elsewhere.

Or, self-PhD to a rewired market mindframe, sooner than later. Preferably – now. This crisis could even just be beginning. No one knows. Since no one also knows how long it will last, for all you know, you could still get a year or two’s great buying ahead.

Wishing you lucrative investing.

Constants

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Waldermort…

…overplayed his hand.

Thought he had the nuts…

…and bet the farm.

Turns out…

…that the adversary’s hole cards…

…plus the flop, turn and river…

…are leading to a full house.

As opposed to Waldy’s…

…ordinary nut flush.

Waldy is oversmart and a half.

Backfires at times.

This one has backfired at the worst possible time.

Only one result.

Waldy loses…

…everything.

Reserve status.

Serious player status.

Reputation, if there was any.

Loyalty, which was abundant from former allies, but is now…

…not even zero, but minus.

What more can one lose?

Whatever one can. It’s lost.

When this is over, a new methodology of doing everything business and financial will have emerged.

Meanwhile, a few constants remain.

There are areas in the world, where there is growth.

And will be, for the next 25 years.

Like India.

Semblance of stability?

Yes.

Integrity?

Yes.

Win-win attitude?

Yes.

Loyalty?

Yes.

Balance?

Yes.

Clout?

Yes.

Consumption.

Yes.

Period.

Buy India during this fall.

As long as the fall lasts. One year. Two years. Three years. No one knows.

What one also doesn’t know is whether India will give this buying opportunity again.

So, buy India.

Even if it means that you get fully invested during current fall.

That’ll be just great.

Magic

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Sure, …

… nobody said this was a bottom already.

No signs of a bottom.

For all you know, the real correction just started.

So, everyone is asking, …

… why in the world a buyer is buying …

… now.

Confused? No need to be.

First up, please understand, that money enters the market in a planned fashion when position sizing rules are in place.

Oh, there’s one more safety rule.

In a day, only so much goes in, in total.

Let’s say what you are referring to as a bottom comes within, hmm, two days, one day, four hours, one hour… ,

… whenever it comes.

Do you actually believe and / or have the guts to get fully invested in that minuscule time-frame?

Let me answer that for you. NO.

Why am I so clear on this?

Moving big money in one shot when the whole world’s pajamas are falling, and watching it possibly become half in a few days will most likely lead to neurosis and / or psychosis.

It is mentally digestible to keep buying at levels as per the entry quantum allowed by one’s position-sizing algorithm.

Though the overall market or index or sector benchmark might not be signalling a bottom, individual stocks hover around correction levels, threatening to recover from there.

We let them hover.

If they are not declining further from a correction level after a bit, we pick up one lot.

What’s the lot?

It’s a function of one’s networth at that point.

What function?

You decide. Yes. Your decide your own position size at each point thus, as per a mathematical calculation. You can decide to programme this function, for example, in a manner that you go in more when you are winning and go in less when you are losing. Or vice-versa. As per your personality and risk-profile. You call the shots. You are the master of your money and journey.

As time goes by, and as the correction deepens, you have lots of lots in. Ideally, you get fully invested before recovery. Compared with trying to move in fully at the exact bottom, well you might get lucky with the latter option, but it will burn your nerves, and resulting psychosis can last longer than when rational decisions will need to be taken. Not worth it. Position-size, entry quantum, going in bit by bit – this is what our nervous system can handle well without getting damaged. Markets change within months, perhaps weeks, and…

… when the magic happens, you deploy your exit strategy, whatever that is. Be rationally around to do so.

Or, simply, don’t do anything except watching the magic, …

… of a low buying average develop into a multiple.

Poise

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Hey.

Story’s changed already.

IT has suddenly become a defensive buy, it seems.

Not perceived as oil dependent.

See how fast that happened.

Five weeks ago one was hearing the RIP bugles for IT, or so the spin-doctors were trying to spin it.

Bottom-line : don’t believe the stories being spun. Have your own…

… high conviction.

And, the opportunity is…

…now.

Make up your mind.

