Saturday, December 24, 2016

The Secret to being a Successful Investor

“If one negligently leaves the bath running with the baby in it, one will realize as one bounds up the stairs towards the bathroom, that if the baby has drowned one has done something awful, whereas if it has not one has merely been careless". I didn't say it. Thomas Nagel did. I just copied pasted it. Because it made me realize something. That this could be it!! After all these years of reading and learning and making mistakes (and repeating these steps again and again, though not necessarily in the same order!), I have quite accidently stumbled upon the secret to successful investing. The difference between success and failure. The answer is actually quite simple. Luck! Just plain ol’ simple dumb luck!

I know you are disappointed with the answer dear readers. But please bear with me. Just indulge me and read the above quote once again. What defines the magnitude of our mistake is not the nature of the mistake itself, but its consequences! Looking back at all the mistakes I have made in my investing lifetime (so far), I realize that I have been extremely lucky! Actually, I can hardly believe how lucky I have been. If all the mistakes that I have made had ended with the worst-case scenario, I doubt if I would have ever had the opportunity to learn from them. Or I would have learnt from them, but would certainly not have had the resources to implement my “learnings”. After all, there are just so many times you can lose your entire bankroll and start all over again.

So many times, we make the mistake of attributing our good luck to skill. And we attribute our bad luck to, well, bad luck. In fact, this phenomenon is so common, that there is a whole mental model about it. Self-serving bias.

“A self-serving bias is any cognitive or perceptual process that is distorted by the need to maintain and enhance self-esteem, or the tendency to perceive oneself in an overly favorable manner. It is the belief that individuals tend to ascribe success to their own abilities and efforts, but ascribe failure to external factors.” - Wikipedia

No matter what investing school you belong to, fundamental or technical, value or growth, there is a great amount of forecasting attached to it. Forecasting, by its very nature, involves uncertainty. And uncertainty involves probability. The easiest way to increase your odds of success is to reduce your odds of failure. And the simplest way to reduce your odds of failure is to learn from your mistakes and avoid repeating them in the future. Every little mistake ticked off results in increasing the odds of success. But like we said in the beginning, the magnitude of our mistakes is not defined by the nature of the mistakes themselves, but by their consequences. And this is exactly where luck comes in! What if the initial few mistakes all had dire consequences!

I believe I am becoming a smarter investor every year. Not because I am closer to finding any secret stock picking formula, but because with passage of time, I can now recognize mistakes that I have made in the past that I had never noticed before. And that, I believe, holds the key to being a successful investor.

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Monday, November 28, 2016

The market is going down

It's certainly been a long time since the last blog post. Long term investing sure is fun if you like watching paint dry. Luckily for me dear readers, it turns out that I actually do like watching paint dry. And its all the more fun if the paint company in question happens to be a sizable chunk of your portfolio! If you are Indian or invest in the Indian stock market, no prizes for guessing which is this paint company!

Anyway, in the last blog post, written on 31st July, I had commented about the negative divergences appearing in the Indian stock market. Here's a copy of the chart that I had posted last time.
    
                             

Well, the prediction has played out perfectly and the market has fallen a good 10% from its highs. And here's how the index looks currently.


Pat pat. That was me patting my back. But seriously dear readers, I have to admit here that I didn't expect the market to fall this much. Same why like I didn't expect Donald Trump to be the leader of the free world. Same way like I didn't expect 500 and 1000 rupees currency notes to be banned in India. I guess my predicting abilities do have their limitations. So much for the pats on the back.

Anyway, the same negative divergences pattern is now appearing in MACD in S&P. 



Is the market headed for a fall? I think so. 
When will this fall happen? No clue. Your guess is as good as mine.
How much will it fall? I can give you the next support levels but so can any guy with crayons who can drawn horizontal lines and trend lines.


Come to think of it, I can't tell you much. But what I can tell you, and luckily for me, it turns out that this is the most important thing in investing, is that how I will react and what my reaction is going to be when the market falls. There are very few things that you and I can predict, and even fewer things that we can control, but we certainly have control over how we respond to these events. Do you have a game plan ready for when/if the markets fall 10% from here?

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Sunday, July 31, 2016

The value investor and technical trader in me both agree for a change......

Note: If you are not interested in the Indian stock market, feel free to directly head to the last paragraph. I think it pretty much applies to all markets and asset classes.

