Bears Bulls and Pigs

“Bears make money Bulls make money Pigs get slaughtered

This is very apt in context of the Stock Market.

Let’s see how it works :

Bears represents people who have a very cautious notions about the future of Stock Market.And there is nothing wrong about it and it actually helps them make money in their own cautious way.

When a price rises too much the cautious nature of a Bear helps him to control his Greed and he is ready to sacrifice an apparent chance of further profit for the security of his principal and gets satisfied with his profit which anyways is more than he was targeting.

Bulls represents people who have a very aggressive and positive notion about Stock Market and that too is not a bad thing either and they make money in their own aggressive way with a strategy.

Most of the times they have a tested strategy and they too like Bear are cautious with a difference that they are ready to put their money with calculated risks.

Bulls are generally first to get into the bandwagon during the initial phases of a price rise and many times they start selling parts of their investment to reduce the risk once price start rising further.

Now when the story of price rise starts making rounds in financial world and herds of experts start giving their own reasons that justify the price rise and giving further positive outlook towards the stock making it look more attractive.

Now comes the another species in the picture the Pig and that is the one that buys that story of still untapped potential of the stock with an inevitable price rise that is going to happen very soon.

Afraid to lose an opportunity and getting assurances from so many expert voices.They start buying believing ‘no price is too high’ for such an opportunity.

This is the time when most of the Bears and Bulls are already out and there is an abundance of Pigs which are waiting for many more Pigs which will bring them a handsome financial reward.

Does that dream comes true ?

You know how it turns out…..right

What happens in reality is somewhat different and it’s nothing short of slaughtering.

We’ll explore more …. Stay Tuned.

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Value Investing the ‘Model’

Human mind is amazing in its capability to create models and we can try to understand Value Investing through the concept of Models.

What is a Model?

A Model is defined as “A hypothetical description of a complex entity or process”.

In our context, the entity is Stock Market or the process is investing in Stocks.

Now don’t be alarmed by the term complex here. The nature of entity need not always define the nature of Model that can help us understand it.

Another important thing to note is that most of the times a Model cannot explain all the things about the entity and focus only on some aspects of it.

So we need to have a clear distinction between what a Model CAN do and more importantly what it CAN’T do.

Let’s try to understand “Value Investing” as a Model that we want to use to explain the investing in stocks.

Main thing to remember is that it’s just a Model like the numerous others.

Which brings us to another question:

Why we want to consider “Value Investing” Model instead of other Models?

The main USP of this Model is Simplicity.

Value Investing does not try to predict the timing of stock market prices. It only helps to buy at a bargain and then waits for the Market to inevitably move towards “Intrinsic Value”.

“Intrinsic Value” is nothing but the fair,optimum value for a business that is supported by some quantifiable aspects of the business.

The “Intrinsic Value.” is determined using methods that produce a fuzzy but very important benchmark.

Now, “Intrinsic Value” calculation is important…. But and that’s a BIG BUT…. The more important thing is to understand that ….It’s NOT the level of accuracy of “Intrinsic Value” that makes the core of Value Investing but the concept of having a “Value” as a benchmark. …..This distinction sometimes is very hard for people to grasp.

Simplicity is just a matter of taste. Some like it complex and some like it simple.

Though added complexity could make the model more accurate but that’s not always the case and most of the times it does not worth the efforts.

To accommodate this possibility of error in calculation another important concept in Value Investing Model is that of “Margin of Safety”….which just states that you only buy at the maximum distance possible from intrinsic value.

“Margin of Safety” is embodiment of the concept of giving up the accuracy for the sake of simplicity and at the same time maintaining the effectiveness of the Model.

A Value Investing Model just boils down to…”You just have to be good at only one thing… and that is identifying mispriced businesses.”

This involves understanding the fundamentals of the business and doing some relatively simple math related to the performance of the business.

We’ll explore more…Stay Tuned.

Myth of Instant Money

One thing that people want to know is :
                     How we can get instant money?

They just wanted to be hand over a ‘Secret’ to double their money in an instant.
It’s like going to a magic show where the magician converts one pigeon into two using a ‘Magic Wand’.

One interesting thing is when these same people go to see a magic show they behave more sensibly and just clap on the act of magician.
If they behave as unreasonably as they do in matter of investing they would have snatched the wand away from magician and run as fast as they could and then try to create pigeons in vain attempts.

This thinking process in case of magic is at most futile with no real consequences…..at most you will be frustrated and will soon realize that it was an illusion and nothing more.

However, in case of investing this kind of thinking process can be irreversibly devastating to the financial health of the person.

The problem intensifies when as a natural process this Demand for the‘Secret’ is followed by Supply:

“Get rich quick” schemes: Make 120% in 1 WEEK using our ‘Secret’formula.
*Annual charges: 100000 INR.

Yes, that’s 120% in a week and NOT 1.2% a week (which itself is more than85% a year).

Now, who is going to get rich by these kind of schemes is a no brainer.
Is it something different from claiming to generate pigeons out of thin air !!

You can decide that yourself….by asking right questions…

If they indeed have a ‘Secret’ formula that works so well they would have more than what Mr. Warren Buffett have….which is just over 34% per annum over a period of 40 Years.

What makes these sensible persons to behave so insensibly when it comes to finance and investing that they are even ready to consider these kind of options?

We will try to understand it in details… Stay tuned.