Speculation to Technical Analysis- Mundane to Exciting

Speculation is an intellectual estimation in advance based on historical facts and figures. My mentor said which is something to similar to what Paul Tudor Jones said earlier. I did not have a choice to tap head and trying to focus on what he is saying. I asked are we saying we don’t need to understand business, or do a valuation even? Mentor cut me in middle, no I am not saying any such thing. Add speculation a layer to your investing philosophy, by the time I was shaken to the core some of books on behavioural finance. I accepted ok lets start (may be in heart I bet myself if this turns out to be gambling then no place for me!).

After six months with number of iterations we arrived at a framework which looks like this:

TEN element of speculation- reminiscence all the way

  1. Setting objectives
  2. Entry Plan
  3. Exit Plan
  4. Holding Plan
  5. Money Management Plan
  6. Trading Systems
  7. Testing of trading systems
  8. Speculation work book
  9. KPI Pack
  10. Behavioural finance tracker

Technical analysis is a small subset of speculation which increase the probability of entry plan as it is based on historical facts (hardly not even 5% of overall speculation). Element 1-9 consists roughly 25%, element ten is around 75%. What does it mean, by following 1 to 9 you can survive as speculator, but you want cut into league of ultra success or master the art of speculation you need to master element 10. I am no where close to element 10 , yet I could hole out expenses from trading in current year.

I can get into detail explanation of each of these terminologies, rather I would advise you to read and familiarise, nevertheless will cover a broad definition of each of the component. I am going to attach practical worksheet which I use to help you understand better.

A small tip which I am convinced same way it work for value investing even. If you keep on copy set up or blindly follow technical analysis only luck can make you alive.

The game of speculation is the most uniformly fascinating game in the world. But its not the game for the stupid , mentally lazy, the person of inferior balance , or get rich adventurer. They will die poor.- Jesse Lauriston Livermore

Element 1: Setting your objectives

I am not a trader, I don’t intend to be one either. This was my ego ridden reply to my mentor when we started conversation on speculation. Like a seasoned master craftsman he didn’t argue with me or pinning me down. He asked what are you looking from speculation? I learned to say now speculation rather than trading (request you to find out difference between speculation and trading- surprise is waiting for you).

I said I like the way speculator use probability to their own advantage e.g. position size, pyramid, exit strategy etc. I am sure some of them can be applied into my investing framework. Our project commenced and we have four major revisions till date. I traded more than 100 plus trades this year. Result is not of importance to you, but it is positive so far. I must confess lot of work required to become successful speculator.

Ok I said can I make 25 lacs from speculation in a year? What is the amount of capital required? My guess for year 1 was a staggering 1.5 Crore capital to generate 16% healthy return.

By the way objectives are beyond a number, if you don’t like speculation you wont be successful no matter you bring 100 Cr capital, you will blow off in the market.

Before I take you through excel spreadsheet, what are they key questions we pondered before finalising this spreadsheet.

  • Target amount
  • Number of stocks and trades required with appreciation there of
  • Pyramid structuring to increase positions
  • Permutations and combinations of winning/loosing
  • Capital outlay to achieve target amount

Here is conclusion for you:

Maximum block capital (without reshuffle and reinvestment) of 88 lacs required we can generate 25 lacs speculation profit. This can be achieved through 7 winning stocks and 49 trades with a probability of winning as low as 30%. We expect the stock appreciate 48% by price.

  • we are taking maximum capital outlay, in my experience this year reinvestment is well upto 50% even with strong market trend. This means you can make 25 lacs with 44 lacs capital in a strong bull or bear market.
  • we assume we will exit after 48% appreciation. In fact 200 plus appreciate more than 100% last year.
  • actual probability of winning over a long period extends to 40% plus.
  • leverage can add a rocket to compounding both way, lets avoid for now.

In other words this figure can be conservative. Then mute question is it so easy? 80-100% return sounds like insane, isn’t it? Devil is fine details, market remains range bound 70% of time. Repeating optimistic scenarios is going to be tough, but applying proper money management techniques the return can be far higher in the year when you have a tail wind. You can enjoy your value investing during other time. Nevertheless risk appetite, position size even very much applicable to value investing.

Commentaries to excel sheet:

  • Standard stop loss is used at 8% (there are multiple ways to define a stop loss, this is for illustration purpose, based on volatility in practice I use 5-12% ATR based stop loss).
  • Pyramid- initial position at 3000, Trade 1 and Trade 2 at 12000, base reduced to 9000 and 6000 subsequently.
  • Max position size restricted to 1.5 lacs against 12000 risk, so corresponding 3000 risk would be 37500.
  • Once profit becomes 3 times of risk we are withdrawing 50% of shares from position (profit booking). The next position becomes base plate of pyramid and top becomes light.

Please let me know questions if any, even I am on learning curve and amending continuously.

Next topic ENTRY PLAN which includes:

  1. Market direction
  2. Entry set up conditions
  3. Rules
  4. Filters
  5. Catalysts
  6. Increasing position conditions

Good wishes

Trading Objective.xlsx (16.8 KB)


A presentation on speculation/technical analysis. Zoom where letter looks small.
Stock_Speculation.2.pdf (2.1 MB)


Anatomy of a Stock Wizard- Know Yourself First

We touched this subject in one of previous post . Story remains same for a Trader but we have to blend certain philosophies specific to understand crowd behaviour. Being a traditional accountant who attempted investing methods based on pure fundamentals, it was not easy or simple for me to adopt the nuggets of wisdom offered by wizards.

Like me there are hundreds of folks here who adore the path of value investing or growth investing but every synopsis must go through fundamental aspects of company. I will never abandon the study of book keeping or business but will not be an ostrich buried in sands to acclimatize with crowd behaviour.