If, like me, you are an investor or trader in the Indian stock market, then you have had a pretty good last three-four months. All dips, and there haven't been many, are being bought and new 52 week highs seem to be pretty much the story of, well, everyday. As someone who is an alumnus of Class of 2008 of Stock Market University, I certainly do appreciate times like these. IPOs getting way oversubscribed, newbies giving advice about trading, pundits looking way into the future. These are magical times. I for one, am certainly not complaining. Normally this means conflicting times for the value/growth investor and technical/momentum investor in me. But not this time. Let's have a look at the NIFTY chart. 



You can see the new highs I talked about. But the MACD indicator is telling a different story as far as the last few weeks is concerned. New highs in the index are being accompanied by lower highs on MACD. Its a pretty decent negative divergence that we see developing. This could mean two things, (a) price consolidation (b) time consolidation. When would this happen? While a couple of years I would have tried to time exactly when this would happen, and you could find plenty of such posts in this blog, now, I don't care about exactly when it would happen. All I am interested in is the probability of it happening, and with each new high, the probability of either of the above two scenarios occurring increases.

What am I doing about it? Well, as a long term believer in India's growth story who has a dream of attaining financial independence, I don't have a choice but to be a long term investor in the equity markets. Most of my net worth is in it. But July was the first month in many years, that I have taken money out from the markets on a net basis. Times like this are a great opportunity for removing the weeds from your portfolio and that's exactly what I am doing. I am not too concerned about the index, if anything, I am enjoying the ride, but I am finding it harder and harder to allocate new money in the markets. So I am not going to force it. Taking some existing money off the table and holding on to the new money till the valuations reach a reasonable level is my strategy for the time being. If the markets continue going up, I am going to enjoy the ride. If the market correct from here, I am going to be ready to try and use the opportunity.

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Tuesday, July 12, 2016

The Poverty of the Rich


I am a firm believer of the fact that our entire moral compass is a function of the times, and thus be extension, the society that we live in. Continuing on the same lines, so many of our thoughts, ideas, dogmas, beliefs are just so ingrained in us, ever since our childhood, that we spend our lifetimes without even, forget questioning them but even thinking about them. I read something today morning that made me not only question a very simple concept, but also see it in a whole new light. The concept of poverty.

What is your definition of poverty dear readers? I will first share mine. Not having enough. Having very little. Struggling to make ends meet. Just few of the phrases that would come to my mind if you were to ask me to try and define poverty. And I am willing to bet that most, if not all, of you readers would have also come up with similar answers.

As the regular readers of this blog know, we have been visiting the works of Seneca in the recent months and trying to gain some financial wisdom. And it was while revisiting his works that I found myself changing my mindset about poverty. Seneca quotes Epicurus and states 

"Contended poverty is an honorable estate. Indeed, if it be contented, it is not poverty at all. It is not the man who has too little, but the man who craves more, that is poor."

I was so impressed by these lines, I found myself reading them again a couple of times. I would suggest you readers to also do the same. Being from a developing country, you come across poverty everyday and by no means, do I want to undermine their condition. But what these lines did was made me expand my definition of poverty. Hence, the title of the post. The Poverty of the Rich.

More on Seneca as applied to finance:

Tuesday, July 5, 2016

Indian stock market - Just some observations

This is what I have been observing about the markets in the past few days......

(1) Articles forecasting stuff like NIFTY i.e. the primary Indian stock market index will go to 13,000 in 2 years. For the uninformed it is at less than 8500 currently.

(2) Every IPO is getting way oversubscribed by retail investors. It is already being said that this could be the best year for IPOs since 2011.

(3) On various forums, people are starting posts talking about quitting their jobs and shifting to equity investing/trading as a full time career.

(4) Colleagues at work, who have always thought that equity markets are risky, are discussing stocks with each other. No, they are not asking about investing, just about how to trade stocks and how to invest in IPOs.

Not making any conclusions, just stating some facts. All the above observations and links are from this week only. Are you readers seeing anything similar in your equity markets?

Take care and good luck!

