not fooled by randomness

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The inter-connection
The exchange is a place that connects everything to everything. In effect it connects you to everything and everything to you. That's not one or two things but several hundreds and thousands of events everyday. Each of these events can impact you positively or negatively. Each of these events can impact you significantly or insignificantly. The events are neither independent nor one off. They have complex inter-connections and have a history behind them. It is important for you to see this connection, to see what is happening around the world and understand what will be its impact. Only then will the insane price tickers on the stock exchange start making any sense to you.

Random or real?
There is a reason behind everything. Nothing is random. But as the number of variables impacting something becomes large, things start to look random because you lose track of the variables and then the equation in your mind becomes incomplete and what cannot be defined by an equation looks random. There are complex theories people use to identify patterns out of randomness like fractals, elliot, fibonacci. These complex patterns are often seen in nature because every event in nature is also a function of large number of variables and hence very complex. But nature has a pattern, we don't see nature as random, right? Something very similar happens in stock markets too.

Beauty of randomness

Something that cannot be defined in absolute terms, cannot be reproduced or mass manufactured but has a pattern to it remains perpetually beautiful because it is unique. That is why nature is beautiful. There are millions of roses but each rose is unique and yet they all follow a pattern. However a teddy bear produced in a factory might look and feel good once or twice but after that it is boring and useless especially when you see hundreds of them racked together in a shopping mall. Similarly stock market is beautiful because everyday in the stock market is unique and every tick in the stock market is unique. There is a pattern but there is no absolute equation that can define the stock market behavior.

Pattern vs points
So how can we use this understanding of pattern and randomness in stock market? For one thing many people waste lot of time trying to accurately predict price points like this stock will hit a target of 32.56 in three days. It is the biggest waste of time and foolishness of the highest degree because like I said above every tick in the stock market is unique and hence cannot be predicted. If you could predict a single price point in the stock market, you can easily become a millionaire by betting all-in on that point however it never works like that. What you can do at best is "understand" the pattern and align yourself with the pattern. It is not intuitive at first because when you think about stock exchange the first thing that comes to your mind is a ticker of red and green numbers and to say that these numbers are meaningless and unpredictable is counter-intuitive. Most of the truth in the world is not what it seems, it is hidden in layers below the visible surface and stock market being as complex as life itself also has similar characteristics.

Lessons so far:
Is stock market random - No
Is stock price predictable - No
Does stock market have a pattern - Yes
Can I predict the pattern - No
Then what the heck?  You can just align yourself with the pattern and enjoy its beauty

How to study patterns?
Patterns can be very simple like continuously rising stock price or continuously falling stock price. Patterns will differ based on the time window you look at. If you use large time windows the patterns are clearer and easier to understand and align with. If you use small time windows the patterns will look erratic, volatile and random or just noise. Try this by refreshing the quote page of a stock every few seconds while the market is open and try to predict the next quote. It is absolutely bizarre. Now try to look at a one year chart and possibly you will see a pattern like rising or falling or range bound. Then try to look at 1 year charts of several stocks and again all the charts would seem random. Here feeling of randomness is due to the lack of knowledge about the events that impacted the stock you are watching. So take one particular stock and start reading about its 1 year history and start mapping the major events to the price movement in the chart and you will start seeing some kind of method to the pattern. Look for dramatic changes or reversals or accelerations in the pattern or trend and try to find reasons behind it and the chart behavior will start becoming clearer to you.

If I had all the time in the world to do this :)
Yes, we don't. Even if we were doing this full time still we cannot analyze things in such detail and keep track off so many things. But the point of this one time exercise is to get your understanding about the stock market right and not to drown yourself in the events of the world. If you understand the stock market as random you will try to take random bets and end up with random often disastrous results. If you understand that there is a pattern, a method to the stock price movement, you will be able to take much more intelligent and accurate decisions and you will be much more comfortable with the fluctuations you see in the market based of how and how much you understand it. You will be able to separate pattern from the noise. So the point of this blog is to understand how not to get fooled by randomness but to understand the patterns that look random.

