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This Blog is mostly about making money, but that is not my only focus. I try to understand the world and educate myself about the issues affecting it. I have thought about a quote from Eleanor Roosevelt many, many times. She said, “Great minds discuss ideas, average minds discuss events, small minds discuss people.” In that spirit, I spend much of my time researching and learning about ideas.

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Today I want to discuss about how Investing Legends Create Wealth without Forecasting?

Please Read our Blog “Being Right or Making Money” before reading this Blog.

George Soros (the man who made bank of England Bankrupt), whose modest $1 billion take‐home pay of a few years ago qualifies him as a market guru, says in his book The Alchemy of Finance,“My financial success stands in stark contrast with my ability to forecast events … all my forecasts are extremely tentative and subject to constant revision in the light of market developments.”

While 95 percent of the people on Wall Street are in the business of making predictions, the super successful Peter Lynch, in his book Beating the Street, says, “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts”. And as Mark Twain once observed, “The art of prophecy is difficult, especially with respect to the future.”

I think it was Alan Shaw, one of the more successful practitioners of technical analysis, who said, “The stock market is man’s invention that has humbled him the most.” Fellow legendary technician Bob Farrell warned, “When all the experts and forecasts agree—something else is going to happen.”( Recent Example of this is the Brexit Vote)

Financial theorist William Bernstein described it similarly, but with an even darker message: “There are two types of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know where markets are headed. Then again, there is a third type of investor—the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

Before examining indicators, I’d like to discuss the record of some professional forecasters. Perhaps the biggest myth in financial markets is that experts have expertise or that forecasters can forecast. The reality is that flipping a coin would produce a better record. Therefore, relying on consensus economic forecasts to provide guidance for investment strategy is almost certain to fail over the long run. Consider forecasts from the Survey of Professional Forecasters released by the Federal Reserve Bank of Philadelphia. The dashed line shows real GDP. The chart shows seven recessions (shaded zones) since 1970. As a group, professional economic forecasters did not correctly call a single one of these recessions. In fact, they have never predicted a recession. on average economists have been 59 percent too high in their 12‐month forecasts (predicted growth: 3.1 percent; actual growth:1.9 percent).

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The last word I’ll offer on predictions is from the Fed’s leader during much of the period covered by the chart. In October 2013 Alan Greenspan said, “We really can’t forecast all that well. We pretend we can, but we can’t.” Forecasting the economy and the investment markets consistently and reliably is very difficult. In fact, consensus predictions often contain the seeds of their own destruction by altering human actions. Most crowds are usually wrong at sentiment extremes.

Conclusion – We at Stallion Asset have delivered 288% returns in last 3 years ending December 2015 investing in Small-Midcap Companies which are often ignored by the Analyst Community. We have never used complex forecasting techniques, never predicted the Sensex or Nifty or Macro economic activity. We are in the Business of Reacting, a Chartist should know even before placing a order that what will he do if prices reach a certain level up or down, will he trail his stop loss, book profits or even book losses. A fundamental Investor should has a more subjective task of knowing if his thesis is working right or no. I Read a lot of Book about the best investment manager and Believe me none of them a good forecaster of the future but they are great risk Managers.

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What distinguishes the best value Investors from the rest?

1) Firstly – They all Hold Highly Concentrated Portfolio’s. Across the 10 Funds we examine the average number of companies in the portfolio is 13. In-contrast to 38 in Average Mutual Fund Industry.

2) Secondly – They are not obsessed with Noise – They don’t worry about trying to know everything about everything. The funds examined do not employ legions of analyst to waste time forecasting next quarter EPS. Instead, try to focus on understanding the valuation and its associated risks. By risk, these managers mean concerns surrounding outlook for profit margins and balance sheet, not the price volatility of the market.

3) Thirdly – On Average they display a willingness to hold cash in face of a lack of investment opportunities. Much like the Concentrated Portfolio, this decisions stems from the core philosophy. If they cannot find bottom up bargains they are happy to hold cash until they can. Right across 10 funds we examine, their cash levels are nearly three times greater than average mutual fund.

4) Fourthly – Our Value Investor Group have long term time Horizons, Their Average Holding Period is 5 years. In Contrast the Average is 1.3 years for mutual funds.

