My life’s learning in Speculation

I was fascinated by the stock market ever since Harshad Mehta became famous.

People have mixed views about Harshad Mehta, but if it wasn’t for him, many people including me would have not been fascinated by the stock market.

It was not the thousands of crores, his Lexus cars or his penthouse with a mini golf course that really made him important.

That was only to fill and sell the magazines and TV shows.

More importantly it was the mass hysteria that he created which made him extremely powerful.

Just rumours of his investment took a junk stock like Karnataka Ball Bearings to  more than 100 times it original value in a few months.

If rumours of his selling a stock came, that stock collapsed.

Banks were lining up and running behind him to give him money to invest.

It was not the money that he made or the fancy stuff that he had, but the power that he had over the Bharatiya stock market is what fascinated me.

The power that Harshad Mehta had and the madness he inspired is what led to my introduction to speculating in the financial markets.

I am largely a self-taught speculator.

After more than 26 years of speculation, and big wins and even bigger losses I thought I should at least briefly write down my lessons from my experience so that people can learn from both my mistakes and successes.

One can never truly be a master at speculation.

It is a continuous learning processes and every trade is a new lesson to be learnt.

Speculation is a combination of both art and science.

It is very rare to find a person who has a combination of both artistic and scientific talents.

But such people who can combine both artistic and scientific abilities make the best speculators.

In fact, not just in speculation, but in any field, the people who combine both art and science into their work, will come out as the highest winners in their field.

To be a success in speculation you must conquer four fundamental things:

  • Ignorance
  • Fear
  • Hope
  • Greed

To eliminate ignorance:

  • Follow overall market patterns for at least 18 months to two years
  • Focus on the charts and institutional buying and selling, and insider buying and selling
  • Focus on pledging of shares

Using the above guidelines you will gain some measure of knowledge.

Ignore and black out all the news, especially TV news and internet message boards.

Remember the stock market is only 15-20% of the financial markets.

There are much larger and profitable and less manipulated markets like commodities, bonds and currencies which also offer immense opportunities.

These markets are still manipulated, but unlike investing in the stock market which is completely opaque, the commodities and currency markets are relatively more transparent.

In Bharat, only the equities markets are developed and extremely liquid, so trading in the commodities and currency markets in Bharat has huge spreads and low liquidity.

Trading in the bond markets is only available to professionals and is the most opaque and illiquid market.

All the markets in the world are tied to the USA.

If the USA markets fall, the whole world falls. If the USA markets rise the whole world rises.

So for the best trends in the USA for equities, financials and commodities follow the CBOE Commitments of Traders (CBOE COT).

The CBOE Commitments of Traders (CBOE COT) is the best indicator for the trend of the market.

Here is an explanation of the CBOE COT.

However the  CBOE COT  is only numbers and very difficult to understand.

As they say a picture speaks a thousand words, so to look at the CBOE COT in pictures, use the CME Quik Strike.

This gives you the map of the USA markets.

With this map if you learn to navigate it properly you will have at least a 20% idea of the trend.

The rest is left to chance since the markets are completely irrational.

It is run on the madness of crowds and as we know madness can never be understood.

Genius is found even in madness but is limited to probably one in a million.

For the rest of the crowd all that is found is madness.

That all the secrets I reveal about my practices.

You figure out who to follow from CME Quik Strike.

Another good site is the Barchart.com Commitments of Traders. 

These charts are much easier and simpler to read than the CME Quik Strike and give the added advantage of the current price of the commodity also.

Hint:

The Managed Money are the wolves.

The Dealers are the shepherds and the Producers are the sheep – they can fight the wolves and direct the sheep.

Shepherds can even direct the sheep off the cliff and the sheep will blindly jump.

But sometimes the sheep just jump over the fence and run away and escape and leave the shepherd and wolves chasing after them.

The most exciting market in the world is the Shanghai Composite (SSEC).

The Shanghai Composite (SSEC) is a good gamblers most orgasmic wet dream and a clueless gamblers worst nightmare.

The Shanghai Composite (SSEC) can fall 4% in a day and rise 2% the next day.

Can you imagine the scale and magnitude of profits or losses that can be made by trading on the Shanghai Composite (SSEC)

However do not speculate in the commodities and currency markets with not more than 0.5% of your net liquid income (net cash only, not land, gold etc), after all expenses, including your planned foreign world tour with your wife, mistress or toy boy whichever may be the case.

