One day to day one

The Thinking
When I was trading part time, after lot of study, practice and following other fellow expert traders I started getting some success in it. I used to trade small amounts since I was just exploring and experimenting. From making losses or random trades most of the time, I was able to successfully establish a model where I started making profit consistently. I was also slowly preparing to move into full time trading.
One of my calculations to quit my regular job and move into full time trading was as follows (please don't laugh)
Assume I can make X per month by trading using a capital of 1 Lakh. Then to match my current income I need to make n times X per month, for which I will need a trading capital of n times 1 Lakh.
Right ? .. Unfortunately wrong .. as you will see this has the potential of becoming a great blunder for me. I used to try bigger trades sometimes, it used to fail wiping out the accumulated profits of past 10-20 successful trades in one go. I did not get the right message out of it. I thought that the large trades are failing because I am not giving full attention to the trade because of my day job. If something can work on a trade of 1 Lakh, it should work just as easily for a trade of 10 Lakh or for that matter a trade of 1 Crore .. after all these are probably big amounts for us but at market scale these are nothing amount, practically zero amount. Now comes the second bad conclusion. I thought I will be able to make it work easily by just scaling it up once I start doing it full time. You see where I am heading.

The Beginning
So I quit my job, move to a new place, set it all up for a trading desk and start trading full time. I think by now you have a fair idea of what happens next. To warm up I start with few small trades. Make good profits and then I try a big one. This time watching it carefully and BOOM wipe out all the profits accumulated until now. Ok shit happens. Probably a matter of chance, bad luck, statistics. So I again do a series of small trade to regain confidence and build my profits back and then try a big one. BAAM .. all profits for the last 10-20 trades wiped out in one go. Now I start to worry a bit. Read a few things, watch few videos, try minor tuning in my trading strategy here and there. Then repeat. So probably a little better this time, but net result is same. My big trades were always failing me. My small trades always worked consistently. It puzzled me .. it frustrated me ..

The Options
Now this was getting serious. I had two options.
Option#1: I need to do lots and lot of small trades to match my (now) previous income which would have been painful
Option#2: Time to pack up and go back or look for something else.

This ordeal lasted for almost 2 months. It was getting frustrating. I was quiet sure that I have to have a strategy in place by the end of 2018. I was not going to waste another year in experimenting and exploring considering this was looking like an endless pursuit mostly ending in failures. My core and biggest assumption that the trades can scale linearly and infinitely had just bombed right in my face
I was heavily invested into this. Had left too many things behind. This was Nov of 2018. I thought I should atleast try few things until 2018. Give myself one last chance and then decide what to do in 2019.
This time no books, no videos, no following what others are doing. This time, it was introspection time. I had read and watched enough over the past several years and was not hopeful about finding anything dramatically new on the internet.

Figuring it out
I went back to the trades that failed. I looked at what specifically was going wrong. Initially it all looked random. Then I started trying to do some incremental trades. Something in between. Not too big, not my regular small trades. This time I was trying to look at what was going wrong with the trades still open/active. Earlier I used to do this analysis only retrospectively. One of my important observations was that I was panicking too easily when my trading position was large. There were few other observations about myself that were quiet funny.  Anyways my small trades used to make a profit or loss of something like 500 to 1500 Rs per trade and I was able to hold on to these trades throughout the day (6 hours of market time without any panic) since these were small amounts even if it was a loss. My large trades would easily move up or down by 4-5K almost instantaneously and it caused me to panic thinking I am losing all the accumulated profit over the past 5-10 trades in just an instant. Once I entered the panic mode I would get filled with imagination if the loss is this much in just few mins what would happen in 6 hours.. setting off a chain effect of doing too many wrong things. Closing positions in panic at obviously wrong levels, over exposure to trades gone wrong instead of exiting them, revenge trading, multiplying my errors and losses. What was I thinking? What did I expect? my regular trades would have a position size of 1 Lakh and my large trades had position size of anywhere between 10 Lakhs to multiples of it all the way upto 1 Crore. Obviously it would move up and down by a similar quantum 10-100X in profit/loss also. For all the numbers, maths and stats love I pride myself with, I was committing some of the most basic mistakes. It is easy to get emotional when large sums of money is involved and difficult to look at them as just numbers.