More about patterns?
Well as far as patterns are concerned, I will have to write a book instead of a blog. Especially the relatively complex ones like elliot, fibonacci and fractals are much more interesting and useful than the simplistic "head and shoulder" and "cup and handle" one's. I have my own techniques which literally enables me to have long and interesting conversations with the stock and market charts  ...but that is for some another day, another time, another blog .. till then don't be fooled by randomness because nothing is random !

envy not jealous less

Envy vs jealousy
Something I didn't know before starting on this blog .. so let's get that clear first, the two terms mean very different .. Envy involves wanting to have something you don't already possess. I'm envious of my colleagues BMW car. (I don't have a BMW car). Jealousy involves wanting to hold on to what you do have. The woman was overcome with jealousy when she saw her husband talking to his secretary.
We will mostly focus on envy in this blog because I have an interesting Warren Buffet story to share on this topic :) , but remember that dealing with jealousy is equally important. I am sure right now several parents are screwing up atleast one of their kids by comparing them math score to math score and class rank to class rank making them feel envious of the other for being more favorite to the same parent. I guess that example explains sufficiently that the lower rank kid's jealousy is going to have far reaching implications both for the kid himself and his parents in the coming 40-50 years of their life together and it is not going to be a pleasant one.

Well let's move on to the easier and lighter topic of envy now.

Owners pride neighbor's envy 

Who does not remember this envy devil from Onida (mirc electronics)? 

Some might say that envy is natural. It helps you get competitive. Some might say that they are content with what they have and they don't envy at all. Trust me it is more prevalent than you would like to believe. Think about it, almost all the ad and marketing campaigns in the tech, consumer, and luxury segment is about how buying a certain product will make others envy you. Look at all the smart phone, luxury cars, real estate, beauty product, deodorant ads more carefully. Slowly and steadily we are being injected with this desire of being better "relative" to others or being the object of envy for others so that the manufacturers of these products can increase their sales volume, revenue and profits. That's how prevalent and exploited envy is. We feel it ourselves and make every effort to make others envious of us and spend a better part of our life trying to achieve such meaningless goals. It is prevalent because everyone goes through the same social pressures. We think, everyone feels it, so its fine, not a big deal, that's the way of life.

Buffet (Stock Market) wisdom to the rescue
Fortunately I came across a video of Guy Spier talking about his $650,000 lunch with Warren Buffet. Guy Spier mentioned in his interview that the lunch date was more of a life lesson for him instead of an investment lesson and thankfully so.
He asked Warren about how to deal with envy, something he was struggling with for sometime now in his professional life. He was expecting a huge dose of wisdom from Warren in reply to his question. He was very serious about it since it was impacting his life and career and happiness. Warren simply answered that he doesn't know.
Guy Spier was kind of disappointed and unsatisfied with Warren's response and was left to introspect on it by himself. He kept on thinking about Warren's response .. and finally after a really long time he got the answer .. Warren Buffet is so much self aligned that envy is something he doesn't know about at all. Envy by definition is an emotion of wanting to have something that you don't have and you see others having it and crave for it. There was no such thing for Warren Buffet. He was perfectly self-aligned. There was nothing that he desired based on what others had. Not just by virtue of being richest person in the world but because he was completely and perfectly self-aligned. Warren Buffet might be the richest person but then he is not Johny Depp of hollywood or Steve Jobs of the tech world and he doesn't care. He is happy most doing what he does best, fund management and value investing, perfectly self aligned.
Imagine the greatness of this man, even by not knowing something, he has such profound lessons to offer. Envy grows on you more and more as you become less and less aligned with yourself and desire to align with someone else or what they possess. In the process you lose sight of what you have  or are capable of achieving while craving for what is not meant for you, which to a large extent poisons your mind. On the other hand if you are completely self aligned, you are in prefect equilibrium, you make the best out of who you are as an individual and what is best for you. In this perfectly self-aligned state of mind you can reach the heights that no one else has scaled in your domain of expertise and liking. Now tell me .. wasn't the lunch worth the $650,000 price tag for Guy Spier? totally worth it ! Fortunately for us it is free :) .. so as far as possible envy not and jealous less .. listen to music and enjoy life !

US rate hike

The biggest sword hanging on the entire "mother of all bull market" theory is the impending US fed rate hike, which is coming soon. How do we prepare for it? Well one possible approach is to study if a similar thing has happened in the past. If yes, what happened then? Fortunately it has happened in the past, so we have a reference point to study .. yay !!

Asian crisis 1997
Last time America raised interest rates in 1994 sparking a financial crisis in Mexico, which could no longer afford to service its debts. A couple of years later the crisis spread to asian countries like Thailand, Korea and the Philippines. Their currencies tumbled, investors fled, stock markets crashed, sparking fears of worldwide economic meltdown. Western stock markets also fell, but rebounded quickly after the Asian countries agreed to fierce austerity programmes. The whole asian crisis lasted for 46 days before recovering to the pre-crash levels. However the austerity measures adopted by the asian countries caused a slump in the commodity market affecting countries like Russia who run their economy on commodity exports which lead to another global panic in 1998. This also lasted around 44 days before recovering to pre-crash levels. Compare this to tech bubble crash of 2000 that lasted for 3 years and the 2008 subprime mortgage crisis that lasted for 1 year followed by the Greek debt crisis in 2011 which lasted for approximately half a year. US interest rate hike does not look like a big deal as long as other countries keep their debt to GDP manageable (for India that is the fortunate case).