Aspiring to be contend within

First few months of understanding speculation was mostly around technical analysis. Bullish pattern, candlesticks, Fibonacci, Head and Shoulders and a long list of names which I never understood by heart and soul. Somehow, I couldn’t convince myself that these are best when it comes to understand crowd behaviour, perhaps these successful indicators were built with a rationale. Knowing those rationales should be important, are there not any other way. Now the good point I can share with you is 1. I have not abandoned the analysis of balance sheet nor will in future. In fact, creative accounting practices will be significant challenge going forward. 2. I rarely used any of popular technical indicators available with charting tools. 3. Large part of success comes from managing risk and position size, I will write in due course.

Then obviously how does an ingrained fundamental investor learn the nuts and bolts of crowd behaviour or speculation? I never refrained from approaching those who are approachable. I chased a stock market wizard and US investing champion, some useful guidance shared by him. My request to 20 plus guys would be, do not hesitate; chase your man BUT give him/her a hope that he can see some of you within him. This means in simple language is demonstrate some hard work and objectivity before expecting nuggets from wizards.

Finally, I have my mentor, if you don’t have one go for it. They are fun and interesting, knowledgeable and helpful, guide and examiner and more importantly you chase them initially; after some time, they chase you to finishing line.

Now credits:

  1. Market Wizard series
  2. Michael Covel interviews and books
  3. Mark Minervini books ( to me these books are too good)
  4. Another bunch of books and articles
  5. Lessons learnt at few seminars on behavioural finance, crowd behaviour.

First thing I was told and learnt is ‘ you may follow different investing method but you can not avoid certain common traits (like capital protection, you call stop loss or something else is not relevant).’ Second you can build any emotional discipline (rather we call philosophy) and customise. For example these days I pick up stocks from momentum screener, come back to check acceleration growth, again goes back to see crowd behaviour before checking competitive advantage of company and so on. Third as my mentor says ‘ a desire to succeed’.

My mentor says every successful results as a precedence requires opportunities and greed in first place. And stock market provides plenty of them for you to find out and execute. Do not let anyone who influence you that you can’t do it. It’s mostly told by people either they haven’t done it or I can not be Warren Buffett or George Soros. We don’t want to belong a category WHO CAN’T DO IT, rather we try and fail. On second aspect we have spoken before, are there only two people (namely Buffett and Soros) in stock market who buy and sell? Who wants to be them? Irony is they want to see different styles of Buffett and Soros within us. My experience says there are thousands neither do not grab attention on television or newspaper, even not billionaires but richer in many aspects than they could have. Mumbai guys, search your neighbourhood Spiderman :blush:, you guys are lucky. But we are promising we will catch up with you soon, of course nothing takes away gigantic spirit of Mumbai.

Unlearning: upside down

How much I can lose not gain is key question behind every speculation. Risk first approach is cornerstone behind success and trust me this is the most difficult to practice as we set foot in stock market either to make a lot of money or become famous having lot of bhakts.

  1. Never give up- starting from March 16 I couldn’t make headway much in world of trading. A number of times I was about to quit the game. This time my excuses were different obviously. A. why do I have to disturb well-oiled machine which so far delivered my living expenses in first place and allowed me to practise a profession of choice B. Am I not digressing from objective and becoming a speculator. By end of Sep 16 things were bit clear but not to my satisfaction. By March 17 I could have changed my approach several times which of course is a symbol of confusion. But as on day it’s stabilised, multiple failures and frustration just eats up your head. There are times when you sit up on bed midnight to think should you go back to nine to six jobs. Hundreds of occasions wife and child will ask you should we spend this and that? You know why because they can see the uncomfort in your eyes and words. Hanging on to your nerves pays of well and that is the difference between interest and commitment. Even if I do not become wealthy and rich still I am happy what I am doing is passionate about and enjoy.

  2. Every time speculation comes up as subject name of Jesse Livermore pops up first. People are obsessed with him, either good or bad. Some think champion speculator is a big failure in life, for others he is still the original inventor of speculation tools. To me these types of personalities told WHAT NOT TO DO. The biggest of learnings from the greatest trader of world:

Do not increase yours spend because income is going up.
One doesn’t need to be fully invested to make money or survive.
Even a wizard is bound to fail with unethical practices and manipulation.
Relative comparison is recipe for disaster, be happy with what you are.
Finally the greatest challenge is not market or investment but US i.e. you and me.

  1. Full time or part time, you have to do it yourself- I realised if I am not prepared before a trade I am just throwing stones at a target. As I am expected to throw few millions times in my life I can’t be lucky all the time. No one will ever care about me , after all it’s my money and career. I have to own up the failures, no one can make me rich. Simple and easy to remember.

  2. Money or ego- one of the most beautiful wisdom speculators tells us. Remember riding on your immaculate skills of creative accounting practices? Or even a business model drawn up in one page? State of the art valuation technique? Time to re-think, differentiate between academics and practice. Ego is dangerous for stock market, at some point of time we have seen the problems. All of us. Now when one says how can you be money minded in stock market? Love your job not money, isn’t it? Well no one is asking to be greedy and criminal. Money is unit of account for your portfolio, the indicators of your performance. That’s it, measure it to know where you are. Nothing plus or minus.

  3. Practice won’t make you genius- if we think lot of practice makes us a master investor again re-think. Practice is art of habit; wrong practice can take you to disaster. It’s only by honing good habits you can develop superior practice.

  4. The thin line- does your investment philosophy address confusion and regret. Both relates to buy, sell and hold. If you have a method which define to take decision for execution and at the same time do not create regret you are done.