Invest where you see stability and growth. Invest in India.

There are a lot of high conviction ideas in India that can be latched on to.

Fear makes good investments fall too. That is happening now. To take advantage of this effect, one needs to be fearless with high conviction.

How does one build high conviction in a stock?

Repeated shareholder-friendliness shown by a management.

Clean balance-sheet.

Abundance of free cashflow.

Debt-free-ness.

Longevity.

Vision.

Margin of safety.

That’s it.

Oh, one more thing.

Don’t force the market.

Let it make you enter.

Be poised with a funded GTT order in place before market open.

Keep doing this throughout the fall, as margin of safety deepens. One can do this if one has created enough liquidity during good times, and if one keeps entering with small entry quanta proportional to one’s networth.

Idea is to enter with and into high conviction multiple times, each time lowering the buying average.

With that, one sets oneself up for a fast multiple when markets recover.

It’s boiling down to…

…poise.

Courage

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Tariff knife is…

…blunting.

500 will need to come on to have any strategic value.

500 is many things.

Call it a joke. Dream. Litany. Madness. Moronic. Ridiculous to the power of n. Whatever.

It’s still getting headlines.

500 will kill.

Since it’s do or die, all sides are coming out in the open.

Yeah, there’s real activity.

There was a 105 minute state visit yesterday. We know who flew in, and where to, with what mandate, etc.

Before that, the German chancellor, accompanied by a powerful team, came to India too.

French and German teams went to Russia.

BRICS counter is very busy, the busiest it has ever been.

New deals. Alliances. Promises. Protection.

Currency?

Yes. Coming.

This one will bypass being bullied.

New world order.

Process is in spurts and then there’s brief time for whatever equilibrium that can be achieved under the circumstances.

And that, exactly, is our style of transferring out…

…of cash…

…and into…

…assets.

Spurt, balance, spurt, balance and in the middle, somewhere, at any resulting low, we go in.

What assets?

The ones we are comfortable with.

Can the blunt knife still hurt?

Yes, 500 will kill. Businesses, relations, trade…

So what then?

The idea is to make 500 work for oneself.

How?

In the wake of 500, there will be many lows, in many assets. Those are entry points. You need to have the courage to buy.

What if there’s a lower point later?

You buy more there, later. This chronology might continue for a while.

How long?

Till the wealth transfer is complete from the old world order to the new world order.

So how long?

Don’t know. 15 months. 5 years. Anybody’s guess. I’m banking on about 3 years or so.

If your liquidity lasts 15 months, how will you manage to buy for 3 continuous years?

As I said, everything is happening in spurts. There will be pockets where my exit rule will trigger for various entries.

Oh, so your entries will generate liquidity along the way, rule-based.

Yup.

Additionally generated liquidity will lead to more buying, along the way.

True, after taking care of my personal liquidity needs.

Hmmm, that’s something.

Yeah. Keep going. Don’t be afraid. Don’t let the screamers knock you off your game. This one will be won if we don’t blink. Stare the bully in the face. Wear the bully down. At the bully’s core, there is huge fear. That’s the difference between the bully and us. At our core, there is …

…conviction…

…which results in…

…courage.

How to?

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How does one…

…position oneself…

…for what’s coming?

What’s coming?

Yeah.

Meaning the turbulence ahead?

What else. First up, we’re taking turbulence to be the norm, from this point onwards.

All right. Turbulence = norm. Baseline set.

Then, how do we maximally exploit our understanding, …

…simultaneously creating income…

…but then also allowing wealth to accumulate and compound?

Yeah, how do we?

You tell me.

We need to start with an asset class.

Right.

Which asset class?

Again, you tell me.

What we’re comfortable with.

Yes. Beautiful. And then we weaponize the asset class chosen, the one we’re comfortable with.

Weaponize?

Yeah. Otherwise it will be no good for these times. We need to make it time-befitting.

Example?

Let’s say you choose gold, ok? What good are your efforts in gold if after a point governments nationalize it and then confiscate it, paying you a reasonable price at that moment, and then, from that point onwards, in the hands of enough governments, gold turns a 100-bagger, for them, not for you?