I have made huge amounts of money before I reached 30, that ordinary people would not make in a lifetime.

But finally, I have only been an eventual failure in speculation over the last 25 years until early 2018.

That is because I could not conquer hope and greed.

People may conquer fear, but hope and greed is the is downfall of most speculators.

Forget about candlesticksmomentumMACDCCI and fundamental analysis.

No matter how many books you read, or however many years of experience you have, if you cannot conquer fear, hope, and greed, you will never be a success in speculation.

First develop a disciplined mind to conquer fear, but more importantly to conquer hope and greed.

The only way to conquer fear, hope and greed is by the sincere and sustained practice of ध्यान (Dhyan) to achieve समत्वम् (Samathvam).

Of course I must not forget to mention that before you start to practice ध्यान (Dhyan) in speculation, it always helps to get kicked in the face many times so that you feel and understand what fear, hope and greed is.

Only when you feel and understand fear, hope, and greed, then you have some chance of learning to conquer it.

You cannot do this by paper trading, you must put your real money at risk.

Of course, since you are putting real money at risk, only put money that you can afford to lose.

Of course, you can be a bigger ass like me and make and then piss away huge amounts of money so that you learn what real fear, hope, and greed is.

But what I did was totally unnecessary, and I would not advise anybody to make my mistakes.

In the recent past from 2019 onwards, I have learnt to conquer hope, but more importantly I am learning to conquer greed.

So, my results are starting to improve since 2019.

I have returned more than 50% on my investments from late 2018 to date as of June 2020 when markets the world over have negative returns.

I am ordinarily not a greedy person at all.

Almost all the money I have I spend on others.

Ask my friends what I would do if I had only Rs 10 in my pocket and saw someone in need.

But when I speculate, I used to get very greedy.

I wanted double the profits than what I already had. 

I would double my bets instead of taking my cards off the table.

This has been my downfall till the recent past until early 2018.

I figure if even a world class speculator like Jesse Livermore did break his rules and make mistakes, I also have made the same mistakes, but hopefully am learning not to repeat them in the future.

Jesse Livermore broke his rules so often that he finally went bankrupt and shot his brains out.

That happens when you don’t learn from getting kicked in the face many times.

My  favourite all time book on speculation is Reminiscences of a Stock Operator.

It is about Jesse Livermore, the greatest speculator in modern history.

By the age of 15, he earned $1000 ($28000, Rs 18,00,000 in 2017 value).

He made $100,000,000 ($1.4 billion, Rs 9100 crores in 2017 value)  in the crash of 1929.

Just follow the below rules by Jesse Livermore and you will be a success at speculation:

1.Cut your losses.

2. Let your winners run.

3. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

4. Money cannot consistently be made trading every day or every week during the year.

5. Don’t trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

6. Markets are never wrong – opinions often are.

7. The real money made in speculating has been in commitments showing in profit right from the start.

8. As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

9. One should never permit speculative ventures to run into investments.

10. The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

11. Never buy a stock because it has had a big decline from its previous high.

12. Never sell a stock because it seems high-priced.

13. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

14. Never average losses.

15. The human side of every person is the greatest enemy of the average investor or speculator.

16. Wishful thinking must be banished.

17. Big movements take time to develop.

18. It is not good to be too curious about all the reasons behind price movements.

19. It is much easier to watch a few than many.

20. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

21. The leaders of today may not be the leaders of two years from now.

22. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

23. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

There was one very important lesson that Jesse Livermore forgot to mention.

Never put all your eggs in one basket.

Never go for “All or Nothing”, because most times you will end up with nothing.

This does not just apply to investing, but to any aspect of your life.

Never risk more than 10% of your trading capital in a single long-term equity trade.

If you are trading short term and volatile products, never put more than 2% of your trading capital in a single trade.

Always use limit orders when you buy and sell, never use market orders

Do not set automatic stop orders unless you cannot watch the market regularly.  If you cannot watch the market regularly then set automatic stop orders below set moving averages chosen on the volatility of the stock.

This publication is for informational purposes only, it should not be considered Financial or Legal Advice.

Investments are subject to market risks and you could lose all or a significant portion of your investment.

Consult a financial professional before making any major financial decisions.

Before you take their advice, make sure the financial professional has a significant portion of their own, and if possible also their children’s net worth, in the investments that they are recommending to you, just like I have done, and publicly displayed at www.artofrealwealth.com.

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