Few more articles I am preparing, will come back at earliest. Somewhere I need to finish the Guru Mantra series to a logical conclusion.

Apologies for not being regular.


@bheeshma Can I request you to change the Topic Name assuming you will have right access rights. To bring more sanity can we change the name to ‘Speculation to Technical Analysis- Mundane to Exciting’.

Apologies for inconvenience.

Money and Risk Management- Don’t hang your lever by a thread

The Power of Mathematics

Going back to memory lane, I happen to talk to a mathematician more a professor who happens to be an investor. Like many (including me) he had numerous questions, market is unpredictable- don’t know when to buy, when to exit, how much to buy, how much to exit. Then of course am I doing all right? The business is so confusing, people say it’s a great quality company but I lost my shirt. The whole theory as he explained first time was I guess market remained a black hole to him. And finally, he blamed if you are not a person from finance background it’s just happened to be luck which can work for you.

I could understand the story, it was year 2008 2nd quarter. Massive drubbing of stock market, the falling levels of portfolio, vanishing fortune tellers, a gloom and doom media adding to the rancor mindset. We see exactly the opposite now. I said have you explored usage of mathematics in stock market? He said how, what mathematics has to do with stock market?

Edward Thorp is a mathematician on a mission to prove the world he can conquer entire financial world through mathematical understanding and application. He smashed people in card game, busted casinos with tonnes of money, decimated the stock market. He hardly understood business behind a company, but he was holding a concept water tight to his chest and that is probability. You can read this fantastic book ‘A Man for All markets’. Is anyone saying one should completely become like Ed Thorp and leave everything else. No, but it gave confirmation to another perspective, ‘in a place of uncertainty one cannot ignore the game of probability of statistics.’

Update: the professor mentioned here now give me tuition every quarter on position sizing. Needless to say, he has become a far better investor, thanks to his competence and love of mathematics.

Biting more than you can chew

I was wiped out nearly twice at early stage and when I look back one of the significant reason was not able to control the loss. Root cause- 1. Unaware of mathematical tools 2. Poor behavioural finance with stuffed egos on both sides of brain 3. Poor record and metrics maintenance.

Initially I was searching the answer through Buffet’s letter, Bill O Neil’s CANSLIM, Porter’s competitive strategy. After second failure and largely due to Professor it was awakening for me to use the concepts which are evergreen always.

That brings us to a question- what did Edward Thorp did which made him to win everything he played with? What made Jesse Livermore become bankrupt 4 times from huge fortune? How did Ed Seykota turned the table with data and statistics? Why can’t it be applied to long term investing? The quest led me to as usual a bunch of books, article and then of course a customised set of rules with ongoing review by the Professor.

Risk Management- like it or hate it, can’t ignore it

Risk is part of life, let us not be hysterical any further. There are four ways a risk can be treated.

Treat- by taking appropriate action to reduce the risk.

Terminate- by stop doing to avoid the risk completely.

Transfer- give it to somebody who can manage

Tolerate- accept as fact of life, can’t do much.

If you look at stock market we can’t use terminate. It’s simple if you have to invest you can’t stop buying and selling. Transfer again not for Do It Yourself type of guys. That leaves with two choices Treat and Tolerate. I was more of tolerate follower who moved to treat. If you are still part of tolerate (I can’t manage risk, market is monster, I am long term, I am short term, good business is good money), these are all ego statements. Take a print out and paste on your desk (I do it every year), after few years you will feel incredibly stupid as you move to better understanding blocks.

Treating the Risk- but before we should know what is risk

Risk in stock market is only one thing, risk of losing capital. Capital is inventory, capital is fuel, you lose it completely you are out of the game. So, despite beaten down twice on my knees why I was a ostrich buried in sands?

  • Salary was coming every month, I thought bankruptcy requires perseverance; eventually I will overcome. As long as I am working I will continue to have capital.
  • You know a great deal of money was profits reinvested. So, profit money encashed will not have Bapu’s face on notes.
  • Lambi race ka ghoda (I am a long-term investor), how much lamba I didn’t know.
  • Mr Market is inefficient, irrational and hopeless. I don’t care what Mr Market thinks, eventually fundamental will catch up with price.

The last point, please note. It was 90% responsible for my disaster, the bruises are still there.

Loss means more nightmares, more hard work

Inverse relationship, opposite cause and effect as Professor says is cornerstone of mathematics. Incidentally my father happens to be a celebrated mathematician also, I cross checked with him. Indeed, it’s true. What it is then?

Every time you lose a percentage of money you need better tricks, better courage to fight back. Look at table:

Loss Recovery required for breakeven
10% 11%
50% 100%
90% 900%
97% 3233%
99% 9700%

If you have to recover 9700% then better you go for pilgrimage and take help of saints to expand your life by 500 years. Never going to happen in your life time. Imagine I was trying to fightback 900%, why ego, ego! Let’s talk more in behavioural finance thread.


Consistency over heroics

Market is not gimmickry, you can’t come at 10 O’ clock and make 10 Crores by 4 O clock. If we have to stay long and survive that would emphasize we have to be consistent. What does this mean? I make 70% in year 1, 70% in year 2 and lose 70% in year 3. Do you know what would be my return? MINUS 4.5% APPROAXIMATELY! Now if I win 20% in year 1, 20% in year 2 and lose only 10% in year 3, my return would be 12% per annum. This is not me mathematics says!

One small exercise I did after I was told by Professor. I replaced my big losses with smaller losses, compounding return just fly off like Jet! That itself was an eye opener for me how important to maintain losses as low as possible. Can we make it zero, no. What is optimum loss for investing and trading, we will come back later.