Yeah, what good are my efforts in gold then?

No good. You need to trade gold, use some profits as income, and another portion of profits you invest in other asset classes, bought cheap, which the government has issues regulating harshly.

Like? Crypto?

Some think so. That’s their weapon of choice. Personally, I have problems with storing my entire networth on a pen-drive. That alone takes crypto off the table for me.

So where do you go?

Stocks. They come naturally to me.

Stocks can be harshly regulated.

In isolation, if we’re looking at stocks-stocks, yes, I’ll give you that. In a solid framework encapsulated within an income-generation cum wealth-creation mechanism operating with fundamental, evergreen principles like margin of safety, letting profits run, position-sizing and what have you, even stocks can be made to behave like the anti-fragile system they are a part of.

Would that not be valid for any asset classes, then?

Yes, provided the government can’t seize that asset class overnight from you.

Like cash?

True.

Gold?

True.

Silver?

Yeah.

Bonds?

Not sure. Risk of default though.

Real-estate?

Prices of real-estate follow demand and supply, and demand is reciprocally proportional to negative regulation. Governments can crash real-estate. So, yes.

Crypto?

I’m not so sure that crypto is beyond regulation. However, exchanges collapsing regularly are not my scene.

Stocks?

Have we heard of governments seizing stocks? As long as no illegal activity, all debts paid off, clear ownership and succession, I don’t think the government can do that. So stocks of companies, for me, remain in the fray. On top of that, we encapsulate them into a system. The system has an edge. It’s multi-faceted. It generates income, approximately when required, in cash. Otherwise, it creates wealth through compounding. Throw in 20 -30 models like margin of safety, letting most profits run, position-sizing, fine-tuned Fibonacci, income dynamos, etc. etc., and what we’re looking at is a unique entity, which behaves differently when compared to fragile stocks, or even to robust stocks.

So what you’re trying to say is that it all depends how you handle each asset class is what makes that asset class either fragile, robust or anti-fragile.

Exactly.

Is that your word?

Which word?

Anti-fragile.

No. It belongs to Mr. Taleb. In whatever way a word or a concept can belong to a person…

Like governments can crash real-estate, they can also crash stocks. What do you say to that?

Oh, that’s an anti-fragile part of this system, which leaves the user liquid enough to benefit greatly from such crash, seen from a 15 month perspective. User of such system is positioned to take huge advantage of temporary and large price dips. Stocks have a very low ticket size as compared to real-estate, and can be readily swooped up in a crash in bulk, unlike real-estate, which is heavy and is a huge liquidity-enemy.

Where do you stand with your system, personally?

As a whole, I’m working towards making my system with stocks, income-generation and wealth-compounding as antifragile as I possibly can.

What’s the critical mass, above which the system can be considered safe for the new world order?

I’m not sure. It’s all experimental.

So how will you know?

If I make the transition to the new world order whilst preserving a large portion of my portfolio, I’ll know that I’ve succeeded.

Any other method apart from the make or break one suggested by you?

No. Everything else is theory. Surviving reasonably well and then thriving is the only practical method that counts for me.

Thanks.

🙂

Where do you want to be?

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Where do I want to be?

Do I want to look at a stock price and know where things stand with the stock in question?

Yes.

That’s where I want to be.

It’s not going to come for free.

What will it take?

Looking at the stock…

…for an year or two.

That’s what it will take.

How boring, you say?

Sure.

When stock market investing seems boring…

…that’s when you’re doing it right.

Excitement and roller-coaster rides are for video-game pleasure, and for making losses.

Money is made when it’s outright boring out there.

Where do you want to be?

In the money?

I thought so.

Then, please get used to boring and don’t ever complain again that things are boring.

How does one position oneself in such a manner that one studies a stock for an year or two.

Hmmm.

Let’s put some skin in the game.

I know, this phrase is becoming more and more popular, what with Nicholas Taleb and all.

