MANEUVERS IN THE STOCK MARKET: THE DEVIL'S GAME

When I was working in the Securities Department of Tobank and Halkbank from 1991 to 1997, I had to face four situations at the same: the investment fund, the bank's stock portfolio, the customers' portfolios and my own portfolio. It was a delicate balance that I had to deal everyday for most of the time; all the eyes were upon me as I was the only one doing the securities analysis and establishing the portfolios' structure and composition.

Regarding the dealing with the investment fund, I had to take into account the constraints set by the law in one hand and the ones imposed by the bank itself on the other hand. Thus, the maneuver involved a constant re-balancing of the fund in order to meet the criteria set by both sides. For example, the law stipulated that the part of the stock present in the A type investment fund was not to drop below 25% whereas for the B type of investment fund, the stock ratio could not be more than 20%. This was the reason why most of the B type funds were either liquid funds with Treasury bills having a maturity of less than 3 months or bond funds or currency funds (which in turn, were state bonds that were sold on the foreign markets in USD or in DM). Consequently, I had to follow these guidelines and watch constantly the balance between the stocks and the bonds. Somehow, the bank had a different view regarding the A type fund as it wanted it to have a yield that was not more than what they were offering for a drawing account.

As far as the bank's portfolio was concerned, I got involved directly in Tobank between October 1991 and January 1992, and in Halkbank from July 1993 until January 1997. There were no real constraints in the management and the composition of the stock portfolio other than some broad lines dealing with liquidity and return. At the beginning of my portfolio management adventure, the management of the department did not trust me as I was a rookie in their eyes. And my ideas about the portfolio management and stock selection methods were seen as dubious in many respects. Consequently, my task was to persuade my superiors that my ideas were correct and thus achieve freedom of decision from above and collaboration from below. Nevertheless, the opportunity came in front of me in August 1991 when the manager of the securities department M.C.C. had gathered the team in order to teach us the sorter analysis. At first glance, it was great and we all jumped on it. But, after few weeks, I started to rebel against it and stated to the manager that it was too long and it was taking too much time and that we had to simplify it. I had proposed to drop the number of criteria from 50 to 20 in the first stage which he accepted. The second version of the sorter was better but I was not satisfied with it as I wanted something simpler and more direct.

As far as my stock selection is concerned, I favor a group approach; I try to buy groups of stocks that meet some simple criterion for being undervalued such as low price to book value or low P/E ratios, regardless of the industry and very little attention to the individual company, provided that there is an adequate balance between value and financial risk.

Due to the time horizon that was shortening after that the government had set the date of the elections for October 17th 1991, we decided to speed up the selection process. In the first week of October, I came up with a prototype of stock selection involving the combination of price elements and half a dozen of financial ratios, bringing the number of criteria down to 10. With this model, I analyzed 80 stocks and picked the top 8 stocks that were to be invested in dollar equal basis to a portfolio worth 100.000 USD. We formed the portfolio during the week of the elections when the ISE index stood at 2400. Needless to say, the investment fund was a big bond portfolio and I never touched it. Regarding the customers' portfolios, I had organized them in a similar fashion to the bank's portfolio but with a twist in the size of the portfolio. For most cases, I had to concentrate the portfolio in one or two stocks. Nevertheless, when the market rebounded and reached 5128 in the third week of January 1991, our portfolio had a return of 220% and the customers' portfolio had all beaten the market's return at various rates. For my part, I went from 1000 USD to 5000 USD...

When the manager T.K. left Halkbank's department of securities in July 1993 (Tobank was merged with Halkbank in May 22nd 1992 by a ministerial decree), I was called in to take a look at the bank's portfolio. When I inspected it, I found out two things: first, the bank's portfolio looked like the Noah's Arc for there was absolutely no consistency among the stocks present in it and it looked more like a zoo than a concrete stock portfolio; second, the portfolio had lost 50% of its value (dropped from 2 million USD to 1 million USD) despite the market had doubled in terms of USD since the beginning of the year. In the mean time, when I worked in the research department of Halkbank Securities Department, I had organized the customers' portfolios which fared quite well until the end of the year attaining a return of 500% in USD whereas the market itself had a return of 300% in USD. I turned to the newly appointed manager Y.Y. and told him that we had to liquidate the portfolio in order to clear our minds and start on a white page. He was white himself when he heard that but after a second thought, he accepted my proposition and liquidated the portfolio. I started to look around for opportunities when a news arrived to the department stating that the energy sector was going into a strike. The prices of all the energy stocks dropped (we were saying energy in the market but in reality, they were petrochemical companies). My attention was concentrated on two stocks: Tupras and Petkim. Both stocks had dropped by more than 50% in a short notice. I turned to the manager and said that we should invest the whole portfolio in Tupras. He was stunned when he heard that and said that he would fire me if the portfolio were to lose money and I accepted it.

I had to talk with our broker K.I. regarding as to how I would operate. We held a meeting on the evening before the start of the buying operation where my colleague and my friend A.A, the broker K.I., the manager Y.Y. and myself attended. I was in charge of the tactical aspect of the operation, mainly investing the whole portfolio in Tupras while the broker was to follow my orders and A.A. would monitor the operation in the name of Y.Y. On that evening, when I went home, I grabbed my grandfather`s field glasses without informing my grandmother (she would have killed me).

The story of this field glasses is interesting. My grandfather was a brigadier general of the Turkish Army and retired in 1961 but in may 1942, a Turkish military delegation went to Germany to meet the German High Command posted in Wolfschanze in East Prussia. My grandfather spoke French and he acted as a translator during the meeting and the Germans having liked him very much, had given him a medal and Hitler had given him through Field Marshal Keitel the field glasses.

So, I ended up using it in the stock exchange where the stocks were written on the boards and I had to stand behind a bar and watch the board with the field glasses and give the orders to the broker through hand signs. The other brokers who knew me were a bit surprised to see me like that but I must say, the scene was exciting. It took me 5 days to invest the portfolio into Tupras without causing a distortion on the stock board. And I repeated the same procedure on the sell.

Shortly after the operation was completed, news reached that the strike was over and the stocks doubled in a short notice. I had also recommended this stock as well as Petkim to the customers but their position was less important as they had portfolios of 8 to 10 companies.

Then, in the fall of 1993, I had bought Bagfas, a major fertilizer company which had returned 30% and in early December, I bought Eregli at 5.000 TL and decided to sell it at 7.500 TL but the manager Y.Y. told me to wait a bit; I was shocked but I had to comply and he sold the position at 8.500 TL.

At the end of the year, the portfolio had reached 3.150.000 USD and the manager Y.Y. transferred it to the top management. Consequently, I concentrated on the customers. During the first week of January 1993, the stock market was brewing and the prices were skyrocketing and I was busy to downsize the customers`portfolios and switching them to repos as I was seeing an overvaluation of the market; a herd-like mentality was sweeping the stock market. At the beginning of the second week, I had forced the clients to liquidate all their positions and place their money in repos until I told them to enter into the stock market. On the 13th of January 1994, the credit rating of Turkey dropped and the stock market started to fall dramatically from 30000 level. The second cut in Turkey's credit rating made the matters worse and the stock market continued its sharp decline until reaching 12800 in February 15th 1994. In the meantime, the USD had surged from 15.000 TL to 38.000 TL with O/N repos soaring from 70% to 400%.

During this terrible period, a customer that I had never seen before was sent to my desk by the manager Y.Y. The person in question had invested 500.000 USD in July 1990 when the ISE had reached 5700 just before the invasion of Kuwait and now, he had 125.000 USD left. He was working in the construction business and was upset to hear that there was a research department and that he was not told about it. Nevertheless, he asked me what could be done with his portfolio. After examining it, I saw that it had the similar problem with the bank`s portfolio in the summer of 1993 and the market in February 1994 was in its abyss. Consequently, I proposed him a daring plan: sell off the portfolio and concentrate on a blue chip, Petkim. He paused for a minute and went to see the manager. Shortly after, the manager came to my desk with him and explained to him that I was correct and that he backed me on this matter. So, the customer invested all his portfolio in Petkim at 3.000 TL or 0.10 USD. The following year in April, when the stock had surged to 50.000 TL, I called him but his son answered and I asked his father. He told me that he was deceased and that he was in charge of the portfolio. It was very sad to hear that but I recuperated rapidly and told him to liquidate the whole portfolio which he did promptly next day by coming to my desk. The position was sold at 50.000 TL and the portfolio at that moment was worth 1.3 million USD...

During this period, the investment funds of the bank had fallen drastically in value and real terms, the stocks as well the bonds were in a terrible shape but I only got the details by pure coincidence. In the second half of the February 1994, the manager in charge of the investment funds at the headquarters in Ankara had called the broker. But as he was not there, the manager was transferred to me and I had learnt that the selected stocks were proposed by the broker in question who, in my eyes, could not count up to three financially speaking. He was collecting the hot tips circulating in the stock exchange and then passing them to the headquarters which in turn was forming the stock composition of the funds. I requested the list of it and after inspecting it, I prepared a drastic plan of action which I submitted to my manager Y.Y. who in turn, approved and sent it to the headquarters. The plan was simple: liquidate the whole stock component and redesign the portfolio by investing in deeply undervalued stocks but with limited stock diversification by paying close attention to the trading volume. I had also advised them to avoid touching the bonds and that they were to replace them with high yield bonds when the previous bonds expired. In August 1994, the market had doubled in value whereas the fund's switch of bonds coupled with the appreciation of the stocks had seen its stock component rise from 25% to 40% and was set to beat the yearly inflation rate before October. But the headquarters' call for restructuring the funds in order to meet the 75% per year while the inflation was at a level of 150% was more than appalling but I had to comply.

