Saturday, December 24, 2016

The Secret to being a Successful Investor

“If one negligently leaves the bath running with the baby in it, one will realize as one bounds up the stairs towards the bathroom, that if the baby has drowned one has done something awful, whereas if it has not one has merely been careless". I didn't say it. Thomas Nagel did. I just copied pasted it. Because it made me realize something. That this could be it!! After all these years of reading and learning and making mistakes (and repeating these steps again and again, though not necessarily in the same order!), I have quite accidently stumbled upon the secret to successful investing. The difference between success and failure. The answer is actually quite simple. Luck! Just plain ol’ simple dumb luck!

I know you are disappointed with the answer dear readers. But please bear with me. Just indulge me and read the above quote once again. What defines the magnitude of our mistake is not the nature of the mistake itself, but its consequences! Looking back at all the mistakes I have made in my investing lifetime (so far), I realize that I have been extremely lucky! Actually, I can hardly believe how lucky I have been. If all the mistakes that I have made had ended with the worst-case scenario, I doubt if I would have ever had the opportunity to learn from them. Or I would have learnt from them, but would certainly not have had the resources to implement my “learnings”. After all, there are just so many times you can lose your entire bankroll and start all over again.

So many times, we make the mistake of attributing our good luck to skill. And we attribute our bad luck to, well, bad luck. In fact, this phenomenon is so common, that there is a whole mental model about it. Self-serving bias.

“A self-serving bias is any cognitive or perceptual process that is distorted by the need to maintain and enhance self-esteem, or the tendency to perceive oneself in an overly favorable manner. It is the belief that individuals tend to ascribe success to their own abilities and efforts, but ascribe failure to external factors.” - Wikipedia

No matter what investing school you belong to, fundamental or technical, value or growth, there is a great amount of forecasting attached to it. Forecasting, by its very nature, involves uncertainty. And uncertainty involves probability. The easiest way to increase your odds of success is to reduce your odds of failure. And the simplest way to reduce your odds of failure is to learn from your mistakes and avoid repeating them in the future. Every little mistake ticked off results in increasing the odds of success. But like we said in the beginning, the magnitude of our mistakes is not defined by the nature of the mistakes themselves, but by their consequences. And this is exactly where luck comes in! What if the initial few mistakes all had dire consequences!

I believe I am becoming a smarter investor every year. Not because I am closer to finding any secret stock picking formula, but because with passage of time, I can now recognize mistakes that I have made in the past that I had never noticed before. And that, I believe, holds the key to being a successful investor.

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Monday, November 28, 2016

The market is going down

It's certainly been a long time since the last blog post. Long term investing sure is fun if you like watching paint dry. Luckily for me dear readers, it turns out that I actually do like watching paint dry. And its all the more fun if the paint company in question happens to be a sizable chunk of your portfolio! If you are Indian or invest in the Indian stock market, no prizes for guessing which is this paint company!

Anyway, in the last blog post, written on 31st July, I had commented about the negative divergences appearing in the Indian stock market. Here's a copy of the chart that I had posted last time.
    
                             

Well, the prediction has played out perfectly and the market has fallen a good 10% from its highs. And here's how the index looks currently.


Pat pat. That was me patting my back. But seriously dear readers, I have to admit here that I didn't expect the market to fall this much. Same why like I didn't expect Donald Trump to be the leader of the free world. Same way like I didn't expect 500 and 1000 rupees currency notes to be banned in India. I guess my predicting abilities do have their limitations. So much for the pats on the back.

Anyway, the same negative divergences pattern is now appearing in MACD in S&P. 



Is the market headed for a fall? I think so. 
When will this fall happen? No clue. Your guess is as good as mine.
How much will it fall? I can give you the next support levels but so can any guy with crayons who can drawn horizontal lines and trend lines.


Come to think of it, I can't tell you much. But what I can tell you, and luckily for me, it turns out that this is the most important thing in investing, is that how I will react and what my reaction is going to be when the market falls. There are very few things that you and I can predict, and even fewer things that we can control, but we certainly have control over how we respond to these events. Do you have a game plan ready for when/if the markets fall 10% from here?

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Sunday, July 31, 2016

The value investor and technical trader in me both agree for a change......

Note: If you are not interested in the Indian stock market, feel free to directly head to the last paragraph. I think it pretty much applies to all markets and asset classes.

If, like me, you are an investor or trader in the Indian stock market, then you have had a pretty good last three-four months. All dips, and there haven't been many, are being bought and new 52 week highs seem to be pretty much the story of, well, everyday. As someone who is an alumnus of Class of 2008 of Stock Market University, I certainly do appreciate times like these. IPOs getting way oversubscribed, newbies giving advice about trading, pundits looking way into the future. These are magical times. I for one, am certainly not complaining. Normally this means conflicting times for the value/growth investor and technical/momentum investor in me. But not this time. Let's have a look at the NIFTY chart. 



You can see the new highs I talked about. But the MACD indicator is telling a different story as far as the last few weeks is concerned. New highs in the index are being accompanied by lower highs on MACD. Its a pretty decent negative divergence that we see developing. This could mean two things, (a) price consolidation (b) time consolidation. When would this happen? While a couple of years I would have tried to time exactly when this would happen, and you could find plenty of such posts in this blog, now, I don't care about exactly when it would happen. All I am interested in is the probability of it happening, and with each new high, the probability of either of the above two scenarios occurring increases.

What am I doing about it? Well, as a long term believer in India's growth story who has a dream of attaining financial independence, I don't have a choice but to be a long term investor in the equity markets. Most of my net worth is in it. But July was the first month in many years, that I have taken money out from the markets on a net basis. Times like this are a great opportunity for removing the weeds from your portfolio and that's exactly what I am doing. I am not too concerned about the index, if anything, I am enjoying the ride, but I am finding it harder and harder to allocate new money in the markets. So I am not going to force it. Taking some existing money off the table and holding on to the new money till the valuations reach a reasonable level is my strategy for the time being. If the markets continue going up, I am going to enjoy the ride. If the market correct from here, I am going to be ready to try and use the opportunity.

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