I had been investing for a number of years before I learnt how to deal with risk. By solidly identifying some market opportunities I had achieved good results, but I treated finance as a game of chess, an exact discipline, where I expected to benefit from good decisions and suffer from poor ones.
1. How to deal with risk
This over-ambitious approach occasionally caused some bad habits. For instance, when I was not performing well, I made three basic mistakes:
Equally, when I made profits, I was over-ambitious and assumed that my reasoning had been right. I thought I was a hero!
Backgammon rather than chess
Fortunately, it didn't take long before I evolved a different way of thinking. I realised that luck plays a role in the investment world. Profits can be simply due to good luck, and losses simply due to bad luck. Financial markets are more like a game of backgammon than a game of chess, because unpredictable events in the markets simulate the involvement of the dice.
With this discovery I started treating markets as partly random and accepted that there was always going to be risk. There is no perfect investment or trade. This approach helped my trading enormously.
This attitude to risk is worth adopting. Accept that trading is unique�-- a doctor or a lawyer would quickly be out of business with the number of failures that are part of a trader's life.
2. Good ideas can lose money
In 1999 and early 2000, Warren Buffett was very sceptical about the rising valuations in the stock market, particularly those in the tech sector. Consequently, he didn't invest as aggressively as many other fund managers. Then, of course, in mid-2000 the share prices of many tech stocks collapsed to a fraction of their boom value.
It was a massive market crash, and the so-called 'Sage of Omaha' was proved right (yet again!). I'm sure, however, that even he must have felt some pressure when prices were relentlessly rising and his funds were under-performing. With his reputation though, his investors stuck with him through this difficult period, and he held firm. They believed that he had the right approach, even though he was not getting immediate results.
Analysis after a loss
If you've lost money on an investment, ask yourself questions such as:
If you have let yourself down, learn from the experience and try not to do it again. But if the investment looks like it made sense, then try not to be put off. Accept that you cannot judge the quality of a single trade or investment by whether you made a profit or loss.
This approach is very disciplined. You do not want to change your investment style on the back of just a few disappointments.
The outcome of an investment or trade is not necessarily a true reflection of the merits of the original idea. Good ideas can lose money.
3. Wild swings and losses are uncomfortable, but they may offer the best rewards
While the markets have evolved and become increasingly sophisticated, there has been enormous scrutiny of just about every possible opportunity. Any obvious and reliable way to make money has now probably disappeared.
This means that there are fewer opportunities which offer smooth above-average returns. In fact, the opportunities likely to last longest are those which are the most uncomfortable. Would you be prepared to back an idea that would probably lose money eleven months out of twelve, even if it would probably pay off in the other month?
A lot of traders don't want that life. A lot of funds would be hammered with capital withdrawals by their investors. We live in a quarterly or annual reporting world. People evaluate performance over a given period and take action if results are not up to scratch.
By careful management of risk, however, you may be able to take on these uncomfortable types of investments. In the mid 1990s, I had "retired" and I only wanted to invest my own money. I continued to trade currencies and futures on my own account, and I also decided to start investing in early stage companies.
Early stage companies are often private companies which are not listed on any share market, although that is normally their aspiration. There are many of these little unlisted companies searching for financial backers, and they usually find it very difficult, since few investors are interested in them.
4. Opportunities may be found in areas that others find uncomfortable
One of my reasons for moving into this high risk sector, was that many people find the risk profile too uncomfortable. The majority of the companies fail, and the investor needs to select his investments extremely carefully, and trust that the winners will more than compensate for the losers.
Investors also have very little liquidity, and they may have to wait years for a chance to get some money back when the company floats on the share market or is acquired by another company.
This is why I came to the conclusion that good, small companies can be underpriced. This can be an advantage for anyone investing in start-ups if they are able to sort through the many companies looking for money and to choose the good over the bad. I have found the process is not that different to looking at the fundamentals driving currencies, interest rates or other markets, and over a ten year period, I have managed to achieve well over a 20 per cent�annual return despite the market collapse in 2000.
Not everyone though, can invest in unlisted companies. The minimum investment needed is at least 50 grand, and you probably need a network to make the introduction. However, I have also been able to apply the experience I have gained from dealing with unlisted companies to help me evaluate small companies which are already listed on the share market.
These are accessible to all investors. In a later chapter I will explore the fundamentals of small companies which I think are important for investors to assess. The small listed companies are also generally riskier than the big solid blue chip stocks, but by making an effort to investigate these opportunities and by managing your risk, you may find that these more uncomfortable investments offer a better price.
In general, keep a lookout for investments and trading styles that others don't like. It is logical that it may be here that you find the winners.
