Tag Archives: #marginofsafety

Rounders

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West’s got…

…woes, …

…currently being voiced in…

…Dawoes.

World Economic Forums come and go.

We’re not looking for flavours of the season.

And what’s our game?

Growth.

Ok.

With value.

How?

Reasonable price. Good dip on chart owing to current theatricals.

How do you measure value on a chart?

You can use conventionally accepted systems like Fibonacci, or you can make up your own systems too, whatever works for you.

Example?

First I’ll give you an example from Fibonacci.

Ok.

I’ll be buying into Growth below midpoint between 61.8% and 78.6% dip on a Fibonacci retracement.

Why?

That’s when the rubber-band is really being stretched, and beyond.

And what if the fall goes beyond 100 on the Fibonacci.

So be it. Change the retracement starting point to one pivot below. You now have a new Fibonacci. Buy below your band, defined just above.

Oh, so you’ve kind of re-assembled Fibonacci usage for yourself.

Ya. Anyone can do it.

Give me a more unique example. Something that’s your own.

I have the round number thing.

Being?

When all levels under consideration are broken or met, that’s when I activate ‘Rounders’.

Ha! Nice touch with the nickname!

:-).

Tell me about Rounders.

Well, at this point, when everything else is broken or met, and you’re poised to enter, you ask yourself just one more question.

Which is?

What’s the one round number below? 1000? 100? 50? 25? 10? 5?

5s are round numbers?

For scrips quoting in double digits, very much so.

Ok, so what of the one round number below?

Below this point, look for a break by about a percent, and buy there.

Sucking out all the value that’s possible, are you?

One takes what one can get.

What if you don’t get your buy?

So we don’t get it. Period. Soldiers are intact to fight another day. We wait for a few sessions and end up getting our price. Or not. In which case we deactivate Rounders if we are that keen to enter, and then we go for it.

I see. Soldiers?

Capital deployed into untriggered trade. This one’s no big deal either, by the way. Jesse Livermore used to buy three points below support, I believe.

Were you inspired by Jesse regarding Rounders?

I’ve read and re-read a lot of his books, so, perhaps.

But the name you’re using is yours.

It is. Rounders is a name I’ve given.

How come you gave a name?

Cheap thrills. 🙂

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 to?

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Changing world order…

…dedollarization…

…shifting boundaries…

…new havens…

…new strategies?

Confused as to what to do?

Where to with your hard-earned funds?

Don’t panic.

I personally don’t adhere to growth at any price, …

…so if your fund manager has you chasing the Moon …

…in gold, silver, copper, crypto, or any other newly identified haven…

…for a second, stop…

…and reflect.

Remember that word…

…’value’?

Ya, that’s a word we like.

We’re pursuing value.

There’s value in growth.

One can see it in the chart, …

…or one can see it in numbers, what with GARP and all that.

GARP’s good, …

…value’s great, …

…and we add two more words.

Nil burden.

Optimal.

Quasi nil burden?

Will do.

That’s where our money is going.

Hopefully, you’ve gotten our drift, but we believe you have the wherewithal to decide for yourself.

We want three other dynamos to work for us.

Liquidity is created by minor capital gain pursuits.

There’s the steady dividend, which adds to liquidity.

Now comes the kicker.

We pledge some portfolio and create margin. A small income is then made on the margin.

So, to recap, there’s the main-game that’s long-term. That our wealth, created and compounding.

Three side-hustles then generate income on top. That’s it for us.

Yeah, over to you now. Where’s your money headed? In these turbulent times, I’m sure this question must be flashing through your mind.

Opportunity

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Knock knock!

Who’s there?

Oppo.

Oppo who?

Oppo – rrrr – tunity, which don’t knock often (enough).

Yes, huge opportunity is knocking.

Global talent will stay indoors, to a large extent, from now onwards, come this September 21st, i.e. today onwards.

Brain gain time for us.

India is going to boom. Forget about tomorrow, next week, next month, but come medium term, and, going on to the long term, India will shine.

