Speculation Diary : From your neighborhood

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Why me? From all people in the world why does it happen to me? I lost money, I lost relationships and I always wondered. Why did bad things happened to good people? I love to tell you success is a magic but its not. I love to tell you success is quick and overnight but it’s not. I know we want everything yesterday but it’s not true. It’s a struggle everyday, between you and you, between your core belief systems and results you are receiving every moment. The good part of tragedies is actually they are shaping you, without telling you.

Recently (in last few years) I believe there is a surge of hyper interest in stock markets. This is largely due to:

  • rules of the games have become simpler (user friend technology)
  • low cost operation (discount brokerages)
  • ready made reports for compliance (e.g. tax computation statement automated)
  • abundant amount of information available freely.
  • generous training programme (some times scam).

More importantly why scores of people turned to markets. There are many reasons:

  • market is considered as epitome of financial independence. It’s believed to be the reflection of country’s growth, company’s performance and sign of well oiled governance system.
  • market provides a promise to compound your capital and it’s base much quicker. So with as little capital of 1 lac even people feel they can make a lot of money.
  • frustrations with current quadrant where they are on. If by working full year your increment translates to 60K (pre-tax), here you stand a chance to win same 60K in 10 minutes.
  • when we step in to doctor’s place we would like to see at least one MMBS after their name. Some carry qualifications more than their address. Here no one feels there is an entry criteria. Without an entry barrier stories are getting sold citing few exceptional individuals on earth.

Am I trying to discourage you? No, no. I am just telling you everything works in a context. Market is a science , market is also art. It’s like Himalaya, gives opportunities to everyone to come and conquer. But not without processes, systems and more importantly hard work and discipline.

For today I am leaving with few food for thoughts:

  • It’s banks, financial institutions who moves money in market. Individual (including Mr Buffett) doesn’t have power to manage collective psychology. Hence we are more reactionary to market than initiators though we may not agree.
  • Most of market wizards (only authenticated wizards are from Jack Schwagger book) do not have a tweeter account or social networking account. They do not appear on television neither news paper.
  • performance metrics are never shown by institutions than only ROI (return on investment). ROI or CAGR doesn’t tell you about risks that was taken, the capital base that was compounded or even the psychological changes when you were executing.
  • If a hospital is run by MBBS then where is MBBS in market. Answer is they are restricted to speak or share. This leaves the field to non-MBBS people, sometimes become a parody.

Watch out for the thread, I will update at least twice a week. I saw 25K users on Zerodha platform. If it can change 25 people’s process I will consider it as my Karma. I am nothing but a survivor of 23 years in financial services industry and speculative world as independent trader cum investor.

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Update 2

A small boy (say 10 years old) in a small sleepy town told fascinating story about money making in stock market by a relative who happens to dabble in stock market. The image of money imprints brain of this boy, it was so much so the boy decides only thing he will do in world is buy and sell stocks. As time passes by 10-year-old boy becomes 20-year-old. By this time, he is matured, knowledgeable and have a demat account. He sits in front of sea beach with a laptop with a beer bottle next. He clicks the mouse for 10 seconds in morning and another 10 seconds in afternoon. Result? He gets entire month expenses in single day. A Bollywood ending.

Now the twist, the lines other than bold are my own story. But nothing happened what I anticipated like in bold lines. Investing or trading turned out to be gut wrenching, extremely disciplined and hard-working venture. Even with decades of investing banking experience it didn’t offer me click to money offers. Rather a lesson I learnt which is very valuable as Einstein said. ‘Do not seek success, seek value. If you are valuable, they will pay you.’

These days when someone asks me about market and its freedom, I go on mute. Reason, can’t tell lies, at the same time can’t finish life time of discipline in 10 minutes. Then silence becomes golden, not going to be silent now. My answer is going to multifold, behold with patience.