Yeah, we are picking up stock.

What stock?

The one we wish to observe for an year or two.

Why pick it up? Why not just observe it?

You won’t. You’ll let it go.

Why?

Because it’s not yours.

So we pick up the stock? What’s the point of observing if we’re picking it up now?

Well, we’re picking up a minute quantity – one quantum – now. That gets our skin into the game. Then we observe, and observe. Anytime there’s shareholder-friendly action by the management, we pick up more, another quantum. We keep picking up, quantum by quantum. Soon, while we’ve kept picking up, we’ve observed the stock for so long, that now, one look at the stock price tells us what kind of margin of safety we are getting in the stock at this point.

Wow.

Now, future entries become seamless. One look and we have a yes or no decision. Isn’t that wonderful?

Absolutely.

That’s where we want to be.

Nature of the Beast

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Stocks…

…crash.

It’s the nature of the beast.

Stocks also multiply.

For stocks to multiply, one needs to do something.

What is that something?

One needs to buy stocks when they crash.

Let me give you an example. 

Let’s assume markets are on a high, and there’s euphoria.

Excel Propionics is cruising at a 1000.

The prevailing euphoria seeps into your brain, and you buy Propionics at a 1000.

For Propionics to multiply 10 times in your lifetime, it will now need to reach 10,000.

Likely? Wait.

Cut to now.

Stocks are crashing. 

The same stock, Excel Propionics, now crawls at 450.

You have studied it. 

It’s debt-free.

Positive cash-flow.

Ratios are good.

Numbers are double-digit.

Leverage is low.

Management is shareholder-friendly. 

You start buying at 450. 

By the time the crash is through, you have bought many times, and your buying average is 333.

For Propionics to multiply 10 times in your lifetime, it will now need to rise to 3330.

Which event is more likely to happen?

Just answer intuitively.

Of course, the second scenario is more likely to play out than the first one. In the second scenario, Propionics will need to peak 3 times lower.

Simple?

No!

Try buying in a crash.

You are shaken up. 

There’s so much pessimism going around.

Rumours, stories, whatsapps, opinions. The whole world has become an authority on where this market is going to go, and you are dying from inside.

What’s killing you?

The hiding that your existing portfolio is taking, that’s what’s killing you.

Are you liquid?

No?

Very bad. 

Why aren’t you liquid?

Create this circumstance for yourself.

Be liquid.

Optimally, be liquid for life. 

Then, you will look forward to a crash, because that’s when you will use your liquidity copiously, to buy quality stocks, or to improve the buying averages of the already existing quality stocks in your folio. 

How do you get liquid for life?

You employ the small entry quantum strategy.

Yes, that’s about right. 

We’ve been speaking about this strategy in this space for the last two years.

Read up!

🙂

We’ll Take Boring

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Boring…

…is good.

Boring means…

…that you’re on the right track.

We’ll take boring.

What are we talking about?

Equity.

When it’s working according to plan, yeah, you got it, it tends to become a bit boring in the long run.

Don’t get alarmed.

That’s exactly where you want your equity to be.

When it’s there, it’s fulfilling its function, and then some.

You’ve moved away from euphoria.

You’ve moved away from fear.

You’ve arrived at boring.

Look no further.

You’re ready to scale up.

We Don’t Want Anymore

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There comes a time…

…when we don’t want anymore.

Why has this happened?

It’s a spin-off from our small entry quantum approach.

We’ve been buying at sale prices, with small entry quanta, each day, a quantum a day.

A groove has been set.

After umpteen failed attempts, prices break through.

An interesting thing happens to us.

Slightly higher prices start to pinch us.

As prices go even higher…

…our mood is off, and…

…we don’t want anymore.

From a strategy perspective, this is the best thing that could have happened to us.

We will not be buying as margin of safety vanishes and remains vanished.

Our want will be triggered once more, when margin of safety returns.

This has not taken place for free.

It is an indirect result of our painful sticking to a small entry quantum approach.

🙂

And Now, We’re Not Looking

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Who’s not looking?