Sure, tomorrow, Indian IT will probably be down. Who’s in it for just tomorrow? One doesn’t get one’s house valued every day, week or year. One might do it when one is contemplating a sale, maybe after twenty years of owning it. Same goes for very long-term held compounders. Like Indian IT.

So, down? Maybe. Out? NO!!! Drag other markets? A bit. Effect to continue? Very short-term.

Beautiful thing is, Indian and possibly other corporates have been working on their plan Bs, and perhaps their plan Cs, and have, slowly but surely, been implementing these.

Also, government is boldly stepping up and refusing to get bullied. Watch out for the measures to be announced that will further boost the economy, to counter this ‘shock’. Thing is, where other nations have started thinking and acting short-term only, India has started to play a longer-term game. One can call it a meta-game.

Bottom-line.?

Time to answer the door-bell, open the door, and let the knockers in.

In my opinion, it’s safe to put one’s money on the line here.

Should Indian IT fall, large quantities of domestic funds will be lapping it up. Smart money will definitely be buying into offered margin of safety.

Why?

Fundamentals.

Clean balance sheets.

Free cashflow.

ZERO DEBT.

High RoE.

Large number of diligently purchased start-ups owned.

AI incorporation and development.

Steady growth.

Technical margin of safety being offered, possibly, tomorrow onwards.

And now, brain gain.

These are some of the big pluses that Indian IT offers.

So, one can easily and calmly go out there, and, with a cool head, put one’s hard-earned money into any margin of safety exhibited by these potential compounders with amazing track records, with a clear-cut goal of generating long-term wealth.

Wishing you happy and lucrative investing!

🙂

Whetting

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What does it take…

…to convince my mind…

…that something’s a very long-term hold?

What am I looking for?

Longevity. Actually, perceived longevity. Perceived in my mind. Mind matters. When the mind is shaken, one lets go. For something to be a long-term hold, the mind needs to be long-term convinced.

Lack of dependency. On water. On other natural resources. On CapEx. On real-estate.

Immunity to trend-change.

Adaptability to disruption. As much proximity to a state of anti-fragility as possible. Entry price and cost-free-ness will reinforce proximity to anti-fragility.

Diligent, share-holder friendly management with good track record, with repeated examples of wealth-creation through exploitation of multiple avenues available.

A product line that is more dependent on human capital than on machinery.

Copious, intelligent, reasonably priced human capital. With that we’ve knocked out inflation.

Very decent margin of safety at entry point. With that we’ve accounted for any remaining idiosyncrasies in capable managements and / or otherwise humane promoters.

Lack of debt. We’re ok with reasonable amounts borrowed at reasonable rates for day to day working capital, but not a big fan of long-term debt.

No smoke cloud. Talking about scams, frauds, bribes, court-cases and the like.

That’s ten things already.

I take these ten, sift through the Nifty 500, and get 43 underlyings, which, for me, satisfy these criteria.

That’s it.

I play with these.

That’s all the whetting I need.

You’re saying I didn’t mention numbers. Metrics. Ratios.

Numbers come and go. Basics remain. When the basics are right, numbers will be intact for long, and for a few quarters they won’t be. Those are re-entry opportunities.

Good basics create good numbers, repeatedly. We are making sure that we are only entering into good basics.

Now the ball’s in your court.

Create your criteria.

What works for you?

Sift through.

Narrow down.

What remains are your whetted stocks.

Start your game.

It’s a long one, so…

…wishing you stamina!

🙂

Dealing with Demotivation

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Every now and then…

…we don’t feel like working. 

This…

…happens. 

Let’s not PhD over it. 

After accepting the onset of periodical demotivation, let’s focus on dealing with it. 

Nullify the cause. Let’s at least try.

Hungry? Eat.

Fight? Resolve.

Losing streak? Review, tweak, test, re-implement.

Unhappy? Chant. Then work. 

Let’s say one is not able to nullify the cause. 

Let’s take a stock. It’s down. You hold it. There’s nothing wrong with it. 

If you’re demotivated here, aha, please rewire your psychology. 

When something fundamentally and technically sound is down, we buy more of it. 