A satisfactory experience
Once I root caused myself in panic state, it was a turning point for me. After which I took several steps to fine tune my trading, execution, record keeping, analysis and several other aspects. By the time I arrived at it I had only 3 trading sessions left in 2018. I will not go into the details of strategy, etc because it depends on individual personalities. However I am happy to share that I was able to execute 3 ultra large trades today successfully in profit, without panic and as per plan. I also  closed today with 3 largest booked profits of my entire trading career of more than a decade including part time and last 2 months of full time. More than anything else today I just felt satisfied. Not euphoric, just satisfied, peace and calm.


I think I have reached day one today. On the way there will be more learning, more tuning, more experiments and more scaling but the starting point is to reach day one .. from one day. It is now time to say Happy New Year 2019 !
Few other interesting problems to look at would be the winners curse, stop loss hunting and supertrends.

Horrible September of 2018

It started with IL&FS default .. and it brings back memory from the Satyam scam way back in 2008 .. the fact that these two are actually connected in some way provides little relief

Satyam scam was a Rs 6000 crore scam .. IL&FS has a debt of Rs 91,000 crore and is defaulting on it's payment obligations. Fortunately in case of Satyam entire 6000 crore vanished into thin air and in case of IL&FS it is less of a scam and more of a mismanagement. There are some assets that have been created over time and might help recover some of the debt but as it happens in most cases like these, there are going to be huge drawdowns and write offs. Govt moved into action swiftly after the default (ideally speaking it is 10 years too late .. as it should have put in checks and balances way back in 2008 after Maytas created one of the biggest crisis in Indian market.. until 2008 .. now it is IL&FS)

It is a bit too late. IL&FS crisis caused corporate bond yields to spike, liquidity freeze in the bond market. Hit the likes of DHFL, IndiaBulls Housing and many other NBFC's very hard. DHFL lost 40% plus in a single day. Over the month of September most stocks in the BFSI sector lost 30-50%. No discrimination was made between small and large, good and bad quality. The most resilient stocks like HDFC, Bajaj Finserv and Piramal Ent had their backs broken.

Goes without saying the plight of good quality stocks looked mediocre compared to what happened to stocks with questionable fundamentals, rumors, and manipulation. Infibeam lost 71% in one trading session. yes 71% in one trading session.

 Few other notable victims of regulatory action includes Yes Bank, Bandhan Bank, 8K Miles and many more ..
 

USD/Brent Crude
A market that was already weakened by rising dollar and crude had a lightening strike straight from hell

 

Good news is bad news

Currently even good news is working as bad news in Indian market. US markets and economy are firing on all cylinders. Unfortunately this will embolden FEDS to take up aggressive rate hikes which will further strengthen dollar and bond yields. Unfortunately that is not so good for equity investments and especially for equity investments outside US as you are earning terrific returns in low risk instruments and low risk markets then why invest in foreign high risk countries

Add to this continuous weakness in Emerging Markets and continuous outflows of FII/FPI from India. The draconian measures from Indian regulators, and Finance Ministry and PMO did little to help except add more oil to fire and more salt to the wounds of investors. (Read LTCG, KYC, and Indian origin foreign fund managers saga) .. the back and forth on these issues was even more pathetic. Market is good at absorbing bad news but doesn't do so well with chaos, confusion and loss of trust which creates panic. I had hoped that regulatory authorities and finance ministry would have known this .. but doesn't look like it. 

Anyways the market doesn't spare anyone .. including the govt .. they will have to take their share of hits for creating and unleashing absolute havoc in the market from time to time ..

Off-course the collateral damage here is much higher. Only the toughest and the most sorted will survive this. Market has become a war zone.  Make no mistake, blood will be spilled, lives will be lost and dreams will be crushed.  Everyone will have to go through the iron test ..

 

However note that this is not the first time and not the last time either .. this is how market cycles work. Periodically it takes out all the weak hands mercilessly and unapologetic.. Market was and always will be the place of only select few .. they are not the heroes .. they are survivors .. 