We. Stock people.

What are we not looking at?

Wrong question. We’re always looking at stocks.

Ok. What are we not looking for?

New stocks.

Why?

Our magic number has been hit.

What’s this magic number?

That’s the number of stocks we wish to handle.

Is it the same for everyone?

No, it’s different for everyone.

How does one arrive at this number?

Through hit and trial. Whatever that works. Where you feel good, that’s your number.

So, will your portfolio now stagnate?

No. Most definitely not. If a stock is not interesting anymore, it can always be replaced.

How does one go about doing that?

Wait for a market high. Then discard the stock you are not interested in anymore.

And how does one find a new stock in a scenario where one is not looking?

You let the stock find you.

Meaning?

You’re not looking, but something eventually hits you in the eye.

Aaahhhh.

Then you dig deeper. If all criteria are met…

…you enter.

Rriiighht….!

Making Equity Antifragile

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Yeps, Taleb’s the famous one. 

Moi, je ne suis pas célèbre.

Néanmoins, j’aime le terme “antifragile” de Taleb.

Also, Taleb has termed equity as robust.

I do equity. 

I’d like my interaction and future with equity to be antifragile.

Let’s first look at Taleb’s definition for antifragile.

He says that anything that has more upside than downside from random events (or certain shocks), is antifragile; the reverse is fragile.

Robust equity will eventually crack when subjected to shock.

We are aware of that.

What do we do now?

Firstly, we take time, and put it in infinity mode. Meaning, that we stay invested, for a long, long, long time. 

We’re now allowing equity amply sufficient time to recover from not one shock, but many shocks.

Also, each time there is a shock, and equity tanks, we go in and buy some more.

How can we do this?

We are sufficiently liquid, all the time. 

Our small entry quantum approach is ensuring that. 

Also, we’ve chosen such equity first-up that is minimally susceptible to cracking. That’s the best we can do. 

We have either avoided debt altogether or chosen debt-levels that are adding value to the stock and can be easily taken care of in the short-term. 

We have chosen equity with decent quick and current ratios. 

We have chosen adaptable managements that function as optimal human capital, fighting inflation, showering shareholder-friendliness and adding value at all times. 

However, crack they do, eventually, and we keep picking up more. 

Since we’ve kept ourselves “infinitely” liquid as per our small entry quantum approach, we are then also “infinitely”poised to benefit from the cracks. 

As we keep getting more and more opportunities to buy with meaningful margins of safety, markets show us more upside than downside. 

Thus, antifragility comes to us as a function of falling price, given that the underlying has sound fundamentals, low to nil debt and benevolent, versatile and diligent management. 

Now, let the shocks come. 

In fact, let 20 shocks come. 

We want shocks to come…

…so that we can continue to buy at rock-bottom prices, which work in an antifragile manner for us, because of the characteristics of the equity and management we have chosen. 

Profiting from shocks?

More upside than downside? Owing to the effects of a shock?

What kind of behaviour is that?

That’s antifragile behaviour.

Time your Friend or Time your Enemy?

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This one depends…

…on you.

How is time treated in your curriculum with regard to the markets?

Are you in a hurry…

…or is your motto “hurry spoils the curry”?

One can make any market action an extremely difficult one if one squeezes time. 

On the other hand, the same market action yields great results when time is stretched to infinity. 

One can understand this in the predicament of the trader.

Expiry is due. 

Trades are in loss. 

It seems that trades are not going to make it to break-even by expiry.

They would probably be showing a profit after expiry. 

However, time-span for validity of the trades has been squeezed to expiry. 

Hence, the trader faces loss. 

The investor, on the other hand, is invested in the stock of the same underlying, and doesn’t dabble in the derivative. 

For the investor, time has been expanded to infinity. 

The investor doesn’t feel pain from a time-window that’s about to close.

Now, let’s look at the cons for the investor, and the pros for the trader. 

The price for making time one’s friend is the principal being locked-in for that much time. 

The investor is comfortable with that. 