5. Diversify
The benefits of diversification are very well-known. There is a famous expression saying that diversification is the one "free lunch" for the investor. No collection of strategies would be complete without a mention of this easy meal. The world is risk averse. People want to avoid nasty surprises. Investors would prefer to have steady reliable returns, rather than potential wild swings of wins and losses.
Diversification can allow investors to reduce their risk without reducing their overall return. The idea of diversification is that it smoothes out the flow of wins and losses. It is unlikely that a variety of separate trading ideas will all win or lose at the same time. So even if we are placing riskier trades, it may not result in a riskier total portfolio.
I have discussed how I believe that uncomfortable trades with the big swings in wins and losses may offer the best rewards. So diversification is especially useful, because it may be possible to have a more comfortable existence, and still pocket the high return.
There are a few points to note about diversification:
(Excerpt from Taming the Lion: 100 Secret Strategies for Investing by Richard Farleigh, who made millions before he was 35 through shrewd investing.
Satyam said that the SEBI approval will enable the investor to acquire a total 51% stake in the company. The management added that Satyam will issue fresh equity of 31% to the investor.
Satyam further said that the investor will make an open offer for 20% on closure of the subscription. The investor will be issued additional equity if it fails to get 51% post the open offer, the management said.
The management also stated that no second offer would be required if additional shares are issued second time. Qualified investor, Satyam said, must have net assets of over USD 150 million.
Satyam also stated that the selected investor will have a lock-in period of three years.
Technicals : The stock is trading at 40.90 up 16%.It is showing bullish signs.If today it closes above 40 then it can move upto 51 and 59 bieng the next resistence Since the scrip is news based it would be a high risk gamble.Any negative news could bring the stock price down.Have a strict stop loss of 35 for any buy positions.
Since the stock market seems to have no bottom, investors want to know why.
What People Read
We know that individual investors are frightened, a perception fueled by stock market results. For most, the stock market is the barometer for economic forecasting.
Fueling this is the popular perception of the economic prospects. The New York Times pulled together a number of op-ed pieces, asking When Will the Recession be Over?
This is powerful material, drawing together the opinions of many experts. Readers should review all of the pieces. We know from reader feedback, emails, and calls that it was an important article.
Jim Grant, erudite, polished, and persuasive, tells us, "don't ask when."
Stephen Roach, of Morgan Stanley, predicts late 2010 or 2011.
A. Michael Spence, the Nobel-Prize winning management Prof from Stanford says "unusually long and deep global recession through 2010." That is if governments get their acts together.
William Poole of the Cato Institute rails against unwise government bailouts, which he believes are making things worse.
Eric Schmidt, Chairman and CEO of Google, expects signs of life later this year, and a resumption of normal lending in 2010, with the Internet playing a key role.
Financial writer George Cooper sees a financial drag extending into the next decade.
Harvard historian Niall Ferguson sees two years of contraction and two lean years after that.
Princeton Econ Prof and former Fed Governor Alan Blinder sees growth resuming in the fourth quarter of 2009, but with many caveats.
University of California-Riverside economists Marcelle Chauvet and Kevin A. Hassett take a probabilistic approach based upon past recessions, and see the probability of the current downturn lasting through 2009 at 50-50.
University of Maryland economist Carmen Reinhart focuses on a return to normal growth, setting out four years or more as the time frame.
NYU Econ Prof Nouriel Roubini sees a three-year recession, with chances for much worse.
A Different Approach
A different approach to the problem is to use a continuing panel, not selected for star quality. The Wall Street Journal forecasting survey provides such a comparison.
The Journal article on the latest survey carries a gloomy headline, Economists' U.S. Outlook Dims. The Journal surveys 52 economists, and reports on 2009 as follows:
The average forecast now sees growth in the third quarter at 0.7%, less than half the rate expected last fall. The fourth-quarter picture has also darkened, but just slightly, to growth of 1.9% from the 2.1% seen in November. Five economists see growth declining through the fourth quarter of 2009; they say the current consensus outlook, which says the recession will end in August as GDP growth returns positive, is far too optimistic.
Briefly put, the economic panel has reduced estimates for growth, but is dramatically more positive (less negative?) than the New York Times group. They see the monthly job loss for the year as 183,000 per month, much better than current rates, and unemployment peaking at 8.8%
A key difference is attention to the stimulus package, which they see as saving about 90K jobs/month. Interestingly some say it was too large, and others, too small!