I would like to end this on a positive note .. for people like us who worship markets, there are no losses .. there are only lessons and an opportunity to grow bigger and stronger with every such cycle .. happy investing !

Continued Market Mayhem in October 

Govt goofs again!

When the going gets bad .. the bad gets going! Govt goofed again. Considering the impact of rising crude and upcoming elections both state and center, our dear govt decided to be extra generous to the public and asked the OMC's to subsidize the fuel retailing by Re 1 per liter. This was enough to send all the OMC's crashing down. 40-50% lost in couple of days. 1.3 Lakh Crores wiped out, further weakening one of the only steady pillars in the market. The scene was almost like govt is triggering a systemic demolition of the markets. Here are some tables and reactions

Regulator goofs again!

I am not an expert on macro economy but sometimes common sense works better than all the institutional expertise .. when INR vs USD was already gasping for breath what could have been the logic to surprise the market .. liquidity concerns? RBI surprises the market using status quo instead of hiking rates that could have helped somewhat to arrest the fall in INR. However market did not like it and it made it very clear. Check out the last hour reaction post RBI announcement. This is however a 50:50 chance decision .. the reaction on the other side could have been bigger on liquidity concerns .. we will never know. Current mood in the market is "Good news is bad news" and "Bad news is panic button being pressed hard" 

Hopefully we are mostly done now .. only time will tell .. but the next important events are the upcoming state elections and couldd be a difficult one for ruling BJP given the overall negative and pessimistic sentiments. 

Silver Linings

• One silver lining in all this mayhem was that promoters have started acquiring their shares. Pilani Investments did a basket buy on all the Birla group companies Century, Hindalco, Aditya Birla Cap. Significant buying was seen in across the board in mid caps also.  
• Another one being India decided to continue to trade oil with Iran despite possible US sanctions. If it manages to avoid US sanctions it is a net positive. Also US was forced to soften it's sanctions on Iran since many countries had indicated that they are not going to follow it. This would also lead to downward pressure even on OPEC oil price that has already fallen from $86 per barrel to a little over $83 per barrel
• A developing positive is the huge defense, nuclear energy and SME deals signed with Russia and bilateral deals between India <-> Russia and India <-> Iran to deal taking place in local currencies instead of using dollar denominated trades. Russia also expressed interest in investing in the infrastructure and energy sector in India
• Venezuela launching it's asset backed crypto currency instead of $ is another indication that $ domination has peaked off and the havoc it is creating in the world currency market is going to pass. Venezuela being a oil exporting country, if it stabilizes will bring additional oil supply into the market and further discourage OPEC cartelization
• SBI decided to purchase the asset providing some support to liquidity strapped NBFC's which will help tide over the temporary liquidity squeeze situation created by IL&FS fiasco

Relief Rally in Oct 2nd Week

There was a huge relief rally in Oct 2nd week. Few events that helped the same. US markets cracked especially NASDAQ and FAANG stocks, this was mostly triggered by fear of FED rate hike in Dec. IMF came up with a lower growth projection in world GDP over trade war concerns, this also triggered a fall in $ and oil. At the same time India got the crown of being the best Emerging market among Emerging Markets. I think there was some rotation happening from developed markets to emerging markets. Oil correcting from $86 per barrel to $80 per barrel was a huge positive. Regarding the liquidity problem triggered by IL&FS crisis, SBI and other large banks announced that they will buy good quality loan assets from NBFC's to give them some liquidity. This was a great boost to hugely battered NBFC and BFSI stocks. Results season had also started on a decent note. On the other hand few factors to worry included FED rate hike in December, Possible US sanctions over India's S400 deal with Russia and Oil deal with Iran, upcoming state elections in MP, Rajasthan with expectations of huge losses for BJP, general implications of continuing trade wars, Italy going bust the Greece way and a possible bigger than expected bust in US stock markets instead of controlled correction

Confluence of factors

2018 is interesting enough with some great lessons that needs to be documented for any investing career that is supposed to last long. What I mean by interesting can be gauged from the NIFTY midcap graph below.

