Archive for the ‘Stock market’ Category

The market rally appears to have run out steam and I think that there is some opportunity.  I hope that the market moves down because maybe this time it’s different.  I don’t really know what I am doing but I like the thrill of the ride.  My options positions are kind of illiquid so let’s see how that works out.

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I have recently been experiencing some success with options trading.  My initial success started to ease my paranoia and I had some good trades and a couple of bad ones.  But the good was outweighing the bad by a long shot.

That was before my latest two trades.  I am now underwater in two options positions by a large amount.  Worse yet, one was up $500 and now is down $800, a $1300 swing in a week (a week!).  The other one is down even more; it caught me completely off-guard because I bet that it would go down like the rest of the market and is hasn’t.  It’s gone straight up and each day it goes up costs me just a bit more money.

So now what?  Do I cut my losses and move on?  The reason I didn’t close my first position early is because I bought a longer term option.  My thinking was that it would correct a bit and then come back down.  Well, it has corrected (ie, gone up) a lot and caught me off-guard.  The market was oversold, which I knew, but I didn’t expect this stock to snap back as well as it has.  The other one has similarly taken off and not corrected at all though I do think it can still come down.

I am kind of in a dilemma.  I know that stocks don’t go up forever, they eventually come down.  The problem is that I need them to do that in the next 3 weeks – not a lot of time.  It’s possible, but in the meantime I will be sweating it out.

My other option (no pun intended) is to keep those ones open because I do not think they can keep going up and start digging myself out with more trades that play to my style.  I’ve discovered that I am good at banking quick profits, a 1-3 day trade that makes 15-50% in that period of time. That seems to be my specialty.  While I often surrender bigger gains by not holding on, I feel good about those quick in-and-out positions.  So, my key is to look for another market turning and execute some new trades.

I am not feeling great about this market.  I think that it will go up a bit more and then come back down and hopefully drag my other two positions down with it.  If I can’t make any money on them, I’d like to at least lessen the loss.  What’s frustrating is that both of those positions went up when I need them to go down, and my other position I needed to go up and instead it went down.  In other words, all three positions moved against me even though they needed to move in different directions.

The saga continues.  But trading is still way more fun that real estate.  Tax benefits aren’t as good, though.

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I closed another option position today using my paranoid strategy.  I bought put options on Owens Corning on May 6.  They were up, then down, and now up again.  Since they expire in 2 days and are now making money for me, and since the market is now oversold, I decided to close them down.  I can’t take the heat.

However, I closed them for a nice 67% gain in two weeks.  Counting all of my open positions as of this minute, then trading options I am up 45% on the capital I have expended in two weeks.  That includes 5 winners and 3 losers.  I have made more on my active trading in two weeks than I did in my Lazy Portfolio in 5 months (before the correction).  I’m not ready to switch to options trading, but I have been proven right over the past little while.  The only times I have been wrong is when I have gone long on the market (ie, bought calls).  In fact, all of my losers are call options.  I need to stick to my downside strategy.

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Trading tidbits

I have a number of pieces of advice I give when it comes to investing in the market.  Investing is something you do long term, my Lazy Portfolio is something I consider investing.  It is not active, it is passive except once per year when you rebalance.  For most people, I recommend a Lazy Portfolio as a way to gain the markets.

Trading, or speculating, is different.  Your time frame is shorter.  You holding period could be minutes, hours, days, weeks or something months.  Months is bordering on investing, though.  Anyhow, trading is far more difficult than investing and requires far more psychological discipline than investing.  The reason is that the market is a difficult place to earn a living.  Yet trading is incredibly rewarding when it works out for you and is a thrilling place to be.  So without further ado, here are some of my pieces of trading tips that I live by:

  1. The four most dangerous words on the market are “This time it’s different.” 

    Jesse Livermore, a famous speculator, once said that human nature never changes, and never will the stock market.  By this he means that there will always be asset bubbles and busts.  During 2003-2007, the real estate market kept climbing, and so did the markets.  There were many people who assumed that this time it was different.  The market cannot keep climbing so there must be a correction.  But the market never did correct.  Why?  Well, maybe it really was different.  Due to technology, the entire world was participating in a boom cycle for the first time, not just the developed world.  Prosperity was around the corner; indeed, upon us.  The survival rate of the human population was increasing and therefore it was logical to assume that real estate could only keep climbing.

    But it didn’t.

