Getting returns from the markets on a sustainable basis

There are 10% of the people who make 90% of the money in the markets. So what do these 10% people do that others do not?

These 10% people have defined how much they would risk in any one position they take and they just stick to this discipline. Risk is defined as the amount of money that you might lose in any one position. Always define this amount as a percentage of your Total Trading Capital. No one can get all their investments or trading positions to make money in the markets. There will be some investments or positions that will lose money and there will be some investments or positions that will make money. Now key is to restrict how much money you lose in any investment to a fixed % of your Total Trading Capital and ride your winners. This way you will never be out of money if you are hit with a losing streak.

If you are risking too much of your Trading Capital in one position, a losing streak (consecutive loss making positions) can put you out of business. Ideally one should not risk more than 1% of Total Trading Capital in any one position. For example if you have Rs. 5 Lacs to trade, you define 1% of your Trading Capital as Rs. 5000. Now if an investment recommendation comes like – BUY IVRCL INFRASTRUCTURE AT 66 WITH Stop Loss 64. This means that  you can buy 5000/2 = 2500 shares of IVRCL INFRASTRUCTURE (Max Risk per position/Stop Loss). So if Stop Loss is hit then at max you lose 1% of your Total Trading Capital. It will take a losing streak of 100 trades to lose your entire capital this way which is next to impossible. On the other hand if you just earn 30% of the amount risked per trade then after 100 trades, your ROI would be 30% absolute. Now 100 trades might happen in 3 months or 6 months or 1 year based on what systems you use to give  you trading signals.

Your job as a trader is to make your earnings consistent and sustainable. Size of the position you take in the markets ultimately defines how consistent and sustainable your earnings are going to be. Also a full time trader living on the earnings from the markets, has a responsibility to contribute to society as well through some meaningful work. This will lead to a balanced life.

Will buyback trigger appreciation in Reliance Industries stock?

Reliance Industries has announced a buy back of upto 12 crore shares at a maximum buy price of 870 per share. First of let’s understand what the implications of buy back is on the share price of the company:

1. Total number of outstanding shares reduce to extent of shares bought back by the company
2. Due to reduction in total outstanding shares, EPS (Earning Per Share) and BV (Book Value) per share will increase
3. Additionally, the buy back instils confidence in the stock of the company to some extent as management of the company is willing to re-purchase the stock at a higher price which improves overall sentiment for the stock

Having said that, buy back announcement is just the willingness of the company to buy back of the mentioned number of shares. As per law, the company has to buy at least 25% of the quantity announced and buy back can happen at any price below 870 that is declared by the company.

One argument can also be that just to prevent its stock price from falling drastically on announcement of results that were below expectation, management might have come up with a buy back offer to improve the negative sentiment in the stock and preventing it to fall drastically.

As such, just because Reliance Industries have come up with a buy back does not mean the stock would quickly rally up to the maximum buy back price. Movement in stock price will depend on fundamentals of the stock, its growth outlook, news of lucrative business opportunities pursed by management which improves future outlook of the company. Stock price is ultimately slave of its earnings. A buyback alone will not lead to rise in the stock price.

Managing your Asset Allocation Smartly

There are different types or category of assets (investments) in which you can invest like Equity, Commodities, Debt (Fixed Income instruments), Real Estate, Alternative Investments. Each asset class or category varies in terms of degree of risk, liquidity, volatality and expected returns on investment.

The minimum objective of any long term investment of your money is to earn a return on investment that is more than the rate of inflation. If your investments are earning less than the rate of inflation then your wealth is getting eroded in real terms as the cost of goods and services that you will be able to purchase will increase faster than rate of growth of your money.

Before making any investment it is important to consider your current stage of life, your age, number of dependents, your current accumulated surplus, your short term liquidity requirements and your long term financial objectives. Based on this information, one needs to plan asset allocation which basically means deciding what percentage of your money to be invested in which asset class. Also the most important factor to consider is market conditions in each of the different asset classes. For e.g. you might have a bigger risk appetite but if the markets are in strong bearish mood then it is not worthwhile to start making investments in a bear market. So the market conditions at the time of investing is a very critical factor while deciding your asset allocation.

A dynamic smart allocation helps you control risk by reducing your exposure to an asset class when risk is high and increasing your exposure when the risk is low. The key to maximization of returns on investment is to focus on keeping your risks low.  An astute financial planner can help you do such smart asset allocation and ensure that you have the right asset allocation to maximize your return on your investment given your appetite for risk and degree of expected volatility.

Time to switch your Fixed Deposit investments to G-SEC’s

Government Securities (G-SEC’s) are excellent investment option in the current environment for those who only keep their money in fixed deposits. Primary motivation of Fixed Deposit investors is safety of capital and they are highly risk averse. G-SEC’s do not carry any default risk as they are Government Securities that come with soverign guarantee. The ROI (Return on Investment) in G-SEC’s depend on interest rate movement. There is an inverse relationship between interest rates and bond prices. So as interest rates fall,  the return on G-SEC funds will rise. Every 1% fall in bond yields will lead to rise in bond prices by about 6.5%. So if in 1 year bond yields fall by 1%, the return on G-SEC funds will be close to over 15% (around 9% coupon + 6.5% appreciation in bond prices).