5) Fifth – These managers accept that they will have bad years. Tweedy Browne published a study showing that a group of value Investor with Excellent track Record under performed the Index 30-40% of the time. One manager went as far as to say ” I would rather lose half my Shareholders than half my shareholders money”

6) Finally – Unusually in a world where asset managers are often paid with respect to Assets under Management, these managers are not afraid to close their fund to new Money. The managers we study are highly cognizant that there are limits to the size of funds they are capable of running without hitting problems. These Managers still have a sense of fiduciary responsibility.

At Stallion Asset, we are not Core Value Investor i.e. we don’t buy stock only because its cheap. The whole idea in investing is to buy into good businesses and if the business does well, you do well in investing if you don’t pay too much. That was true 25 years ago and it will be true 25 years from now.

Read our Investment Philosophy.

Stallion Asset has returned 288% for the last 3 years using its Growth at a reasonable price strategy which is back tested over last 22 years.

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This Report on Ujjivan Finance was sent to our premium clients about 50 Days back on the 16/5/2016 at CMP 258.

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 THESIS

At Stallion Asset we normally look for companies that can

1)Grow at 25% plus for long periods of time (opportunity size)

 2)Generate High ROCE  

3)Smart and Ethical Management  

4)Reasonable valuations  

We believe Ujjivan financial services has the above traits. Ujjivan is one of the leading MFIs in the country with a pan-India presence serving the under-privileged. The Microfinance Industry is expected to grow at 30%+ rates for next 5 years. We strongly believe that growth is sustainable in this sector for long periods of time.

History – Microfinance Industry can be divided in 3 phases after RBI gave permission for setting up microfinance companies in 2000

1) Phase 1 – (2000-2010)-Initial Growth phase where MFI AUM grew at 100% CAGR to INR 163 Billion.

2) Phase 2 – (2010-2012) – Following reports of suicides by some women borrowers; the Andhra Pradesh government passed an ordinance in Oct’10 restricting the activities of MFIs in terms of new disbursements and collections. The cause of the borrowers was supported by some political parties, which led to a mass default in AP. Micro-finance companies lost 30-40% of their outstanding portfolio in the sector due to this mass default. Most microfinance companies which had significant exposure to AP went bankrupt after the mass default.

3) Phase 3 – (2012-Present) – Revival after Regulation – The microfinance industry stood back on its feet with loan growth of more than 50% CAGR. The RBI announced setting up of small finance banks last year. MFIs were the favourites with the RBI, grabbing 8 of 10 small finance bank licenses.

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 Disclosure – Stallion Asset has Vested Interest. This is not a recommendation but for education Purpose only.

 

 

There is are large difference between being right and making money. I have never heard any market wizard saying that I was right 75% of times or something even close to that. I have been studying the biggest wealth creating funds and people for the last 5 years and believe me they are not right more than 50% times. It’s not the markets they trade or even the techniques they use. These are people who rely on different philosophies,ranging from Ben Graham’s long-term valuation techniques to in-and-out technical commodity trading; from dollar-cost averaging to market timing; from buying high-yielding stocks to buying relatively strong stocks with almost no yield. Clearly, a variety of techniques can make money. I find it exciting that numerous techniques can make money, as investors can choose the technique that best fits their own psyches.

The winning methods of successful professional investors are even sometimes contradictory. For example, in the book Market Wizards the successful pro Jim Rogers is quoted as saying that he often examines charts for signs of “hysteria,” and also that “I haven’t met a rich technician.” In the same book an equally successful pro, Marty Schwartz, is quoted as saying, “I always laugh at people who say, ‘I’ve never met a rich technician.’ I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician.” If you think that is confusing, in the book ‘What I Learned Losing a Million Dollars’ the legendary John Templeton is quoted as saying, “Diversify your investments.” In the same book, the equally legendary Warren Buffett says, “Concentrate your investments.

If you have a harem of forty women, you never get to know any of them very well.” So as I studied other long-term winners on Wall Street, I found that instinctively or otherwise, they had come to the same conclusions that I had. While the methods of Warren Buffett, Peter Lynch, and John Templeton are very different from my risk-management, asset-allocation, market-timing orientation, all of these men have been exceedingly humble, made multiple mistakes, and rarely (if ever) get headlines about a spectacular call. Yet they all use objective methods for picking stocks, their investment philosophy is disciplined and designed to limit risks, and they are flexible when they must be.