First step becoming a successful trader or investor is line up personality those who have travelled this path and shared. Luckily for us speculation is old as hills, it’s the sibling of greed and fear. Two most stark personality we should understand before even thinking about investing are:

  • Jesse Lauriston Livermore
  • Warren Edward Buffett

Jesse Livermore

He was perhaps the greatest stock trader ever lived, made the quickest money in history of mankind. Born as unwanted child (parents didn’t want any more child) was forced to go to farm with father. The poor child runaway to Boston and rest as they say history. From chalk boy in bucket shop to greatest bear of wall street he has seen it all. The man had the ability to fight back from bankruptcy within few months, he made 3 million dollars (equivalent would be 300 million now- 2100 Cr) in a single day, was spending 2 million a year (say 200M now- 1400Cr). In the end he went bankrupt and shot himself in a dull evening, that was the end of his legacy. Whether stop loss or pyramid we owe foundation of modern speculation to Jesse Livermore. He may have died his wisdom never died.

Warren Buffett

Born in 1930 when Mr Livermore was one of Top ten richest man in world. His father almost lost everything in 1929 crash. The boy fought through entire life and build a philosophy called value investing. This means buy companies who runs fantastic business, market will take care of you. Unlike Mr Livermore who never studied balance sheet, for him market was game of abstract numbers. Mr Buffett is known for book reading, philanthropy and frugal life style despite his gigantic money.

A champion speculator like Jesse Livermore combined with champion human being Warrant Buffett can probably put the compounding interest into outer sky limit. But in real life it doesn’t happen. They are all unique.

You read more profiles you will come to know very few basic principles:

  • It’s not easy for any one of them.
  • They have seen at least 2 or more failures in life (these are bankruptcies).
  • They have worked through head off, extremely hard-working people.
  • They loved discipline so much even some of them work from home wearing shoes.

There is more list to discuss, for now let’s take a step back and analyse. If these are quality required for being successful investor then mute question aren’t, they applicable to every endeavour you do. You are right, trading is no different than running a business.

Next, I will discuss as extension of this, Why trading? You can’t survive in trading without making money. At same time you can’t succeed even by chasing money only. Quite contradictory? No, every thing looks contradiction till we untangled the thread of confusion.

I leave with you a story which should remind first thing after we woke up from bed.

President of United States did not want another economic depression and market collapse. During 1920’s Herbert Hoover (US president then) sent his emissaries to connect with nine most influential people of the time and build a fool proof plan to avoid future catastrophe. This infamous meeting took place secretly in Florida and outcome was a flop. None of the guys agreed on anything. But what’s interesting is aftermath, huge lessons for us. Here it is:

Participant 1: President of largest steel company of world- Charles Schwab. He died in 1939 BANKRUPT. He was known to even defy presidential orders.

Participant 2: President of largest utility company- Samuel Insull. Died of heart attack in 1938 in Paris metro station because he was a poor man and couldn’t have afford medical bills. Once he paid off entire Newyork Port so that his yachts could be parked before it was over ruled by Presidential orders.

Participant 3: The greatest stock trader ever lived- Jesse Livermore. Shot himself in 1940 after fell to bankruptcy fourth time. Only living Livermore family member is a porn actress now. He paid off traffic policemen from his Long Island mansion to his office in Manhattan (120 km stretch) so that there won’t be red lights for him.

Participant 4: The greatest bull of world- Aurther Cutten. He vanished post 1929, last he was seen streets of New York, no one knows what happened after he lost his fortune. Cutten was famously known with Bernard Baruch to have their cavalry of cars. They wanted to be treated like President!

Participant 5: The president of New York stock exchange- Richard Whitney. Post 1929 crash he was sentenced to jail for life, properties confiscated. With terminal disease he was released from jail to die in slums. He created a coveted club at hay days where even US secretary of defense was not invited (income criteria).

Participant 6: The president of largest gas company of world- Howard Hubson. He lost everything including his mental balance. He was declared insane person by court. Lived last part of life talking crazy and ridiculed by people on streets of America. At some point he refused to meet Winston Churchill (one of influential leaders and UK Prime Minister) citing lack of time.