I can say that the funds' composition, though similar in many respects, had divergent objectives and no operational objective seemed to be envisaged by the headquarters. Looking at them from a professional point of view, the scheme did not appear at all promising and despite my efforts to restore the situation, top management's strange objectives prevailed.

I want to pause here in order to explain my thoughts regarding the issue of portfolio management. In most cases, the finance books tell us that we have to wait for the stock to reach its intrinsic value before selling it and when that stock is bought, we should not move if it drops below our purchase price for it is of temporary nature. I disagree with this because if you buy a stock below its book value while its intrinsic value is significant, despite the reality of the concept, it is very frustrating to see the position slide. Consequently, I was placing a protective stop below my purchase price in order to limit the loss. But as I was buying the stock at a big discount to its book value, the protective stop was almost never reached. On the other hand, along with selling the stock when it reached its intrinsic value, I was using trailing stops which were capturing about 70% of the move. Depending on the situation, I would adopt one of the two approaches as I saw fit. But when I was dealing with situations where one could not know with certainty as to how the stock would behave, I was inclined to use the trailing stop whereas when I was quite confident about a particular stock, I was preferring to wait its price reach its intrinsic value.

Various fashionable investment approaches used by the market participants have the advantage of simplicity, though hardly the charm of novelty. Consequently, one has to look to alternative approaches. Generally, the investment portfolios have a limited component of stocks which renders them to have low returns, thus pointless in terms of attractiveness. Thus, any subdivision of the limited capital would be the greatest mistake that one can make in the investment arena. But it is precisely this that the investors tend to do in practice.

The essential of the whole investment scheme is that we invest all the available limited capital in one company at a decisive moment; to have such a strong price appreciation that we need not to worry about the risk of loss; and then immediately exploit any profit gained on paper by placing a trailing stop without bothering to wait for the price correction.

Generally, top management cannot grasp the significance of active portfolio management. They want to have a carefully planned measures of investment based on definite, pre-arranged circumstances . They want a complete picture of the market before deciding on any undertaking. Once the decision is taken, it will be carried out according to a plan, one might say almost methodically. This mania for planned control, in which nothing should be left to chance, leads to the organization of the portfolio in a form that will not destroy the general scheme.

Using leverage in investments produce superior returns when the going is good, but produces also a loss when events fail to conform to the expectations. One of the main difficulties in judging is the level of risk in which one can feel safe. There are no universally valid yardsticks: each situation needs to be considered on its own merit. In the final analysis, one must rely upon its instincts for survival (leverage works in both directions: one has to be on the right side of the market in order to benefit from it).

I don't invest in companies according to orthodox set of rules: I am always more interested in understanding the changes that occur in the rules of the game. I start with a hypothesis relating to an individual company after I have done an analysis of it which provides me with some kind of an impression. I then turn this impression into a hypothesis by formulating it and test it in the market place. If the hypothesis is right, I obtain a good return but if the hypothesis is wrong, I lose money at which point, I have to contain my losses through the uses of a protective stop (a method that produces outstanding results during good periods and helps to contain losses during bad periods must be declared a success).

The stock market is like a casino and my approach of formulating hypotheses and testing them against the market has a tendency to become worse than useless: by the time I recognize a market trend and formulate a hypothesis to explain it, the trend has changed already and I have to find a new hypothesis. The result is that I am always lagging behind the market and keep on getting whipsawed until I abandon the hopeless struggle. I can argue that an approach which allows me to recognize when it does not work is a valid approach; still, it is somehow more convincing to demonstrate it at a juncture when it does work.

If you try to propound an unformulated hypothesis, what you will get is a hit-or-miss result. By contrast, when you deliberately formulate your hypotheses, you can consistently outperform the market averages, provided that your specific predictions are not too far off the mark. I can say that the process of treating the stock market as a mechanism for testing hypotheses is an effective approach: it produces results that are better than a random walk.

I want to add a word about the management itself on these matters. My approach to the stock market is abstract in a broad sense. It takes a form that is very personal and emotional: investing is associated with fear and pain whereas success is met with relief. Nevertheless, based on my experience on this field, the stock market's behavior is forming in my mind a different attitude: I have a low regard for the sagacity of the so-called market professionals and the more influential is their position, the less I am considering them capable of making the right decisions. Worse, they are so detached from the reality that their decision has a tendency to fall behind the events and quite often, their decisions turn out to be the wrong ones and we suffer from the consequences. For example, the headquarters of Halkbank was in Ankara but the stock market operations were in Istanbul and to make the matters worse, there was a lack of understanding and coordination between the two and that was causing a lot of trouble. Both sides were operating on their own and in moments of crisis, the problem was becoming plain to see for everybody. But the top management had other priorities.

During this period, I took the initiative of taking contact with the top management, especially with the manager of the Capital Markets Directory. I found out that he had little knowledge of what we were doing and I had to  explain to him what was going on and sent him a fax that summarized our dealing and our approach. Two days later, he showed up in our department and I was able to clarify him amply on the matters discussed above. After a brief meeting, he agreed that I would prepare the stock list with the portfolio composition and sent it to him after my manager's approval. Thus a liaison had been established between the headquarters and our department which worked pretty well.

It is essentially very important to work with a team where people know each other well and there should be a trust. When the manager gives an order with a few words, the personnel who receives the directive must understand it not only at his own level but also at the level of the department which will reinforce the effectiveness of its application. Consequently, a few words will suffice to operate effectively without having to go on length over the issues. In the stock market, things change rapidly and there is no time to discuss the matters during the phase of operations. Generally, I would discuss the situation with my superiors for 5 minutes and receive the directives (and not the orders) that I would apply as I saw fit because in a rapidly changing situations, I had to take the initiative as to how I had to tackle the problem, even if it meant to go against the directive itself. Unless the person is stupid, he will perfectly understand the concept behind the directive and act accordingly, provided that he is more or less competent on the matter.

Frequently, this understanding of the matters implies that one knows what's on the mind of the manager or the person who is operating. This can be reinforced by close collaboration between the personnel making up the team by, for example, organizing sporting events once a week where two teams would be set up and thus permit a kind of team play. This will have a direct impact upon the work. In North America, the teams are set as ad hoc where people don't know each other and have to collaborate. Quite often, the team members display their ideas and concepts to other members who accept them or not. When I went to the Ryerson University to take a course in investments, I was placed in a team of 4 where the students had no idea about how to operate the portfolio other than just selecting randomly the stocks and place them in the portfolio. My style being different, it did not work as the time period was short. But the management of the team was brilliant as I had given them the necessary directives as to how we would tackle the project. When one is dealing with a team made up of rookies, he has to educate them and provide them with a sense of trust. The number of team works that I had undertaken during the course of my studies in the secondary school and the high school were barely 10 and none of them fared well. It was only in the university and in the army that things changed because we were in the same boat. And when I transferred those skills to the securities department, it was a success. 

In today's working environment, people rely too much on computers and software. This creates a problem of too much dependency on these things and one gets rapidly detached from the reality when facing an amalgam of data pouring like a rain in front of you. We had learned in the high school and in the university as well as in the army not to rely too much upon electronic stuff as we were the ones who were making the decisions. The program delivers you a set of results and you are the one who is going to decide of what to do. But when you are dealing with a fast moving environment, the computers are of little help and time is more valuable than ever. The reliance of the computers hampers the decision process by lagging behind the events. We had developed an approach where the commitment of the team was deliberately set to a limited number of persons. In Halkbank, there were 3 persons dealing with the stock portfolio: the manager, the broker and myself. I had a simple computer screen in front of me where I was using the lotus 123 for my analysis of stocks and the monitoring of various portfolios. The analysis of the stocks was simple but very efficient and I was not wasting my time over the stock issues and thus I was able to concentrate on how to operate the stock portfolios efficiently.  

I can say that the concept of management we used in the securities department was a broad concept, embracing a theory of the nature of the capital market, character and leadership traits, command and control, senior-subordinate relationships, and training and education. It is a comprehensive approach to the management as a whole. The concept emphasizes the manager's intent, which gives the subordinate a base from which to make his own decisions, so that they are in harmony with the overall plan. The department was using mission statements in the form of the manager's intent. The manager then assigned tasks to subordinate sections to carry out his intent. The subordinate section's leader decided upon a specific course of action which became his resolution. It is more than a method of giving orders, actually more akin to a habit of thought. usually the manager would provide a single statement about the operation; the job of working out the details is left wholly to the subordinate section's leader without supervision. It was simply granted that everyone would exercise initiative to get the task accomplished.