The Four Keys to making Money.

OBJECTIVE INDICATORS: These legendary investors all used objectively determined indicators, be it Paul Tudor Jones or Warren Buffet’s Guru Graham.

DISCIPLINE: All the winners are very disciplined, remaining faithful to their systems through good and bad times.

FLEXIBILITY: While disciplined, these winners were flexible enough to change their minds when the evidence shifted, even if they did not understand why. In his book Winning on Wall Street, Marty Zweig talks about how bearish he was during a sell-off in February and March 1980: “I was sitting there looking at conditions and being as bearish as I could be—but the market had reversed. Things began to change as the Fed reduced interest rates and eased credit controls. Even though I had preconceived ideas that we were heading toward some type of 1929 calamity, I responded to changing conditions.” In conclusion he states, “The problem with most people who play the market is that they are not flexible to succeed in the market you must have discipline, flexibility and patience.” Barton Biggs once called Stan Druckenmiller “the investment equivalent of Michael Jordan. He is the best consistent macro player.” Biggs said, “He is a combination of being very intellectual and analytical, but also using technical analysis.” In Market Wizards , author Jack Schwager writes of Druckenmiller: Another important lesson, is that if you make a mistake, respond immediately! Druckenmiller made the incredible error of shifting from short to 130 percent long on the very day before the massive October 19, 1987, stock crash, yet he finished the month with a net gain. How? When he realized he was dead wrong, he liquidated his entire long position during the first hour of trading on October 19 and actually went short.The flexibility of Druckenmiller’s style is obviously a key element of his success. So as I learned in kindergarten: expect surprises. Things change.

RISK MANAGEMENT: Finally, all of these successful investors were risk managers. Ned Davis asked Paul Tudor Jones once what he does at work all day, and he answered, “The first thing I do is try to figure out what is going to go wrong, and then I spend the rest of the day trying to cover my butt.” In Market Wizards , Paul says, “I am always thinking about losing money as opposed to making money.” He is widely known as a risk taker! Nearly all of the pros I have studied are clear about one thing: they want to control their losses. In Market Wizards , fundamentalist Jim Rogers says, “Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. my basic advice is don’t lose money.” In the same book, technician Marty Schwartz says, “Learn to take the losses. The most important thing in making money is not letting your losses get out of hand.” In his book, Pit Bull, Schwartz says, “Honor thy stop; exiting a losing trade clears your head and restores your objectivity.” Controlling losses is one lesson I wished I had learned in kindergarten. They did tell me to be careful, but it wasn’t until much later that it sunk in. I learned this from Warren Buffett, who once stated his two favorite rules for successful investing: Rule #1: Never lose money. Rule #2: Never forget Rule #1.

In What I Learned Losing a Million Dollars , the legendary Bernard Baruch is quoted as saying, “Don’t expect to be right all the time. If you have a mistake, cut your loss as quickly as possible. ”In Reminiscences of a Stock Operator, the hero (widely believed to be the legendary trader Jesse Livermore) says, “A loss never bothers me after I take it. I forget it overnight. But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.” Echoing that sentiment,Druckenmiller in The New Market Wizards says of George Soros, “Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position.” Finally, the last word on the subject of taking losses (and making money) goes to Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange.

In the book The Inner Game of Trading, in response to the question, “What do you think are the primary psychological barriers that prevent most traders from being successful?” Leo answered: “One of them is the ability to take a loss. You’ve got to know that no risk taker is going to be right all the time. As a matter of fact, I figured out when I was trading that I could be wrong 60 percent of the time and come out a big winner. The key is money management. You must take your losses quickly and keep them small and let your profits run and make them worthwhile.

So, in conclusion, what I’ve learned after all these years is that we are in the business of making mistakes . I’ve never heard Peter Lynch give an interview where he didn’t point out some mistake he has made. And he has said, “If you are right half of the time (in the markets), you have a terrific score. It is not an easy business.” So if we all make mistakes, what separates the winners from the losers? The answer is simple— the winners make small mistakes , while the losers make big mistakes. The Above extract has been complied from various traders and books especially from Ned Davis.

 

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