However, every bone in our body feels deflated upon an accrued notional loss. 

That’s how we humans are wired. We hate losing. We want to win all the time. The best time to buy good stocks is, though, when they’re losing. 

Therefore, …

… rewire,…

…if you want to survive in the markets. 

Once you’re done rewiring, get back to your desk, and buy more of that something fundamentally and technically sound offering margin of safety. 

Lazy?

Market will finish you. Cut it out. Back to your desk.

Wish to get away from your desk? Fine, take your laptop, ipad and smartphone to your easy-chair. Work.

Nothing’s working? Take a small break. Watch an episode of “Billions”, or of whatever gets you going. 

Done?

Let’s go.

We’ve got stamina.

The Number One Reason

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Yeah, what is it?

What’s the number one reason why we fail in a long-term investment?

I’ve made this mistake, and true, those investments didn’t work out well for me.

However, I’ve stopped making this mistake.

That’s right. I don’t buy without margin of safety anymore.

Even a growth stock will eventually offer you some kind of margin of safety.

Wait for it to.

So, why doesn’t an investment work out that hasn’t been bought with margin of safety?

Mathematics…

…and psychology.

Lesser the margin of safety, the more difficult it is to make a multiple. Just do the math.

Then, investor-psychology is such, that investments bought without margin of safety don’t allow the investor to sit.

They disturb the investor when they go against him or her.

The more an investment goes against an investor, the more he or she jumps.

In the end, too much jumping leads to an erratic decision.

In the worst case scenario, one bails out of a sound investment at the lowest point of the market.

How does one avoid something like this?

Learn to sit.

Create circumstances around yourself that allow you to sit.

Buy with margin of safety.

An investment bought with ample margin of safety allows you to sit even when the investment is down.

Because you’re holding sound investments, …

… sitting makes you win in the long-term.

The Cue from Disturbia

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I am disturbed. 

This stock that I’m invested in is continuing to fall. 

That’s ok.

I want to be disturbed. 

That’s my cue…

…to invest more in the stock.

I’m in the stock for a reason. 

Something appeals to me. 

That something continues to appeal to me, despite the continuous fall. 

If that were not the case, the case for the stock would be closed, and one would look to get rid of it on a market high. 

However, that is the case,…

…and, I follow the small entry quantum strategy.

Where does that leave me?

My investment in the stock is small.

I am liquid.

That’s the beauty of the small entry quantum strategy.

It leaves you liquid.

Continued fall means better margin of safety, and that another quantum can go in.

The small entry quantum strategy ensures multiple entry opportunities as the stock continues to generate margin of safety.

When do my ears stand up?

When the fall is disturbing enough. 

The fall is the cue to go in. 

It is from Disturbia. 

Who said making money was easy?

This strategy works as long as one’s research is sound. 

Let’s go with what works.

Trigger-Happiness triggering your happiness?

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Action?

All the time?

Do you crave it?

And, are you in the markets?

Boy, do you have your work cut out for you, or do you have your work cut out for you?

Ideally, your long-term investment should not give you action.

When it does, it should push you to act.

What backfires is when you act to push it.

Unless you’re convinced by a stock, you don’t buy it.

Unless there’s margin of safety, you don’t buy it.

Unless there’s more margin of safety, you don’t re-buy it.

Unless you’re fed up with the stock or the antics of its management, you don’t sell it.

The whole long-term game is biased towards inaction.

Those who master the art of inaction are good long-term investors.

Bridging gaps is paramount.

What do you do with the vast amounts of time at your disposal?

Do twenty other things.

Create value in many walks of life.

Let the areas not overlap with any of the markets you are tapping.

Capture the attention of your mind.

What happens if you don’t?

Boredom, inaction or the need for action will propel you towards making a mistake.

Mistakes in the market cost money.

That’s how they’re defined.

Do yourself a huge favour.

Approach the markets after having embraced inaction.

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.

Busy Times

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Market falls are busy times. 

No, we’re not busy whining. 

We’re busy buying.

Are we not afraid?

That the crack might deepen?