If not, the investor feels pain from the lock-in, and may make a detrimental move that works against long-term investing philosophy, as in cutting a sound investment at its bottom-most point during a long drawn-out correction. 

Investors need to fulfil the comfort condition before committing to infinity. 

After a small loss, the trader moves on with the bulk of his or her funds. 

Traders needs to take a loss in stride. 

If not, future trades get affected. 

The advantage of committing funds for short periods, in trades, is that one can utilize the same funds many times over. 

The price for using short periods of time to one’s advantage, however, is tension. 

One is glued to the market, and is not really able to use the same time productively, elsewhere. 

Friendship with one aspect of time works adversely with regard to another aspect of time. 

The investor is not glued to market movements. He or she can utilize his or time for multiple purposes while being invested simultaneously and then forgetting temporarily about the long-term investment. 

It is easier to forget temporarily about an investment than it is to forget about a trade. 

Over the years, I have found it difficult to combine trading and long-term investing, specifically in the same market.

However, I do take occasional trades, apart from being invested for the long term. 

This works for me when the markets in question are different, as in Forex and Equity. 

Personal Long-Term Investing Isn’t about Establishing a Mutual Fund

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If it were the case, why bother?

Just put your money in a mutual fund instead. 

There are many competent fully equity-oriented mutual funds out there. 

Some of the competent ones have very reasonable expense ratios and eye-popping statistics. 

Investing in a mutual fund takes away your work-load completely. 

You put in the money for the longish-term, and then you’re done. Don’t bother for the next 5 years. 

If you’ve chose the dividend payout option, you get an SMS or an email maybe once or twice a year that puts a smile on your face. It’s a payout!

What is a mutual fund?

What’s so mutual about it?

You mutually agree to what the fund manager is doing. 

Thus, make sure that the fund-manager is competent. Study the fund-manager’s track-record. 

A mutual fund typically consists of 50-75 stocks. Some are weighted heavily, some more lightly. 

The return you get is the mathematical average of the 50-75 stocks, adjusted for the weight they carry. 

It would suffice here to say, that the MF delivers some kind of an average return, less all kinds of fees, which typically range around the 2.5% mark per annum. 

Therefore, as far as returns are concerned, after tax deductions, one is probably left with a high single-digit one or a low double-digit one, in the long run, compounded. 

Not too bad.

Remember, this is equity we are talking about. Equity is an asset-class which gives returns that are adjusted for inflation. 

Actually, great. 

Those of you who are satisfied with this need not read any further. Just go ahead and put your surplus funds into MFs.

However, some of us want that extra kick. We are not satisfied with low single digits. We want 15%+, per annum compounded, after tax and adjusted for inflation. 

This is not greed. 

Ambition perhaps. 

Drive. 

Renumeration requirement for the arduous work put in. 

We’ve struggled. 

We’ve gotten hit many, many times. Each time, we’ve stood up, taken the hit, and carried on.

We have learnt. 

All for what?

Now it’s time to cash-in.

We go about setting up our long-term portfolios in the proper fashion. 

Total number of stocks eventually in the portfolio needs to be well clear of the MF mark…otherwise, right, why bother.

MF-type diversification will give an average return. 

We will build a focus portfolio. 

Focused returns are higher in the long run.

What’s the magic number?

Well clear of 50-75 stocks in all is understood. For me, even 40 is too much. I could deal with 30, though. Hmmm, let’s steer clear of the 3 in 30, so 29 is good enough for me as a maximum. The pundits are satisfied with 15-20 stocks, no more. Focus-gurus swear by 10-15 stocks. I’m ok with a maximum of 29, (a limit I’ve not reached yet) because in reality, I just hold 6 sectors, and multiple underlyings within the sectors. Thus, even with a maximum like 29, the 6 sectors alone make it a focused portfolio. 

The bottom-line is focus. 

As long-term investors doing it ourselves, we are going to focus. 

Staggered entry. 

Small entry quantum each time, many, many times. 

How small?

