Being Tortoisish

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When I update that we must be very careful and we must buy into the market very small quantities and very slowly, people often come to me in just a day or two and ask .. it's done right? Good time to buy now? and I am like duuuhhh ... what did I just tell you like a hundred times?
I guess it is difficult both to explain and to practice. Like many wise men say that the toughest thing to do in the market is to do nothing. Market is such a happening place that people always want to do something before time runs out or opportunity gets lost. Everything is treated like now or never. The concept and value of doing nothing is just ignored or lost by many in the day to day market frenzy.

Being Tortoisish
This is where I thought I will make a formal strategy out of it to explain this most valuable concept of doing nothing or doing something very slow in the market for time like the current one.
Forget bulls and bears, it's time to be like a tortoise in the market. Bulls are characterized by someone who can cause a rampage just run ahead over everything. Bears are characterized by someone who can maul and throw down anything of any size. Tortoise is characterized by someone who can ... well do nothing. It just stays there for a hundred years.

A tortoise is hard shelled. It is well protected inside it's shell no matter what ever is happening in the outside world. It is slow and steady, not rampaging, not mauling, doing nothing. It probably likes to munch on a few things and just keeps moving slowly towards it. It pursues endlessly what it wants but is never in a hurry to get it and always takes little not everything. Wow a flower ! one day I will reach it and enjoy a few petals from it. It gets it when it gets it. Once it gets it, it enjoys a bit of it and then goes back in it's shell, happy and satisfied.

Buy slowly, small quantities and be very careful
In a market like it is now, you don't need to hurry about anything. First you need to be hard shelled. You need to have enough emergency financial resources that will last long and will fully cover all you need. Then you just need to focus on few opportunities that are very important to you and you need to pursue them slowly and endlessly and you need to do it in very small amounts and be happy and satisfied with very small things. No heroic or mega bets required in this market. Once you had your nibble just go back to your shell and relax. You should be so slow and so small that you can last a hundred years like this ! like the tortoise ! Not saying that the current market situation will last hundred years but you should have the feeling that you can get by even if it does last that long so that you don't have anything to worry about even in the worst of the worst case scenario. Infact you would be slowly and steadily benefiting from it no matter how worse it gets. Simple .. got it?

Enjoy a slow life for sometime
Now don't ask me again if this has started or if that is over and if this is the right time for this or that .. just enjoy a slow and easy life .. it's much more cool thing to do once you get a hang of it .. believe me ! Rest assured if it is time to be a bull again, I will be the first one to let you know .. that is if I am not sleeping in my shell at that time :)

Gandhiji's three stock market monkeys

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There are three possible financial position you can be in while playing the investment game. Partially invested, fully invested, and leveraged. Partially invested means you have some cash and some investments. Fully invested means you have deployed all your cash into investment instruments and have no more cash left on hand. Leveraged means you have fully invested all your cash and you have borrowed additional money for investments. There is another type with zero investments and full cash. We ignore these people because they are not impacted in any way by the market. Now let's look at what will happen for these three type of investors in different market situations.

Bull market
Maximum gains will be made by the leveraged investors, followed by fully invested, followed by partially invested. Leveraged investors are on an accelerated & dangerous path to riches, fully invested people are on a fast and risky path to riches and partially invested people are on a slow and steady path to riches.  But all will gain so no problem here, all good.

Bear market
Partially invested people are in a sweet spot. They won't loose much and at the same time they have cash to take advantage of the market fall. Usually the strategy should be to never run out of cash and to deploy it slowly into the market when the market is in the grip of fear and panic and is offering great bargain hunting opportunities. Off-course this will lead to depletion of cash reserves which should be replenished once the market recovers so that it can be used for the next cycle.
Fully invested people are in a tight spot. They will be suffering huge mark to market losses on their investments and won't be able to take advantage of the market fall also because they have no investment cash reserve for rainy days. In the worst scenario they can loose all their investment value and be left with a near-zero networth. This is still not as bad as the third category.
Leveraged people will be suffering losses multiplied by the times they leveraged themselves. They run the risk of not only losing their entire networth, but on top of that owing money to others that they will have to pay back or face extremely severe consequences. Market mechanics are designed such that during bad times you have to payback immediately and during good times you can keep on adding more leverage. A dangerous and poisonous cocktail guaranteed to kill you if overdosed. This is the dangerous part. Extreme cases will suffer bankruptcy, harassment, legal trouble, depression to start with and things could get much worse.