Our Take
The entire media approach is very negative. The New York Times has an all-star cast of experts, but it leaves us wondering a bit. When an article like this appears it creates an illusion of scientific sampling. We are also bothered by the lack of attention to the dramatic government intervention begun many months ago, policies with known lags. The peak of the crisis came right after the Lehman fall and credit freeze.
None of the economic models have any experience with the myriad of Fed programs, not to mention the stimulus package.
Models can be quantitative or qualitative, but are always based upon experience. None of us have the relevant experience for this particular crisis, so our models are suspect. It is also natural to highlight experts who have been right -- those who "got it" in the popular Street parlance. The question is whether the skills involved in predicting the problem are also the right skills for identifying the possible solutions.
We find the WSJ panel to be an interesting counterpoint. The investment prize will go to those who can identify economic indicators showing any bottoming signs. With equity prices at depression levels, even a moderation in the depth of the recession could be good news.
Meanwhile, most investors are focused on the headlines.
If you want to recession-proof your career, the key is to focus on work that continues even when most people don't have disposable income to spend. So while consumers may not hit the mall as often, you can guarantee that people will continue to get sick, pay taxes and use energy. These are just a few of the careers and industries that can be expected to thrive in a down economy.
Although today's job market may be bleak, there are some bright spots if you know where to look. While recessions hit some sectors hard, others go on like clockwork — or even experience growth. So whether you're hunting for a job or still feeling ostensibly secure, now is a good time to evaluate your options and consider one of the aforementioned recession-proof careers
I always like to read and listen to veteran investors. Veterans are persons who have long experience or practice in an activity or capacity and these fellows have gone through booms and busts and normally know a trick or two about the markets.
Jim Rogers, the legendary investor, has been a frequent speaker on financial media over the last few weeks and is very bearish on the stock market. Recently he said to an Indian TV Channel, “I have sold all my stocks everywhere in the world, except for some stocks in China. I bought some more stocks in China in October and in November but I am not buying shares anywhere in the world.”
Jim Rogers, a long term bull in commodities, is still expressing his bullish views, and told Maria Bartiromo this week regarding commodities, “I recently bought more of all of them. But I really think agriculture is going to be the best place to be.”
To the contrary, Marc Faber while skeptical and pessimistic on the economy is bullish for the stock market at least short term. Marc told Bloomberg TV last Friday that “a countertrend rally could occur soon where stocks would suddenly rise quite substantially.”
Marc Faber sees opportunities elsewhere and recommends selling short Treasury Bonds and the Japanese Yen. Regarding gold, Marc says it is expensive relative to other commodities and stated that “I’m a little bit careful about the outlook for gold for the rest of the year.”
Doug Casey, the Chairman of Casey Research LLC known for his investment wisdom is very bullish on gold prices and terribly pessimistic on the economy. In a recent interview printed here on Seeking Alpha, Doug said “We’ve definitely entered what I describe as the Greater Depression. It’s not coming; it’s here.”
Regarding agriculture, Doug agrees with Jim Rogers stating that “I’m bullish on agricultural commodities. They ran way up last year and then collapsed again. I think a good case can be made that most of the soft commodities are quite cheap and will go higher.“
Casey likewise Faber, is bearish on Government Bonds and reaffirmed that “Government Bonds are perhaps the worst single thing to be in.” This is the point where they all agree. Consensus investing is dangerous, but this trade deserves a second thought.
It’s easy to sell mutual funds at the top of the market when the tide is
running with you. But you will do the most for your clients, and
hence in the long run for yourself, when you can sell successfully
against the tide. The tide that is running against us today is the tide
of credibility. But the perception that mutual funds are poor
investments today is not reality. Nevertheless, the tide of credibility is
running against us. And that is reality. I hope I can help you to
successfully sell against that tide. I hope I can help you to establish in
your own minds and in the minds of your clients the credibility of
mutual funds as long-term investments.
The bear market we have at this time has been the longest, broadest
and steepest experienced in over 25 years.
One significant reasonwhy there is such an extreme degree of bearishness, pessimism,
bewildering confusion and sheer terror in the minds of brokers and
investors alike right now, is that most people today have nothing in
their own experience that they can relate to this market decline.
They have the feeling that no one’s ever been here before, because
they
haven’t been here before.My message to you, therefore, is: Courage! We have been here before.
Bear markets have lasted this long before. Well-managed mutual
funds have gone down this much before. And shareholders in those
funds and we in the industry survived and prospered.
I don’t know if we have seen the absolute bottom of this bear market.
But notwithstanding the uncertainties that exist today – including the
possibility that the market may go lower – I personally believe that,
right now, good common stocks in general, and well-managed mutual
funds in particular, probably represent the greatest opportunity for
long-term investors that we have seen since early 1942.
