hot money investing

What do you do when market keeps running up but you don't have valuation comfort for investment?

What is valuation comfort?
Without going into fundamental details, put it simply when you have to pay Rs 100 to buy something that was available for Rs 40-70 just few days back, you feel lack of valuation comfort since the cost of acquisition of the same asset has become way more expensive than what it was just few days back.

Why consider investing without valuation comfort?
Without going into technical details, in another few days you might have to pay Rs 120-130 if you decide to purchase the same asset that you can buy today for Rs 100.

Why consider "not" investing without valuation comfort?
Because something that is expensive has low or negative margin of safety and if the macro factors driving the run up changes, it can lead to huge capital loss

Trade-off's
You don't invest and miss the capital gain while others who invested get richer by the day
VS
You invest and take the risk of a huge capital loss and become poorer compared to those who didn't invest

When there are trade-offs the best path is the middle path
The middle path here is hot money investing and yes this is a great time and setup to practice hot money investing. One of the most exciting and thrilling phases for proactive money managers. The idea is to use fairly large chunk of money for capturing large profits from volatile stock price movements but keeping the money in the trade for a really short time to minimize the risk and repeating this multiple times in different trades to capture maximum number of opportunities.

What is hot money investing?
Hot money refers to money with high velocity that rotates in and out at high speed. To understand how hot money can be used to profit we need to understand what kind of market is suitable for hot money trading. Put it simply a highly volatile market with overreaction both on the up and down side is the kind of market we are looking at. Usually such markets happen after a stable trend run has completed and the market is trying to decide the future direction whether to reverse or continue in the direction of the previous trend. So usually things run up fast and come down fast and they overshoot in either direction and they keep repeating this cycle again and again. Huge money can be made by either trying to position yourself aligned to the run and ride the wave or by contra-positioning yourself once the overshoot happens. The gains are amplified due to overshooting of prices which happens due to high velocity. In either case a trader would typically make these bets with a large chunk of money w.r.t a normal trade and move in and out pretty fast with 10-30% movement in the stock price within few days or even intraday. Sounds exciting?

Strategy & Risk management
Off-course hot money investing is high risk but also comes with a great reward. Typically a good trader would make profits equal to his annual profits in just a couple of months doubling up on his profits for the year. But our goal is to make this strategy "low risk high gain" from "high risk high gain". How to do that? Few tips given below:

• Allocate a fixed capital for hot money trading and stay within those limits
• Low capital (say 1% - 10% max of your portfolio size) reduces the risk 
• To gain high rewards using low capital you need to focus on two things number of iterations of hot money trades and capturing maximum part of the stock price spikes in either direction 
• Fix maximum time for a trade and follow the discipline to exit the trade with profit or loss within that time (this could be intraday, to few days at max). If the trade doesn't work then just exit and look for other opportunities. This will help you to maximize the number of iterations and also reduce the time risk
• Look for opportunities that can lead to price volatility as well as overshooting. In a volatile market stock price reactions to news based triggers are fairly predictable, frequent and amplified .. things like results, bonus, sales numbers, management interviews, corporate restructuring, mergers & acquisitions, credit rating, policy actions, commodity prices, IPO, fund raising, business deals, anything that will create news. 
• Position yourself before the price movement and wait for it to play out by using easy forecasting techniques. This will help you capture maximum part of the stock price movement. Typically after the news is out 50-70% of the stock price movement will happen within seconds leaving little to trade with. However in such cases you can look for overshooting of prices and contra-position yourself. 
• Don't fall in love with your trades, have targets and exit once your targets are met or if the price turns adverse to your trade. 

Why do all this?
Well like I said, if you perfect the art, you can make a year worth of gains in just couple of months. Besides you will have extra something independent of the impact of the larger trend on your stable portfolio that can act as a buffer or moral booster to ride out short term adverse impact on your larger portfolio. This gives you an edge over others who might panic due to lack of buffer, plan B, hedging and large exposure to a single market direction. If you are doing good on both this can be treated just as a double income that can be splurged on anything you like but are holding off due to the expense involved. For me it's pure fun & thrill :)

Note
Not an easy thing at all, will take lot of practice and experience. Typically for a person trying it on his own, his hot money capital will get wiped out for the first few times. Once you get a hang of it, it is a smooth ride .. pretty easy and off-course .. very hot !