Disposition effect

The Guru’s of market studied millions of transactions for multi decades and surprised to found what made these accounts went busted.

  • Investors allow bigger losses than bigger gains (RGR-Proportions of gains realised to PLR- Proportion of Losses Realised)
  • Buy more shares when they are in loss rather than in gain
  • Happy with small gain than small loss

See the conclusion statement of study:

This paper finds that individual investors demonstrate a significant preference for selling winners and holding losers, except December when tax motivated selling prevails. This investor behaviour does not appear to be motivated by a desire to rebalance portfolios or by a reluctance to incur the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. It leads, in fact, to lower returns, particularly so for taxable accounts.

This is a 1998 study, you know what I did after reading? I said I am a value investor, I buy a business and I don’t care. This paranoid attitude las led many to doom.

Loads to talk about this subject, before I sign off I want to highlight certain things which Lee Freeman Shore highlighted, you can read in this book.

‘Personally I was shocked to discover only 49% investment ideas made money.’
This begged question- how they are making money if their ideas are wrong most of the times?

‘I am afraid that misanthropic investors can not rejoice at this point, it is perfectly possible for the opposite of love to be an issue.’

Stubbornness resulted a never change in mind which ultimately led to their fall.’

‘Large losses are impossible to accept.’

‘Selling a stock is hurting your sentiments, feelings of pleasure, pain and fear go a long way to explain omissions and errors.’

‘the fact is greatest minds of the planet can be wrong.’

Do the read book, I don’t want to disclose a point which will short change Author’s effort.

We will continue with plenty of examples, pages of experience I have to share. I found it extremely difficult to change some of my beliefs, this is for those who wants to adopt certain beliefs stated here ;please feel free to raise questions, write mails or whatever way you want to connect.


Dear Sir,
Winners becoming quick profit and Losers becoming part of LT investment is unfortunate … Please validate the notion that Keeping a longer view for one or two years reduces the risk of losing capital… than day trading and swing trading … Thanx for imparting knowledge …

Honestly I was expecting few questions of similar nature if someone is reading. Thanks for asking one of them, although better clarifications I will provide through examples in future posts, let me put some thing which came in my life as ‘centrifugal force’. There are some words mentioned here may be out of your beliefs range (please ignore them, it’s not specific answer to your questions), it’s just over arch of understanding.

  1. Somewhat in the age of social networking we believe value investing is cool and intelligent. Traders are speculators, they somewhat considered as gambler. There is nothing farther from truth, not everyone is Warren Buffet. By the way Mr Buffett is not a standalone investor but an enterprenuer. Second unlike people thinks, Mr Buffett is a champion speculator, don’t read his letters only, go through other sources.
  2. Speculation and trading can compliment each other but they are not one and same. Even during Maurya dynasty people bartered cow for rice, there was hardly any speculation involved. On other hand speculation is old as hills, it is used in war rooms, it is used by politicians and government , used by everyone day in and day out. The choice is between ignorant speculator and informed speculator, a lot of cool investors prefer the first choice.
  3. Traders (popular word) are equally intelligent and sharp if not more brilliant. Most of them come from highly academic background, figures are audited. When Jack Schwager went out to write Market Wizard series for a particular era (for those who are alive) he couldn’t fit them into 4 books. Other side John Train couldn’t find people who follows fundamental investing even to fill 100 pages , he was forced to include currency traders, stock traders etc.
  4. There is a bunch of techno funda traders who does everything under the sun to spot speculation interest supported by fundamentals. That includes even as complex tool like expectations investing!

The point is somewhere else I wanted to drive here in this thread, not definitely a debate between investors and trader. And that is around eternal truth of science and arts.

Every business is symmetry of time and operations. A businessman does not blow off his money forever. He has a plan, process for everything. Do you have one? If you have one then how do you manage a. when to enter (capital gains is decided by entry and exit point) b. how are you planning to deal with risk c. how you will retain profits d. how you will allocate and re-allocate funds? If you lose a bunch of your capital you are gone, doesn’t matter whether you trade or invest. And yes to answer your question keeping a longer view will protect capital but with a plan and process. A company going from 100 to 50 will go to 5 also, history is full of such examples. When you plan something we should not factor colossal damage which will put us into coma.

Let me drive you into somewhere else, after buying a stock some buy and hold for dear life. A big reason include waiting for something to happen which will bring back the price. A excel piece of calculation which says intrinsic value is 100% higher than CMP. By the way I am yet to come across a financial institution who buys basis DCF method. Everyone goes through indecisiveness and regret. Mostly this stems around not having a established plan with time line.

My argument is not around which form investing is better but knowing yourself and your belief systems. Once you know yourself a method fits into you. If your plan accommodates 30% loss you build a process so that you don’t get whipsawed. But when you build a large loss, negative compounding PLEASE DO NOT IGNORE POWER OF MATHEMATICS. And that’s where post was focusing, a loss of 90% makes you extremely vulnerable to come back. Probability of success goes down to wire!

Much more broken beliefs we will argue. Stay tuned and thanks!


Dear Sir…
Techno Funda or Fundo technica … Whatever we call it Why there is a clear dichotomy between TA and FA followers… Both are so convinced about their methods …

Is it right to assume ( As I do not have any research to back up ) that Fundamentally Good companies bought at a technically opportune time would reward…

I hear from my Investing circle of friends requiring to recommend some stocks for 5-10 years … How can we shortlist some companies which will perform better for the next ten years in this rapidly changing world… Should we not be flexible to tweak our view as every Quarter go by …

Hope i stayed with in the topic… Thanks in advance

1 Like

Techno Funda or Fundo technica … Whatever we call it Why there is a clear dichotomy between TA and FA followers… Both are so convinced about their methods …

Happy to see you have such rational thinking. Duffer like me thought speculators are gamblers, money plunderers. I brush aside Jesse Livermore as a spooky manic and chronic drunkard and womanizer. I thought these type of guys needed medical treatment not stock market. Later part of life when I saw 59 wizards and billionnaire paying tribute to same person (rather his methods), I realised I need medical treatment and should check my own head!