To foster this kind of individual initiative is a major goal of the personnel and the manager's training. Through the personnel's training,  the individual's decision is honored, and if wrong, corrected without condemnation. To do otherwise will stilt initiative. When properly trained, the personnel finds it unnecessary to receive detailed specifics from their superiors in the form of orders and directives. Their thinking is not limited to specified doctrine or techniques but has to do more with a professional devotion to fulfilling the manager's intention. It is much better to make a decision now, than to spend considerable time to find the best possible solution or worse, to wait for accurate information before taking action. This attitude extends down the hierarchy, to the individual personnel. In a situation when the contact with the manager is lost, the subordinate leaders is counted on to take the action they thinks is appropriate, rather than to stop and wait until contact is reestablished. This aggressive attitude allowed us to take advantage of temporary profitable situation. A subordinate leader is justified in modifying or even changing the task assigned to him as long as his action supports the manager's intent.

During the fast moving operations in the stock market, the orders were normally given verbally, either by telephone or, if possible, in person. Later, when the pace has slowed down somewhat, a written copy of these orders would be prepared for the department's diary. The more formal process of developing orders would be too much slow. The training referred earlier would ensure that everybody thought along the same general lines. This will go far in reducing the length of orders, since details do not have to be mentioned. The personnel also tends to get to know each other better when they work together long enough. The manager and the subordinate leaders start to understand each other during the operations. The better they know each other, the shorter and less detailed the orders can be. In Tobank and in Halkbank, the team usually allowed themselves only about 5 minutes in which to decide what to do in the next operation in the stock market. The manager would issue the daily order at 9 a.m. By 9.15 a.m., the order had been analyzed by the section's leaders and were translated into directives and transmitted to the personnel.

The staff must be small and we had that chance in the department of Tobank and Halkbank, compared to today's standards. The less there is, the less aggravation we have. I see this as essential to the proper exercise of the concept. The operational level should have only half a dozen of personnel and leaders and a minimum supporting personnel.

The decision process was quick, without much detail or staff analysis, although the underlying staff work was both competent and detailed. We were stretched to the breaking point but this practice helped to hold down the size of the staff and ensured continuity. The daily briefing with extensive number of staff did not exist. I would go with my papers to the manager, who is taking his morning coffee while trying to catch the air from the daily news on newspapers and television channels; I would deliver the verbal report quickly. There was no huge theater required.

During the period of heavy trading in the stock market, the manager had established a routine, of sorts. The manager spent the day dealing with the market. Late in the day, after conferring with his operation team, he made his decisions for the following day. He would go to the lower personnel and give personally the order for the next day. In this way, the subordinate leaders and personnel could begin to plan for the next day, although they knew that these orders had not yet been discussed with the headquarters in Ankara, and were therefore subject to change (it happened rarely). As he was closer to the market realities, he had a better feel of the situation and thus he was calling the right plays. Of course, he was not aware of the larger picture to the degree the headquarters in Ankara were. But close contact between him and the headquarters minimized the discrepancy, if it was ever practiced. Generally, the manager would be dealing with the daily market operations and thus see and feel the actual situation.I would brief him with the current situation within the market as well as the larger picture based on my contact with the headquarters in Ankara but the second rarely happened. This allowed the manager to compare the information about the portfolio's situation as he experienced it on the market with the one reported by myself. In this way, discrepancies could be identified and resolved; reality could be separated from fiction. He was also informed of the headquarters' situation, in particularly about the Director of the Capital Markets' intent. By keeping up with the overall situation through me, he could usually anticipate the next move. He was an extremely important asset to the headquarters who could count on him to have a very realistic picture of the market. Thus, the Director of the Capital Markets would place great weight on the manager's proposals, and usually accept them if they were in line with the headquarters' intent.

Today's securities departments and their staff often resemble a three-ring circus. Instead of using the new communications and data processing technologies to reduce the labor force, more personnel is required to keep the whole thing from collapsing. With more people, internal friction increases and it becomes harder to ensure that the right information gets to the right person.

The small size of the organization proved to be very effective. I served both as the orchestrator of the department's portfolio when a change had to be made and the department's contact with the headquarters in Ankara. I was the focal point of all the information coming from into the department from outside. I analyzed the information as well as the field reports and reported my analysis to the manager, keeping him abreast of the bigger picture. The manager did not spend much time with things outside the department, relying on me to tell him what he needed to know.

Important returns resulted by my adoption of unorthodox approach in dealing with the portfolio management. I knew that I was expected to show initiative in delivering a superior return. When a rare opportunity presented itself, I had the confidence to take advantage of it, knowing that this was precisely what my superiors expected from me. My guidance was the manager's intent.

Our need for detailed data must be tempered by what we really need to know in order to arrive at a quick, good decision, rather than what we would like to know in order to arrive at a lengthy, optimum decision. Operational staffs must be small so that information can be easily shared among a nucleus of personnel streamlined enough to advise the manager in making timely operational decisions.

In the operation orders, the managers often turn their concept into a lengthy diatribe on exactly how they envision the investment operation to be undertaken.  Short, very broad concepts are needed rather than detailed  minutes. Generally operations orders are far too detailed. Standard procedure, for example, belong in SOPs and not in operations orders. The manager must train his staff and subordinate leaders so that they don't need lengthy instructions. Quick, broad orders are needed to keep ahead of the events. The challenge is to combine the right style with the information processing power of the computer to achieve a management system where good decisions are made quickly and at the appropriate level.

MANEUVERS IN THE STOCK MARKET: THREE STOCK SELECTION METHODS

In order to obtain an investment result that will be above the average over a long period of time, there is a necessity of having a method of stock selection which incorporates two elements: (1) it must possess an objective or rational back-test; and (2) it must be different from the ones used by the vast majority of investors. My experience on this field leads me to consider three stock selection methods which meet them. They are different from each other and and each requires a different set of ability and psychology.

Blue chip companies

The market has a tendency to overvalue the stocks which have been exhibiting high growth whereas it undervalues the stocks that are out of favour due to adverse developments of a temporary nature. It constitutes one of the essential parts of the stock market dynamics and point to an investment approach which is relatively safe and promising.

The basic approach would be to concentrate upon the large companies undergoing an adverse period. The large companies have the resources in capital and in intellectual capacity to get out of the adverse situation and return to the normal earnings base; also, the market will most probably respond quickly to any improvement.

The idea of buying unpopular large companies on a group basis is quite simple. Nevertheless, when the individual companies are considered, another factor must be taken into consideration. During their good years, the companies have a tendency to sell at a high price and at a low P/E in the good years and the opposite in their bad years. In this case, the market has doubts over the perseverance of high profits in terms of valuation and the opposite when earnings are almost nil. Thus, one should start with a low P/E concept but must consider the issue together with qualitative and quantitative factors when constructing his portfolio.

Bargain companies

I define a bargain stock when it trades to less than its book value and thus is worth much more. In order to be definite on the matter, I may suggest that the stock is not a real bargain  unless the current price of the stock is less than 50% of the book value.

One can value the stock by estimating future earnings and then multiply them by a factor, whether inherent to the company itself or to the market. If the obtained value is well above the current price, the stock can be considered as a bargain issue.

At the bottom of the market, a large section of the stocks can be very attractive in terms of price, measured by such standards. The current earnings and immediate future may be grim but the average future conditions may indicate intrinsic values that are well above the current levels. The only thing that one needs in depressed markets is courage and application of some basic valuation techniques.

The excesses of the stock market's behavior both on individual basis and on market basis permits the existence of many bargain issues at practically all levels. Therefore, there are two major sources of undervaluation: (1) short term unfavorable results and (2) general neglect. Nevertheless, on a stand alone basis, these cannot be considered as reliable methods for sound investment.

One should look for some sort of stability in the earnings over the past years with a sufficient size and financial strength in order to meet unfavorable events. The best combination could be a large company trading at a big discount to its past price and average P/E. This method may disregard many golden opportunities but I prefer real-profits compared to probable profits.

Stock selling below liquidation value

Sometimes, the stocks have a terrible beating in the market and they sell at big discounts relative to their book value. In such instances, the liquidation of the business itself would produce abnormal profits. All that the investor has to do is to estimate the relative fire-sale value of the company's assets and deduct all prior obligations. If the balance is positive compared to the stock price, the investor has a good bargain.

My experience with this type of investment selection had been very good for several years. I can affirm without any hesitation that this stock selection method constitutes a very safe and profitable method of determining undervalued situations and thus exploit them.

ON QUANTITATIVE EASING: PROJECTIONS FOR THE YEAR 2014

In the light of our experience this year, there are two important determinants for the U.S. First, of course, is the U.S. Federal Reserve (Fed). If it does not start on December 17-18 on this year's last meeting, when and how severely it will begin to reduce the amount of bond purchases will be the primary determinant and it looks that it will start in the next quarter after the taking office of the new chairman. After that the Fed raised that possibility in May, the net capital inflow to developing countries decreased dramatically and therefore, the exchange rates and the interest rates spreads jumped. The reduction of net capital inflows decrease the rate of credit flow after a while. Consumption and investment spending are adversely affected; the growth rates are declining. Because it will lead to similar movements in 2014, the Fed's decision is very important.