market poker

Sometimes your biggest victory turns into your biggest defeat and these are the one's you need to be really careful about. The best example comes from the game of poker. In poker you win a hand based on the combination of cards you have like a pair, or 2 pairs, or 3 of a kind or 4 of a kind. One of  the top winning combination is called straight flush where you have 5 cards in a sequence like 5-6-7-8-9. What are the chances of getting that? Extremely rare and hence "if" you get it, you must play it with all you have as the chances of you winning the hand is extremely high by virtue of it being extremely rare .. except ... if one of the other guys has a straight flush with a higher sequence like 10-J-Q-K-A ... now what are the chances of that happening ? ... EXTREMELY RARE.. and yet "if" it happens, you loose big time exactly when you had one of the best chances of winning the game. Your luckiest chance becomes your biggest curse, just like that.

This is exactly what happened to me with Brexit. I was following up on Brexit from much before anyone had even heard of that term. Two weeks before the poll, market was full of buzz that Brexit won't win and the market will run up on that. Market had already started pricing it in by running up ahead of the event. Betting market was in favor of Brexit not passing, stock market was running up in anticipation of the same. Top politicians, businessmen, celebrities made very public anti-Brexit speeches. However I was on the other side. My gut feeling was Brexit has a good chance of happening because I had a pulse on the deteriorating economic condition, anti-migrant uprising, and general anti-establishment feeling rising generally in the European countries and the risk was too high for me. A possibility of full blown EU disintegration crisis. So I positioned myself by converting a good chunk of my equity investments into cash.

How I got royally flushed?
And I got my straight flush ! Brexit wins. I got it right when the biggest, wisest, and the strongest got it wrong ! My moment of fame and glory !!! Unfortunately that lasted only for a moment.

In just two days market recovered and then zoomed past the pre-brexit highs. FUCK ! I sat through it in denial. Brexit is a catastrophic event. Market has to crash, but markets started breaking into new highs. FUCK !  In my defense, this was not a move based on fundamentals. It was thanks to the money printing policy adopted by central banks around the world. US decided not to rate hike, BOE was expected to cut rate and ECB to pump $250 billion into the markets to handle Brexit shock. And that was the royal flush thrown at me by the markets. FUCK ! FUCK ! FUCK !!!

What is money printing policy?
A new age policy to solve every problem by printing free money. Poor economic conditions .. print money, political uprising .. print money, bomb blast ... print money, civil unrest .. print money, corruption scandal .. print money. Print money .. keep the stock market high, keep the public happy.

A wise game of poker 
Then I got invited for poker at a friend's place. I played .. I lost but I realized that it was not my fault .. it was a royal flush. The problem is not that the markets ran up post Brexit, the problem is not that I did not see that coming, the problem is just that I was refusing to accept it ! problem solved !! no more fuck. Now I am deploying the extra cash back to work. My stock picking skills are still as good and my head much clearer. So I am back to doing what I do best .. making money in stock markets ! Thanks to my poker group :)