Similarities between the current and previous
bear markets
That period and the current one provide some astonishing
similarities. There are differences, of course. But in their very
differences, there is a commonality.
Namely, each crisis ischaracterised by its own new set of non-recurring factors; its own
set of apparently insoluble problems; and its own set of apparently
logical reasons for well-founded pessimism about the future.
It’s worth taking a look at the environment in 1942 and comparing
it with the environment today:
First, nobody wants to buy common stocks today. Nobodywanted to buy common stocks in April 1942.
Today there are thoughtful, experienced, respected economists,bankers, investors and businessmen who can give you wellreasoned,
logical, documented arguments why this bear market is
different; why this time things are going to get worse – and hence
why this is not a good time to invest in common stocks, even
though they may appear low. In April 1942, any intelligent person
who read the papers knew that it was a lousy time to invest.
Today people are saying: “There are so many bewilderinguncertainties and so many enormous problems still facing us that
there is no hope until some of these uncertainties are cleared up.
This is a whole new ball game.” In 1942 everybody knew it was a
whole new ball game. Uncertainties? We were in a war that we
were losing.
Today inflation is a serious problem. In April 1942, inflation wasrampant.
Today there is concern about the slump in housing construction.On 8 April 1942, the lead article in the Wall Street Journal was:
“Home Construction. Private builders hard hit.”
Today almost every financial journal or investment letter carries alist of reasons why investors are standing on the sidelines. They
usually include (1) continued inflation; (2) illiquidity in the
banking system; (3) shortage of energy; (4) possibility of further
outbreak of hostilities in the Middle East; and (5) high interest
rates. These are serious problems.
I
n April 1942, discussing the slow price erosion of many groups ofstocks, a leading stock-market commentator said: “Signs are still
lacking that the market has reached permanently solid grounds for a
sustained reversal.”
— Our analysis of global property cycles (across 15 countries) indicates that:
– Volumes are closely related to GDP (lag of ~1-2 years) and real returns on properties but share a weak relation with interest rates
— While volumes have reduced sharply, banks’ outstanding to real estate has increased even as real estate debt has been successively downgraded
— Negative real returns on property are likely to drive property investors to exit holdings, keeping prices under pressure, keeping large project launches by developers at bay
— Developer volumes and sales are likely to remain highly subdued over an extended period of time and debt servicing will get increasingly onerous for developers
Capitulation, though delayed, is likely to return to haunt the sector
As the weak Asian stock markets heightened fears of capital outflows the rupee slipped to record lows on Monday. Analysts expect it to weaken more in the near term. At 10:23am, the partially convertible rupee was at Rs51.67/68, 1.1% down from Friday’s close of Rs51.10/12. The rupee traded as low as Rs52 per dollar according to Reuters data, although dealers said it was likely to have been a mishit that could be reversed with the counterparty later in the day. They said without that trade, the low was around Rs51.8 per dollar, which would still be a record low. The rupee shed 2.7% last week, its worst performance since the week to 14 November when it fell 2.8%.
Dealers said a number of factors had hit the rupee, including worsening economic data, falling stocks, importers buying dollars in anticipation of further weakness, and arbitrage plays between the onshore spot market and offshore derivative markets. Traders said exporters were cancelling orders set when the rupee was much stronger, adding to demand for dollars, and firms which had foreign currency liabilities were also seeking dollars. J. Moses Harding, head of global markets at IndusInd Bank, expects the rupee to strike Rs53 per dollar in the near term. The BSE Sensex has fallen nearly 10% in 2009, with foreign fund withdrawing about $1.7 billion. The outflows have been a key driver for the rupee. In 2008, the rupee fell 19.1% on the back of net sales of more than $13 billion of stocks by foreign funds. HSBC, which has forecast the rupee could fall to Rs54 per dollar by end-2009, said the current account and government deficits were likely to be the worst since the 1991 crisis. “We expect the external shortfall to exceed 3% of GDP in 2008-09, the highest for more than 50 years, while the combined central and local government deficit will come within a whisker of 10%,” HSBC economist Robert Prior-Wandesforde said.
The Indian rupee on Friday depreciated to an all-time low of 50.69 against the US dollar in early trade on continued capital outflow by foreign funds and increased dollar demand from importers.
At the Interbank Foreign Exchange (Forex) market, the domestic currency was quoted at 50.69 against the dollar, down 23 paise from its previous day's close.
Dealers said concerns of capital outflows by funds and increased demand for dollar from importers caused the rupee to weaken. They added that the dollar's gains against other major currencies also weighed on the domestic currency.
