Trade the Markets like Roger Federer Plays Tennis

Apurva Sheth

At the age of 35 years and 342 days, when most sportsmen are hanging up their Nikes, Roger Federer became the oldest player to win the Wimbledon title-this after suffering a major a knee injury last year.

As I, and much of the world, watched in astonishment last Sunday, Federer beat Marin Cilic 6-3, 6-1, 6-4 in the finals to win the Grand Slam title, and make tennis history.

He became the only player in 140 years of Wimbledon history to win the tournament 8 times (topping William Renshaw and Pete Sampras who both have seven Wimbledon titles).

He also became only the second man after Bjorn Borg to win the title without losing a single set.

As a tennis enthusiast, I attribute Federer's extraordinary success in the game to a few factors. And as a trading expert, I believe these factors are also the keys to success in trading. If you want to beat the Wimbledon of the stock markets, these 3 things that led to Federer's historical performance will get you there.

  1. The right mindset leads to the right shots

    'Better than holding the trophy and winning today, it's just being healthy. It feels great and it means the world to me,' Federer said in an interview after the match.

    Winning isn't the most important thing, even for an eight-time Wimbledon champion. But it is the most important thing for most traders. Their only focus is to win each trade, which, unfortunately, is not in your control. To succeed as a trader, focus on what is in your control, namely:

  2. Knowing what you can and cannot control

    So it beats me why...

  3. Choosing your battles wisely

    Federer has a better winning percentage on grass courts than clay courts. Before Sunday, Federer had won at Wimbledon (grass) seven times and only once at the French Open (clay). It wasn't a surprise earlier this year when he announced he'd skip the French Open.

    'I need to recognise that scheduling will be the key to my longevity moving forward,' Federer said of the decision.

    Even the king of tennis knows he has limitations and chooses his battles wisely. Yet most traders fail to understand they cannot win in every type of market. Successful traders pick and choose their battles and wait calmly for better opportunities.

    If Federer can skip one of the four Grand Slam tournaments, traders can show some restraint and not jump at every opportunity. As in tennis, having the patience to wait for the right opportunity is the key to winning in trading.

  4. Train. Train. And then train some more.

      There is no way around hard work. Embrace it. - Roger Federer

    After winning the Australian Open in January 2017, Federer didn't play a single match. But that doesn't mean he wasn't working hard. To stay on top at this stage in his game requires intense training.

    Trading is one of the most competitive fields in the world today. The person taking the opposite trade could be a scientist, a chartered accountant, or even an algorithm.

    What do you think your odds are against them without training?

    Like a Grand Slam champion, a trader must embrace training to win.

    Now, if you want to excel at trading and are willing to embrace the training required, I have something exciting for you soon. Something that will not only show you how to trade like Federer, but give you a proven path to becoming a Master Trader in JUST 87 DAYS. Even if you have zero trading experience today!

    Stay tuned...

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Market Notes

Naming Names: 13 Companies with High Debt and Promoter Pledging

In recent market notes, we have seen that promoter share pledging is a warning sign. Companies with a high and increasing level of promoter pledgeing tend to underperform. Share pledging is usually the promoter's last fundraising option. In other words, no one is willing to fund them because the company is in bad shape or already has too much debt or other financial constraints.

But share pledging is not always bad. Since it's one of the fastest ways to raise money, some promoters use it for short-term needs. Which is fine. But when a company is already piled high with debt and then has to pledge its shares, this is bad.

When we asked Kunal Thanvi and Rohan Pinto, editors of Equitymaster's Smart Money Secrets, their views on debt and promoter pledging, here is what they said...

    We usually prefer not to recommend companies with a debt-to-equity ratio above one. Of course, there are a few exceptions and it depends on the business. But a high debt-to-equity ratio indicates the business needs more capital than it can generate from its own operations. In fact, having high debt is a double edged sword; it may boost your profits in the short run, however can haunt the company during the economic slowdown.

    In general, a high debt-to-equity ratio is not a good sign. And above that, promoter's pledging is something we don't like to see in a company. We generally don't consider stocks whose promoters have pledged shares, unless the rationale for the pledging is justified and valid.

Promoter pledging in addition to a high debt-to-equity ratio means the company is over-leveraged.

We have already seen the -5% average five-year CAGR returns of stocks whose promoters pledged more than 50% of the shares and whose share pledging has increased over time...and how these stocks generated negative returns 63% of the time.

Now let's see the combined effect of high debt and promoter share pledging on the stock prices of S&P BSE 500 companies from FY2011-16. As you can probably guess, the results were disastrous. Just have a look at the chart below.

Average Five-Year CAGR Returns

We excluded companies whose debt-to-equity ratio and promoter share pledging have decreased over time as this might be a sign of an improving situation.

Thirteen companies have a debt-to-equity ratio above one and increasing and promoters share pledging above 5% and increasing. The list of these companies is as follows: Adani Enterprises, Adani Ports, Bajaj Hindustan Sugar, HCC, Jindal Steel and Power, JSW Steel, Kesoram Industries, RattanIndia Power, Reliance Communications, Reliance Defence, Shree Renuka Sugars, Suzlon Energy, and Videocon Industries.

The average five-year CAGR returns of these thirteen companies were -14%. This is a huge underperformance compared to Nifty returns of 6%.

Of these thirteen companies, eleven generated negative returns. That's a failure rate of 85%. The maximum return was only 13% and minimum returns were -39%.

From this data, we can conclude that it is better to avoid companies with high debt-to-equity ratios and promoter share pledging. This is because high debt coupled with share pledging means a major part of the company's profit goes to paying the lenders. This ultimately affects the interest of the retail shareholders.

Investors should always check the promoter's holdings in the company along with its pledge shares and the reasons for the pledge before acting. A high promoters pledge is usually a bad sign. And if the share pledging is on top of excess debt, avoid the stock.

From the Market Wizards...

"Traders focus almost entirely on where to enter a trade. In reality, the entry size is often more important than the entry price." - Jack D. Schwager

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1 Responses to "Trade the Markets like Roger Federer Plays Tennis"
B J KALIANWALA
21 Jul, 2017
Well explained.Please expand the letters CAGR.. There are the following takeaways as understood by me, an old man of 89 yrs 6months. 1.That one should patiently wait for the right opportunity. 2. That Companies having more Debt than Equity are not safe. I find some good companies still seem to have high debts , invariably for specific projects.. thank youLike 
We request your view! Post a comment on "Trade the Markets like Roger Federer Plays Tennis". Click here!