Sunday, December 25, 2011

Investment Strategy

My Investment Strategy needs updating after reading the book " What I Learnt  Losing A Million Dollars".

1. Position Limits
No More Than 25k in a single stock.
 This is a very strict rule which need to be followed; No amount of promise of stock can break this rule.
2. All these Orders Are Placed On entry-- 10k is your current market.
- 15k  buy order @ 25% less than the 1st buy.


3. Holding Period
Minimum of 1 year.
- This is a strict rule, no amount of valuation will let you change your rule.

Stock Selection Checklist-

1. Working Capital Trend or NPA\NPL trend positive.
 2. Discount to Tangible Book Value
 3. Percent away from 52 week lows 
 4. Business should be #1, #2 or #3 in market share.

5. Power of customer should not be huge.

Sunday, November 13, 2011

Risk Management

I have read writings of Gerald Loeb, Jesse Livermore, Max Gunther, Nassim Taleb, Peter Lynch, Warren Buffet etc. on position sizing, loss cutting and various other risk management strategies and found many of them contradictory and unclear.
 In this blog I point out what each one said and then give my take on this-

Cutting Your Loses Early and Don't Average Down-
 This is probably one of the most controversial rules out there.
  • Buffet and Lynch basically advocate averaging down because of their value bent. If you think a stock is valuable $10 per share and when at $5 it should be of greater value all else remaining equal. If you don't average down then you need to sell the stock ASAP. Buffet says that you should have the stomach to take a 50% loss on your investment and not throw in the towel.
  • Loeb\Livermore\Taleb advocate using stop losses and getting out of bad situations early. 
  • Taleb makes an interesting point which contradicts his stop loss rule  which is - "The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on". What this means is that if most people use stop loses to hedge their positions then most of the time stop loses will be triggered irrespective of the direction of the stock.Now you could argue that stop loses are not hedging but my take is any loss minimization program is a hedge. 
  • My take: Automatic stop loses means that market maker will constantly trigger  your stop loses because of the hedging rule by Taleb. My take is Lynch\Buffet have the best rule for success with some caveats. You need to understand the business thoroughly before you average down. Companies with debt coming due or companies needing more cash means that you are at the mercy of others.

Invest Only In Things You Understand-
  • Taleb,  Buffet and  Peter Lynch argue for that but for different reasons. Buffet\Lynch think that you invest in businesses not stocks and more you understand what you buy better you are. Taleb argues that price action on instruments you trade need to be understood.
  • Livermore\Loeb are a pure macrotrader where he says that in a bull market all things on up and in a bear market all things go down. You need to worry about the larger trend\general conditions and  not about individual fluctuations.

Position sizing-
Buffet\Lynch\Gunther all advise on holding max 5 holdings. Any thing more you are diversifying for the sake of diversifying anything less you are increasing your risk. Market risk cannot be eliminated but firm risk can be reduced by diversification.

Buy and Hold-
  • Lynch\Buffet all want you to hold for the long run disregarding the recession.
  • Livermore wants you to hold until bull market ends.
  • Gunther wants you to take profits quickly.

Saturday, October 15, 2011

Zurich Axioms - Max Gunther

I got hold of this lovely book by Max Gunther. These are basically axioms about investing and risk taking.

First Axiom: On Risk
If you are not worried enough you are not risking enough.
My experience is that whatever you are buying should sound awful. You just need to be the last man standing, if you have some people standing with you then you are taking a big risk.
If you are not worried about your investments then your investment has not bottomed and has lot more to fall.
HE also says everything is speculation and there is no difference between investing and gambling.

Friday, October 14, 2011

How To Get Lucky In Life!

This post is from the excellent book: How to Get Lucky: 13 techniques for discovering and taking advantage of life's good breaks.

Here are his 13 tips to turn your luck around:

The First Technique: Making the Luck/Planning (skills) Distinction

When a desired outcome is brought about by luck, you must acknowledge that fact.
 If you confuse luck with planning, you will all but guarantee that your luck, in the long run, will be bad.
This is a very common problem in financial markets and business where distinction of luck and skills is non existent. So people gloat over success when they were plain lucky and luck runs out after a few innings.

The Second Technique: Finding the Fast Flow
Go where events flow fastest, surround yourself with a churning mass of people and things will happen.
It doesn''t matter if you are a quiet person; all you need to do is meet a lot of people and let them know who you are. Then they will direct opportunities your way.
Put in a different way try different things and get exposed a lot.

The Third Technique: Risk Spooning

There are two ways to be an almost sure loser in life.
One is to take risks that are out of proportion to the rewards being sought. The other is to take no risks at all. Lucky people, characteristically, avoid both extremes.
So basically take bets which are in your favor but don't leverage yourself, so you need to have the staying power.

The Fourth Technique: Run Cutting
Always assume that a run of luck is going to be short, never try to ride a run to its peak. You will virtually always be right as the law of averages is heavily on your side.
If you have good profits on your investments expecting the same investment to outperform is foolhardy.

The Fifth Technique: Luck Selection
Is there some likelihood that the problems with your investment - whether it be time, money or love - will go away? Do you have some realistic hope of fixing them? If so, you should stay aboard. If not, you should get out and look for better luck elsewhere.
Basically cut your loses when you look at insurmountable odds. Do not have cavalier attitude.

The Sixth Technique: The Zigzag Path
Despite what many people think the path to success is rarely a straight line. Lucky men and women, on the whole, are not straight-line strugglers. They not only allow themselves to be distracted, they invite distraction. A plan should be used as a guide only and if something better comes along the plan should be discarded immediately without regret.

The Seventh Technique: Constructive Super naturalism
Not because it makes you more lucky but because it helps you make impossible choices. Sometimes there is no rational choice to make, yet the worst reaction is to do nothing.
A supernatural belief can enable people to get into a potentially winning position simply by helping them make choices.

The Eighth Technique: Worst-Case Analysis
Lucky people, as a breed, tend to be pessimistic. Optimism means expecting the best, but good luck involves knowing how you will handle the worst.

The Ninth Technique: The Closed Mouth
Talk can tie you up and lock you in positions that seem right today but may be wrong tomorrow. Avoid unnecessary talk about your problems, plans and feelings. When there is no good reason to say something, say nothing.

The Tenth Technique: Recognising a Nonlesson
There are experiences in life that seem to be lessons but aren''t. Recognise when something was just bad luck and move on.

The Eleventh Technique: Accepting an Unfair Universe
All of us, the good, the bad and the in-between, are all equally likely to realize our fondest dreams or contract cancer.

The Twelfth Technique: The Juggling Act
The more activities you have going the greater the likelihood that something good will happen.

The Thirteenth Technique: Destiny Pairing

This is someone who is someone who changes your luck over a long term. This person is not necessarily a romantic partner and is usually just found by blind luck but it can help if you are actively looking.