So recommend all fixed deposit investors to switch to G-SEC’s. This will dramatically improve your ROI in next 1-2 years. The only risk in G-SEC’s is continued rise in interest rates as increase of more than 150 basis points in interest rates can lead to marginally negative returns on G-SEC’s. But in the current economic environment, interest rates seem to be peaking out and not much hike in interest rates is expected further.

Concept of Value Buying

Raju goes to a Mall to shop for a vase as a gift for his wife on their anniversary. He spots a beautiful vase there. The moment his eyes fall on the master piece, they get glued to it. He loves it and wants it badly. He knows how excited his wife would be. But the price tag of 5,000/- is way beyond his budget. He gets very disappointed and decides to postpone his purchase plans. Being the holiday season, he goes to his village to visit his parents. One evening, he decides to visit the village mela. Suddenly in one of the many colorful stalls, he spots the same vase which he had wanted to buy at the city mall. Over here, at the Mela, the same vase was being sold at a “believe it or not” price of just 500. Now Raju was no less than a doubting Thomas. “How could the same master piece be available for one tenth the price?” he thought to himself. “Was it a defective piece?” So Raju started examining the vase from every conceivable angle with a single minded determination of spotting some defect or the other. To his utter surprise he could not spot even a minor aberration. It simply looked perfect. Raju’s joy knew no bounds. He had discovered something that he would remember throughout his life. He had just been introduced to the concept of “VALUE BUYING”. When one has the patience to buy the same product at a much lower cost, it is called “VALUE BUYING”.

10 Commandments of Trading

Trading is 60% psychology, 30% Risk Management and 10% Technical Analysis/charting. That is not to say that technical analysis of the markets isn’t important. It’s vital. You can’t trade without a plan based on technical analysis that encompasses support and resistance, trend lines, moving averages, momentum, volatility and the like. But you can’t possibly execute that plan consistently if your mental game and risk management is off. That’s where the ‘Ten Commandments’ of trading come in. These 10 commandments have been authored by Lewis J. Borsellino.

1.       Trade for success, not for money. Your motivation should be first and foremost to make a well-executed trade. If money alone is your motivation you will severely limit your chance of success. Why? Because focusing on money will raise all kinds of emotional issues, from fear to greed. It will make you afraid of losses to the point that you will abandon your discipline. It will tempt you to trade too often, too large and with too much risk. Whereas if you focus on making solid, well-executed trades – even if the result is a losing trade that you exit quickly – you will reinforce your discipline and increase your trading potential.

 2.       Discipline is the one quality that all traders must possess above all others. For a trader discipline means the ability to devise a trading plan, execute according to that plan, and to never deviate from the plan.

 3.       Know yourself. Do you break out in cold sweat at the mere thought of risking something – such as your own capital? Do you think of trading like ‘gambling’, long shot to make a million? Or can you handle risk in a disciplined fashion knowing how much is ‘too much’ for your capital.

 4.       Drop your ego. No matter how much success you enjoy as a trader, you’ll never outsmart the market. If you think you can, you are in for a humbling experience. The market rules, always and for everyone. You need to silence your ego in order to listen to the market, to follow what your technical analysis is indicating – and not what your intellect (and your ego) thinks should happen. To trade effectively, you need to put yourself aside. At the same time, you cannot be so emotionally fragile that unprofitable trades shatter your confidence. Don’t be crushed by the market, but don’t ever think you’ve mastered it either.

 5.       There’s no such thing as hoping, wishing or praying. I’ve seen so many traders staring panic-stricken at the computer screen and begging the market to move their way. Why? Because they have lost their discipline and allowed what was a small loss to turn into a much bigger one. They keep hanging on, hoping, wishing, and praying for things to turn around. The reality is on the screen. When the market hits your Stop Loss level (the price at which you’ll cut your losses at a pre-determined level), get out.

 6.       Let your profits run and cut your losses quickly. This is golden rule of trading and most people do exactly the opposite. Most people would book their profits quickly and hang on to their losses in hope of getting back to even – letting their losses run to become bigger eventually. When you place a trade, know in advance where you’ll exit in case position goes against you and do not change that level. When you are in profits exit by trailing your stop losses. Keep increasing your stop loss as the stock goes higher. This way you can keep participating until a rally lasts. So you will let your profits run and cut your losses quickly.

 7.       Know when to trade and when to wait. Trade when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn’t have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.

8.       Love your losers like you love your winners. Losing trades will be your best teachers. When you have a losing trade, it’s because of some flaw in your analysis or your judgment. Or perhaps the market simply didn’t do what you thought it would. Examine what went wrong – objectively – then adjust your thinking, if necessary and enter the trade again.