That it might go down to zero?

No.

We’re not afraid of this scenario. 

Meaning?

Meaning that even though such a scenario cannot be ruled out…

Huh!?

Yeah, it can’t be ruled out. With trade wars and back to back black swans waiting to strike, theoretically, the bottom is zero.

And you’re not afraid?

No.

Why?

Because I buy into fundamentally sound businesses…

…zero debt…

…great 5 year numbers…

…sometimes, great ten year numbers…

…and I buy with considerable margin of safety.

Still, one is normally always afraid, right?

Wrong. A small entry quantum strategy kicks out all remnant fear.

How?

This strategy leaves me liquid. Let it go down to zero. I’ll still have liquidity to buy.

And that which you’re buying…

…is sound, yes. If I buy something sound, it will yield returns. It’s like agriculture. Crops grow in good soil. They don’t grow well in bad soil. I make sure that I choose excellent soil.

How does one do that?

Due diligence. Period.

With all the scams and frauds going on…

Well, I look long and hard for shareholder-friendly managements. Representable salaries, willingness to share, largesse, debt-averseness, intelligence, business savvy, the list goes on.

What if you land up with a fraud management?

Solid research will make you avoid scamsters. I search the internet thoroughly for any kind of smoke. Crooks leave a trail, and one is able to catch their online trail pretty easily. 

Alone online?

Second recourse are annual reports. They reveal a lot. I don’t invest in a company without having a thorough look into its annual reports. I look at CSR, the director’s report, skin in the game, balance sheets, profit and loss statements, cash-flow, special items, what have you.

What if you still land up with a fraud?

After I know I’ve landed up with a fraud management, I would look to exit at the next market high. 

What if your holding is wiped out till then?

If it’s wiped out, I have many other holdings to lean on, and don’t forget the liquidity that is yet to flow into honest managements.

So you’re not afraid of the loss?

There is some risk one has to take. Here, it is the risk of being wrong. The good thing is, once I know that I’m wrong, I won’t double up on my wrong call. I’ll get busy elsewhere and look to exit from my wrong call with as little damage as possible, perhaps even in profit.

Profit?

You forget, I like to buy with margin of safety, and you’d be surprised at what people are willing to pay at market highs. 

I see, well then, happy investing!

Thanks! 🙂

Stamina of a Marathon Runner

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Yes.

That’s what a small entry quantum approach demands of its player.

To be frank, I’ve not run any marathons on field and track.

However, I’ve done my share in life, and continue to do so. 

If it’s not a marathon, I don’t get a kick.

If you’ve got that in yourself, you’re cut out for the small entry quantum approach.

There’s repetition.

Boredom.

The long-haul.

Life in the background.

No hype.

Going on and on…

…till you break through,…

…and the contents of your portfolio spill over…

…and start to show.

Might take a few decades. 

Do you have it in you?

What will make you hold out?

Stick to the tenets of the small entry quantum approach, and you will not only hold out, but your folio will burgeon too.

Buy with surplus.

Buy with margin of safety.

Learn to sit.

Enter small. Many times.

Keep entering over the years, till there is reason to enter.

Exit on highs. Only get rid of those stocks you don’t feel like holding anymore.

No fear please. Kill it. Create the circumstances for fear to vanish.

No euphoria either. That’s a tough one, especially when the whole world is dancing around you. 

Do your homework. 

Don’t listen to anyone.

You’re set.

 

This is Why Your Blockbuster Gain Story is going to Happen

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You’re learning to sit. 

You buy with margin of safety. 

You buy in small quanta,…

…and that’s why you’re always liquid,…

…to avail any opportunity that arises. 

Yeah, there’s nothing impeding your liquidity…

…because you’ve kept yourself virus-free, i.e. debt-free. 

You only buy quality…

…that’s going to be around for a long, long while,…

…because you don’t sell for a long, long while. 

You don’t listen to what the grapevine is saying…

…because of the conviction and strength of your own research and opinion.

Yes, you regularly go against the crowd. 

You either buy into debt-free-ness, or into managable debt that spurts growth. 