LTCG
The whole tumble started from the introduction of the LTCG in Budget'18. Certainly a very poor move by the Govt of India that soured the mood for many large investors especially foreign investors with options to invest in multiple countries and India overnight started looking considerably less attractive investment destination. It was a sad moment because things had just started picking up and no one came out a winner from such stupid policy decisions. Investors lost wealth and there were no gains left to pay taxes on for a majority of the investors.
Now we cannot put 100% blame on the Govt and their stupid LTCG for sure. Soon afterwards started a confluence of multiple strong headwinds that shook the Indian market one after another and never gave it a chance to recover.

EM Exit
LTCG announcement was followed by a mass exit of foreign investors from emerging markets as a basket that included India. Why? Strong growth in developed markets like US made the riskier EM's less attractive. When you can earn at home why move the money around the world.
This was followed by increasing weightage for EM's like China in MSCI index, which meant reduced weightage for EM's like India which belonged to the same basket. Simply put India was left with a small share of foreign capital investment quota in a scenario where all the money was already fleeing back from EM's to US. The SGX Nifty controversy made matters worse for India. In a bid to disallow Indian instruments being traded more in foreign exchanges compared to local exchanges, India decided to stop sharing data with foreign exchanges like SGX and was perceived as anti free market and was being further threatened with lower weightage in MSCI as a retaliation measure.

We are just starting folks ....

MF Categorization Restrictions
SEBI introduced a new law that all MF can have only few broad categories in Large, Mid, Small cap and there can be no cross holdings, i.e a Large cap fund cannot hold even a small percentage in mid/small caps and if they do they must sell. Also they cannot come up with fancy categorizations to find a way around this. So you cannot call your fund something like Future Focus and hold stocks belonging to mid and small caps along with large caps.

Banking Mess and NPA's
Then came a series of NPA resolution mess. Indian Banks especially PSU had loaded up on several non performing assets for several decades on their books, however they were yet to recognize the fact that they have fucked up. New RBI guidelines (starting with Raghuram Rajan) went aggressively after the Indian banks to clean up their books. This lead to several decades of toilet being flushed from the banks in just last couple of years. NPA's soared from 3-4% to as high as 25-30%. Banks like IDBI, Bank of Baroda, Bank of India, Indian Overseas Bank went belly up. The list is really long and includes almost all the PSU banks. A special mention to Punjab National Bank that had handed over their SWIFT passwords to fraudulent loan takers like Nirav Modi to borrow as much money from the bank as they desire. After the scam broke out PNB swiftly lost over 50% of its market cap in few days. India's third largest bank was now trading in two digits. Several scams came to light after this one by one. Many of these fraud corporate had to make a run from India leaving the banks with very few options to recover their loan Nirav Modi, Mehul Choksi of Gitanjali gems and Vijay Mallaya deserve special mention here. Lakhs of crores of loan book had to be written off. A pretty alarming situation. Private banks were not spared either. A special mention to Chandra Kochar of ICICI Bank and Shikha Sharma of Axis Bank who provided their valuable contributions in destroying whatever little trust was left in Indian Banks.

Share jacking up and corporate frauds in mid/small cap
Then came the Vakrangee fraud. A company that had risen from Rs 10 to Rs 1000 per share. India's rural network poster boy was caught jacking up the share price of it's company. It got caught when it declared a substantial treasury investment in PC Jewellers that brought to light another mega scam in Indian markets, mid cap companies buying shares in each others company and jacking up share prices in collusion. After this several mid and small cap companies crashed. 70-90% loss in market cap examples became abundant.

ASM
Then SEBI introduced ASM or Additional Surveillance Measure leading to restrictions on trading of several midcaps. Many renowned and reputed companies got caught in ASM which lead to a mass panic exit from all counters. Dilip Buildcon, 8K Miles, Graphite stocks, one by one a large part of the midcap universe got hammered and started a bloodbath of lower circuits in the Indian markets.

Audit Compliance 
Indian Govt lead by Modi had made it clear that auditors and independent directors will be held accountable for company frauds. This lead to auditors of several companies resigning instead of agreeing to adjustment in accounts. Notable story here is of Manpasand Beverages

Policy disruptions
GST, e-way bill etc had lead to lot of disruptions in the SME segment leading to reporting of poor numbers and results in the previous quarters

There is still more...