    Eventually, the bubble burst.  The market entered into a 2-year bear market.  Just like every single other boom cycle, the bubble burst and we came crashing down to reality.  The real reality?  It’s never different.  History may not repeat itself, but it rhymes.  If you’re ever in a stock and believe it will go up because it’s a different kind of company (like Apple or Google), trust me, it’s not different.  Believing so will cost you money.

  2. Hope is a four letter word.

    Hope is generally assumed to be positive, but not on the markets.  The term “Four letter word” is a euphemism for a dirty phrase.  When some people buy stocks, they buy at the wrong time and start sitting on a loss.  First it’s small and people hope for it to come back.  Then it gets a bit larger and they hope that things will turn around.  Then the stock really starts to tank and then people are resigned to thinking it’s a long term investment, hoping that it will return to its peak.

    A lot of people bought Lucent, Cisco and Microsoft hoping that they would either go up or will return to its glory days.  On the markets, there is no room for hope.  Either you cut your losses or you wait forever, hoping for an event that may never come and ties up your capital such that you can’t make a profit elsewhere. 

  3. Stay liquid.

    This is one of my favorites.  Liquidity refers to the ease at which you can get into and out of a position.  On the stock markets, liquidity is abundant.  I can log in to my broker’s website and buy stocks and sell options with relative ease.  It’s easy to execute stocks that have a lot of volume.  By contrast, real estate is very illiquid (as I am finding out).  There are only limited buyers and sellers and it takes forever to get into and out of a position.  If you are going to tie yourself to a long term position, make sure that it’s a good one.

    I kind of liken trading stocks to going out on a coffee date with someone.  Buying real estate is like getting married.  One’s liquid, one’s not.  Be careful about the liquidity of your relationships, too.

  4. The markets are expensive place to buy a thrill.

    I say in my introduction that trading is thrilling, but if you’re in it for the thrills, it’s going to cost you a lot of money. The reason is that the markets are related to money, and money is an emotional subject.  But it should be an emotional subject because of what it represents – you can use money for food and shelter (ie, basic survival) and also luxuries (ie, stuff you like to do).  We need money in order to live and therefore it goes right to our limbic brains.

    Unfortunately, our limbic brains are not necessarily the best allocators of capital.  When we get a lot of it, we feel a rush of energy.  But when we lose a lot of it, we start to panic.  And trying to get it back doesn’t necessarily mean we will get it back.  Most people often follow it up with a series of mistakes.

    So, if you’re in the markets for the thrill, you’ll get it.  But the emotional rollercoaster can also be very draining.  Trading for thrills will send a trader into premature retirement.

  5. The market is like the Lord, in that it helps those who help themselves.  The market is unlike the Lord, in that it does not forgive those who know not what they do.

    This is a quote from Warren Buffett and I chuckle every time I read it.  The idea behind it is that the market is an expensive place to get an education.

    There is plenty of money to be made from trading the markets.  But it’s difficult to do it.  And if you don’t have a trading plan or understand what you are doing – and really understand it – you will lose money over the long term.  That’s why I recommend a Lazy Portfolio, because the general trend of the market is up and you want to participate in it.  If you are going to trade, you are likely to get spooked and miss out on the best trends because it is hard to time the market.

    A good trader expects to outperform the market.  A poor trader can expect to perform much worse.

Those are some of my top trading tips.  I would consider myself an average trader, at best.  But yet I continue to try and will continue to try.  I’ve now lived through a bear market so that’s kind of exciting to me.  I always said that I wouldn’t switch to becoming a full time trader until after I had lived through a bear market.  Now that I’m learning options, we’ll see where this current strategy takes me.

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Now that I’m single again, I’m finding myself with a lot more time on my hands.  While my blogging has picked up recently, it also picked up in February and March before I was single so I haven’t been filling my time with additional writing.  Instead, especially over the past couple of weeks, I’ve started to get more actively involved in trading again.

This has been a double-edged sword.

I just started fooling around with options again.  While some of my trades have been profitable, I’m currently sitting on a position that is several hundred dollars underwater (and was the opposite the week before) that I still think will be profitable in a week.  Next Friday is the deadline because that is when they expire.  I probably should have sold them last Friday but I am certain that they are going to go up in value.  I am fighting my impulse to cut my losses because I have a belief in my own analysis.

The good thing about options trading is that I am learning to trust my instincts and pattern recognition from years of having a feeling that I can’t describe.  I’ve felt the market do stuff like this before and I feel like I know what is going to happen.  Yet I can’t be sure because I don’t have a good strategy.  It turns out I am profitable more often than not, and that’s because I know that my trades are often profitable for a short period of time and then turn around.  Because I am currently forcing myself to get out of positions quickly, this is working.