Your input into the market doesn’t affect your daily life, leaving you tension-free to address your non-market world and thrive in it,…

…and that is why,…

…for all the above reasons,…

…your blockbuster gain story is going to happen,…

…and what’s more,…

…you are also enjoying the ride leading up to it. 

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.

🙂

Factoring in Doomsday

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Because of your small entry quantum, you are always liquid.

That’s how you have defined the strategy.

What happens when there’s a market crash?

Your existing folio takes a hit.

You’ve been buying with margin of safety.

Because of your small entry quantum strategy, your hit is not hitting you.

Your focus is elsewhere.

It is on the bargains that the crash has created.

You keep targeting these with your fresh entry quanta.

You keep getting margin of safety.

Suddenly you realise, that you like it.

You like being in bargain area.

You like the sale that’s going on.

It won’t always be so.

There will be times that you won’t be getting any margin of safety whatsoever.

Then, you realize another thing.

You’re not afraid of a crash…

…because…

…you are ready, to pick more.

What has empowered you?

Margin of safety.

Small entry quanta.

Controlled level of activity.

Great fundamentals.

Great managements.

Quality.

Crashes come. Crashes go.

You’ll keep buying stocks with the above criteria as per your outlined strategy, and you’ll keep adding on to your purchases with small entry quanta.

It’s not hurting you, because the money you’re putting in has been defined in such a manner.

Your mind has digested this definition, and your strategy is in place.

The market being down while you buy is a requirement for your strategy to be successful in the long run.

It is a good thing for you. It is not a bad thing.

It takes a while to realize this.

The Stand-Out Price

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You’re ready with your small entry quantum,…

…looking to add on to you portfolio. 

You’re always liquid,…

…owing to your small entry quantum strategy. 

Where do you enter?

This is not a difficult question.

Why is this question not difficult?

That’s because the stocks in your portfolio are fundamentally tested, and have been found to be sound by you.  

Fundamental soundness is a bombastic plus. 

Now comes the next question.

Where is margin of safety being offered to you?

Is it enough margin of safety for you?

Are more stocks offering this kind of margin of safety?

What, then, is a stand-out price?

You will enter there. 

A stand-out price hits you in the eye. 

It is unusual. 

It speaks of a large fall such that the level of the price draws your attention within milliseconds. 

When you see a stand-out price on the way down like this, you ask the next questions. 

Why is the price where it is? 

What has happened?

Whatever that has happened, is it a one-time thing?

Is the momentum of the fall subsiding, or mid-way, or what?

Ask as many questions as you may want. 

The answer you want to drive at is yes or no.

Yes as in you would like to use your small entry quantum to pick up the stock in question. 

No as in you would like to wait for more clarification. 

If you pick up, you’re done for the day, if you follow a one-entry per day strategy, that is. 

If not, you look for another stand-out price. 

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.

Negating Promoter Greed

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You like a stock. 

You’ve checked it out. 

Fundamentals are under control. 

You find the management reasonable.

They’re shareholder-friendly. 

They have high salaries though, specifically those connected to the promoter-group. 

Now, you need to answer some questions.

Are you ok with high salaries for the top staff?

What is your definition of high?

Are salaries performance-driven?

Do the company’s number justify what promoter-connected management is taking home?

Ok. 

You’ve answered these questions. 

You still want the stock, despite the fact that an answer to two could be an outlier. 

That’s fine. 

One won’t find perfection anywhere. 

If one finds it, the stock will probably already be overpriced. 

So, you’re ok with mild imperfection, as long as your basic needs are met. 

You decide to purchase the stock. 

Here’s how you can negate promoter greed. 

The fancy cars, the family dish outs, the pushed-in lunch bills, the first class travel, you get the drift. 

Who doesn’t do it, given the opportunity?

Your promoter is human, and will surround him- or herself with comforts, at the company’s expense. 

That is the norm. Get used to it. 

Here’s how you are not letting this affect you. 

You buy in a staggered fashion. 

You buy with margin of safety. 

Because you’re sure of fundamentals, you average down. 