Market Notes 18-July-2016

• Good results from RIL .. jio launch date not confirmed .. but speculation is it will be launched on Aug'15
• Navi Mumbai airport approval makes Jai corp/RIL very attractive
• France suffers third major terror attack when a truck rams into a crowd celebrating bastille day .. to affect tourism stocks like Thomas cook down 5% in london markets .. so bad for all related stocks ..Cox & Kings .. hotel, travel, tourism, etc especially based out of EU
• Quess Corp a subsidiary of Thomas Cook had a bumper listing at 55% premium giving multi-fold returns to Thomas Cook
• Turkey coup to take over from Erdogan fails as he takes back control within 24 hours .. but relationship with US strains over deportation of Gulen .. conspiracy theory suggests there could be US hand behind the coup. The strained relationship between US & Turkey could impact strategically located US military base in Turkey with direct reach to Iraq, Syria, & Iran
• Banks, lenders and other international business centers will see lower confidence in turkey after this coup but Turkish Central Bank Pledges "Unlimited Liquidity" .. this is second such incident after Britain lost confidence due to Brexit
• This coup might impact turkish EU membership which is due soon .. 
• Overall this will cause further strain in EU markets which is still recovering from Brexit shock and preparing for political shocks from many other countries .. but monday could have been lot worse for the world markets if the Turkey situation had not stabilized .. so this is once again a narrow escape for the bulls
• Theresa May who took over as Britain PM supports Brexit and is negotiating other terms related to trade and is expecting to kickoff Brexit in 2018
• BOE unexpectedly didn't reduce rates this time but is expected to do so in the next meeting which is a future positive and will support FTSE on the downside 
• Deutsche bank asking for heavy recapitalization and is a nuke that everyone is trying to stop from going off .. but has been so for several years now .. DB stocks are hitting new lows though
• All EU banks and property stocks are under huge strain as of now 
• Italy is most likely the next country from where some surprises could pop up political or banking .. 
• 28pages released again points to misguided war by NATO on Iraq and points finger to S Arabia .. this is a source of tension between US & Saudi Arabia ..but surprisingly uneventful and silent on this side ... might impact SA bond sale & aramco ipo
• Civil unrest in US growing with two incidents of shooting at white cops by Black lives matter extremists leading to several casualties .. ISIS has asked the black community people to join their anti-US/anti-establishment propaganda. This is a developing situation but not much impact at present .. maybe will impact elections but is the first credible threat coming from inside US
• Hillary seems to be leading over trump in the latest polls .. which might be good for mkts as it will be continuation of Obama "keep the mkts high" policy
• For some unknown reason Deccan Gold hits 20% ckt on Friday .. has been positive biased since the passage of mines & minerals act and strength in gold commodity prices .. ckt filter revised to 10% by BSE
• Inflation in India is on the higher side which reduces the chances of rate cut in the upcoming RBI meeting
• New RBI governor to be announced soon which will cheer the Indian mkts
• Monsoon is largely ok in India this year and has covered most of the drought prone areas .. caused flooding in MP, Uttarakhand, etc .. this will aid the rural sector growth
• Milk prices are on the upside .. will help backward integrated players .. kwality? has recently received 520 Cr funding from KKR
• Hinduja Ventures has both positives and negatives the group could face some strains because it is london based but on the positive side is expected to launch Nxt Digital next month 
• Piramal step closer to demerger through internal restructuring of business ..
• L&T infotech IPO though fully subscribed is a flop due to fall in grey mkt as premium turns negative, this will impact L&T technology IPO and in effect L&T 
• Jairam Ramesh makes strong statement opposing GST passage again throwing cold water on this major reform
• P Chidambaram to be inducted into the parliament in the monsoon session and expect major disruption since he is also against current GST, however BJP now has the numbers to pass GST even if congress does not support it. Still it remains to be seen how the parliament session progresses
• Govt mulls stake sale in NBCC through OFS and also in SUUTI components include Axis, ITC, L&T .. more OFS could also be planned which will keep pressure on PSU's. PSU banks are positive as they might soon be recapitalized (short term positive). 
• Bond yields around the world are flattening down and stock markets are at record highs which has everyone confused .. new normal?

the worst is yet to come

"There's a storm coming, Mr. Wayne. You and your friends better batten down the hatches, because when it hits...you're all gonna wonder how you ever thought you could live so large... and leave so little for the rest of us."

my posts recently are becoming increasingly political but that is just because the markets are also being driven more by political factors instead of commerce & economics. Civil disobedience, anarchy and uprising of the common man is the global trend that is rapidly sweeping across the world. Let's take a look at the ultra macro picture ...

Why?
As Max Keiser beautifully explains it ... the evil central bankers print billions and trillions of dollars and give it to the evil retail banks by re-purchasing their toxic assets accumulated from previous crimes, who in turn lend it to the richest 1% population for free (ZIRP zero interest rate policy). This free money is not for the common man since they don't meet the credit score requirements that are designed to favor only the top 1%. The top 1% are supposed to use this money to create industry, jobs and commerce that will provide employment for the common man but instead they use the free money to invest it in speculative assets like property, derivatives and equity which in turn benefits whom? yes you guessed it right .. the top 1% again. It makes them richer because only the richest can invest in property in London, San Francisco, and Sydney and exotic derivatives cooked up by Goldman Sachs, JP Morgan, Deutsche Banks of the world. This leads to higher unemployment (money meant for employment generation actually went in property & equity speculation by the top 1%), more and more income inequality, rich & poor divide. However this is not the worst part. The worst is yet to come.