Global Trade War & Currency weakness
Donald Trump wanted to even out America's trade balance with rest of the world which lead to a global trade war. Companies started imposing import duties on each other. Local manufacturing started taking hit. Businesses on the ground were now struggling for profitability and survival. The notable story in this trade war was China vs US. The two countries slapped each other with billions of dollars of tariffs and duties. Yuan tumbled over 8-10% from the start of the year.
Strong dollar made life even more difficult for countries like India which is a net importer, i.e pays in dollars but earns in rupees. For FII's also Indian market became worse because of forex conversion losses.

The Iran Saga
Donald Trump also does not like Iran. He imposed several sanctions on Iran a major importer of commodities and a major exporter of cheap oil and gas. This created havoc for the import export players and sent the crude price surging. By sanctioning Iran crude market is easy to control by Saudi Arabia that can then demand whatever it likes from crude importers. 

Poor Monsoon and Farm loan waivers
Poor monsoon this year is already sending jitters across the investing community and rural population. Huge protest by farmers on MSP and ensuing farm loan waivers for political gains by state governments is adding to the fiscal burden of the state and central governments and making the inflation more unpredictable.

RBI hawkish policy
Now when infaltion is unpredictable, RBI comes into action and has been steadily increasing interest rates making loans which is the lifeline of any business more and more expensive, just what we needed .. isn't it ?

Political Uncertainity
Add to this the political climate was aso heating up. Noises of Mahagatbandhan started becoming stronger after the Congress won the Karnataka election over BJP by forming an alliance with JDU. A minority party now ruling the state.

Investment sentiment 
And so the overall investment climate was bitter, people suffered huge losses. Technicals and panic threw the Indian market in the grip of bears. Bulls made a huge retreat. New investors got scared off. Mutual Fund inflows slowed down and everything went spiralling down. A point to note here is that all this is happening in the larger context where central banks around the world are tightening market liquidity by rolling back their QE program that started in the post 2008 world. While the markets have generally absorbed it well, at some point this might pinch hard.

Winds of change
Few things brought a turn around in the Indian market starting July

• All countries ignored the US sanctions on Iran and continued to trade with Iran as exception. Ultimately US had to soften it's stand on Iran
• Crude softened signalling a peak in crude prices. Iran has threatened to disrupt trade routes in crude if sanctioned and that remains a risk 
• Donald Trump tweeted about being unhappy with strong dollar which signaled a peak in dollar as it puts America also at an disadvantage since manufacturing is cheaper in other countries
• Developed markets were overheated due to huge inflows. The FANG stocks now have a market cap greater than the GDP of several countries. Apple is a trillion $ market cap company now. This should lead to some of the foreign investments coming back as they book profits in developed markets and look for value investments in EMs
• Trade wars have become a common news and seems to be fairly discounted by the markets
• Indian Bank NPA's seem to have peaked and a recovery is projected soon. Govt helped by using large capital infusions in several affected banks
• Congress lost and BJP got a huge victory in the vote of no confidence motion against the govt which reinforced confidence in the future prospects of BJP 
• The Congress debacle in no-confidence motion also helped to put in place regional leaders like the Shiv Sena and TDP in their right place who were becoming a bit too noisy for their own good. It also re-inforced that the winking Gandhi is at best a poor comedian and not a future PM candidate. 
• Quarterly Performance and results by listed companies has been generally good and signals future optimism
• Indian large caps held the investor flag high admist all the bloodbath.  RIL, TCS became the first two Indian companies to hit the $100 billion market cap. Few others who deserve a mention are M&M, Bajaj Finance Group, Consumer and IT stocks HUL, Page Industries, etc
• Major relief was given in GST by reducing tax slabs for several goods
• Poltical and policy uncertainties, global trade wars, and poor monsoon continue to be a risk 

Things are going to continue to be interesting atleast upto 2020 but we market players are not here only for the good times. We as much cherish the downs as we do the ups. That is what makes it thrilling, the bull needs a bear to fight and win ... so bring it on !