What can happen when US hikes rate this time

I think there can be a blip effect (30-50% depending on your portfolio beta) and you have to be prepared for a couple of months of intense pain in the market, possibly followed by an equally sharp recovery. Which means if you have enough cash in hand and deploy it smartly during this blip (if you get it), you would earn enough for the next ten years in just a few months time. If you have atleast a percentage of money in hand during this blip and deploy it smartly to average out your losses, you would recover almost as soon as the blip recovers and be back in business in no time. If you are fully invested before this blip, you might take about a year to recover, still not a very big deal. It will be like a bomb blast, if you got caught at the center of it, it can be fatal (late entrants who rush to invest in wave-5 of the rally) but if you survived the moment, it should be fine from there on.

For the survivors
If this is followed by another crisis situation like Russia crisis the market could stagnate for a few years before getting back to what it does best i.e making you rich. However if this leads to an accelerated bust of the bigger time bomb, .. actually a nuke bomb .. called the global debt bubble .. then we are all screwed. Make no mistake then it won't matter whether you are invested in gold, real-estate, debt or equity, or you are dependent on your salary for monthly expenses, we will all fall down, flat & hard. Only people who will do well are the one's who have hard cash locked in their lockers at home. But you know it, nuclear bomb is usually an "end of the world" scenario so everyone will try their best to not let it happen.

Keep your bomb disposal suit on .. but don't give up the fight
Assuming that a financial nuclear explosion will not be allowed to happen through combined efforts of the world, I think equity is still your best option even today (weighing risk vs reward) and US rate hike is more of an opportunity (if you are smart enough and prepared in advance). Most of the symptoms are already unfolding around the world. Many small countries are on the verge of defaulting or already defaulted. Lot of commodity related sectors are already in deep crisis. However the world is and likely to continue to be supported by few big countries who will keep it going. Forget not, a very big global rally trigger is also impending. If the conflict situation in the middle east comes to an end in couple of years from now, it will trigger a global market rally of epic proportions, this time commodity market included. Luckily we are on the brighter side instead of on the darker side. So let's see how it plays out and be prepared .. keep your bomb disposal suit on for the smaller bombs which will explode, hope the bigger bombs don't explode and are diffused by combined efforts of the world together and wait for the middle east crisis situation to end which will also happen soon. You will love what comes next ..

self-review

One of the things that has helped me the most in my investment journey is self-review. Not once or twice a year, but continuously. My usual investment routine consists of tracking all the latest developments around the world, in the stock market, in specific companies, look for interesting stories and then make calculated bets based on my experience. But anything that gets into a routine, be it life or investments, there is always a chance that you become robotic about it and start missing the finer details often getting off track. Good thing about stock market is that it punishes you as soon as you get off-track unlike life where you can be off track for several years before you realize it and it is often too late before you realize it. Life also punishes or rewards you sooner or later but it mostly works on accumulated debt settlement model, which is kind of irritating. Well I am not a life expert but let's talk about stock market where I do know a thing or two :)

Example explains things better
Recently I had taken a fancy to investing in holding companies that were de-merging their subsidiaries and providing free shares of the de-merged entity to the holding company shareholders as a value unlocking exercise. I made many such successful bets and went crazy on this strategy investing larger and larger amounts of money on every new opportunity making bolder and bolder bets. What can go wrong? I have already made several successful investments on this theme. I was accumulating large quantities of one such company after it came up with a de-merger announcement. For me the rationale was simple, de-merger = value unlocking = profits and hence go blind and big on it. This particular stock soon reached the top investment rank in my portfolio without me realizing it since I was buying chunks of it every now and then. One weekend when I was just reviewing my portfolio casually, this company caught my attention on how it had become my top holding a bit too fast and at a fairly high price compared to what I would normally pay for a company like this. I started thinking about it. Just a blank thought, what am I doing here? I went through the de-merger scheme again trying to analyze the whole deal. What struck me was very interesting. The company was actually hiving off a very high debt, low return subsidiary into a separate company. The newly de-merged entity would be the kind of stock I would never invest my hard earned money into. What the heck? I don't want this de-merged entity at all and I am still pumping money continuously into it? The right strategy would have been to wait for the de-merger to take place and then invest in the parent entity that is left with the better business and has gotten rid of the high debt, low return business by hiving it off. I was doing exactly opposite of what I should be doing. Goes without saying, I took immediate corrective action and fixed it. But it was a narrow escape from a disastrous investment.