Small enough, such that one can enter about 30 or so times in a year and still have ample savings on the side from one’s earnings. Why 30 or so? That’s a rough 10-year average calculated per annum, estimated by me, during which one gets margin of safety in the 220 days or so that the markets are open in the year.

There we are : focus-investing, margin of safety, staggered entry, many, many entries, small entry quantum each time and generation of ample savings despite equity exposure. 

Is that a formula or is that a formula?

🙂

What is Human Capital Capable of Doing?

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Sky’s the limit, and so’s the ocean.

That’s the deal with human capital. 

However, we are pretty capable of choosing that kind of human capital which aims for the sky. 

After weeding out the fraudsters, we go ahead and align ourselves with stellar managements. 

Choice of management is one of the top three criteria while selecting a stock. 

Why?

One doesn’t wish to be in a stock with a lack-lustre, dull and boring management which has stagnated and has no creativity.

One wants one’s management to be actively pursuing the prime goal of finding means to beat inflation. 

Equity is perhaps the only asset class that promises to beat inflation, in case a management uses its intelligence. 

That is what good human capital is doing for us all the time, i.e. finding means to beat inflation and maximise profits. 

Inflation is something that eats into our assets, and at a rather alarming rate too. 

Gold, cash, real-estate, fixed-deposits, bonds and other similar asset classes have no choice but to take the hit. The returns they give us in reality can well be negative, with the exception of real-estate and bonds sometimes. However, here, even the real positive returns are expressed after deducting the effects of inflation, and they don’t amount to much, and we’re not really looking at double digits at all after inflation has done its work.

Equity, on the other hand, tells a different story.

It suffices to to sum up the case of equity by saying that this asset class gives inflation adjusted returns.

How?

Managements tear their brains apart to find ways to circumvent the effects of new laws, tariffs, duties, levies, taxes, natural events, unexpected circumstances etc. and the like to try and achieve a commendable balance sheet by the end of the financial year. 

What is inflation?

Exactly this.

Inflation is the sum of all the effects of new laws, tariffs, duties, levies, taxes, natural events, unexpected circumstances etc. and the like on your asset class, and the result that it causes is the diminishing of the value of your asset class. 

Managements thus take inflation head-on, and are constantly devising ways to come out with a stellar performance despite the sum total that we refer to as inflation. 

Because we have chosen to align ourselves with stellar managements that already have a commendable track record in taking inflation head-on and beating it, our assets are ideally positioned to show inflation-adjusted positive returns, year upon year upon year, and perhaps even double digit ones. 

I’ll leave you with some hard cold facts. 

Adjusted for inflation, gold has yielded 1% per annum compounded since the history of its existence. 

Adjusted for inflation, bonds, cash and fixed deposits are yielding negative returns, and have been doing so for a long time now. 

Adjusted for inflation, and after taking the black money component out, real-estate has yielded single-digit returns, per annum compounded.

Adjusted for inflation, all-time equity, including all stocks that don’t exist anymore, has yielded 6% per annum compounded. 

Adjusted for inflation, all-time equity, not including stocks that don’t exist anymore, has yielded 11% per annum compounded. 

Adjusted for inflation, an intelligently chosen portfolio is extremely capable of yielding 15%+ per annum compounded over a period of 10 years or more.

What more can one want from an asset class?

Go for it, do super due diligence, choose wisely, enter in a proper manner, and build up your long-term portfolio. Master the art of sitting, and you will be in a great position to make double-digit returns, per annum compounded, adjusted for inflation. 

🙂

The Benefit of Quantum upon Quantum

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Underlying equity. 

How do you protect against fraud and / or investor-unfriendliness?

You’ve done your research. 

All good. 

Stock is a buy. 

Meets your parameters. 

What’s the next step?

Protection. 

You buy quantum upon quantum. 

You don’t plunge into the stock with all you’ve got to give. 

No. 

You put in a quantum.

Then you wait. 

Better opportunity arises.

Fundamentals haven’t changed. All still good. 

You put in another quantum.