Is it right to assume ( As I do not have any research to back up ) that Fundamentally Good companies bought at a technically opportune time would reward…

Like a Civil Engineer can pull architectural marvels in his own way, every investor customise his own methods. Every school of thought can bring success if one becomes focused practitioner. And a focus practitioner is much much beyond over confidence. Like it’s a scientifically tested rule 10000 hours needed for any subject with deliberate practice. Specifically to answer your question my current investment philosophy includes a good portion of constructive price behaviour for entry and exit, a seventh block added to six fundamental blocks. So it is working for me, may not work for others.

I hear from my Investing circle of friends requiring to recommend some stocks for 5-10 years … How can we shortlist some companies which will perform better for the next ten years in this rapidly changing world… Should we not be flexible to tweak our view as every Quarter go by …

Sir, in my humble opinion please don’t even pay attention to recommendation i.e, either giving or accepting. No one is going to do anything for us except imparting their knowledge and information sharing. Second yes if a competitive advantage comes from a durable source then we can be optimist about business survival. But I completely take your point, if a catastrophe happens and i lose capital heavily; I don’t mind to be called as gambler, rat, anything. I will sell and sit outside, watch carefully.


Money and Risk Management- Honey, it’s all about money

Stock market is just a business

Whether you hold the stock as an asset or inventory it does not allow us to afford one carelessness and that is handle with care just like a business. This is another thing I learnt a great deal from speculators, once they buy a stock they become more vigilant, more watchful not lax.

Loss is A function of gain

Whether asset or inventory loss cannot be avoided by any businessman. As I had very little losses faced in life, perhaps one of most difficult beliefs to ingrain within me. We never saw salary going down, you can get lower marks but fail is almost a taboo for majority of guys. Unless there is a loss there will not be gain, it depends how we manage it.

When a vegetable vendor closes her day out, she throws away those unsold items which cannot be further sold say like smashed potatoes, rotten tomatoes etc. She does not fret, oh my god I should have checked everything in morning, how can it be rotten? Over a period, she realises she is likely to lose 5% say of purchase as normal loss i.e. being thrown at end of day. The price she sells includes losses. How do we manage in investing world?

First, we need to assume we will have losses, unavoidable. In fact, we are in a more complex and uncertain business than vegetables, we will have more losses than many other businesses.

Second, if we allow losses more than profits we achieved year after year, month after month we have to close down our business. Imagine same vegetable vendor is not able to factor the normal loss in selling price, she has to take a cut overall loss only. After some point shut the business.

Third, if there are good days don’t complain and don’t be greedy. Immediately make a plan for partial profit booking or watch closely so that you don’t lose everything. And also, don’t throw up mental models in air to justify price rise with your brilliance. When it rains and there are few vegetable vendors they just sell and close the day. Our problem is market is not a onetime event, battle goes till the time we want.

Fourth, gain and loss depends on external factors as well. If there is an economic depression no matter how much heroics you have your gains are going to come down. Tighten your losses, this is you have to do; unlike gains it won’t adjust automatically.

Fifth be bold when in profit, be fearful when in loss. This has nothing to do overall market conditions. If you are sitting in loss in a huge bull market, others may be bursting crackers for you it’s about soul searching not euphoria. Similarly, when you are sitting in profits, make it work harder for something in first place which worked for you.

Please note I am not asking here you take loss frequently, small or anything that short of things. These are attributes of mathematics which will impact results. One need to customise carefully before building a plan.

Be fearful when others are greedy, be greedy when others are fearful. I agree with this statement with a caveat. I don’t have a problem with what people thinks but problem with what people acts. Because I belong to people!

Compounding- eighth wonder of world

The most celebrated scientist of our time was absolutely right. But like all wise men he didn’t tell us how to use, because he knew he would get into a meaningless discussion on a subject which can only be implemented customised. Anything customised we are talking about 5-6 billion case studies on earth, equal to number of humans!

Compounding works much faster with a variable time

Waiting for a long long period can some time works against you. The compounding short spells provide far superior returns than long period. Don’t want to believe?

Situation One

I invest in stock A at 100 Rs, stock goes up to 100% for year 1 and I exit. That means I get 200 Rupees. I invest that 200 Rupees into Stock B and get another 100% by year 2. My value will be 400. Right? Look at this now:

Situation two

I invest in stock A at 100 rs, goes up by 50% by six months. At end of six months my value will be 150 rs. I invest in Stock B for balance six months. My value becomes 225 Rs by end of year 1. I rotate 225 rs to Stock A for next six months at 50% gain. By end of 18 months my value becomes 337. Last six months I came back to Stock B for last assault. With a 50% gain I move to 505 rs as final value.

Two stocks, we compounded twice at 100% and compounded 50% four times in same time bandwidth. Difference in first case 300% absolute return, second case 400% return!

**Warning: not advising you to adapt these methods, just letting you know how beliefs needs to broke for proper usage. **

In a non-linear place with volatility acceleration compounding is a miracle if one can manage. One of major secret of John Maynard Keynes to Paul Tudor Jones.

Magic of expectancy

I owe this to Dr Van Tharp classes, of course I had to grind multiple times before it fits into my DNA. Imagine you are building an asset, and I come and tell you great young boy! We are so happy you are building a marvel but let me tell your chance of making profit is zero. You would get shattered, right? Welcome to mathematics my friend, I owe my father for his valuable coaching when he was not looking for my career.