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Sunday, June 26, 2016

A matter of perspective

Brexit. Greenspan says this is the worst period since he has been in public service. They say it's the worst step backward for Europe since World War 2. And it has far reaching security implications. The pound reached its lowest level since 1985. Take your pick of any of these news items. Either way, its big. Very big. Exactly how big, perhaps we will realize only decades later. The markets reacted the only way they know how to react to news like this. Let's have a look at the S&P and NIFTY (Indian stock index charts) now.




As you can see it was a disastrous day and the markets made their lowest lows since.....(drumroll)......May 2016!! Wait a minute!! That's it?? An event of earth shattering proportions and we have reached where we were last month! Talk about an anticlimax. So, let's just sit back and analyze. The trouble with days like Friday is that everything seems to unfold very quickly. At times like this, it helps to take a deep breath and look at the bigger picture, even if the bigger picture is just a three month daily chart.

The markets, with all the poll predictions, had got complacent about Brexit and what caught on the wrong foot when it actually happened. Hence, Friday happened. While it would take us at least a few years to analyze the true impact and implications of Brexit, the market's reaction from Friday, from the above charts, it doesn't look that bad at all. The S&P is stuck in a trading range for the past three months. Not surprising, if you consider the fact that it is still 10% since February. Brexit or no Brexit, consolidation has to happen after a move like that. And still over MA(200). No damage done so far. If anything, the Indian market chart only looks better than S&P.

All of the above makes Monday an important day in my opinion. A dull boring day would mean that the markets are quite pleased with how they have assessed the risk on Friday. Another day like Friday would mean that markets are still unsure of the impact of Brexit and are still trying to learn how to price it in. Either way, the next 2-3 days are going to be exciting!!

In case you are interested, here is my take on long term implications of Brexit.

Take care and good luck!

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Saturday, June 25, 2016

Tata Motors - Post Brexit Chart Review

Tata Motors' purchase of Jaguar Land Rover in 2008 means that it had pretty much been the proxy for the fortunes of Brexit vote in the Indian stock exchange in the past one week. The fate of the Brexit vote had pretty much been decided when the Indian markets opened on Friday. That meant that pretty much all bets were off on how much the stock would fall when the Indian markets opened. I, for one, pretty much expected all technical analysis to be thrown out of the window with there being panic in the air and blood on the streets. Let's have a look at what the stock did on Friday.



This is simply amazing dear readers! The stock bounced exactly off its strong support level at the 420 level! There have been reports of the company suffering losses of 1 billion pounds in case of Brexit. With all the panic around, there was a serious danger of the baby being thrown out along with the bathwater. In fact, I was expecting nothing less! Still, the stock manages to respect good ol' technical analysis and respect its support level. Makes a move up only to be stopped at EMA(20).

There is something to be said about keeping your cool on days like this and coming out the winning side. And as far as technical analysis is concerned, just one word needs to be said. Respect.

BTW, you can trade Tata Motors even on the US stock exchange. It goes by the symbol TTM.

Here is a post on my views on larger implications on the rise of Trump and Brexit.

Take care and good luck!

Friday, June 24, 2016

On Trump and Brexit


Surely you have read enough on the matter, but I couldn’t help but get my two cents in. While as traders and investors, we can get overly engrossed in the percentage decline in the markets and currencies, the historic Brexit referendum also provides us with an opportunity to step back, take a breather and appreciate the larger picture at play here. We were witness to history being made last night. And I am not talking just about the EU. For the last few years, EU falling apart has pretty much been a question of when, rather than if.

I am talking about the much larger picture here. I truly believe that despite all the challenges we face, right now is the best time to be alive in the history of mankind. I also sincerely believe that it just gets better from here. This belief mostly stems from my faith in man’s ingenuity and spirit of innovation. Our best is yet to come.

But make no mistake, change is coming. It’s already upon us. Numerous studies are predicting that by the year 2030, 50-60% jobs, as we know it, will cease to exist. Just Google it. I shudder to imagine the social upheaval this will cause. Let’s say the studies are off a bit. It’s not 2030 but 2035. It’s not 50-60% jobs, but 40%. That’s still a massive social revolution upon us. And we can already see the first signs of it around us. A growing part of the population is not participating in the wonderful progress that we are making; rather they are hurting because of it. Think automation and jobs. What are we doing to get people ready for this change that is soon coming? In my opinion, nothing. And that’s the part that worries me. It’s not the change, but our level of preparedness, or rather the lack of it, for this certain change.

