Dealing with the Depressed Markets with a Smile

Everyone makes money in Bull markets. It is said that the bulls are the friends of the fools. This is
why when the bulls get slaughtered in the market crash; the fools are the first victims. They are the
most hopefuls of the lots. They tend to believe that there will be always sunshine, they ignore the
earnings and warning signs, garland the high flyers in the name of growth, and welcome the Mergers
and Acquisitions as the sign of welcome interest in their economies.

However, regardless of the pains, they enjoyed the journey and whatever minor gains they earned for
their smartness. The market correction comes from nowhere, without notice, without anything
appearing on CNBC or other business channels, and that is what called the “Market surprise”

Market is the unpredictable Beast

Often the media blurts on both horns that “market says this, market says that, market will go here,
market will go there etc”. This is very amusing. The market never talks; it just behaves the way it
wants to. The innocent investors, who are normally late entrants; read, hear and watch 100 times
same item and get carried away.

I always used to teach my customers that you never make investments by reading newspapers or
watching CNBC, NDTV or other stocks channels. When the news is known to everyone, there is no
more secrecy left, and the stock pattern reverses itself.

Now that one has burnt his finger as a speculator, he qualifies to become an Investor. The losses are
the tuition fees that one pays to learn from the bears. The bulls just kick, not bears. This is why there
is always a “Bear Hug’. Only those hug, who are the friends or well wishers. Have you heard ever the
term “Bull Hug”?

Not many cope with the stress and the problem. They begin to distrust everyone, same way the
banks do not trust each other today. All are in same boat.

Learn this Primer before you proceed further

When you were in normal or bull market...
You were perhaps entering after watching others making money (that they falsely claim – never
believe them). Your entry level is perhaps high. Do the following:
1. Treat each transaction (A1, A2, and A3) of each stock (A, B C) as separate transaction.
Never count the Average Cost
a. Sell the transaction whenever you are in profit by at least 11%.
b. Thus if you are losing in A1 but making money in A2 and the stock is not going further,
sell A2 and retain cash – do not employ elsewhere.
c. If the stock A goes higher, do not regret your decision for selling A2. You still have A1,
so sell it if the stock has made big move recently.
d. If the stock goes down, buy back the same stock, if you believe that its full potential is
not reached as yet.
2. NEVER hate yourself for any mistake. It is natural. You are your best friend and worst
enemy. You decide what you want.
3. Never ignore your mainstay business while investing in stock market. Remember, you got
money to invest only from your mainstay business.
4. Keep two boxes – RED and GREEN.
When you make money, deposit 10 Cents/Paisa per 100 (0.10%) in either box
if you booked losses or gains. For example, if you make 1,000, deposit Rs/$1
in your green box. If you have booked loss, put it in red box. At the end of any
period, see how many units are in Red and Green. If Red contains 20 and
Green 30, you made a gain of 10 x 1000 – 10,000
 5. Avoid buying IPO in bull market because they are always hyped up and valuation is rich.
When the stock does not have history, do not touch it as far as possible unless you have
special reasons to do so. The idea of becoming instant money on opening day of the trading is
dangerous. I never bought IPO in my life.

Look what happened to Reliance Power IPO (in India). While it is at depressed level, in this
market crash, Goldman Sachs has come up with the negative recommendation lowering the
target even further. Where was Goldman at IPO time? All brokers are suckers in the game –
When it is good, they call it best; and when it is bad, they call it worst. When they want to see
the price higher, they talk about the company Vs GDP, Infrastructure, and growth etc – all big
things. When their call goes wrong or the master crashes, they start talking about the
fundamentals.
6. Read, listen and watch everything and everybody but make your own decision. God has
given you the tiny little brain which is thousand times more powerful that Intel dual core chips.
Use it while you are human, otherwise in next birth (if you believe in reincarnation theory), the
God will make you an insect or animal that does not need a versatile brain of human.
7. Reverse the transaction as soon as possible if you ever thought that you made a mistake
due to impulse. For instance, you bought a stock by error, just sell it right in the market,
regardless of loss you have. Similarly, if you have sold something by mistake, buy back
immediately. (The reason is that if you continue, it stings you even at night and you will
continue to blame yourself). This is the biggest mistake an investor makes. In stock market,
the only thing that counts is the Decision, Decision and only Decision similar to in property
where the rule for selection is Location, Location and only Location. How much you lose in
reversing your faulty decision immediately – only 1% to 3%? Just take it, instead of losing
20% to 70% later.

In stock market or for that matter, in any market, only decision makers make money in the
long run. The indecision makers always tend to lose and they blame their own fate or lady luck
for their loss. Both fate and lady luck amuse themselves. They know their job is thankless.

Restructuring the troubled Portfolio for quick Turnaround

Remember, the market is an ocean. Anything you throw into the ocean always comes back. The
ocean is large hearted – it never retains anything for its own use. Similarly, what you throw into the
market will ultimately come back, provided you follow the market discipline. All the points mentioned
under 1 to 7 apply to the depressed market as well.

Now that you have lost heavily, do not brood over it. It is a fact. The loss is a history. You can not roll
it back. Your aim should be how to recover and turn this cheaper opportunity into good profit. This is
the art you will have to learn and practice.

At any time, you feel that you are indecisive, follow the mentioned rules in two parts – Actual and
Demo. When you are unable to decide with physical involvement, play it out on paper in demo
exercise. Write down the date, time and index when you took the actions. It is provided in the excel
spreadsheet provided in the download center on right bar in the file of same subject as enclosure.