The problem is that I feel that I am only as good as my last trade.  And my last trade isn’t the one I closed, it’s the one I closed but shouldn’t have.  I made 7% in one day yesterday.  But had I held on, I could have made 30% in two days.  That makes me feel terrible on the inside.  But yet I can’t stop trading, it is a feeling that I don’t understand.

Jim Cramer, of Mad Money fame, has a book called Confessions of a Street Addict.  It’s one of my favorite books because he tells the story of his day-to-day nature of hedge fund trading and the emotional swings that he went through.  He wrote a column last year describing how he “hates” himself.  I thought he was being melodramatic, but I completely understand what he means.  The term “hate” is not the best way to describe it.  I don’t know how to use words to describe the emotion that goes along with it, but I get it.

I used to think that in the markets, emotions can be a detriment.  I know longer think that.  People who have had brain damage where their intellect is intact but their emotional processing centers have been damaged have serious problems doing basic tasks.  They can organize things but they cannot prioritize and take action.  They can figure out that certain things are risky and dangerous to their well being but keep doing them in spite of knowing this.  This suggests that emotions are still a center of our well being and we need them in order to function normally.

These emotional swings, highs and lows, are things that I experience.  I feel so much regret when I see a trade go up further still when I sold it earlier.  And I have a lump in the pit of my stomach with these other option positions that are so much in the hole.  And I feel elation when I make 100% in one day.  And I have to fight every ounce of my desire that wants to close my current position in natural gas even though it’s up 10% in two days.

I cannot tell you why I just don’t stop trading.  Well, maybe I can – I don’t stop trading because I don’t want to.  I  have stop losses.  I restrict options trading to less than 10% of my portfolio.  I trade reversals and short term momentum so I think I know what I am doing.  But I still experience that emotional anxiety that I thought I had cured myself of when I went to a lazy portfolio.  That little bit of active trading part is a powerful elixir.

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I’ve started trading in options a bit and I find myself panicking and doing the wrong thing for lack of knowledge in this crazy market.

I opened up two positions yesterday – call options in IBB (Nasdaq biotech) and UYM (building materials).  I made a bit of money in the former and lost a bit on the latter.  I really should have let them ride but decided to close them today even though I think they have more to go.  But not having a good options trading strategy, I’ve decided to go in and out relatively quickly until such time as I feel comfortable letting them ride.

I made a net gain of 7% ($122) in one day.  Not bad, I would say.  Not great, I think that I can get triple digit returns trading options but I saw that the SP-500 reached its 50 day and encountered resistance.  To me, that suggested that the rally was not looking as good as it once did and that the risk/reward ratio was not in my favor anymore.  I fully expect maybe a slight advancement and then a collapse in some other positions that I am not in and then pick up some put options.

I fully expected my position in IBB to keep rallying even more, but now I am not so sure.  The market isn’t oversold anymore (only slightly) and so because my preferred holding period in options is so short, I decided to abandon my positions and keep my tight profits.  I realize that this is not a great idea, but not having a strategy means get in and get out quickly.

Mind you, 7% return in one day is better than the 1.5% it would have earned in a savings account in a year.  So I guess I should be proud of that.  In order to get $122 return in a savings account, I would have needed to tie up $8133 for a year.  This way, I only tied up $1742 for one day (includes commissions).  That’s a better way to get a return on investment, I think.

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Today, the market pounded everybody really, really hard.  It started off as a slow decline and at around 2:40 pm Eastern, it fell off the table and started selling off massively.  Everyone who’s portfolio was exposed to the long side of the market took a hit today, including my own.  It was a complete beating.

Except it wasn’t a complete beating.

As I have explained before, I have a lazy portfolio which is composed of ETFs that track various markets.  However, I also have an active trading component.  One of those is RSW which is an inverse ETF.  Whenever the market goes down, that one goes up.  So, I made a little bit of money in RSW, selling too early but still locking in a gain.

That’s not the good part, though.  I don’t normally boast about all of my trades, but this one is special.  Last night, I went home and made a list of all of the stocks in my watchlists that were trading near their 52-week highs.  For you see, I had a theory – all of my good stocks were getting stopped out after large down moves but all of these other ones were bucking the trend.  I’ve had stocks buck trends before and they hold up for a while but eventually collapse and get dragged down under the weight of the rest of the market.  I ended up with a list of five stocks.  Among them was Baidu, my all time best trade.