Each time your holding average touches a new low, you’ve secured yourself against promoter greed just a tad more. 

Because of sound fundamentals, ultimately, the stock will start to rise. 

That’s the time your low holding average will show a stellar profit for you. 

Perhaps your holding average is better than that of the promoter.

If that is the case, rise in price has given you more profit than it has to the promoter. 

Therefore, while the promoter got to live in the lap of luxury at the cost of the company, you were busy raking in a better result owing to the price rise.

Successive margin of safety buying amounting to averaging down after convincing oneself of intact fundamentals has been the key for you. 

Use this key, but do so wisely, and safely. 

Remember, that averaging down only works well in the case of diligent, research-based long-term investing. Averaging down is a strict no-no for short-term traders, however. 

Wishing you happy and fruitful investing!

🙂

Price Based Margin of Safety

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You might laugh at this one.

However, it is need based. 

We have been talking so much about small entry quanta. 

A small entry quantum allows for smaller mistakes.

It allows you to enter many times. 

It is small enough to make your capacity for entry outlast the number of margin of safety market days in a year. 

You take your savings. You define what you want to invest in equity for the year. 

You divide it by an estimate for the margin of safety days you might be getting for the year. You arrive at this number by estimating over a ten year average. 

Upon this division, you get your daily entry quantum, for the whole year, on margin of safety days. 

I go one step further to keep a constant small entry quantum defined for longer periods, for any particular entry day. 

As we said, small entry quanta should also mean many entries. 

We won’t be getting the same margin of safety every day.

On many days, we won’t be getting margin of safety at all, in the purist sense of its definition.

We will need to tweak the definition of margin of safety a bit, to have access to many entries. 

We are doing this because we are already on safe grounds. 

First up, we are playing with money we won’t be requiring for the next ten years, or so we estimate. 

Then, this is the money that is coming from our savings and is going into equity. It is for no other purpose. If it eventually doesn’t go into equity, we will end up finding some other use for it, such is human nature, and such is the nature of these multi-tasking times. 

Thus, if we see even a smallish entry possibility, we take it, because of the nature of the small entry quantum approach. 

How do we propose to tweak margin of safety?

We watch the price of a scrip we are unable to enter in. 

We watch, and we watch. 

Still too high. High, too, are fundamental entry allowers (FEAs), like price to earnings, price to book value, price to cash-flow, price to sales, etc., and we don’t enter. 

Then, one day, price starts to drop, for whatever reason. 

It continues to drop to a level, where we feel that for this particular scrip, that’s a pretty decent correction. 

It’s all feeling. 

You can look at charts, but then you tend to look once a month, and the feeling element fails to develop properly. 

So, we’re feeling pretty good about the level of correction, and we cast a glance at the FEAs. 

These are still a tad high, albeit much lower than before. 

For the FEAs to become lower than classic margin of safety levels, there could be a longer wait, or this event might not even happen, especially if we are looking at growth scrips.

If the event does not happen, it means no entry, and with our approach of small entry quanta, this leaves us high and dry with respect to the scrip. 

Are we going to let that happen?

Because of our safe small entry quantum approach, we are not going to let that happen if we can help it. 

When price offers margin of safety but FEAs are still a tad high, we enter with one quantum. 

Then we wait.

Scrip quotes some percentage points (2%, 3%, 5%, you choose) lower than our last entry. We enter with one more quantum, and so on. 

Now, two things can happen. 

The scrip can start zooming from here, and you are going to feel good about your entries. 

Or, the scrip falls further, and quotes lower than classical FEA definitions for margin of safety. 

Are you going to feel bad about your previous entries, which were small mistakes?

No.

Why?

You are too busy undertaking further entries into the scrip, quantum by quantum, for as long as the scrip quotes at levels below classical FEA definitions for margin of safety. 

Soon, you have a lot of entries done, at these safe levels, and you have more than made up for your few small mistakes. 

You’re good. 

In the other scenario, you were good anyways. 

Thanks to your small entry quantum strategy, it’s been a win-win for you all around.