 9.       After three losing trades in a row, take a break. This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional. But if you take a break, you can gather your wits and regain your composure more quickly.

10.   The unbreakable rule. You can break a rule and get away with it once in a while. But one day, the rules will break you. If you continually violate these ‘Commandments of Trading’ you will eventually pay for it with your profits. That’s the unbreakable rule. If you have trouble with any of them, come back and read this one. Then read it again.

What dominates your mind while taking investment decisions?

What dominates your mind while taking investment decisions? Fear of losing your principal? Safety of capital?

Well, losing principal is not the only risk in investing. People confuse certainty and safety. They think of fixed deposits as safe. They’re not safe. They’re certain because you’ll get your money back, but unfortunately we live in a world where inflation is an issue, so although you may get your money back it will buy you less and less. That’s not particularly safe.

Ideally, one need to balance preservation of principal with preservation of spending power. Investors need a real cash flow – one that grows with inflation. And they can’t get that through fixed income investments or “safe” investments.

A mathematical process of financial planning helps you in quantifying your life goals, prioritize them and determine the return on investment needed to accomplish your goals. A suitable Asset Allocation strategy and Reallocation process will then guide you to in achieving your defined goals.

Do not just focus of safety of principal. Instead aim for meeting your long term life goals. Preservation of capital and preservation of purchasing power of your capital will come naturally, once you think big and keep an eye on your long term life goals.

However it is essential to focus on the process of planning!!!

Which way are you attracting wealth?

An interesting question came to the mind – What is the combined Net Wealth of the World? Is new Wealth created or does wealth only gets transferred from one nation to another?

Following logical thoughts come to mind to answer the above question.

Wealth in the World is constant. Only Wealth gets transferred from one nation to another. There is no new Wealth creation that happens. So you can not create wealth but you can attract wealth.

Wealth was there when the World originated. Earlier wealth was in the form of natural resources. As population increased people got hold of resources in the form of land, minerals, oil, crops etc. Barter system was formed earlier when the goods used to be exchanged. Today barter system has taken the form of currency but ultimately only exchange takes place. No new wealth gets created. One nation has OIL which it exports, another nation exports something else….and so on. You only attract wealth by creating products and services that are unique and provide utility to people. Hence demand gets created and people are ready to transfer their wealth to you in exchange of those products or services.

So you attract wealth either by producing something of value or by investing in companies that do the same or by trading financial instruments in an organized manner.

Which way are you attracting wealth?

Have you created your Financial Plan to guide your Investment Portfolio?

Your Investment Portfolio isn’t pulled from thin air or created in a vacuum. Your Portfolio is a tool to get you to where you want to go. You need to realize that you don’t have a portfolio – you really have a plan. It’s very important to understand that your investments must fit with what you’re trying to accomplish and that you must take appopriate risks to meet your goals.

Everything begins with assessing financial goals. You need to look at what’s important to you, what’s essential and what’s ideal. Then look at where you are, where you need to go, where you want to go and what it takes to get there. It is not easy. This procedure is not something you do in five minutes. An overall analysis – in form of a Financial Plan – is the best way to establish the returns needed to reasonably accomplish your goals. One of our experienced Wealth Advisor can guide you in accomplishing the process.

Next important thing is to determine the appropriate risk that can be taken. Risk is not determined by your neighbours or by the markets but rather by your own needs. Knowing how much risk you can take is essential. If you are saving and accumulating sufficient amounts and your goals are attainable, you may not need to take much risk at all. If you take more risk you may inadvertently jeopardize your financial health. On the other hand, if your needs are much greater than your resources, you may have to take on a higher level of risk in order to have a chance to succeed. If you take less risk, you may condemn yourself to a dismal financial failure.

The Financial Planning process will help you determine your Investment Portfolio strategy and determine the appropriate level of risk.

Strategy in a Turbulent Market

If you’re selling off investments when their value is depressed, you forfeit the chance to recoup. As you deplete the principal, you lower future income and potential for appreciation.

Turbulent times are scary. It is natural to believe that you must take action. The urge is – becuase we’re human beings and we’re not machines – to want to do something in a severe market downturn to change your strategy. Generally that action means selling investments and waiting for normal times to return. In essence, we want to get out and wait until we feel better about it. Acting on that response almost always is the wrong move to make.

To truly build an investment strategy that is as invincible as any you can create, you always need to have at all times a diverse portfolio of well managed, value investments. As long as you have a truly diversified portfolio across asset classes in place, you ought to be able to get through downturns without doing a lot except rebalancing. Downturns offer an outstanding opportunity to benefit from reallocating to your investments, letting you take adantage of what has been in favor and also what has been distressed. Markets move up unexpectedly and if you miss the initial up days, you significantly lower your long term returns. No one knows when bottom has been reached. At a bottom, it always feels like the market will go much lower. No one knows that a bottom is a bottom until months later.

In a downturn, continue to save and invest with the plan you had when investments were higher. Ongoing investing is even more important and powerful in turbulent times.