Quantum…

…upon quantum. 

That’s how you keep entering the stock till it keeps giving you a reason to enter. 

Year upon year. 

Between quanta, you’re studying behaviour. 

You’re looking for investor-friendliness. 

Your next quantum is only going in if investor-friendliness continues.

No more investor-friendliness?

No more quanta.

You wait.

Will investor-friendly behaviour resume?

And you wait.

Is it coming?

Yes. 

Good. 

Upon buy criteria being met, next quantum goes in. 

Not coming?

At all?

Ok. You’re looking to exit. 

Market will give you a high to exit. That’s what markets do. They give lows, and highs. 

Wait for the high. 

High?

Exit. 

Nath on Equity – Yardsticks, Measures and Rules

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Peeps, these are my rules, measures and yardsticks. 

They might or might not work for you. 

If they do, it makes me happy, and please do feel free to use them. 

Ok, here goes. 

I like to do my homework well. 1). DUE DILIGENCE. 

I like to write out my rationale for entry. 2). DIARY entry.

I do not enter if I don’t see 3). VALUE.

I like to see 4). MOAT also. 

I don’t commit in one shot. 5). Staggered entry.

I can afford to 6). average down, because my fundamentals are clear. 

My 7). defined entry quantum unit per shot is minuscule compared to networth. 

I only enter 8). one underlying on a day, max. If a second underlying awaits entry, it will not be entered into on the same day something else has been purchased. 

I’ve left 9). reentry options open to unlimited. 

I enter for 10). ten years plus. 

Funds committed are classified as 11). lockable for ten years plus. 

For reentry, 12). stock must give me a reason to rebuy. 

If the reason is good enough, I don’t mind 13). averaging up. 

Exits are 14). overshadowed by lack of repurchase. 

I love 15). honest managements. 

I detest 16). debt. 

I like 17). free cashflow. 

My margin of safety 18). allows me to sit. 

I pray for 19). patience for a pick to turn into a multibagger.

I keep my long-term portfolio 20). well cordoned off from bias, discussion, opinion, or review by any other person. 

There’s more, but it’ll come another day. 

🙂

Sheer Moat Investing is not Antifragile 

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There we go again. 

That word. 

It’s not going to leave us. 

Nicholas Nassim Taleb has coined together what is possibly the market-word of the century. 

Antifragile. 

We’re equity-people. 

We want to remain so. 

We don’t wish to desert equity just because it is a fragile asset-class by itself. 

No. 

We wish to make our equity-foray as antifragile as possible. 

First-up, we need to understand, that when panic sets in, everything falls. 

The fearful weak hand doesn’t differentiate between a gem and a donkey-stock. He or she just sells and sells alike. 

Second-up, we need to comprehend that this is the age of shocks. There will be shocks. Shock after shock after shock. Such are the times. Please acknowledge this, and digest it. 

To make our equity-play antifragile, we’ll need to incorporate solid strategies to account for above two facts. 

We love moats, right? 

No problem. 

We’ll keep our moats. 

Just wait for moat-stocks to show value. Then, we’ll pick them up. 

We go in during the aftermath of a shock. Otherwise, we don’t. 

We go in with small quanta. Time after time after time. 

Voila. 

We’re  already sufficiently antifragile. 

No magic. 

Just sheer common sense. 

We’re still buying quality stocks. 

We’re buying them when they’re not fragile, or lesser fragile. 

We’re going in each time with minute quanta such that the absence of these quanta (after they’ve gone in) doesn’t alter our financial lives. We’re saving the rest of our pickled corpus for the next shock, after which the gem-stock will be yet lesser fragile. 

Yes, we’re averaging down, only because we’re dealing with gems. We’ll never average down with donkey-stocks. We might trade these, averaging up. We won’t be investing in them. 

Thus, we asymptotically approach antifragility in a gem-stock. 

Over time, after many cycles, the antifragile bottom-level of the gem-stock should be moving significantly upwards. 

Gem-stock upon gem-stock upon gem-stock. 

We’re done already.