The second determinant is whether the well known fight which has the risk of locking the fiscal policy of the United States will continue in 2014. The first test is in the first months of 2014: let's see what the Republicans and the Democrats are going to do. If the public sector is led to a shut-down of its system, the Fed's decision (if it does not start within this period of time) in terms of timing and/or severity may be affected: it may be postponed a few months and the purchase amount may be reduced further. The challenge of building a baseline scenario for 2014 has emerged while discussing the United States. We still have in store the uncertainties related to Europe.

There have been several positive developments related to Europe this year. First, several small steps have been taken towards the establishment of a common banking authority. Second, with the exception of Italy, the unit labor cost of the troubled countries is dropping. It has not reached yet the Germany's level  but there's an improvement which is considered as to be one of the biggest issues of the Euro zone. But nonetheless, Europe is growing slowly and the inflation is very low.

In that case, whether the European Central Bank (ECB) will or not loosen further the monetary policy is under discussion. What kind of path will the ECB follow depends on two factors: the first element is as to how the inflation will take shape in the coming months which leads to concerns such as "Is the scourge of deflation coming?" due to the fact that the inflation dropped below 1% during the previous two months. Secondly, of course, is the growth rate. If there isn't any development in this area and the inflation continues to remain below 1%, ECB may take steps for additional measures. It has the option between three tools that can be used together and which are not mutually exclusive: to reset to zero the monetary policy's interest rate which has been reduced to 0.25% during the course of this month. The banks will not accredit and give negative interest rate to the deposits held with ECB. Issuing more money by purchasing more bonds. The first one is the more likely. The second one is somehow doubtful. And the third one is a policy that could irritate Germany.

Consequently, I want to give an "early" basic scenario. "Early" because a significant part of the scenario depends on what the Fed is going to do. The Fed is meeting on December 17-18. In this meeting, there is a possibility that the "feared" decision is going to be reached. Even if it is not reached, its statements may change the expectations regarding the timing and the severity of the decision. If this is the case, then I will update my current scenario under the heading of "new base scenario". For the time being, my assumptions about the external conditions are as follows:

The Fed will gradually decrease the third quantitative easing during the course of the year and will reset it to zero. Even if it does not start it at the end of this year, it will begin in March. On the other hand, in accordance with what was previously announced, the monetary policy's interest rate will remain unchanged in 2014.

Uncertainties related to the fiscal policy in the U.S. will not be on the rise as compared to 2013. In different terms, the Republicans and the Democrats will continue their disputes in front of a scared world. But they will agree before the time is up. Meanwhile, the first test of the correctness of this assumption will take place in the first months of 2014.

Europe will not have a deflation and will recover, albeit very slowly: Europe is not expected to grow in 2013. By contrast, the IMF is predicting that it will grow by 1.3% in 2014. And the forecast for the Euro zone is at the level of 1%. On the other hand, the economic programs in force in the troubled countries will be continued. To put it differently, the questions of "Does the Euro zone crash?" will not come up. In this case, ECB will not undertake the monetary easing by purchasing bonds. There is a possibility to set to zero the monetary policy rate of 0.25%.

THE PRINCIPLES OF THE MANEUVERS IN THE STOCK MARKET

When I look for investment opportunities in the stock market, I look for cases of pessimism if not extreme. Each stock market crash provides me with a moment of great opportunity where the stock prices have dropped to such an extent that there is no more risk involved. This perspective pushes me to look for an opportunity to take advantage of the fear in the market and to look for ideas, under the condition to have sufficient cash at hand.

In most cases, I try to understand the nature of the problem with the price of the stock and the company itself and I put it into mathematical terms what these problems are. One of them is to determine the impact of the financial disaster upon the company and to quantify it. And then, I try to see if the problems have been reflected properly upon the stock price itself.

If you want to be a contrarian, you ought to do what other people are not going to do or will not dare to undertake. But one must not be a contrarian for the sake of being a contrarian. I always try to understand the issue and get some insights as to why people are not doing certain things and what are the elements that they do not take into consideration in terms of valuation.

When a stock has dropped significantly, just because it is cheap that one should invest into it right away has some reserves. Most of these drops are event driven and this requires an event driven analysis. When an event has impacted negatively upon a stock, one should look into it in order to see whether there's an opportunity. I can say that at least half of my investment ideas come from this understanding.

Any major financial crisis pushes down extensively the stock prices and thus creates an opportunity for me to buy a stock at a big discount. There isn't necessary a catalyst to turn around the stock and when a catalyst drives the prices down, I react to it by buying it. Frequently, the Turkish stock market had severe drops in the marketplace during the financial crisis, reaching more than 50% drops. All I had to do was to start to look for beaten stocks once the drop went further than 50%.

What I was trying to understand was what I was paying for the company and what was it doing. If it is a cement company, what is the value of the company in the marketplace, the enterprise value per produced cement unit? It is more interesting to me than just to look at the book value of the company or the earnings stream of it. I am trying to figure out what I am paying for this company per unit of whatever it does. And this in turn gives a better sense of "is it affordable?"

One must understand what it means to buy a company. It is not just the market value of the company but it also means assuming the liabilities in terms of balance sheet. Due to this, I do a lot of stock screenings. I look for problems that push down the stocks dramatically. Such stocks come to my screening because they have a lot of problems. Therefore, I do a number of screens in terms of valuation and attractiveness criterias such as a formula that I had developed to evaluate the private market value of the stocks.

I am very mindful of the famous phrase of Warren Buffett: "diversification is a protection against ignorance." I don't turn much the portfolio and in fact I avoid it as much as possible and accordingly, I hold 10 stocks at a time in the portfolio and my holding period is quite long, at least until the next extreme optimism in which case I sell the entire portfolio without a second thought.

One of the things that one must do as far as the investment style is concerned is to change the investment style over time. I maintain a list of stock selection methods but I must always have 10 different ways of looking at a stock. I do a lot of future earnings projections and discounting them to today's stock price and also, I look at the dividend streams over a long period of time. But had I kept doing the same thing that I had done 10 years ago, it wouldn't have worked. The dynamics in the marketplace change over time and consequently, I am constantly trying to improve what I am doing. When the market is offering me something, I have to identify what is cheap on the market. At some point, growth stocks might be cheap; in other times, value stocks might be cheap. Consequently, I have to find what is cheap in the market or what it is offering to me and I try to understand why it is cheap and what is the rationale behind that price. Flexibility in the investment approach is very important. And changing my investment approach according to what the market is accommodating to me is very important as well.

Over a long period of time. I have been trying to find a normalized earnings over a full business cycle. Many investors concentrate on what the company will do this quarter or next year but the more efficient part of the market is further out because people are not willing to look to that further out, they are not comfortable of holding securities that long. Thus, the shorter term is less efficient that the longer term; so, I concentrate on the longer term. I believe that the normal business cycle is five years. So I can figure out what a company can earn both in recession and in expansion periods over that five years period. Then I discount it back to the current stock price.

One part of my job is to manage risk. I want to know how much money I can lose in every single stock that I have invested and how much money I can make. I hold in the portfolio a certain number of names for the upside and I may be wrong a third of the time despite running the numbers on a constant fashion. For example, I may think that the bottom price is 10 but it may go to 8. Then the management sits with me around the table and discuss with me about it by saying that why I was wrong and is it temporary in terms of stock prices, etc (especially when I bought the Turkish Airlines at 800 TL (0.11 USD) in 1991 at 50% to its book value and in early 1993, the stock dropped to 400 TL (0.035 USD) at 20% to its book value before jumping to 24000 TL (0.40 USD) in 1995).

The most important thing for me when I am wrong is that I try to understand why I am wrong and I try to determine whether I am comfortable with that or not and whether the longer term thesis of the stock is still in place or not. When the price of a stock goes down and I don't understand why it went down, it will be wrong for me to maintain that position.

I believe that people are wasting time in thinking too much about the overall risk than the company's specific risk. And their asset allocation decisions based on risk trade totally ignore the company's specific valuations and this provides me with investment opportunities.

PORTFOLIO MANAGER: MANEUVERS IN THE STOCK MARKET

My adventure with the stock market begun on October 19th, 1987 when the stock markets around the world had plunged by 20%. Back then, I had just arrived to Paris for my studies at the University of Sorbonne. On that day, my father was jumping around stating that we were on the eve of another 1929 crisis. As I had a vague idea about it, I preferred to watch the movement of the prices and to understand what was going on. Until my military service, I watched the markets and followed daily the Dow Jones Industrial Index without really knowing the forces that were behind the movement. My military service was going to change that...

I still remember my first encountering with the Turkish stock market when I was serving my military service in the Army back in 1989. At that time, I was a translator in the Turkish Headquarters in Ankara and during this period, the stock market was having one of its biggest bull market since its debut in 1985. The various officers in the building were consulting the reserve officers about which stock to buy and were trying to organize their portfolio as best they could. For my part, I knew not much about the stock market but I tried to put my hand on whatever I could find on the subject. Thus, I got involved indirectly in the stock market first through some weekly financial magazines that I scrutinized in deep and second, through some finance books and Institutional Investor magazines that I had found in the military library. Through them, I had got a certain idea about the stock market and its dynamics and at one point I started to test timidly some stock selection methods. On paper the results were good but in the reality, I could not know how well I could fare as I needed to know the basics as well as the dynamics of the investment business.