for partially invested people
You are in a fine spot. Just keep calm and play the market fall wisely and you will come out of this phase much stronger. "Wisely" is the most important word here. Make sure you retain the edge you have. If you are inexperienced in dealing with bear markets, don't do it on your own. Seek expert guidance.

for fully invested people
Try to lighten up if possible. If not, you have to take a break from the market and focus on new earnings and build up your cash reserve again. Out of cash is out of game. You will have to take a slow and patient path to recovery.

for leveraged investors
Seek help. Act quickly. Close all leveraged positions, book your losses, try to minimize it as much as possible. If you need, seek help from near and dear one's, else you will be in so much trouble that there will be no path to recovery left. You need to act urgently and be prepared for a really long and painful path to recovery.

Don't pounce on dead cat bounce

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As the stock market reverses trend from positive to negative, let's look at one of the biggest trap during the bear cycle in the market.

trend reversals
After long and continuous bull phase markets become overbought, expensive and enter a bubble phase and for one reason or another has to correct to get rid of the excesses. After all underlying business does not grow on a daily basis but the market can run up daily leading to divergence between fundamentals and market value. So once the market reaches the tipping point it reverses trend and starts falling instead of rising.

dead cat bounce
As markets fall sharply they pause in between and give minor bounce backs periodically just like they correct periodically with minor falls during a sharp rise. This is known as dead cat bounce. It means market is like a falling dead cat that bounces after hitting the ground but is nonetheless still dead. When first wave of sell-off is over market bounces a bit as it hits technical support levels and then resumes it's fall again. Instead of falling straight from top to bottom, it is more like a dead cat falling through the stairs and bouncing everytime it hits the floor of the stairs at each step. So whenever there is a trend reversal followed by a sharp fall, expect a series of similar pattern to occur post the major event.

the bounce trap
Novice investors look at this bounce and think that the fall in the stock market is over and now it will start rising again like it was doing before the fall started. So they pounce on the first bounce back thinking that they are getting the stocks much cheaper compared to the recent highs. What actually happens is that the bears are just taking a break and the technical bulls are just trying to play for small gains from a bounce at the support levels. This bounce sucks in many new and inexperienced investors, as bulls and bears play their game in the market. The bounce back actually gives a slightly better price for the bears to start the next wave of shorting. Simply put the bounce back gives the market more momentum for the next fall. This pattern continues till the market reaches the bottom of the stairs and gets so cheap that the battered fundamental bulls can buy huge volumes of stocks with very little investment i.e the stocks have become ridiculously cheap. One example in such cases could be stocks offering better dividend yields than fixed deposit interest rate. This helps the bulls make a fully charged comeback and reverse the trend from negative to positive again.
Also note that initially as the trend changes to negative many bulls get stuck and run out of cash. It takes some time for them to recover from shock & surprise and arrange for enough ammunition to fight back the selling pressure from the bears. So after a major event almost certainly you should not expect an immediate reversal within a few days. It takes some time. Any rally immediately after major falls is most likely a counter trend pull back that is not guaranteed to last. It will take multiple waves of similar events and enough consolidation time for the larger trend to reverse again.

lessons from the bouncy cat
The main goal of the article is to help you understand the risks and the pitfalls that lie in the small counter-trend rallies within a major trend. You should be skilled enough to recognize these and not get sucked in by it. Let the dead cat fall, bounce, fly, do whatever it likes, don't pounce on it, just focus on the larger trend & fundamentals.

how to invest in gold

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This blog does not recommend using any of the investment techniques or specific stocks mentioned. The goal is just to explore different options through examples.

Physical Gold 
Go to reputed jewelry shops and buy gold bars, biscuits, coins or jewelry. This will come with lot of maintenance overhead but will make the women in your family happy besides providing the most guaranteed investment in gold. On the flip side there are risks of robbery and higher costs of acquisition as well as depreciated value while converting back to cash in the name of various charges added by the retailer.