Situation 1: you tried 10 stocks, win 5 and lose 5. Capital allocated at individual stock 1 lac for simplicity.

Situation 2: you tried 10 stocks, win 4 and lose 6. Capital allocated at individual stock 1 lac for simplicity.

Situation 3: you tried 10 stocks, win 3 and lose 7. Capital allocated at individual stock 1 lac for simplicity.

Now watch this, your average gain in situation 1 is 50000 and loss is 40000. Situation 2 we replace 40000 losses with 20000. For situation 3 we change 20000 losses to 8000.

Profit and loss now: Situation 1: INR 50000

Situation 2: INR 80000

Situation 3: INR 94000

Despite of winning 30% of stocks still you delivered almost 100% return more than situation 1 where you won 50%. Why this happen, probability is at play.

In stock market where we live with uncertainty probability becomes most important tool for us to manage. Never play a game with negative expectancy.

How to calculate expectancy?

Average Gain for Situation 1 to 3: 50%

Average loss for Situation 1: 40%, Situation 2: 20%, Situation 3: 8%

Hit rate of win: Situation 1: 50%, Situation 2: 40%, Situation 3: 30%

Expectancy is equal to (Probability of win* Average Win)- (Probability of loss* average loss)
So, expectancy for Situation 1 is (0.550000-0.540000) or 5000. Mathematical expectancy is MINUS 0.775.

Situation 2 is (0.450000-0.6 20000) or 8000. Mathematical expectancy is PLUS 0.4.

Situation 3 is (0.350000-0.78000) or 9400. Mathematical expectancy is PLUS 1.175.

See how powerful is situation 3 is. Now replace loss 40000 with 80000 in situation 1 (familiar with catastrophic losses?), expectancy becomes MINUS 15000 (0.550000- 0.580000). Your game is over, never go to a war by knowing you will lose from day 1. That’s what Gambling are, organiser always wins! Because before every hand is played expectancy is calculated, same goes for lottery.


Please do read more about mathematical expectancy.

Multi bagger with multi looser is dooms day

We all love multi baggers, they are great to change balance sheet. Even one can change your aspiration, I been there one stock is responsible for today what I am doing largely. But now imagine multi baggers with multi losers, what will happen? Results may be shocking than you think!

Now let’s simulate: 10 stocks, capital invested in each stock 10000 INR. Total capital 1 lac

Situation 1: our average gain is 700%, loss is 90%. Probability of winning 10%. Net result MINUS 11000.

Situation 2: our average gain is 100%, loss is 50%. Probability of winning 30%. Net result MINUS 5000.

Situation 3: our average gain is 20%, loss is 10%. Probability of winning 40%. Net result PLUS 2000.

Even a 7 bagger when you lose 90% on 90% of stocks it cannot protect you. But a small 20% profit with small 10% loss and just with 40% winning stocks you are back in positive territory.
If I make 7 baggers in situation with 10 bagger I am back in 81000 Profit.

Don’t get carried away by theoretical numbers, maintain your own metrics to know where do you stand. But please do note:

  • Both short and long-term investing works as long as mathematics work for you. How did I survive? I lost 60% of stocks once with one 200 bagger which wiped out all loss. But having 200 baggers is difficult than we think.
  • When you allow loss to creep in your portfolio do not forget these numbers. Calculate once at least to know where do you stand.

A lot of message missing now, not able to pack them at one go. For example, like adding to profit line, in equal position size can create more havoc etc. Let’s discuss next time!

I leave with you my next unconventional thought- ‘Average price of a stock is one of biggest lie told to me’. Give me a chance to put my workings next time, of course comes with caveat!

But trust me unless you maintain record and metrics you won’t even know where you are, by just calculating net worth number one can jump like jackal that I cracked 40% CAGR, ahoy!

Good wishes!


this has to be read daily to remind of mind follies and the garbage induced in us via financial porn…

Suvendu sir,
A Q on .
Situation two

I invest in stock A at 100 rs, goes up by 50% by six months. At end of six months my value will be 150 rs. I invest in Stock B for balance six months. My value becomes 225 Rs by end of year 1. I rotate 225 rs to Stock A for next six months at 50% gain. By end of 18 months my value becomes 337. Last six months I came back to Stock B for last assault. With a 50% gain I move to 505 rs as final valu…

Shouldnt consistency need to be there in this case to enjoy such gains? I mean this dream situation will take time to be realized by experimentation experience and observation… ~From turtle traders.

Further masses have a risk avoidance behaviour towards profit and risk seeking one towards losses!!


Shouldn’t consistency need to be there in this case to enjoy such gains? I mean this dream situation will take time to be realized by experimentation experience and observation… ~From turtle traders.
Further masses have a risk avoidance behaviour towards profit and risk seeking one towards losses!!
Absolutely, without consistency we will never do well in anything. But there is another point which is far more important here.

Imagine you are in employment and comes with a spectacular idea. Unless company shares you with profit your monetary rewards will be restricted to commitment by company as per agreement. Similarly if you mess everything you may not be punished via salary cut. So risk and rewards move through a certain plateau in salary credit. This is unlike investing quadrant, as the quadrant itself is non linear multiple factors will impact risk and rewards. External, internal, skill and luck as well. For example if market is good, recovering from a bull market returns become plenty even if you don’t plan. Traditional time, risk free return plus variables may not work best for all. I have amended certain things partially, was happy to see losses have minimised drastically. Which automatically lifted compounding more so tail wind at your back.