Shortly after completing my military service, I went to Istanbul in September 1990 and started to look for a job in various banks and brokerage houses. Needless to say, at that time, I was only a high school graduate and the industry was brewing with people armed with bachelor's degree in economics or management with some masters and MBA here and there. To fill in the vacuum, I shopped around for books in finance and got hold of two books that served me very well later on. Finally, I got a position in Tobank in February 1991 in the accounting department. But as I wanted to go to the securities department of the bank, I thought it could be a good place to start. A couple of days later, my father had called me and when I told him that I was about to enter to this bank, he told me that he knew the CEO of the bank who happened to be a friend of his and shortly after a small talk in the office with the CEO, I entered the securities department.

Here was the place of my dreams I thought when I was going for my first day. But once I had arrived to the department, I was disappointed when I saw the deplorable situation in which it was: no professional screens, no analyst whatsoever and worst of all, everybody was hunting hot tips in order to speculate in the market. There was a small room where the investors were gathering and were following the market through a sliding tape and I could here the manager of the session screaming over the phone and trying to get the orders executed. During those days, archaic cellular phones were being used and the lines were served badly.

So, I started to listen to the investors and tried to understand what they were up to. Shortly after, a detail had come to my attention when an investor was shouting constantly about the earnings that a company had reported and its relationship with the paid-in capital. I wondered what it meant and inquired about it by grabbing the broker. I asked him some questions about the relationship. Through the answers he provided me, I managed to have a clue as to how to calculate the intrinsic value of a Turkish stock, a topic which seemed to be considered as secondary compared to the speculative mania that always brewed in the marketplace.

During my tenure in this department, I had tried to gather the financial statements of the companies in order to create a valid and reliable data base in order to use it in the financial analysis of the stocks. It was pretty funny to find the financial statements in the garbage baskets and people thought that I was weird when I was checking for them or looking under the tables. People just looked at them and threw them away. Shortly after, I was able to put some order but events that unfolded in May 1991 had a turning point in my career. Before those events, I had started to have some issues with the deputy manager M.A. who disliked the fact that I had started to build a portfolio of customers through stock advice that I was providing (in fact, other than a manager, he looked more like a bandit who had just arrived from the Eastern mountains but had lost his horse along the way). And he started to lobby against me and at some point I received my notice of transfer to another department in May 1991. Shortly before, the department underwent an auditing and I realized that it was not conducted properly. Seizing the occasion of striking back his team, I contacted the fund directory with whom I was playing soccer during the week. They intervened by saying to scrutinize some specific accounts in depth. No need to say, they found out quickly about me but nothing happened as the new manager, M.C.C. had stepped in.

He got rid of all the previous personnel and set up a new team with some elements coming from the fund directory. But he heard that I was leaving due to the notice I had received. He said that I would be back in one week which in fact happened. During my stay of one week at the headquarters of the bank, I wrote a report about how to manage an investment fund. Shortly after my arrival, I started to work with M.K. who became a good friend of mine ever since. He helped me to put some order to my methods and ideas for they looked like a hedgehog. Then the manager started to organize the department and put some order to the affairs. Following that, he proposed a stock selection method called Sorter in which we had to input 50 types of data before arriving to a list of stocks ranked according to their attractiveness as a whole and we would deliberately invest in the top 20 stocks. The returns of this method were substantial but the work was exhausting. So, I rebelled to this by stating to the manager that we should simplify it as we had to deal with 80 companies trading on the ISE (when I had arrived to the department in February 1991, there were less than 70 issues trading in the ISE). He accepted it and asked me to prepare and submit the proposition. I jumped on this occasion and started to prepare as I had some idea about what to do. Shortly after, I came up with the new version of the Sorter (Sorter II) with 20 types of data which proved to be slightly more effective than the first one.

The Sorter II was ready just in time as the government went to the election on October 17th 1991. On that day, the market had bottomed just below 2400 and I proposed a portfolio consisting of 10 stocks invested in equal dollar amounts. The manager had secured 100.000 USD fund for the portfolio and invested according to the plan I had submitted. In January 1992, the stock market index had reached 5128 by which time the portfolio's return had exceeded 200%. During that time, I had started to develop a tactical approach to investing as I had a limited capital. First, I had invested in a bank stock named Is Bankasi C which was trading in a narrow band (between 800 TL and 1000 TL). In those days, the price could only go up or down by 10% maximum according to the weighted average close of the previous session. I was buying at the opening price and then placing a sell order at the top price. I kept on repeating this for one week and I had a return of 50% in one week. But the headache and the stress which were involved forced me to abandon this approach. Shortly after, I found Deva Holding which I bought at 2400 TL. The stock went up 6000 TL but I sold it at 5700 TL for I was stopped out by the trailing stop. By January 1992, I had managed to grow my capital to 1000 USD from a tiny 150 USD at the start of my adventure.

During January 1992, the top management had requested an analysis of Edip Iplik (textile industry company) which went public in the summer of 1990 and Tobank was one of the intermediaries who had organized the IPO. But the sale of the stock to the public did not go well and the bank together with Tekstilbank ended up with an important amount of stocks at hand. To worsen the affair altogether, the stock was trading with a ridiculously low volume, just enough to stay in the market. So, the job came in front of me and aside the usual financial statements and graphs, I wrote a two-page report stating that nothing was wrong in the company and the business would be profitable and thus, the trading volume of the company should expand and push the price to its intrinsic value. At the time, the stock had split for a bonus stock and was trading at 1700 TL (0,34 USD) and the price was less than half of its book value. The management found the report interesting and in the summer of 1994, the portfolio was liquidated at 188.000 TL (4,94 USD).

When I had started to work in Tobank, the bank was serving as a safe for the TOKI who was in charge of the privatization of the state owned companies. And one of them was Petkim. The safe was filled with this stock and I was curious about it. When I analyzed the financial statements of the company, I found out that the business was sound and apart from carrying a loss, the company was financially strong and the stock was trading at 30% of its book value at a price of 300 TL (0,06 USD) in early 1993 alone.

In those days, it was quite common to find such stocks, especially in the early 1993. The market had dropped significantly from its high of 5700 in early August 1990, prior to the first Gulf Crisis and in terms of dollars, it was worth 2,00 USD whereas it had bottomed twice to the level of 0,66 USD before reaching again 2,00 USD in January 1994. This state of the affairs prevailed in much of the 1990s but it started to change by 1999 and the mark went to 5,00 USD.

But things started to go wrong by April 1992. I did not see it right away but I sensed that there was something on the store. And in May 22 1992, Tobank was merged with Halkbank by the ministerial decree. It was a shock for me: my salary dropped by 50% and I had to face a dreadful manager T.K.
He had such a loud voice that one could hear it from two floors above despite that his door was closed (in fact, we had a nickname for him, meaning approximately ``the landlord of our village`). Even the employees who passed in front of his closed door had to pay attention to how they were wearing their jacket. Shortly after the merge, he forbade me to perform security analysis and to talk to the investors and for this, he took away the computer. So, instead of arguing with him, I jumped to the second floor where there was the safe room where the stock certificates as well as the treasury bills were deposited. There, M.D. who was in charge of the room had let me use his computer for my analyses. During the lunch breaks, the team was gathering in the cafe of the Gar of Sirkeci and there, we were discussing about the market and the investment opportunities. This continued until the summer of 1993 when the top management changed. Shortly after that, he was removed and I was able to come back to my desk with the computer ready to go. But almost the whole team had resigned and passed to various other brokerage houses or banks.

The deputy director Y.Y. had become the interregnum director of the department, that is a director without effective ruling powers. Nevertheless, I was told that the bank`s portfolio of 2 million USD has lost half of its value despite that the stock market had doubled. After inspecting the composition of the portfolio, I turned to Y.Y. and proposed a daring maneuver: liquidation of the entire portfolio and concentration of the whole capital upon one company. His color turned to white... Seeing that, I submitted him my research on the strategy and explained to him the dynamics that were involved. In August 1993, there was a strike in the energy industry and the stocks of the industry fell by 50% despite a modest advance of the market as a whole. I jumped on the occasion stating that the strike was of a temporary nature and it would soon be solved; consequently the entire portfolio should be invested in Tupras. After a moment of hesitation he said that he would have me removed if the money were to be lost and I accepted it. The investment was done swiftly and we started to wait. Shortly after, the strike was over and the stock came back to its previous levels at which point I proposed the sell of the stock. We had doubled the money...

Towards the end of November, I had found Eregli which was trading at 5000 TL and I turned to my manager and proposed him to invest the entire portfolio into this stock. To my surprise, he picked up the phone and gave right away the buy order. In the evening, the broker came in and said that I had left a blue print in the stock market as people wondered what the bank was doing. I just smiled and said that I did not care about what the other investors were thinking of it; the important thing is to follow the orders given by your mind and not by your ears. Soon afterwards, the stock started to go up and I proposed to the manager that we sell the stock as it reached 7500 but he said no and I was surprised. Shortly after the stock reached 9000 at which point he liquidated the whole portfolio. I guess, he had a better judgment about the market than I had for I was going by the numbers whereas he was breathing the market.

