ISSUEI 2010VOLUMEII

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UARTER AND

PENNY

NSIGHTS

XPERIENCES FROMYOUR FUND MANAGER

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QUARTERLY

FUND

PERFORMANCE ............

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KEY

SIGNALS

LOOK

NOW ...............................

Falcon

ocus

ADDRESSING THE NEEDS OF INDIVIDUAL INVESTORS AND PLANTINGTHE SEEDS FOR A SECURE FUTURE.

A Quarter to remember, Crowd Psychology, Predictive Mindset and Financial Alpha

A Quarter and a Penny

Dear Investor,Its often said, that-

“In market theSecond Year is often the toughest”.

I think, I understand. Let meexplain.When a full fledged bull run is inworks, the first year is often met with skepticism, doubt and thisdoubt fuels the rally. Becausealways remember for a trend topersist, doubt must exist. Why?Because there must be sellers at

all levels. It’s a different thing tha

t,psychological strength of sellersmight be weak, but there must besellers. Because if there are no,sellers then the trend will not move ahead. I think you get mypoint.Often, 9-10 months of skeweringis enough for even the hardyinvestors, and this is rapidly met with a situation where the crowdpsychology changes. And hence,

around the second year, it’s a

difficult time for everybody- bulls,bears or pigs. 2010 is the secondyear of this bull run, which startedin 2009 March.And it was verily a very toughyear. Since Jan 2010, 5300 provedto be an extremely difficult levelto exceed. Each time index inchedup to 5300, it was met with aheavy bevy of sellers. Mediainitially branded them as profit bookers, but soon gave up on sucha hackneyed term.The irony of the situation was,volatility was fast moving out of the markets. To be frank, we trend

followers don’t care if markets

rise or fall. Only there should beenough movement. And thoughthe flee of volatility was good inone sense, because that was asignal retail investors weregetting disenchanted, yet wesuffered.

We waited patiently, for 5300 tobreak. That was July.In August, break they did, only toget trapped within 5370 on thedownside to 5500 on the upside.Yes, it was a great time to be a daytrader or even a trader with holdingperiods less than say a week. Butour system is not built in that way,and as in a trendless period, wesuffered.Somewhere, we went from a trendfollowing paradigm to a mild trendanticipating setup. We increasedour position size in anticipation of the trend. This was on the longside. To offset such buildup, weput ahead, short positions onindividual stocks as well.To diversify, we took commoditybets as well. But there was onlyone, outcome. Whipsaws!Our longs fell, our shorts rose, andour commodity bets went haywire.In retrospect, I believe, we made amistake of not going long on gold,and I would take the entire blamefor that.We did lose -12.4% in one monthalone, which is high from along/short perspective (theoreticallimit is around 10%, observed limitwas around 8%But, I am not overtly concernedbecause the entire damage took place when we were in a biased100% long only position (our othershort side positions were washed

out). So from that perspective it‟s

very much within limits.Is that a consolation? No. But, thatis a statement of faith from yourfund manager, whose focus issolely on your best financialinterests.You might think, August was adreary month, but I woulddiffer. September, was anexcellent month, and we haverecovered almost the entire loss.

We are still down, but it‟s a

good recovery, even the mostcynical of our investors wouldagree.

We posted a terrific10.54% in the month of September,

to end the quarter afaint 4.77% down.And these are the instances,when having a system, and notreally listening to media folksmake it all worth it. While theretail investors kept cashingout(Mutual Funds are facingrecord redemptions, there ishuge skepticism in air), Isincerely believe that it is thisdoubt which will help infuelling the rally ahead.A recent report has come upthat, this year retail investorshave sold 7011crore worth of monies out of their MutualFund holdings in Septemberalone. And is it a surprise thatin a brisk month, the indexliterally slung ahead by 10%from 5500 to 6000. So, myopinion is, we have to stick towhat we do, how we do it.Go against the crowd behavior,psychology, go against theretail emotions.As mentioned, in the T&C, wewont be charging any fees forthis quarter.

NAV by September end is12.36 (a 23.6% gain fromMarch 10)

QUARTER PERFORMANCE

Fig 1: The shaded portion is the Fund Performance from June end to September end. Fig 2: We were not beaten, much, we are still holding well on our own,