Gold ETFs
You can buy reputed gold ETF's online. These are liquid instruments and easily tradeable but not guaranteed to be backed by physical gold. In extreme situations the ETF provider can default making it less guaranteed instrument than physical gold. However the risk lies in only very extreme situations

Gold Bonds
These are floated by the government and select financial institutions and banks and are certificates that you can purchase instead of buying physical gold. These are government backed and hence carry extra guarantee and safety. It can be still less guaranteed than physical gold in case of government defaults

Commodity Trading Accounts
Through commodity trading accounts you can take long positions in gold. In India you can do it through MCX. Note that commodity exchange is expected to guarantee your contracts with underlying physical asset. However these are not regulated very strictly and there are chances of default both from the counter party as well as the exchange.

Gold loan companies
These are companies that offer loan against gold pledged to them. Usually they build large reserves of gold holding in this business. While they do not benefit directly from the price of gold they do benefit indirectly from high value transactions and low defaults in case of rising gold prices. Also note that they do collect good amount of gold reserves from loan defaulters. Some companies in Indian stock exchange include Muthoot & Manappuram finance

Gold mining companies
Companies with gold mining lease who can benefit significantly from rise in gold rices as the value of their asset will increase proportionately. In India there is only one listed entity in this space i.e Deccan gold mines, however it is yet to start commercial production. Internationally you will find many more high quality companies. However make sure that they are gold focused and not heavily diversified else all the gains in gold assets will get drained in other non-precious mining assets that are in a severe bear phase at present.

Gold dealing companies
Trying to play with gold jewelers can be a risky bet since their situation will depend on how they manage their inventories and how transparent, ethical and shareholder friendly they are. Since rising gold prices will attract more retail buying, efficiently managed companies might benefit like Titan. However real benefit will come for companies who have complete backward and forward integration like Rajesh exports. There could be some underdogs like Shirpur Gold refinery but they are yet to prove themselves as serious and shareholder friendly business house.

Why Gold?
In the current situation paper assets like stocks, currencies, bonds, lack any fundamentals or are highly overvalued and are manipulated by central banks and governments. This asset class has already entered a highly volatile and high risk phase. There can be a steady outflow from these assets to assets with hard fundamentals like gold & silver. Due to turmoil in the world markets and commodity space there is a high chance that many currencies and bonds will be discarded as junk as the countries backing them face high default risks. With geopolitical tensions rising around the world there can be a major flight from high risk assets to safe heaven assets that includes gold. Along with geopolitical risks currently many countries face a very high probability of a civil war like situation internally. Gold is currently available at near production costs and there could be a cyclical uptrend in this precious metal commodity space. Many institutions might increase their gold exposure as a hedge to the rest of their portfolio. Weak economic recovery can lead to continued lower US fed rates and QE in many other countries however appetite for risky assets is decreasing steadily as traders have already started making huge losses due to high volatility. In such a situation any extra cash positions will be used for instruments like gold instead of any other high risk investments. I am hearing lot of noise on gold from lot of influential names. That is a good indication of something big coming up.

Overall at present gold makes sense and you can use a combination of above discussed alternatives to increase your holding in gold.

Is it urgent?
Nothing is ever urgent. Investment is a game for slow, steady and patient players only

stock market bubble

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How to identify stock market bubble
There are many signs that keep on repeating in every stock market bubble which can offer early warning signals to investors with high stakes. Let's look at a few here

String of successful IPOs
Lot's of IPO offers. Read lot of groups realizing that they can get premium valuation in the current market and hence lining up for listing on the exchanges. High premium earned easily means bubble. This becomes very evident as even low quality company IPO's gets oversubscribed at premium valuations and the lineup of IPO's starts increasing at an accelerated pace. This signifies that there is a hurry to raise money from the market before the opportunity goes away, since the next such opportunity will come back again only after a really long time.

small/midcaps preference over large caps
preference of small and midcap stocks over large caps signals shift of focus from safe & steady to quick & risky among investors. Just like IPO's this is fine upto some extent as long as high quality midcaps with good potential are running up, but when low quality mid & smallcaps and unheard names (penny & paper companies) start hitting upper circuits everyday you are definitely in a bubble phase

High Volatility
Significant run up on mildest of good news and complete crash on a hint of bad news points to the same money being rotated to capture as many opportunities as possible. This is also called hot money. High volatility indicates a higher percentage of hot money floating in the market instead of stable long term investments. Hot money is usually used for trading and is leveraged multifolds to amplify the effect. This kind of money will exit the market on the first sign of trouble at any available market price, leaving the stable investors high & dry specifically if invested at higher levels pumped by hot money.