Participant 7: President of world’s largest bank- Leon Fraser. 435 cases filed post bankruptcy, his name was called out in senate to send him in gallows. He couldn’t handle humiliation, killed himself by taking large quantity of nitrogen. When US banned alcohol manufacturing in world during world war I he opened a factory with Jesse Livermore for self consumption.

Participant 8: Head of greatest monopoly- Ivar Krueger. Took his life in mysterious circumstances. He was a Swedish where he controlled even the Public elections of Sweden sitting from Chicago.

Participant 9: Anchor of meeting- a presidential nominee. Albert Fall. Imprisoned life time , died in jail.

The above people along with another 5/6 family (e.g. Durrant, Morgan, Rockerfeller, Rothschild, Carnegie etc) controlled 65% of world wealth for almost three to five decades. Perhaps this was the last time when so much wealth and power controlled by a handful people between 15-20. Interestingly all of them started from a humble beginning, extreme hard working people, innovators, dreamers…all quality one would like to have and aspire for.

Lessons:

  1. Those who are on top now are not certain to finish top or even no guarantee to everlasting influence.

  2. Be careful about whom to idolize.

  3. Being larger than life looks good in movies, don’t imitate them in real life. Life humbles you if try to humble it.

  4. Managing expenses is key behind happiness. Instant gratification is prime reason responsible behind bankruptcy. Be careful of debt and EMI, don’t use them unless necessary.

  5. All of these guys led a sedentary life style, rarely enjoyed a family life. Hence be a family man.

Tragedies start early and accrue interest over time, these nine men never realised their eventuality in life started in the day when they refused to abide by law, they refused to believe in gravity even! Let us not become lazy to realise real values of life, the same hard work and discipline needs to be consistent till you set out for your last journey.

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Update 3

Money is unit of account- Nothing more nothing less

Famous proverb, ‘honey it’s all about money’. Then it’s also true money can not glue you to your objective for long. How does one balance between?

  • Trading is a game of money- without money making task is incomplete
  • No objective in world has ever been built on money- stay away from meaningless obsession of money

First question why money is required? It’s simple to trade or invest you need capital which is expressed as money; may be in digital form. If capital vanishes with due course then you are out of game. So basic rule of trading is to have money (please note I said it’s rule not objective). To have money here will mean either you retain a substantial amount of money what you came with or increase the money. But to increase or retain money please note the following:

  • You may not win as you would like to
  • You may not be right as you would like to
  • The winners may not be impactful as you would like to
  • The winners may not come quickly as you would like to

In other words, you are likely to lose, you are likely to be wrong and you may wait for no reason. Even when you have money you have to manage all of these and imagine it stands good even if you don’t have money. Can money alone help to overcome ego, pain, struggle, fear, greed or hope? Answer is no, that’s where psychology becomes centrifugal part of pyramid. Or more appropriate terminology behavioural finance.

Now the first secret, how you are going to make when you lose a lot, when you wrong often, when things are stacked against you. Answer lies in metric like anything else and metrics is measurement in terms of mathematics which never lies to you. Metrics here is:

Expectancy Multiplied by Number of opportunities

Expectancy in short is return on capital employed by you. A positive expectancy means positive return. A positive return can be created mathematically when:

  • Either you increase the accuracy (meaning win higher number of times)
  • Or when you win it’s big enough to compensate losses when you lose.

Now if your expectancy is 20% (0.2) it means you are making 20% on every 100 rupees capital invested. It doesn’t matter you are buying with a technical indicator; you are buying after a bottle of whisky or you just gamble as your wife says buy! As long as positive expectancy exist you exist in market, you make money. It’s simple and easy to remember. Now imagine you have positive expectancy what is the other things you need? Well, all you need is keep repeating as much as possible and that is number of opportunities. Because more times you repeat positivity it creates a compounding effect.

This is the only holy grail investing have, no other secret exists.

There is another intertwined element and that is holding period in creating a positive expectancy. Shorter the cycle bigger is compounding, this is the advantage of trading for those with smaller capital. Suppose your average holding period of a stock is 10 days and expectancy is 20%, it means you are making 20% capital in every 10 days. Incredible compounding, it’s possible but not easy. The difference between trading and investing lies with holding period. Investor holds for a longer period where as a trader churns the stocks much faster. Why they do, another time.