I decided that I was going to buy a put option on Baidu.  A put option gives you the right to sell a stock at a particular price.  So, if the price goes down, the value of the option goes up.  I woke up early and put on a trade 7:13 am this morning.  I closed my position at 11:53 am, 4 and a half hours later.  I made a gain of 108%.  That is not a typo, I shall type it again – I made a gain of 108% in one day.

This represents my all-time best trade ever.  I have never come anywhere close to that, and it is unlikely I will ever come anywhere close ever again.  It was a lot of luck.  I had no idea that the market would sell off that hard.  I watched it go up, come down and go up.  And then it went up more.  And some more.  And then some more!  At that point, things started to get ridiculous and I decided to close my position because I had doubled my money in one day.  And I was lucky I did because the market had a huge sell off and then made a V-shaped recovery.  Had I waited to sell at the end of the day I would have surrendered 1/4 of my gain.

This is one of those times when things worked out well.  I bought the option at the perfect time because the stock moved up in the first hour of trading, which is when the option would be cheapest.  I then sold it about 10 minutes after the market swooned; had I sold 10 minutes earlier I could have tripled my money… but I’m not complaining.  I’ll take a 100% in one day, any day.  Yes, there was a lot of luck involved, but it was also pattern recognition.  I recognized the pattern of seeing stocks hold up and I bet that they were probably going to fall.

So yes, today was a terrible day on the market.  But it wasn’t that terrible.

Incidentally, I had another smaller position that was also up 100% but I held onto it and it surrendered 90% of those gains (from a technical perspective the underlying stock should fall another 3-4 points).  Like the rest of the market, this stock also formed a sharp V-shaped recovery.  Even though I made a huge gain in Baidu, I still feel like I missed out on this one.  I was thinking at the time I should have sold, although my web broker account was frozen so I guess everyone was trying to get out.  Maybe tomorrow it will continue the collapse.  Here’s hoping.

Finally, every single stock on my watchlist moved down huge today.  I could have bought put options on any of them and made money.  I didn’t go all out because I don’t have a good options trading strategy (yet).  But perhaps 2010 is the year I change that.

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Remember that stock I was talking about last week that was up 10% for me in a few days?  Well, it swung around and fell 20% from that.  It gapped down and I decided to close the position because it releases earnings tomorrow.  It’s either going to gap up or gap down but from a technical perspective, the trend has changed.  I kind of wanted to hold out in hopes of getting a good earnings report and a reversal, but on the markets, “hope” is a 4-letter word.

My trading this year in individual stocks has been awful.  I am right temporarily… and then the market turns around.  My stocks tend to correct much harder than the rest of the market which is irritating.  My timing is always either right and then wrong, or early.  The only good news in all of this is that I bought an inverse ETF (RSW again) and I am catching back some of my losses for the first time in forever.

The redeeming feature in all of this is that while the market is correcting, it will be a good time to add to some shares.  The other redeeming feature is that I played my hand properly, restricting my active trading to only a narrow portion of my portfolio.  I am wondering whether or not I should close my other position and lock in my gain while I am still showing a profit.  Or maybe I should buy some put options and hedge against future losses.

Hmm, options… Might be time to fork out a strategy.

Oh yes, one more thing – I need to adjust Terry Zink’s Lazy Portfolio to include Emerging Markets.  This means a reduction in exposure to EFA and buying more EEM or VWO.  I don’t really need a big position in underachieving Japan, do I?  No, I think not.


Ok, so I have been thinking.  I really need to get an automated system in place to execute my trade exits.  I seem to lose that discipline in trading when it comes to taking profits/cutting losses until those losses are either much larger than I planned or the gains have vanished.  This happens to me over and over.

I have been thinking that I have a few technical systems I could implement.  I could easily write a software program that connects to the web, downloads market data and does some technical analysis.  If it meets a sell point, it should sell the stock.  I think it’d be difficult for me (personally) to do this coding, but I could have it send me an email alert instead.  Once I get it, I could execute the trade.

The one problem is that my second thoughts might get in a way.  What I really need is a trained monkey who can understand a cell phone and log into my account and do the trades for me.  That cuts out my own emotions of second guessing.  The reason I don’t sell these stocks is because I want to hold them for the long term (this greatly improved my trading 3 years ago).  But I don’t have to do that anymore since I now have a lazy portfolio.  So maybe swing trading is the way to be for me that uses a variety of exit signals.  I still have to enter them manually, but getting out should be done using a strict set of criteria.