1. If your portfolio is very large, more than 12 stocks, you will have to prune down the list to 12 or
less. Check your list and determine what you hate and would not have. (Example – Watch the
growing plant; if some shoots are blackened, the gardener prune them out to save the whole
plant. He also prunes the healthy shoots to promote the growth. An investor should also take
the profit in same stock occasionally)
2. When the market recovers, the large cap stocks recover first. So determine, whether you have
any large cap stocks. If you do not have any, buy some first. When the market is sufficiently
advanced, sell the large caps and focus on the mid or small caps held by you.
3. NEVER think that if the stock at 100 is expensive and at 30 it is cheap. All prices are
relative to earnings. See the price relative to earnings (P/E)
4. If the market sentiment is negative to extreme, DO NOT invest fresh money; instead do
the following:
a. Re-Check which stocks you want to retain for long haul.
b. If you own high priced stock, and loss is not much, sell it to raise the cash for
redeployment later.
c. Identify the sector that might benefit more on recovery. You will be buying stocks in
those sectors first. Within that sector, you have to identify top 2 or 3 stocks. The
selection of stock is more like a beauty contest. They eliminate 45 contestants to come
to final 5, then 3 and then the final one.
d. Identify which stock has the least loss and one has maximum loss. Sell the stock with
least loss (say 20%) and buy the one with greater loss (say 50% or more). By doing
so, you are averaging down the cost of the bigger loser with same amount of money,
without pumping new money.
e. If the stock has come down by 70%, (say 30 from 100), the stock has to more than
triple from low level. So, buy 3 times more than original quantity (if you own 300 @100,
buy 1200@30). My rule is simple; if the stock has become 1/3rd, buy 3 times; if 1/4th,
buy 4 times and 1/5th buy 5 times. Of course, you do not buy all at same time, but in 3
stages; 2 on way down and one on way up so that you know that the bottom has finally
reached.
f. Bring down the list to 12 or below. Do not focus on other stocks unless they offer better
value. How many children you have? 2 to 5 or more than 20? Keep the inventory list to
the extent you can effectively manage.
g. After doing above adjustments, relax, have a coffee, go for a movie in Cinema (not at
home) and have a fresh look at the reformed portfolio. Just as the pruned plant needs
time, but it does prosper very fast, your portfolio will bloom soon.
h. Study those stocks in details, paying special attention to their behavior, how they move
up or down, in size and speed, and its volume. If the price rise or fall is not
accompanied by volume, the movement is erratic.
i. Remember you will not use the law of averages while making decision. Each
purchase is a separate deal. If that deal makes money, you should be prepared to sell.
j. Do not try to make money in every deal. It is impossible. See the overall position,
whether you made money in the portfolio (not individual stocks) or not.
k. Watch the market movement, government policy, concerned industry, and the
industry that may benefit
l. Invest new funds only when you feel that the market has stabilized and may not go
down more. Allow the market to come up by 15% from all time low before deciding to
invest more new money.
m. It is always more profitable to average up than average down. In such case, your
average cost is always below the market. For instance, if A 200 cost in bull market was
100 for 200 shares, and then crashed to 20, you buy 3 times at 20, 18 and 25. Then
when it reaches to 40 and retraces to 35, buy some more. The idea is to catch the
upward trend. Please note that this imperfect science. It all depends on the mental
make up of an investor, and circumstances prevailing at that time.
n. Always be alert and agile even if you are not participating in the market due to bad
conditions. Always keep the market conditions right under your eyes. You never know
when the screaming opportunity would arise.
o. Be stock specific rather than market specific. If certain stocks go down more due to
reasons peculiar to the industry, buy that stock regardless of the market conditions.
EXAMPLE: When the oil prices were very high, near 145, the Airline stocks
were very low, so also the refineries. They would have come down more
due to industry specific reasons. Buy them.
p. DO NOT sit over the stock like a Chicken hatching an Egg. If the stock has gone
up higher and slows down, simply sell that stock at the market even if recent high
could not be reached. When it comes down, buy it back. Do not use that money for
other stocks. In other words, in bear market you float with the stocks.
q. EVEN IF you make wrong decisions, do not worry. It is better to make 3 wrong
decisions than not making any at all. Once you start making decisions, you will
improve progressively with the result that you may one day make a big killing that will
 compensate you for all past losses. It will also improve your character. In every form of
business or personal life, you will begin to make decisions rather than keeping the
issues on back burner. Delay is gone from your life forever.
r. Sit before Candle at night for 10 minutes.. . When you lose money, you do not get
sleep easily. What you must do is to sit before a lighted candle for 10 to 15 minutes
just before you go to bed. Focus only on light. Deep breathing also help you focus
better. Inhale from left nostril and exhale from right. Presume that gains are coming in
when you breathe and losses are moving out when you exhale. This has nothing to do
with finance or stock market. It just makes you focus on trade as well when you
transact. Secondly, it costs you nothing and gets everything.
s. And finally, Dress Up at your Best during Bear phase… When you dress up well,
you feel good and charming. You will begin to respect yourself. This is what you need.
Money comes to those who are neat and clean. Good things always bring in good
result – that is the rule of the nature. So do it.

I enclose the Hypothetical Portfolio and how is it restructured. This applies to all markets. Replace the
names and indices as appropriate to your country. It is an excel spreadsheet where you can replace
my entries with your stock name and quantity and price. You can modify to your needs as the time
passes by.

Please remember, the Gains and Losses are the form of day and night. They come
and go all the time. Face them like a Lion, not a Lamb. You are your best friend and
your worst enemy. Pick up what you want.

This reminds me of a friend who died some time back who used to display a banner in his home as
under ( English translation from Gujarati – an Indian language)

These Days Will Never Be Forever

I asked him what it meant. He said:

In good days, it forewarns me not to overspend.

Good days never last forever. Save something when there is sunshine.

In bad days, it encourages me not to despair.

Do not spare your efforts. Double up. After all, these bad days too do not last forever.

Kalidas, Hong Kong

14-Oct-2008