On next episode let’s talk about:

  • Difference between trader and investor
  • How to address problem of accuracy
  • How to address problem of margins (profit/loss)

We will talk in detail about entry set up, value investing, screening etc as we progress.

But to do all this there is something not negotiable. And that is your self-belief. It’s a long subject, we will keep touching every time. The mundane way of self-belief is at least getting motivated to start with:

  • If you hold your ground and push through pain you will become stronger. All life demands struggle, we don’t appreciate and become lazy to appreciate real life values of life and that is and that is hard work and discipline is main ingredient of your future.
  • Without struggle there is no victory. When you earned, no one can take away from you.
  • There are winners, there are looser and there are people who has not discovered how to win.
  • Nothing is impossible unless you want to make it. I want you to hold on, it’s necessary you go for your dream.

(*Assorted quotes collected from many places).

I leave with you NINE books that I always found extremely helpful while practising (I am not including focussed subject books like entry set up, money management or psychology).

Number 9

Trend Trading by Darryl Guppy: An Australian trader and coach has been able to simplify usage of fractals through his GMMA (Guppy Multiple Moving Average) which indicates behaviour of traders and investors as moving averages contract and expand. This is an all-inclusive book covering screening to entry and basics of risk management. Darryl Guppy have written multiple books covering money management etc (you can try them separately).

Number 8

Secrets for profiting in bull and bear market by Stan Weinstein: A colourful personality 1980’s. He picked up economic theory of John Maynard Keynes and decipher stages a stock go through or stage analysis. Another package book covering end to end.

Number 7

Long term secrets to short term trading by Larry Williams: Larry Williams holds a world record in turning 10000 to 1.1. million in a year. Often for many he was the first to highlight significance of money management. A money management technique is also attributed to him i.e. Williams Fixed Risk. This book is not about specific money management. Larry tells you how to basic OHLC bar and engage actively to produce a system with positive expectancy. Very practical and easy to follow.

Number 6

Trade Like a stock Market Wizard by Mark Minervini: Mark Minervini is one of market wizards over last four decades. Largely from the school of investing who use both fundamental and technical analysis (O Neil disciples). This book talks about everything again, the expansion to O Neil methodology can be seen e.g. VCP (volatility contraction pattern) is natural economic behaviour of prices. Second sequel of this book is Think and Trade like a champion. Both books are masterpiece.

Number 5

How to make money in stocks by William O Neil: Another investing legend and market wizard, known to be father of techno funda investing. His widely known framework CANSLIM (CAN-Fundamental SLI- Technical M- Macro) is not only explained but you can see live through Market Smith Application (O Neil coaching market material are far better and economical than most twitter jokers).

Number 4

Universal Principles of Trading by Brent Penfold: Hard hitting book, combines money management with a simple entry set up. Provides practical nuggets on how to do. The coverage of money management is mind boggling.

Number 3

Market Wizards by Jack Schwagger: It’s a four series book where trader cum journalist Jack Schwagger met and interviewed painstakingly with most of great traders of our time including O Neil, Seykota, Paul Tudor and so on. Multiple readings required, the book will tell you: how to identify basic traits for successful trading, how to avoid scams of course and lot more wisdom.

Number 2

What I learned losing million dollars by Jim Paul: Jim is a commodity trader of 1970’s who made a fortune of hundreds of million dollars and lost everything in 45 days. Of course, his come back from abyss, all presented with practical insight. A rare book will tell you difference between speculating, trading, investing and gambling.

Number 1

Reminiscence of a stock operator by Edwin Lefvre: After reading of thousands of books and attending seminars suddenly you realise everything can be found in this book. It’s the fictional biography of Jesse Livermore. Mr Livermore was a loner, when he unravels his journey in pseudo name to Edwin Lefvre no body imagined the book will become a cult for generations to come. It’s a holy book, at least one reading required every year.

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