During the whole year of 1993, my investments fared pretty well despite that I was spending a lot and at the end, I had managed to grow to 10000 USD, my initial 1000 USD. I had entered various stocks here and there but at the end, it was a success. During the year, I had traded Mardin Cimento, Eregli, Bagfas and Petkim but I never stayed too long in any position. Things were about to change rapidly...

The index had started 1993 at roughly 4100 and had reached 20000 by the end of the year and was to reach 30000 on January 13, 1994. On that date, the credit rating of Turkey had dropped and a wave of sell orders started to pour into the market. Coupled with a second cut in the credit rating, the movement got worse and the stock market dropped by about 60% in 4 weeks to bottom at 12800 in the middle of February 1994. By that time, I was in bonds and nominally speaking I had no loss but in terms of dollar, I had lost 60%  and had the equivalent of 4000 USD due to the devaluation. Shortly after, I was able to recover by investing in Petkim at 3000 TL (0,08 USD) which went to 54000 TL (1,10 USD) in April 1995. In the mean time, the bank`s investment funds had performed poorly and the management responsible for them was being advised by one of our broker A.A. who couldn't even count up to three financially speaking. So, I jumped on the occasion and restructured the investment fund by modifying and simplifying the stock and bond holdings. As a result, the six months performance of the fund was quite well despite the fact that I was supposed to limit the stock holding at 25% in a constant fashion and in late August, they called me to complain about the 40% of stock holdings whereas they wanted it to stay in 25% because the fund should not return more than what they were providing for the drawing accounts in the banks. I was baffled when I heard that but I had to comply to it quite reluctantly I must say (in 1994, the inflation was 150% and interest rates were 380% and the bank was offering 75% to the drawing accounts...).

During this time, I had a terrible beating in my finances as I had lost my purchasing power. My finances were in a shaky state. And worse of all, when I was in my second year at the Sorbonne, I was forced to abandon it due to my military service and later I got enrolled in the University of Nanterre but I had to drop it in the second year because I could not obtain the necessary permission in order to enter the September exams. So, I got enrolled into the University of Istanbul in 1994 and another adventure started.

Attending the university while working was very hard for me and despite all the setbacks, I had arrived to my third year in the University. During this time, the stock market fluctuated wildly, partly due to the fact that an Islamist party had come to the power and speculators were pricing this in a wild way. Nevertheless, I was able to catch some stocks here and there. One of my friend, M.K., had went to a brokerage house and I was visiting him after hours in order to do some technical analysis. There, he had told me about an IPO concerning Gediz Iplik. When I checked the financial statements, I found out that the management had hidden the profit in a clumsy fashion and that it had reported a loss on the fiscal year of 1995 but was going to report a profit in the first quarter of 1996. The IPO price was 6000 TL but the intrinsic value of the company was 24000 TL. I advised my friend to buy it right away and hold it until he sees 20000 TL. The next day, he started to buy but he told me that he had a hard time to buy it because there was no volume and the stock was controlled by big investors. I told him to carry on with the plan whatever the situation may be. The reward was substantial...

It is not quite common for me to propose to people to buy an IPO because most of the time, it sold at a highly inflated price. But when I find some IPO issues that are selling at a big discount, I literally jump on them. For example, in April 1992. Netas went public at a price of 5700 TL. I had told my colleague O.Y. to buy it and he bought to sell it shortly right after. I asked why he did it and he said he did not want to take excessive risk. The stock went to 54000 TL...

In another occasion, Tukas was on the market as an IPO and I attended the roadshow for the company. During the meeting, I realized that the CEO was silent, acting like a scarecrow while the CEO of the OYAK Securities was talking loud. Undeterred, I scrutinized the financial statements and I found out that the money which was going to be collected from the IPO corresponded to the total bank debt that the company had on its liabilities. So, I asked about it to the CEO of Tukas. But to my greatest surprise, the CEO of OYAK Group stood up and said that they would collect the money and use it as they like it. Shortly after returning from the meeting, I urged the investors to not to buy Tukas on these grounds.

During this period, I found out that some companies make fun of the investors by selling their shares in an IPO offering at a very expensive price only to see it slide dramatically. This happened to Ihlas Holding which, back in the summer of 1995, went on the market at a price of 100.000 TL for its IPO. I had calculated that it was barely worth 10000 TL but no one believed me. Worse, rumors stating that it had sold at 200.000 in the OTC fueled the speculation. Initially the stock went up to 110.000 TL and then went down the road until 9.700 TL...

Early 1997, I left the bank in order to complete my university studies. During this period, I was doing translations for various university students who were preparing a master or a PhD thesis in finance, management or economics (8 master thesis and 3 PhD thesis in total). But I continued to follow the market as best as I could by visiting some brokerage houses session rooms where the investors were gathering. There, the management was always getting divided over the issue of taking me into their team for I was standing out of order by many respects when I saw the investment community.

It is not really the education that creates a professional investor. Because, at the end, if you put everybody with all the necessary certifications into the building, what you will get is another common denominator but at a higher degree. They will look like knowing very well their subject and they may astonish you on this matter quite well. But when it comes to the real world, things change rapidly. I remember a job interview where the manager of the research department was bullshiting about the position of security analyst that I had applied for when suddenly a phone rang next to him. He picked up the phone and on the other side of the line, the person was telling him a hot tip which he said was unbelievable. After he hang up the phone, he called his broker and ordered him to buy the stock with all the money available. Then he turned back to me and continued his bullshiting. At one point, I asked him why he was buying on a hot tip whereas he was the head of the research department and had, in theory, all the necessary information under his hand. He got infuriated at such a point that he told me to get out of the room. I went out with laughter... Sweet spot!

It is quite surprising to find out that the books on finance are nice to read only to see them becoming useless when applied to the market realities. The dynamics of the marketplace differ widely from what the finance books tell and if one relies too much on them, the result may be heartbreaking. I don`t say that one should not read them at all; one needs some basic knowledge in which case, one should buy the best books on the subject. As far as I know, their numbers are less than 10 and frankly speaking I had an edge over the market on this matter as I had studied the French Literature in the University of Istanbul. I was able to discern some interesting details in those finance books that the vast majority of the professional investors did not. And that has served me very well in my analysis of stocks in particular.

When I served as a translator in the Turkish Headquarters during my military service, I was employed by various departments such as Department of the Operations, Library etc. In these occasions, I had to translate various field manuals and historical war plans or military operations through which I had learned how to plan. And I had translated 6 books on military history and 4 books on intelligence which provided me a great deal of ideas for my investment activities.

But the most interesting department was the military intelligence department. When I went there for the first time, I was surprised to see few people working there but I performed by duty of translating some documents. Later one day, after delivering a translation, I started to bullshit about military intelligence. The commander stopped and said that I knew a lot of things but I knew nothing. I was baffled. After a moment of silence, I asked them if they could teach me the job. They all bursted into laughter. But I stood there and watched them. Soon the commander stopped laughing and turned to me and gave a document to be translated in a short notice and told me to start from here. I promptly translated the document but at first I did not understand it. Later, when more documents came along, I realized that I was facing something else: I was being trained to ``read between the lines``. Shortly after, they started to ask me to get an information for a given topic. At the beginning, I was terrible. But soon, I started to learn about it. All these things served me a lot when I practiced security analysis and portfolio management. They had given me a different perspective to the investment world.

Shortly after my graduation from the university in 1998, I started to look around and I tried to apply for immigration to Australia but I did not even have 10 dollars on me in order to pay for the language exam. I got frustrated but got a position of Treasury Manager at a small company, LaMer Ltd, which was dealing with import/export business of commodities. I was able to follow the market closely and using the technical analysis in order to forecast the price patterns. The treasury part was relatively easy as I had access to privileged information concerning the possible movement of the interest rates. Nonetheless the work lasted 8 months after which I entered into research company, HTP Consulting Services. There, I first started to operate data and then slowly I started to get involved in the company`s financial affairs. My friend M.K. was working there as the Accounting Director and time to time, he was delivering me some information about the affairs. One day, the management requested from him to give an evaluation of the company that they were intending to sell to a possible British buyer. He pointed me to the management who brought before me the relevant data. I quickly assessed that the company was worth 1.6 million dollars and they got upset for they were expecting to sell the company at 3 or 4 million dollars. Later on, I heard that the British acquirer had proposed 1.7 million dollars... My laureate please.

In October 1997, the market had reached the top by hitting the 4000 and steadily declined in order to reach the bottom on January 1999 to less than 2000 (at the end of 1996, the ISE had erased two zeros from the index). There I had started to trade various stocks and went all the way up until August 1999. In August 17, 1999, a terrible earthquake hit the Marmara region and Istanbul felt it hard. But I got caught on margin and after the market resumed its course, I had lost most of my position. Consequently, I had to fight back virtually from scratch and arrived to 3000 dollars in late November 1999. After a small pause, I decided to invest in Kardemir D at 1000 TL. That month of December was a very good one for me as the stock exploded and by the time the index had reached in zenith in January 2000 at 20000, I had multiplied my money by 4. What a hit!

