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Saturday, 12 March 2011

Define your Investment Strategy

For years, if not decades, we've lived under complacent financial allocations. Most of us consider debt to be risk-free. Till a few years ago, most of us considered equities to be risk-free over the long-run. We systematically look at price targets on our investments without considering the downside risk we're taking on. The number of equities investors, who get paranoid when their portfolios are down 20% tells you everything you need to know about the lack of appreciation of risk that permeates societies across the world today. Mass-marketing of financial securities has led to a widespread under-appreciation of risk. These false convictions were both the foundations of and the consequence of one of the most pronounced financial bubbles in human history. 

If there's one thing I'd like you to take from this blog, it's this: think through the impact of your financial decisions. Appreciate the risks involved. Pursue returns consistent with your risk-taking capacity. Also understand that the monetary system we live in penalizes idle money. Money loses value over time. A dollar today will be worth less in 2015. So, most of you probably don't want to leave your money idle. However, none of you want to be invested in a stock or commodity based purely on hope. There needs to be a compelling reason that draws your funds into a long-term investment.
There needs to be a degree of conviction to a short-term trade. People have got rich based on good fortune in the past, and they will continue to do so - but, a competitive market punishes gamblers and rewards investors who enjoy a genuine edge in the market place. There is time tested wisdom to George Soros' assessment that "Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes". 

Booking your losses is often an important ingredient in seeking long-term returns. Liberate yourself from any emotional ties to your investment decisions. Investing, trading and making money in markets is about buying low and selling high. Compelling ideas are worth more than mediocre ones - but all investments have a price beyond which they are irrational. Don't get caught up in irrational exuberance.

In the days, weeks and months that follow - I will often draw upon a compelling idea. I might tell you how much of my allocation I consider it worthy of. However, please always make an independent financial decision if you ever choose to follow a recommendation. Risk-assessment is something I will constantly re-visit on this blog. But, don't ever lose sight of the downside risk of any financial security. There are no "sure things" in financial markets - merely high probability events. Good bets and bad bets.

Personally, I don't build hard and fast allocations. I've had zero percent in my equity portfolio on occasion. I've had exclusively long positions. Exclusively short positions. I've had a mix. I've moved significant portions of my portfolio to gold, and I've held no commodity at all. However, this is a consequence of dedicating myself to markets. For most of you, you will need to make allocations. While doing so, you need to consider your time horizon, your appetite for risk and the entry point of your investments. Always stress test your allocations. Consider a scenario where the risk you take on leads to significant downsides. Ponder what you would do in that situation.

Don't expose yourself to risk levels that you can't handle emotionally. Markets tend to oscillate between greed and fear. If you learn to disassociate yourself from both emotions - you will increase your chances of making financially sound, rational decisions.

Happy Investing

Welcome Back


Welcome to Eazeetrade. The goal behind this blog is to document my thoughts on global equities, macro-economic trends, economic theory and asset allocation.

A bit of background about me and my point of departure. I have spent several years trading and analyzing various investment instruments. I am more inclined to trade secular trends, but the life of a investor is incomplete without trading those tactical and strategic trades: so you will find plenty of those on here.

I certainly have a set of intellectual convictions. I am a libertarian and I believe in free markets. I am intellectually obsessed with money. There's nothing quite as interesting as it. It's one half of every transaction and perhaps the most important element to modern human history. Of course, I'd like to see a more sound currency. I'd like to see greater freedom. I'd like to see good businesses thrive and bad banks fail. But, let's not get carried away with the political side of what interests me.

As a trader, I'm often long markets which I believe are structurally flawed. There is no contradiction there. Trading isn't a lesson in philosophy, it's a life-long course in analyzing risk. You never want to be on the side of a ship with too many people on it. In certain circumstances, you have to learn to be a contrarian. On other occasions, the trend is your friend.

The best way to think about trading is to divide trades into three broad categories. Secular trades, which you want to be involved in over many years. These must be backed by a big idea. A thesis. A sound rationale and inescapably sound logic. Secular trades will usually make you the most money. The life of a trader isn't one that revolves around big secular calls, however. It revolves around the second type of trade. Strategic trades. These essentially involve making a limited call on the future. A strategic trade may be to short an automobile manufacturer under conditions of rising interest rates and commodity costs. It may be to go long exporters under conditions of a weakening domestic currency. It may be to be short the market due to expectations of a negative industrial output reading. Strategic calls are challenging - but, if they're well executed, they can be deeply rewarding. Finally, as a trader, you tend to spend a lot of time figuring out tactical trades. These aren't the most intellectual exercises on the planet. These calls focus on execution. They're all about getting involved in a terribly oversold stock, and getting out at the first sign of resistance.

The above is what I consider most relevant about my approach and background. I currently focus primarily on Investment opportunities in India, Canada and USA but my methods of analysis and views are primarily global. The blog will feature plenty of thoughts on global indices, commodities and such - but, stock specific stuff will usually be restricted to India, US of A and Canada.

One of the main reason's I am now documenting my trades is because over the last few years, I was deeply pessimistic about the economy at the top and I grew quite bullish in March '09. In between all that, I have picked out key variables that defined relative out-performance. I do believe my approach to markets is founded in a deeply agnostic, dispassionate approach which might aid some of you in your understanding of markets. I'm not a classic technical trader - but i use a lot of technical analysis in the way I trade markets. At some stage, this blog may be the starting point of bigger things.

Until I decide otherwise, consider this a free to view, free to use blog on the global economy. Feel free to comment on any posts - lively debate is always enjoyable. I will also be posting details on trades I enter, before I enter them, with my target price, stop-loss level and I'll sometimes take you through a trade where I change those levels around based on various indicators. I'm a passionate trader, a genuinely inspired economist and a generally curious human being who loves markets. I look forward to sharing thoughts on a range of issues with you.