Retail participation:
Retail is just a nice word for unwise or inexperienced people in stock markets. They do not take their own investment decisions but rely on tips and advise from others. Also they are hard to convince and slow to act because they have little knowledge about the working of the stock market and hence remain skeptical for most of the time. So when they finally decide to act, they are almost certainly the last one's to act which also means when the retail starts to act it signifies the beginning of the end of the current cycle. If they start to buy in big numbers, it marks the beginning of the end of the bull cycle and if they start to sell in big numbers, it marks the beginning of the end of the bear cycle. This is also because retail trades only on greed on the buy side and fear on the sell side. Interestingly high volatility attracts more retail participation because they like spectacular and fast moves. 20% in one day attracts retail attention but 2% for 10 trading sessions is boring for retail. This is also one of the reason why retail investors enter the stock market in the last phase of the bull run i.e when it gets more volatile, makes more news and attracts more attention.

Ignoring bad news & deteriorating macros 
Bad monsoon, lower job and wage growth, high interest rates, geopolitical tensions, terror attacks, business frauds, corporate governance issues and corruption, unstable political environment, growing NPA's in banking system, lot of corporate defaults, institutions/states/countries going bankrupt ... no problem stock market always goes up. When you feel that way, you know it's a bubble. In other words it is also called euphoria. Market always sees good even in bad news. Fed decided not to raise rates because of poor job growth is regarded as great news because that means cheaper credit to invest in risky assets but is actually bad news that the economic recovery is not happening inspite of all the efforts put in but market takes it as a good news.

Hectic market activity
Lot of analysts and stock gurus showing up everyday with new multibagger ideas daily, lot of investment blogs :) , lot of M&A and fund raising activities at insane valuations, lot of new startups, lot of media coverage, lot of demat & brokerage accounts getting opened, lot of talk of HNI's and investment agents, people claiming to have bought cars and house out of money earned from stock market and suggesting the same to others, lot of leveraging, loan taking and financial transactions. Basically very high money velocity in the market. Lower almost recessionary value for hard physical assets like gold, silver and real estate.

Insider selling
Lot of promoters selling or diluting their stake in the company they are running and raising money either through institutions or through open market. You might also see huge exits from large institutions or long term funds. However the entire selling gets absorbed by the market because of the retail euphoria who are ready to pick up stocks at any price.

Technicals
there are several ways to identify cycles using advanced technicals like elliot waves however for the layman the easiest way to identify bubble is to look at one year graph of many stocks and indices and check for exponential or spike patterns towards the later end in most of the graphs. This simple pattern is on the way up but if the trend has already reversed look for lower lows or look for sharp high volume falls followed by sluggish low volume recoveries. You can also look at technical ratios like stock and sector P/E. In the Indian context 15 and below is investment worthy and 30 and above is bubble formation.

Warnings from stock market veterans
Highly experienced and successful stock market veterans detect bubbles much earlier than retail & media and give out very soft warnings for two reasons, one they are in the process of positioning themselves for the coming bust and don't want to spread panic, second they know that they detect the bubble earlier so there is still some time for the market to run up during which things could change so no point in making hard predictions. So they give out very subtle warnings.