So what are the other reasons for the fall of the Indian currency?
Higher crude oil prices too have weighed in on sentiment. Oil refiners are amongst the biggest dollar buyers in the Indian currency market and the demand especially is at the high towards the end of a month as they make the payments for their imports.
Even a dip in the inflation figure did not help the rupee rise slightly. Inflation declined to about a 15-month low of 3.36 per cent mainly due to fall in the prices food articles like fruit and vegetables, pulses, and some manufactured items, raising hopes of cuts in the key policy rates by the Reserve Bank of India.
Meanwhile, the outlook downgrade by rating agency Standard & Poor's too has increased the risk of further depreciation of the rupee in the near term. S&P cut its outlook on India's long-term sovereign credit rating to negative from stable on Tuesday, citing worsening government finances, which could raise firms' overseas borrowing costs and weaken the rupee.
Morgan Stanley has predicted that the rupee could test 52-53 levels in the next 4 to 6 months on balance of payments pressures.
Demand for rupees, simultaneously, has dipped because capital inflows are down. The American sub-prime crisis that shook the global financial markets has seen unprecedented bailouts and infusion of dollars into the US economy.
This infusion has been at a cost of many an emerging market, from where funds have been pulled out to plough back into America.
India has been one of the worst hit countries on this count, as foreign funds took flight, thereby making dollars scarce. The sudden and colossal demand for the US greenback has seen it strengthen, while the rupee's exchange rate has depreciated dramatically during the same period.
India's stock market regulator, the Securities and Exchange Board of India, has said that foreign investors sold more Indian shares than they bought.
Global funds are said to have sold Indian shares to the tune of over $12 billion more than they have bought during the last few months year.
As demand for dollars from importers increased and the US Treasury poured in hundreds of billions of dollars into the floundering US economy to bail out drowning financial giants, the Indian market saw an outflow of a huge amount of dollars leading to a spurt in the dollar price against the rupee.
The growing Indian trade deficit and the large fiscal deficit are also contributing to the fall of the rupee. The demand-supply balance and the fundamentals are against the rupee.
One more reason for the fall of the rupee, as propounded by some economists, is the overseas non-deliverable forward (NDF) market that is not sanctioned by the Reserve Bank of India.
An NDF is a non-deliverable forward contract where financial institutions buy forward dollars (that is, they book dollars now for delivery at a predetermined future date) in the Indian market and at the same time sell a similar amount of dollars in an overseas market -- or vice-versa -- so that on the delivery date they make a profit or loss, which is the difference between both the rates.
The recruitment process for these jobs is expected to start soon.
How can India control the value of the rupee in the international market?
The Reserve Bank of India can sell dollars in the open market to bring down the value of the US greenback, albeit slightly.
Normally, the RBI uses its Monetary Policy to defend the rupee's value. Short-term interest rates changes do impact the value of the rupee against other currencies. But, the RBI has mostly used the policy to stabilize internal conditions, like steps to control rising inflation.
However, if the Indian stock markets boom -- like they did in 2007 -- more global funds would begin to invest in India thereby strengthening the rupee as the demand for the dollar in the local markets drops.
What has the RBI done?
The Reserve Bank of India is closely monitoring the developments in the global as well as domestic financial markets and stands ready to take such pre-emptive action as may be necessary to contain excess volatility in the domestic financial markets.
In order to alleviate these transient pressures which are related largely to external developments, the RBI has decided to take the following measures:
(a) Forex Market
In the light of current developments in the foreign exchange markets, as on some previous occasions, the Reserve Bank will continue to sell foreign exchange (US dollar) through agent banks to augment supply in the domestic foreign exchange market or intervene directly to meet any demand-supply gaps. The Reserve Bank would either sell the foreign exchange directly or advise the bank concerned to buy it in the market. All the transactions by the Reserve Bank will be at the prevailing market rates and as per market practice.
(b) Interest Rates on FCNR (B) Deposits
Currently, the interest rate ceiling on FCNR (B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 75 basis points for the respective foreign currencies. In view of the prevailing market conditions, it has been decided: to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates minus 25 basis points; and to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 50 basis points.
But why do currency values fluctuate?
There are many participants in any foreign exchange market. These entities -- like banks, corporations, brokers, even individuals -- buy and sell currencies everyday.
Here too the universal economic law of demand and supply is applicable: when there are more buyers for a currency than sellers, its exchange rate rises.
Similarly, when there are more sellers of a particular currency than buyers, its exchange rate in the global markets will fall. This does not mean people no longer want money; it only means that people prefer to keep their wealth in some other form or another currency.