What saved me? 
A simple weekend review and a very simple question "why?"

After this experience, I have made it a practice to take a periodic break from routine and not do any investments during that period but just go through what I have, what I have been doing for the past few months, what I am trying to actually do and how. As you can see I have expanded the review exercise by adding lot more questions to it.

Does it help?

Everytime. No matter how many times I do it, every single time. Some of the best ideas have come to me during this review break period. It is never planned. I just take a break. Most of the time when I go on a break I don't even have a review agenda. Often I start with what do I want to review this time? Many times I don't have a clue for couple of days and I am just stuck on this thought. Surely something comes up sooner or later and that starts a chain reaction of review thoughts. I never go back to my investment routine unless and until I have a new thought process to work on or atleast confirm that what I am doing right now is a great idea and I want to scale it up big time. What can be better  than this? You get a break and you get great insights in your break time and you get to go back to your routine all fresh and excited with new ideas to implement. It's a yay moment ! Like taking a break on weekend and being excited about monday ! 

Can we apply this to life?

Like I say always, anything that is applicable to stock market, is applicable to life in general. I am no life expert but I do try it from time to time. Unfortunately, unlike stock markets I never get any bright ideas about life and have to go back to routine .. well maybe some day .. I might .. as long as I keep taking time off to review it ... 

So how are things going at your end ? :)

P.S just a warning .. self reviewing life can be a depressing exercise. Do it only if you can handle it :)

what next

Every now and then, we keep hitting these dead ends in our life. It is like a thick brick wall in front of you and darkness all around. It could hit anyone, anytime doing anything. Everything was fine until now and suddenly you are wondering where you are, what are you doing there? It is a time when you just have nowhere to go, dark all around and an endless brick wall in front of you.
It feels like the only option you have now is to hit your head on the brick wall. Well please don't do that my friend! You have just reached a phase that calls for a big change in what you are doing and the way you are doing things. It is like a multi-level video game where you have cleared the current level and it's time to hit the "next level" button. New setup, new challenges and new rewards await you.
I keep hitting these dead ends every now and then, specifically with respect to my investment activities and spend days just wondering .. what next .. what next .. I don't feel like reading the news anymore, I don't feel like looking at my portfolio, investing or researching anymore. But I am writing this blog because there are two paths from here and I need to remind myself of the right path when I hit this dead end again in life. Happens quiet frequently in my profession, at-least few times a year.

Path-I take a break and come back later
This is one approach, where you can just say "I am done with this .. i need a break" and just stop doing what you are doing. It is a feeling of loss and dejection that the smooth ride has come to an end with this endless brick wall in front of you. It is a feeling about having reached a wrong place, a dead end. You can take a complete break, in a sense walk backwards from the wall you just hit, wander around here and there, clear up you head and start fresh again ... in the sense get back on the path towards the brick wall again, maybe take a different path this time and do it all over again. However remember since you are practically walking the same path again, you will probably reach the same dead end .. pretty soon and pretty easily.

Path-II don't take a break, climb or jump the wall
This is the second approach. Here you realize that you are at this dead end because you have completed the current level. It is an achievement, a big accomplishment, there is nothing more left in this level of the game and you have to hit the "next level" button that will take you to the other side of the wall.

Next Level
Getting to the next level however will require you to be ready for lot of changes. Next level will be a less familiar arena compared to the last level you were playing for a long time. There will be new dangers but it will be exciting, there will be new rewards, better rewards, higher rewards to fetch and you will need to develop a new set of skills to win them and you can be rest assured that it will be sometime before you hit the next dead end.

How to cross dead ends
So what should you do when you hit a dead end again, here is my checklist

• Don't think about taking a break
• Think what next 
• Don't feel at loss when in front of the brick wall, don't go back from there 
• Feel accomplished and press the "next level" button, climb or jump the wall
• Change things, adapt to the new level, learn new skills, take on new challenges and dangers, gather new rewards and enjoy !
• Go to experts, books, videos and listen to people who have covered much longer journeys, completed many more levels and try to get motivation from them, if you lack it 
• Be a happy mario :)