All different perspectives, works well and doesn’t work well. Depends on how we maintain records, how much effort we give etc. But I wanted to broke my taboo of certain bizarre practices which were residing within me. One should know multiple choices, why one only?

Guys, this thread is live in Zerodha forum, there may be goodies there also. I haven’t explored , I will use content for both places going forward if time permits. Questions and answers would be more fun to know more people.

I take this opportunity to thank all entrepreneurs whether it’s Donald or Nithin for allowing a platform to share our mundane thoughts.

Loads of wishes

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I do not have much of investing experience and I m lot more stupid but sometime back I did study of my portfolio and found some thing very surprising:

  • those stocks where I did not have high conviction were the biggest winners example V2 Retail bought at 12, Kaveri seeds at 200 (pre split), RS software at 60 (sold later at 700+ since it hit stop loss) , AK capital at 135

so I was more angry with myself than happy to have multibaggers because capital allocation was not optimum. so now I tried pyramiding ( regular &
inverse) with strict stop loss to get the maximum juice. my objective is to get the maximum juice out of my profit generators and keep strict stop loss irrespective of how good / bad the company is.

This way though my % profit is relatively low, my absolute profits are better.

But this has posed another problem… my portfolio capital allocation goes for a toss. a single share crossed 40% of the size of portfolio though in absolute term my profits were better due to continuous pyramiding.

This is something where I really need help and I think I may be able to use this in active trading also.

Now that I am back in India, looking eagerly to meet you soon.


Sure, let’s catch up.

Imagine I have two stock in my portfolio now. One is 71%, second 29%. First is 465 baggers (22 years, 139 pyramid transactions, 139 risk free transactions), second is 248 baggers (9 years, 65 pyramid transactions, 65 of them risk free). Of course I wanted to have more stocks, some of them I killed despite being good performers but were idle! Now small capital in a range bound market is keeping me alive.

All due to active pyramid, of course non performers have been shown the door. Those guys came back as cash and earning some amount, more importantly keeping me alive for next battle.

All different styles, same objective. Happy to help anyone who wants to adapt.


Money and Risk Management- Average price of a stock is one of biggest lie told to me

Average life expectancy, average score by students, average salary increase, average performance by Indian crickets, average return by stock market and so on. I am no scientist nor having resources to get exact number but I sense we listen average word at least 10 times every year i.e. roughly 3500 times a year. With deliberate practice it is sitting within us deep rooted.

Now you may ask so what? What’s wrong with this word use average? Not much it can ruin your career and life.

Average is 41, two transactions i.e. 2 and 80. Average is 12% CAGR, number of stocks in index 30, index composition completely changes in 3 decades. You ask anyone in street, my average stock price is 50, If I get 70 I am happy. How does this impact our decision making, here is my submission?

It turns definition of money management upside down

Transaction 1: On 01 Apr 2017, I bought 100 shares of company X at 100.
Transaction 2: On 01 May 2017, I bought 100 shares of company X at 120.
Transaction 3: On 01 June 2017, I bought 100 shares of company X at 100.
Transaction 4: On 01 July 2017, I bought 100 shares of company X at 80.
Transaction 5: On 01 Aug 2017, I bought 100 shares of company X at 60.
Transaction 6: On 01 Sep 2017, I bought 100 shares of company X at 75.
On 30 Sep 2017 price of X is 70.

All total I have purchased 600 shares at 89.17 average cost. If CMP is 70 then then I am sitting on a loss 11500 or absolute return of 21% loss. You may complain why 70, fair let us take 140. In that case we have 30500 profit or absolute return of 57%. In both cases this statement will miss some of significant requirement of investment.

  1. The holding period of different transaction varies six months to one months. The element of time unless you use a method similar to NAV, your CAGR calculation will be grossly misstated.
  2. If you are sitting on profit overall you never realise you have a loss somewhere and miss the learning aspect of loss somehow. Say if transaction 2 is reporting loss it may due to factors controllable by you, focusing on them can increase your return further. So, in short average price can cover some of stupidest mistakes.
  3. Position size and capital protection completely get defeated as you may be continuously increasing risk without increasing profit. Not many knows about how can a transaction becomes risk free. Those who are aware may argue how does it matter? I am a value investor and long term. I cannot emphasize more, whether you are value investor or house wife science can work against you. You are no different. How?
  • Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
    T1 2000 0 -2000 -4000 -2500 -3000
    T2 -2000 -4000 -6000 -4500 -5000
    T3 -2000 -4000 -2500 -3000
    T4 -2000 -500 -1000
    T5 1500 1000
    T6 -500
    2000 -2000 -8000 -16000 -8500 -11500

See this table, that’s actual result. By end of month 4 you were already incurring the highest loss. In fact, this could have been better constructed, say my risk is 10% of capital. How it will look then?

Month 1	Month 2	Month 3	Month 4	Month 5	Month 6

Risk 1000 2000 3000 4000 5000 6000
Profit 2000 -2000 -8000 -16000 -8500 -11500

By end of Month 4 actually you have increased risk 4 times despite loss have gone up 8 times between Month 2 and Month 4.

-Let’s simulate example with a profit say price of 140 at end of month 6. What happens then?

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
2000 0 -2000 -4000 -2500 4000
-2000 -4000 -6000 -4500 2000
-2000 -4000 -2500 4000
-2000 -500 6000
1500 8000
2000 -2000 -8000 -16000 -8500 30500

Your profit profile changes dramatically in month 6 otherwise consistently you were losing money. Now what about risk?
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Risk 1000 2000 3000 4000 5000 6000
Profit 2000 -2000 -8000 -16000 -8500 30500

Same story, last month only profit showed recovery of risk. Or else four months you were sitting on huge risk and loss.