Remember everytime things are slightly different so stock market analysis should be done correlating or using a combination of multiple factors and keeping in mind the broader macros and current context along with future projections.

value and growth trap

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The value trap
One day you decided that you will find your own multibagger stock instead of taking tips from bloggers like this one :). You did your study on how to identify value investment based on earnings, stock P/E, sector P/E, peer comparison, dividend policy, quality management, quality products and several other parameters. Then you went through thousands of listed stock to identify the one that stands true on all these parameters and still offers great value. After lot of hard work and time finally you found "The One" great stock available at great bargain price. This is it ! this is going to be your discovery, your find, your gateway to success. You account for all the money you can invest and then pick up a huge stake in this gem discovered by you but hidden from the market. Now all you have to do is wait. Wait for the market to realize that they have missed this great gem all along until you discovered it, that it is grossly mis-priced and needs to be re-rated to much higher multiples than what it currently enjoys. After few weeks the stock is still trading in the same price range. Maybe it will take some time. Anyways you do your part of the deal by advocating the stock and its virtues on all possible message boards and stock forums hoping others will also join you in this great journey. After few months the stock is still trading in the same price range. Maybe it will take some more time. All you need to do is wait patiently, after all you are a "long term" value investor.  After few years the stock is still trading in the same price range. And now you have lost all your patience. How can this be? This was the perfect find. Nothing wrong with it and yet it refuses to reward you even after being so patient with it. In-fact it has destroyed your wealth. In so many years money would have doubled even in fixed deposit, and here it is still the same in this stock. What is happening?

My friend, you are a victim of value trap. Yes it is a rare case, but remember .. you went looking for it .. a rare discovery :) You went through thousands of stock to find that one stock that wouldn't grow in price inspite of great fundamentals and that is exactly what you got! Only difference is that now even you are stuck in it. 

S*** happens

Value trap is often seen in cases where company management is not dynamic. They are doing the same thing for years and fortunately have retained the same revenue, market share and profits for years. Whatever they earn, they pay it out as dividend and they lack a desire to grow the company beyond its current capacity and capabilities. They are happy and content with what they have. Consider a local grocery store. The owners of this store have setup a small shop selling groceries and they know that this shop is going to take good care of their family for their lifetime and they don't need to do anything more in life now. They just need to keep this shop running and are happy and content with it. Now think about similar listed businesses, these are your classic value trap stories. Once you get trapped in such investments the only thing you can do is wait endlessly or get out and relieve yourself from this stagnancy. If you keep thinking that it is underpriced and market will one day discover it, your wait is never going to be over. Market pays premium for possibilities and discounts what is well known. Everything about this business is known so the market will not show any interest in it. It is paying some dividend and has some known value so it will settle down at some price and will always be in the same range just like the business it is running. In-fact market is discounting the fact that  eventually one day this business will become obsolete and wind up since anything that is not growing is ultimately dead. You see, market is very wise and always thinks forward. If you are in the stock market, you are here for growth and not stability so you need to avoid such traps or atleast get out once you realize it. And that brings us to the second investing trap "the growth trap"

The growth trap

Unlike value trap, you don't need to go hunting for a growth trap. The growth trap hunts for you. Unlike value trap these are not undiscovered but over-discovered or marketed stocks through punters, promoters and manipulators. So what is a growth trap? Here you get a stock that is just flying away. The only way to grab it is to chase it. There are great things being talked about the stock everyday, there are great announcements being made, new orders, new ventures, new products, new markets, great results, great future projections, all good all around. You are completely convinced of the growth potential in this stock after reading so many news and articles about it and it's future plans. After waiting for some time for the stock price to correct to reasonable levels, you realize that the stock is just zooming away and there is no way you are going to get it at lower values. Enough, you finally decide to stop waiting and take the plunge at whatever price market offers it to you. This is a one way rocket stock and no point waiting for it to come back to the station, just jump on it. Congratulations you are now on-board the rocket. Now you are feeling relaxed, no more waiting on the side hearing from everyone how they have doubled, tripled their money in this counter and soon it is going to multiply several times more. Now you are also part of this winning group and you will let the rocket take you to new heights, so you close your eyes to rest a bit. After all it has been a tough journey to get on this rocket. When you open your eyes you realize that the rocket is nosediving .. faster than it went up. Much of your investments have already evaporated like jet fuel. Welcome to the growth trap and yes your investment was used to fuel the rocket in the final round before nosediving. All the great things about the stock suddenly disappeared. Suddenly the business environment is tough and it will take few years to recover. While you are still recovering with the shock trying to figure out what just happened, some days later you hear in the news how a big/marquee investor sold all his holding at the top and got out of this stock aka rocket. 

S*** happens!

Self explanatory :) Happy new year, don't fall into a trap .. say cheese !