But the lousy state of my salary pushed me to partially liquidate the account in order to meet my ever growing expenses. Finally in December 2000, I had found Menderes Tekstil which I had bought at 15000 TL and sold it a few months later at 36000 TL, just before the February 2001 debacle...

On that month, the Turkish economy entered into its most violent economic crisis of its history where overnight repos jumped from 65% to 7000% and the stock market lost 2/3 of its value. The index fell from its top of 20000  in January 2000 to 6700 in March 2001. When this point was reached, I entered the market by buying the traditional undervalued stocks. But to my great surprise, this strategy did not work at all and I was constantly lagging behind the market. I was sensing that something had changed in the dynamic of the marketplace. It took me some time to find out about it when I had started to back-test some new investment strategies. It was only then that I was able to understand what went on in the marketplace.

Basically, the big money had shifted its interest from the traditional value approach to a more restrained approach of concentrating on the blue chips. Thus, the remaining stocks, for most part did not perform well during this period of time and my approach was lagging behind. Once I modified it, things got better. In autumn 2005, I had found Vakif Leasing which was trading at a discount to its book value at 1.8 TL (1.30 USD) and I had invested all my capital in it and I was expecting to have a decent performance. But in the autumn of 2006, the stock surged to 5.50 TL and I sold the position quickly at 5.10 TL (3.50 USD). Then the news came that a change was made in the way of doing business regarding the leasing sector. The stock plummeted and came back to its previous levels.

During the period of 2005 and 2008, I had worked in various companies, namely consulting companies. They were not involved in the stock market but I was. During this lousy period, I had to trade various stocks before starting to trade in a band with Is Bankasi C. On each trade, I was getting at least 10% return. When accumulated with the other stocks that I had traded, I managed to more than double the money. And then the companies that I worked for went bankrupt and I moved to Ankara. There, I developed my stock selection methods and came up with new approach and tested it on Mardin Cimento by buying it in February 2009 at less than 2000 TL and held the position until October 2011 which I sold at 9000 TL. It was with that money that I went to Canada. The new approach basically combined an old sorter criteria in a different way but I applied some modifications to it. Thus, I was able to find a financially sound stock at discount in an automated manner. As Albert Einstein said: ``don`t make it simple, make it simpler``.

When I came here in Canada, I tested an old approach by using the data present in the Globe and Mail journal and followed it for a while. The result was a disaster. So I abandoned it and looked to somewhere else. In July 2012, I took a finance course at Ryerson University. The only thing that stayed in my mind was a website which provided me all the information that I needed in order to analyze the stocks. Shortly after, I started to back-test my approach on various stocks and I found out that it did not work. So, I modified radically and made another back-test. This time it worked well and I tested for set of stocks bought on margin. The returns were 80% for 2012 and 50% for 2013. The real test in going to be with real money...

In March 2005, I had attended the F/X course provided by Teletrade in Istanbul. A Russian investment bank was training some persons as traders for itself. The training lasted 1 month after which, we had to manage a demo account for 2 months. Later. the management would evaluate it and decide if you meet the criteria or not. Frankly speaking, it did not work out well for me despite I followed the rules but the techniques worked out perfectly well in the stock market. It`s just the way they teach you that really matters. I had read that the Russians were excellent timers in entering and exiting commodity markets and that the North American traders were baffled by that. When I went to the course, I saw it but the drawback was that I had dealt quite a long time with stocks and I understood only the stocks, nothing else. Nevertheless, the experience proved to be very valuable for me. In spring of 2013, I had met a colleague who talked to me about his adventure in the commodities market; he stated that he had invested 5000 USD in a course on commodity trading provided by the Chicago Commodity Exchange and that he jumped into the trading business with 25000 USD in order to see it all gone in a few trading operation. Arrogance and greed are the two basic ingredients for disaster...

Ever since I was involved in the stock market, I was always interested in depressed securities, namely the stocks that were trading below their book values. But sometimes, I could find profitable companies that were trading at attractive prices relative to their business outlook. In December of 2008, while the whole market was still drifting to lower levels, I had undertaken to analyze the stocks according to their latest 3rd quarter financial statements in order to see if I could find some interesting issues. And I also used the opportunity to to test EV/EBITDA concept to see how it will work. I was disappointed...

First of all, after computation of the value, I realized that it was becoming meaningful only in times when the issues was trading at low P/E levels or below book value. Other than that, there wasn't any bargain if the margin was slim. Secondly, despite its fancy look, I was considering it as a formula coming out of the hat of a fake magician. The financial engineering has not limits and the more a person invents a complicated formula that even professionals have a hard time to understand its dynamics, the more it complicates the matters when applied. My experience in this market tells me that nothing works beyond basic algebra. That reminds me of a story that took place in one of the branches of the Halkbank where I was trying to teach the deputy director how to use a calculator. The poor guy had a hard time to calculate a simple interest with the calculator. When I showed him how to do it by writing the formula on a piece of paper, he got upset and screamed at me by saying that he had been working in the bank for 20 years and who the hell I was to teach him the interest rates and the use of a calculator (no need to mention that he did not know how to calculate the compounded interest rate...).

People have a tendency to think that complicated formulas will solve the issue of valuing the stock and thus create a sort of alchemy that will be valid in every case. At first glance, this looks like to be true but at the end, it is the personal experience and judgment that prevails. I often heard about the standards of the finance industry loaded with hefty certification lists. And that reminds me about a historical event...

When the German army had invaded the western Europe by attacking Netherlands, Belgium and France, the German army's equipment had no superiority in terms of quality over the allied forces' equipment and in fact, the allied forces outnumbered the German army. What made the difference was the way the armies were handled in the campaign, especially the initiative and the leadership in the lower echelons starting down from the level of captain. This had a direct impact upon the outcome of the battles. This system permitted the German army to reach the outskirts of Moscow in 1941 and when Hitler took over the command, this initiative and leadership factors were reduced drastically with the known consequences.

When applied to the world of investments, especially to the portfolio management, constraints and rules kill the freedom of maneuver and renders the investment performance close to the market's performance through excessive portfolio diversification in the name of reducing risk. In fact, the term risk as defined in the finance books is just a fancy formula which is hammered upon the brains of the investment community whereas risk is involved when you don't know what you are doing. The finance books were tying to put into formulas the concepts of sound practices prevailing in the marketplace since its beginnings. But the human factor and the psychological motives of the investors are mostly ignored. And that is when one gets into trouble when one relies too much upon these fancy financial or theoretical concepts. In order to avoid this, one has to be simple when dealing with the investments. When you have a concept about an investment strategy, the best thing to do is to back-test it in the marketplace by using past data and to see how it works and test it in different circumstances in order to see its probable strengths and weaknesses. It is only then that one will be able to devise an effective investment strategy tailored to its needs.

When I had to deal with my superiors or with the customers, I always used the investment plan concept. I was elaborating an investment plan according to the current conditions of the market in which I was determining which stocks to invest in and how much to buy together with the entry and exit levels for each individual stock. And then, I was suggesting it to my superiors or the customers who, most of the time, jumped on it. I was leaving the investment decision to them as I could not get involved directly, nor was I in the position to impose them; after all, I was at a lower echelon in the hierarchy.

The idea of suggesting an investment plan to my superiors or to the customers came from a book I had read on guerrilla warfare, back in 1989 during my military service. During the Civil War of China (1927-1937), the Nationalist were unsuccessful against the Communist forces present in the mainland and a delegation of Nationalist officers was sent to Germany and the issue was presented to the German Army. After careful assessment of the situation, the German Army suggested a plan which would tackle the problem faced by the Nationalist. Shortly after their return to China, the Nationalists applied the plan in late 1934 and the Communist forces were severely defeated and thus the Long March begun.

Another instance of a suggested plan took place during the 1877-1878 Russo-Turkish War where the Turkish army resisted for 9 months against the incursion of the Russian Army into the Balkans. Initially, the state of the Ottoman army was bad and their reports were unreliable. Thus the Sultan relied on the reports of the British Embassy who had a clearer picture about the state of the affairs in the army and in the Empire as a whole. When war broke out, the British Embassy handed over the order of battle and the war plan to the Ottoman army. The Ottoman Army held out for 9 months against the superior Russian army but the depletion of resources available for the war forced them to retreat up to 40 km at the outskirts of Istanbul at which point, England intervened by anchoring its fleet into the Bosphorus. The operations ceased and the Treaty of San Stefano was signed and permitted the safeguard of the Ottoman Empire.

THE MIND OF A PORTFOLIO MANAGER

The stock market takes the brightest people and smashes them to the pavement at a regular basis. There's only one bottom line in the stock market and the bottom line is how much money you make. It is probably one of the most stressful jobs that you can find on earth. You have stress every single second; consequently, not everybody can survive. Arrogance, greed, corruption, those are all traps when you work in the stock market. Whatever your background was, it's "can you make money? can you contribute to profitable ideas?"