Now see the rise of Trump and Brexit in this context. These are not isolated chapters in human history. It’s the forgotten man’s chance to raise his voice and make his presence felt. He has been feeling neglected and left behind for far too long. By the way, please don’t misunderstand me. I am an ardent fan of capitalism and believe it to be mostly responsible for the advances that we have made as a society.

And yes, I still believe our best is yet to come. But we are surely in for some interesting times ahead.

Wednesday, June 8, 2016

How much money is enough?


Imagine you are running a race. A marathon, if you like.  It’s a multi-day marathon. You get a couple of hours to prepare everyday and then you start running. Running as hard as you can. And then you take a breather for the night. Only to start all over again the next day. I got to admit here that I have lied here a little dear readers. It’s not a multi-day marathon. It could last years. Actually, it WILL last years. It could quite possibly last your lifetime. Actually, it’s quite possible that you don’t know where the finish line is. You just got to keep running as hard as you can. I know what you are thinking…..this is f***ing crazy right? Who in their right mind would willingly do this? Well, this is you dear readers. This is me. And we do it every single day of our lives.

The title should have given it away. This is us in our endless pursuit of money. Our endless tireless pursuit of money. Maybe it’s not money per se. Call it quality of life or standard of living or keeping up with the Jones, if you will. But make no mistake about it. It all comes down to money. How much time do you spend in your pursuit of money everyday? Probably stuck in a job you would quit today if you only could (As a side note, if you have a job that you love, I just hope you appreciate how lucky you are!). And in calculating this time, don’t forget to add the time that you spend in commute to and from work. Also, add the time you spend at home preparing for work. This is all time that you could be spending with your family and/or spent doing something you love. Now, make no mistake dear readers, I have nothing against money. In fact, if anything, I love money. Heck, this is a financial blog for crying out loud! Let me tell you what I DO have a problem with.

I have a problem in running a race without knowing where the finish line is. Without knowing where the finish line is, the race looks something like this.




So, if you don’t draw the finish line, life will draw it for you. Pretty simple, isn’t it?

Hence, the question. How much money is enough? The problem is that this is a highly subjective question. A man who has a lot of money and poor health, will gladly exchange all his wealth for health and a man who has no money and good health, will gladly exchange his health for wealth. Hence, you can’t have one-size fits all approach. But luckily, this is also the easy part. Just grab a retirement calculator and see where it takes you.

The problem is that the question is also a philosophical one and not just a quantitative one. How much money is enough? But luckily, we have our in house resident philosopher, Seneca (4 BC - AD 65), whom we have been studying in this blog for the past few weeks, to help us answer this question. Luckily for us dear readers, Mr. Seneca did ponder over this conundrum and this is what he has for an answer.

"Do you ask what is the proper limit to wealth? It is, first, to have what is necessary, and, second, to have what is enough."

Now, this answer just blew me away. The beauty of this statement lies in its simplicity. Read it again dear readers. It’s delightfully simple yet utterly profound!! William of Ockham would be proud of it.

Now, you may very well ask, if the answer is so simple, then why don’t more people practice it. I asked myself this question too and found that the answer to this also lies in that line itself. Let’s have a look at it again.

      
The first extreme or the bare minimum is “what is necessary”. The way I see it, this part consists of our basic physical needs, for example food, shelter, clothing etc. Of course, the definition of necessity will itself be subjective, but since this is the starting point, let’s take this to be the bare minimum. Coming from a country where majority of the population still struggles to live above the poverty line, you get a pretty good appreciation of what bare minimum is. But I am not going to argue with someone who says that a decent internet connection is also a basic necessity as I certainly agree with him! But the point I am trying to make here is that the “what is necessary” part is mainly determined by our physical needs and is generally pretty common to all.

Let’s go to the other extreme now – “what is enough”. In contrast to the previous extreme, which depended on the physical needs, this one is purely mental in nature i.e. it totally depends on one’s state of mind. And that’s what makes it so difficult to implement!! Fulfilling the basic physical needs is the easy part, but putting a limit to what all we think we need is difficult indeed!

The end point being a mental one is hard to quantify. And that’s what makes winning this race so difficult. But the moment you quantify this goal and mark the finish line, you will notice a change in your attitude towards money and you will begin treating money as what it really is – as means to an end rather than as the end itself.

Also in this series:


Take care and good luck! 


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