Not clear? Let me explain, remember the tables above.

Unless price goes up systematically month by month you will be increasing risk and loss both. The situation is unlikely to change unless sudden upturn in price which covers your loss. Do you want a situation where you keep on adding with no sight of profit and increasing risk? Well I would be sit out if I can’t cover my risk. Risk is nothing but my capital, capital gone and I am gone.

I think this excel data showing improper alignment, I am attaching the excel which I used for pasting.Book1.xlsx (9.6 KB)

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Trade Book Analysis

For short term trading I analyse trade book every 2 months. I have found more wisdom in my own trade book than in any book.

A time to challenge your own beliefs and take corrective action. These comments are live almost, finished exercise yesterday.

Note: this has no relationship with my investing demat account. In fact they are managed in completely opposing philosophies. So for investors, take it as educational view if you are aligned to similar principles.

First Summary of lessons and action plan

  1. Breakout entry restricted between 4-7%.
  2. IPO stocks also included in constructive price behaviour mechanism.
  3. Wait for post lunch if the stock is not able to move beyond 2-3% of cusp of pivot
  4. Errors due to pre-result day trades, oversight but repeated mistakes.
  5. Separate entry set up for low volume BSE scrip or avoid.
  6. Unplanned holiday trades - no fresh entry before 5 days.

Few important comments from analysis


Metrics and KPI: At broad level

I want to speak about it in detail, let me dig out some time next month. Meanwhile I am sharing what kind metrics I maintain for trading. Time period- 2 month (new demat account).


The Risk of Ruin: Survive today for to conquer future

Enjoying the pain- Adversity

This is perhaps only rule ever change in a stock market, the market will do everything to disappoint you and you should never ignore this. It creates obstacles, confusion, complexity which makes easy things extremely difficult. It forces you to doubt every move you make in market.

You can say it’s the discipline market expects from you, with a stronger discipline money transfer from weaker hands to stronger hands. Discipline can be partly overcome by good behavioural finance also money management! One of the key aspect of money management to trade with zero risk of ruin at any point of time.

What is Risk of Ruin?

It indicates the chance you will go bust, unable to trade after certain capital losses. So, this should become our first priority as risk management. It’s a concept from statistics, likelihood you will incur such a huge loss you would stop trading. It may not mean losing entire capital or called bankrupt. Depending on your risk tolerance your point of ruin can be 50% even. Example my point of Ruin is 35% of available capital for investing and trading.

The first step to avoid ruin is to calculate the probability of reaching ruin. If the probability is on higher side you must work towards to reduce it to an acceptable level. This itself demonstrates a significant step toward in survival in trading. In short higher capital you risk in a stock higher the chance of being wiped out.

Lets come to the formula for Risk of Ruin

((1-(W-L)) DIVIDED BY ((1+(W-L)) TO THE POWER ‘U’

W is probability of winning

L is probability of losing

U is number of attempts you are planning to allocate available capital (say 1 lac in account, I want to invest 10000 each in 10 stocks once. Then U becomes 10).

Let us not waste time behind formula. Plenty of calculators are available free online. Let us simulate results for better understanding:


If you see at probability of winning 50%, with equal amount of winner/loser (this means when you win average amount is 10000, when you lose also 10000), number of attempts 10 (10% risk), 70% is tolerance level (at 50% capital loss I will stop investing). The risk of ruin is 100%, a very high probability. YOU WILL BUST HERE, TODAY OR TOMORROW IS JUST A WAITING TIME!

Now lets change number of attempts to 20 , Risk of ruin is 100% still. Even with 1% it remains 100%. You know why because with equal probability between number of winners and amount you will never make money.

For better pastures lets change probability of winning to 60%, and winner/loser to 2:1. With 10% risk per attempt Risk of ruin fall down to 4.46%. When you make 2% risk per attempt it becomes zero percent.

Grave it in platinum, NEVER EVER INVEST OR TRADE AT ANY POINT OF TIME WHEN RISK OF RUIN IS MORE THAN ZERO PERCENTAGE. Yes you heard it right, ZERO; let me repeat a BIG ZERO. Not even 0.2% or 0.5%. Forget 2% even!

Fine, let us move to understand what is this conveying and how do we understand attributes behind this.

First we must understand even with zero percent risk of ruin we can still go bust. Because zero risk of ruin does not guarantee accuracy of win or even the amount of winner against loser. So zero percent risk of ruin does not guarantee a deterioration in methodology will protect you. But method remains steady it will prevent you getting ruined. At the end statistical measure depends on various inputs, they are all dependent on each other. Either increase amount of winner or increase of percentage of winners. Message it’s a combo plan not stand alone plan.

Obviously then how do we reduce risk of ruin. Of course we need to risk a smaller amount of capital, if it’s too high we will be knocked out. This is where money management should begin, successful investing is about survival and good risk management.

Let me summarise one more time how to reduce risk of ruin:

  • Reduce the capital allocation per attempt
  • Increase your winning percentage
  • Increase pay off- average winner higher than average loser.

Do let me know your risk of ruin if you can calculate, this is mine on 09 Dec 2017

Accuracy of winning: 41%

Average winner to loser: 3.38

Risk of Ruin: Zero

Story is just beginning, lots to cover. Risk of ruin without expectancy, methodology and position size is meaningless. They are all part of single framework.

Lets continue with holy grail of money management; next may be how expectancy is linked to risk of ruin in detail. Sometime we will move to entry method. But trust me the challenge is to find a good risk management and money management customised to your requirement. Stock name won’t resolve 10% of problem even, I am still learning hard way.


Was searching for this only just now. Saved 1 hour! thank you Sir