You should wake up in the morning with immediate dread no matter what and that is simply because if you know what you are doing, you realize that it may be a fluke.You have to be among the top 5% of portfolio managers of the country and even in a period of 24 month you have only one month down, you must make sure that this never happens again. Investing is basically making bets in a certain direction of the price of the stock (or any other investment vehicle), whether it is short or long. I basically sit down and look at what I have in the book and what I am going to need to do today; do I want to add positions or do I want to cut positions. The unwritten stock market rule is that you never tell anyone how you trade and make money. When the market opens, you have a flood of orders where the amateurs open the market and the professionals close it. You are going to have a funky period in the prices at the beginning of the session. When I trade, I focus as much as possible on the market and never let anything distract my mind and I will stay in that position until I get what I want from the market. There is a lot of thing to be worry about. It's not a time to buy or sell on pure sentiments.

Rule no 1: never listen to anyone in the stock market, same rule applies to CNBC.
Rule no 2: always buy the Dips and sell the Rips.
Rule no 3: the Holy Grail is money management; small losers, big winners.

What counts here is patience. The job looks more like an air traffic controller, it is very stressful as it may be. Prices fluctuate wildly, say by 5% in a day, and you are not in the control of the market. Informations come and go rapidly and are instantly reflected on the stock's price. The basic approach is to have the lowest risk and highest return in any given position. You don't want to allow one mistake to undo what you have just done. Consequently, I play the very best I can and act conservatively.The trick is to identify the rhythm of the market and once it has been identified, one has to stay with it. I have to decide what I am going to put in the book and then decide what is the most effective way to effectuate the relevant trade.There are times when it will be more prudent to buy it over the course of the day or over a course of several days where value comes in front of you. You need to understand what's going on in the market place. You don't just buy or sell by being long or short in stocks but you have to be able to do money in a market that heads south or north. When you initially go against the positions and then obviously are exiting them, it's a little bit frustrating but it is the rule of the game.

One of the things that trips the people all the time is that once you hit your objective you need to pull yourself out of the market and rest for a moment. I do that all the time; I'm not always in the market waiting for the opportunity to flood along and try to grab it. It is the crowd that makes the stock market move and it is your battlefield. You can be right 90% of the day but it is the 10% that really kills you. You need to be able to say "Monday will come and there is nothing that I can do between the closing of Friday and the opening of Monday". Thus, you need to rest, to shut down a bit your business part. You cannot be upbeat all the time for eventually you will end up dead. By installing the necessary software at home, I am able to follow through during the weekend  the position thus be able to act properly on Monday.What did the market do, what I have in short or long, what group of stocks are strong or what group of stocks are weak; these are not the kind of things that I want to leave to the Monday morning at 0630. There's too much news going around and it never stops.

This is a business where if you don't control it, it will definitely take control of you. If you don't have a real love of what you do in here, you are not going to survive. If you don't love being a market professional who can't imagine doing anything else, you will be among the 9 out of 10 who fail. You are invincible until the moment you take a beat in the market. You can never rest on your laurels. It is very important to be humble otherwise the market will humble you in an instant (you set yourself up to blow your account out). There is an old expression: the market has a paddle to spank anyone after.

A TRADER`S DAY

0630

Good morning everyone! Today I thought you would like me to show you how a currency trader's day looks like. It's just 0630 and I've got out of the bed. The first thing that I do in the morning is a black tea for every trader needs something strong for a good kickstart in the morning but coffee is not my preferable choice.. Let's go now to my trading desk and look at the markets in order to find out what they were up to.

0645

Lets go! In my office I have a screen and two computers. The first thing that I want to know when I get up in the morning is to find out if I have any open positions and what they have been doing during the trading session. We have traditionally 3 major trading sessions every 24 hours. We have the Asian trading session, the European trading session and from there we have the U.S. trading session. My desk is clean and neat; I don't have much around and I set up my office like a professional. I have a screen, a computer and a laptop that I take outside, say, when I go to my office or somewhere else. Essentially, this is all the tools that I need. The first thing that I want to check is if there have been any orders in the market, what they have been doing the last 12 hours. Then what I do is that I  want to find out about what are the major events in the market. Most people think it is very complex to understand and that the average person will not get it. It is actually wrong. I personally use a couple of websites and I listen to a couple of persons and read about them everyday for 10 minutes in order to grasp what has driven the markets. Because, it is not only a set of charts of currency markets; it`s the fundamental news. So, what I do is I spend 5 to 10  minutes by going over to what`s been driving the U.S. market and then the European market. What I`ll do is to look at a couple of websites such as Bloomberg, CNBC and learn about what`s been going on. And then, I will have to prepare my daily trading plan regarding any trades setup. So, I`ll have to find out what will drive the market, what is the economic calendar for the day, what economic news is coming out and then I will reference my chart to see where the price is and to see what is coming up over the course of the next few hours. Before the trade, I essentially have to do about 30 minutes of work right now.  And once the work is done, I may have to come back to the computer for 4 to 6 hours for a couple of minutes and then in the evening for another couple of minutes if I see some setup in the charts that I look at. After looking at the setup of the currency, I will decide whether to trade today or not. So, once I have found out what`s been driving the markets and look at my chart for the setup, I simply put it into my notes in my diary, a diary that every trader should have one and tells me when I have to come back to my computer or anything important that I have to watch out for the day. And this as much as it goes for my preparation, basically. If I have a trade setup that is coming, what I actually do is to prepare to put the trade on, it takes a couple of minutes. So, once I have found out what has been driving the markets and once I have looked at the chart for the trade setups, the next thing I need to do is to prepare the order which will take me a few minutes. Then I place my orders and get on with the day.

0730

My work for the day is really done now. Because I like to trade daily on a hour basis and on a 4 hour chart means that I already know before going to bed last night what setups are probably coming and I know that we may have a setup at 1000 in the morning. So, I`ll write in the diary ``check the computer ant 1000`` and then get on with that day. So, what I am going to do is to find out what has been driving the markets financially during the overnight, spend 5-10 minutes in the setups, prepare and place the orders and get on with my day.

1000

Now, it`s just after 1000 and I have come back to check a particular position that I am waiting to confirm. Now, the European stock markets are opening and essentially they will trigger the European trading session. There`s some break in the morning and then different european markets start to move around. I've got all the market that I trade along the bottom of my trading platform. This is essentially my toolboxes hat I look at, how I trade, place the order etc. Some traders have multiple screens around them; it looks great and they have to look to everything. I prefer to be a sniper or a dog hunter, trying to exactly pick what I am going to trade. I have all the markets at the bottom, especially the U.S. which all the traders watch closely. And also, I follow the copper in order to see what`s going on in the commodity markets. And I also want to see what has happened in the biggest stock index in the world, the Dow Jones because stock market, commodities and currencies tend to move together. Currently I am watching the EUR/USD position and as the U.S. market is expected to open high, I expect sellers to come forward in this currency pair. For the time being, there nothing on the move and there are no important news to come. Let`s see later.

1700

It`s time for passing some international calls. I can tell you now. as a professional trader, if you want to make money, you need to have colleagues in the game in order to know where the big money is sitting. They will provide with the information about where the big money is going to trade. We need to know where the big money is going to position itself and these people will let you know. Today, they are shorting the Euro because they are expecting it to fall a bit. You cannot trade without the knowledge of this. Being a currency trader is sometimes very boring for there isn't much to do during the day for most of the time. Now I am waiting for the futures markets to open and I will start to see money coming to the market there. Today, it has been very quite but, you know, that`s trading. From time to time, I get busy days.

1900

We've got a growth number coming from the U.S. about in an hour and a half. The market is still trading and I going to look at the market if there's an opportunity to trade. The GBP/JPY chart is not showing a net opportunity yet and I am looking at the candlestick chart to look for that juicy opportunity on the downside which will tell me that the sellers are about to come on the market with some momentum. So, I might stay a bit around but I will not spend much time in front of the computer. I know what the market needs to give me and if I need to stay late in the evening just to check what's going on in the Asian markets, I will. If something happens, it will happen, if not, then it won't. At the end of the day, my approach to the trade will decide how well I will fare in this. When I trade during the day, the process may look to be simple but in fact it comes from the past experience. Consequently, I collect all available data in order to prepare the necessary trade order. I perform on average 2 to 3 trades a week and today is a typical day; sitting 30 minutes in front of the chart and trying to figure out where to place the orders by applying chart and indicator analysis. Then I determine the possible entry and exits points together with the stop/loss points. Once I have made up my mind, I place the order accordingly and forget the rest of the day until the close of the market.

Regarding the control of the emotions during the trading session, I generally have a tendency to say "Aha!' for a position that goes bad or good instead of jumping around in an endless tide ranging from pessimism to optimism. Generally, in a winning position, traders act as if they are like Bobby Fischer who trounced Garry Kasparov by 6-0; in a losing position, they feel like the captain of the Spanish Armada who lost half of his fleet while making a tour of the Isles without being able to shoot a single shot at the ducks and pigeons who were passing by. But sometimes, deep pessimism gets hold of me and I start to loose my nerve in a losing position; needless to say, I use up half of the dictionary of cursing available on the market... Consequently, a mechanical approach to this problem solves 80% of the issue but one has to get away with it; if not, forget about trading.