Mastering the Game of Money Making

Dec 14, 2017

The Indian stock markets had a volatile trading session amid the second and final phase of the Gujarat Assembly elections 2017 today. The outcome of the election will be known on 18 Dec 2017. We'll keep a close watch on the outcome and how the markets react to it.

Regarding two of my investing ideas - the buyback arbitrage opportunity of Wipro and Infosys - I would like to inform you that the last day of the buyback offer period for Wipro was yesterday. For Infosys, today is the last day to tender your shares.

And in a couple of weeks, the proceeds from the buyback will be credited in your bank. We still don't know what the final acceptance ratio will be. For shares that are not accepted in the buyback, I would insist you stick to your original investment thesis. If you bought these shares simply to capture the buyback arbitrage gains, you could consider selling the remaining shares. However, if these stocks are part of your long-term holdings, you may want to continue to hold them.

Recently, Apurva penned some very insightful lessons from one of the most successful investors and hedge funds managers Stanley Druckenmiller. I believe, if you can internalise these traits, nothing can stop you from mastering the game of money making.

Here's what Apurva wrote to his Profit Hunter Pro premium subscribers:

  • Who is Stanley Druckenmiller?

    Here is what hedge fund manager Scott Bessent says about Druckenmiller in the book "Inside the House of Money':

    "Stan may be the greatest moneymaking machine in history. He has Jim Roger's analytical ability, George Soros's trading ability, and the stomach of a riverboat gambler when it comes to placing his bets."

    Druckenmiller was George Soros' sidekick when they broke the Bank of England in 1992, who then went on with his own Duquesne Capital Management posting returns which averaged a mind-blowing 30% over a 30-year career, before retiring in 2010. He now manages his money through a family office. His networth stands at US $4.7 billion and ranks frequently in the Forbes rich list.

    So here are a few trading acumens one could learn from Stanley:

    Sitting in on Cash - 'we changed our investment philosophy so that if we ever felt bearish about the market again we would go to a 100% cash position.'

    Druckenmiller came to this realization after a situation proved he was absolutely right about his assessment of the market, but still lost money. After realizing that the market was heading lower, Druckenmiller cut his portfolio back to being only 50% invested. Despite being cautious here, had he been more cautious and moved his entire portfolio to cash, he would have saved himself from losses.

    The ability to go to cash is one of the greatest assets available to the traders. The idea that you don't have to be fully invested at all times is an elusive concept for some people to grasp. One needs to develop the discipline to be able to sit on the sidelines for an extended period of time.

    Maximizing the opportunity - 'The most significant thing is that, it's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn't maximize the opportunity.'

    Druckenmiller shared the story of his and Soros' famous British pound short bet broke the Bank of England. Make no mistake about it, shorting the pound was Stan Druckenmiller's idea. Soros contributed by pushing him to take a gigantic position and maximize the opportunity.

    The general idea here is, you must get out fast when you've been proven wrong, and stay on for the ride and maximize the opportunity when proven right.

    Flexibility - On the day of October 1987 crash, Druckenmiller made the incredible error of shifting from short to 130% long, yet he somehow managed to finish the month with a net gain. When he realized he was wrong, he liquidated his entire long position during the first hour of trading on October 19 and went short.

    Had he been slightly pessimistic, defended his original position, or if he had procrastinated to track how the market recovered, he would have suffered a tremendous loss. Instead, he managed to make small profit.

    The lesson one can probably learn here is the ability to accept cold truths and that events counter to one's position and have the flexibility to respond without hesitation is the mark of a successful trader. Being wrong in the stock market is part of the game, but staying wrong is.

    Capital Preservation & Not Allowing Losses to Affect Your Judgement - There was something very interesting Druckenmiller said about trading losses and how he learnt his lesson from George Soros.

    'Soros is 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. There are a lot of shoes on the shelf; wear only the ones that fit. If you're extremely confident, taking a loss doesn't bother you.'

    In order to attain that level of mental flexibility, you need to learn to detach your ego from the immediate trade outcomes. If you allow losses to cloud your ability to make a judgement, you will inevitably make bigger mistakes.

    As long as you protect your capital, you can always make another trade. Druckenmiller believed "wonderful thing about our business is that it's liquid, and you can wipe the slate clean on any day. As long as I can cover my positions - there's no reason to be nervous."

    Always Have an Exit Strategy - When Soros and Druckenmiller made their famous bet against the British Pound, they knew exactly how much they could lose - their entire YTD gain of 12%.

    Exit strategies and other money management techniques can greatly enhance your trading practice by eliminating emotion and reducing risk. Before you enter a trade, you should ask yourself three questions:
  1. How long am I planning on being in this trade?
  2. How much risk am I willing to take?
  3. And Where do I want to get out?
  • You have to be able to answer these questions in order to consistently make money in the stock market.

Happy Investing,

Ankit Shah
Ankit Shah (Research Analyst)
Editor, kodicms Insider

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