The slavery of the common man
We discussed how the rich gets richer in the previous para. That should not really matter the common man because they are used to living a common life. But here is what happens, because the rich get money for free and invest in property, the property rates go up making the rich richer but at the same time making it completely un-affordable for the common man. A roof over the head is a basic need even for the common man so he has to work, work hard, work multiple jobs, work multiple shifts, save every penny so that he can buy a house at prices set by the speculative activity of the richest 1%. No amount of earning is enough and no amount of saving is enough because the divide between the rich and the poor is like the distance between the moon and earth. So the common man takes a debt to fulfill his dream and then spends the rest of his life re-paying the debt by working, working hard, working multiple jobs and working multiple shifts, grows old and dies in debt trying to repay it.  Also because the common man is doing multiple jobs and earning salary, he has to pay taxes whereas the richest 1% have free debt on their books and hence not liable to pay any taxes. So the common man spends his life working like a slave, paying taxes and repaying debt whereas the richest just chill out and get richer. However this is not the worst part. The worst is yet to come.

The rotting social structure
The lifelong struggle of the common man and his increasing impoverishment, constant struggle, unemployment, and failures eventually catches up with him. The common man desires to be among the top 1% but the distance he has to cover to reach there is so long and the system in which he has to take this journey is complete rigged against him. This frustrates him, defeats his goodness. He finally understands that he is fighting a battle that is designed to make him loose, designed by the richest 1%, by the evil bankers, the politicians, the establishment. It never was a fair  battle. The game is rigged. However this is not the worst part. The worst is yet to come.

Uprising and civil disobedience
David Cameron told them not to vote in favor of brexit, Obama warned them not to vote in favor of brexit, Merkel told them that EU will alienate them if they vote for brexit, evil bankers told them brexit will have dire consequences on their day to day life, media told them UK will go into recession if brexit wins, but what did the common man do?  They went out and voted in favor of brexit. This vote was not about staying in or leaving EU. It was an anti-establishment vote. They will do exactly opposite of what they are being asked to do, no matter what the consequence. In a poetic justice what happens post brexit? property prices get impacted, property funds crash and freeze, evil bank stocks crash, property stocks crash. Basically the top 1% got slapped in their face and now you know who had to loose if brexit won, it was not the common man, their common life goes on ... it is the top 1% that got hit due to brexit .. and they got hit hard.

More and more people are coming out on the streets and displaying their anger more and more aggressively. Look at what is happening in Greece, Italy, look how Trump is now a republican presidential candidate in America, look at the rise of bitcoin and other block chain technology based currency a clear trend signalling lack of faith in paper currency printed by the central banks. Imagine if people don't believe in the government backed currency of their countries then what is left? No, it is not about black vs white, republicans vs democrats, young vs old, educated vs uneducated, male vs female vs transgender, gay vs straight, religious vs atheist, one religion vs another, law abiding citizens vs terrorists, as the government funded media would want you to believe. Put it simply it is the richest 1% vs the remaining 99% of the world. However this is not the worst part. The worst is yet to come.

Anarchy and war
The 99% are brainwashed by the government funded media that the reason for his poor and miserable life is because of black vs white, republicans vs democrats, young vs old, educated vs uneducated, male vs female vs transgender, gay vs straight, religious vs atheist, one religion vs another, law abiding citizens vs terrorists and this 99% of the world population is getting frustrated. They are confused, angry, really angry and this is coming out in random acts of violence, terrorism in the name of religion, gender, color, political beliefs leading to exponentially increasing  incidents of shootouts, suicide bombings, destruction, wars and more terrorism. None of this would thrive in a world of prosperity and equality but the top 1% are full of greed and they want more wealth and more power to retain that wealth and guard against the remaining 99%. They understand it is good to be in the top 1% of the richest list but not good if you are standing up against a mob of angry, confused 99% in a world of anarchy, so it is better to keep this 99% busy fighting among themselves leading to increasing lawlessness and militarization of law and order to enforce the law.
But beware the top 1% of the world .. anarchy is coming .. a war is brewing not at the borders far away .. it is brewing right in the middle of where you live .. and this is not even the worst part. The worst is yet to come ...

So what does all this mean for the stock markets?
In the stock markets the larger trend is no longer bullish or bearish .. it is volatility, it is that of uprising, anarchy and war .. as politics and economics fuse together in a dangerous mix .. the worst is yet to come, but it is coming soon .. be ready ..