Update 2

Ok.  So, I’ve been reviewing strategies for making money in a down market.  I went and looked for stocks that have been holding up well and have moved in a single direction (up) without collapsing yet.  I’ve been toying around with the idea of either going short on them or picking up some put options.

Options are difficult to trade because they are so volatile.  If I did buy some, I’d have to be right and be right fast.  The gains are smaller but the amount of capital you expend is also smaller.  For example, it’s possible to make $100 on a $500 investment, a gain of 20% in only a few days.  That’s if you’re right. 

I am going to wake up early tomorrow and pick up some short term options on the stocks I have identified and see if I can pull out some gains.  My capital in my account is starting to deplete (down 7% in 3 weeks) so maybe I can make myself feel better by making some of it back.

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Last week, I wrote about my then-successes in the stock market.

This week, I write about how my fortunes have completely reversed.  I originally bought Green Mountain Coffee Roasters (GMCR) at the end of January.  It went up slowly for a few weeks and then kind of stalled in early April.  Since then, it has corrected 20% and now stands at a loss so I had to sell it.  All of the massive selling occurred and I had to protect my capital. 

Last week, I similarly said that a stock I was in (CAAS) was up 10%.  Well, it reversed – hard – and I am now sitting on a small loss in it.  I wrote at the time that things could change… and they did.  The frustrating thing is that the overall market is up in this time frame, so the stocks I did have are severely underperforming the market.

It just goes to show how quickly things can change.

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It was almost six months ago when I took a bunch of my money and put it into Terry Zink’s Lazy Portfolio.  In six months time I will have to rebalance my portfolio.  But let’s review where I am at mid-year, exclusive of dividends:

  • EFA (International fund ex-US) – up 3.76%
  • VTI (US fund) – Up 18.8%
  • VNQ (International real estate fund) – Up 33.2%
  • BND (International bond fund) – Down 0.37%

Taking the weighted average of all of these, overall I am up 11.8% in six months.  If I include dividends and interest, then it is 13.0% in six months.  I actually bought more shares in each a few weeks ago but I am excluding those from my calculations.  With them included it lowers my rate of return (obviously, since those positions have not been in the market as long).  I think that a 13% return is respectable until you realize that the SP-500 is up 16.75% over the same time period which means that I am underperforming the market by 3.75%.  Not good.  My diversification has hurt me in this case.

Regarding active trading, I have had some winners and some losers:

  • GMCR – up 1.98% (this was 12% two weeks ago)
  • SQM – down 16.5%
  • NEU – up 20.90% (lucky timing)
  • RSW – down 6.10%
  • CAAS – up 8.54%

My trade in SQM has no redeeming quality.  The stock had a decent pattern, broke out and reversed.  It’s still trading at a loss today (but now closed).  RSW was an attempt to make money against an overbought market.  As was true the last 4 times I bought it, I lost money (you’d have thought I would have learned by now, but no).  Finally, GMCR was a slow, boring trade but it sold off over the past two weeks.  It’s still above water, but barely.  My active trading is not doing well at all.

And then there’s the one got away.  I bought Netflix on paper on January 19.  Had I actually bought it, I would be up 95% in it today.  That’s amazing.  And I can only watch.

So my overall performance is lagging the market by a significant amount.  I’m not losing money but I’m not taking more than my fair share, either.  Stupid international stocks…

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Last Thursday, April 15, I bought a few shares in China Automotive Systems (CAAS).  The stock looked like it was in a good risk/reward position so I figured the risk was low.  The next day, the SEC charged Goldman Sachs with securities fraud and the entire market sold off, including CAAS.  At one point I was down 8% in two days.  I thought that was horrible timing on my part and even updated my Facebook status indicating so.

Yet the market has shown amazing resiliency, somehow.  People keep saying that this market should go lower and there is no reason for it to go higher.  Yet higher it goes.  And my position in CAAS has done the same thing.  It is now a week later and I am actually up 6%.  A 6% gain in a week.  That is unusual for me to make that much in so small a time frame, but there it is.  When I saw what it was trading at this morning, I cheered.  Now, I know that it could be shortlived and there is a very good chance it could sell off and I will feel terrible.  Yet right now, I feel good and so I shall enjoy it.

Oh, one more thing – when I saw when it was up for me this morning, not only did I cheer, but I started humming the Final Fantasy victory music.  I literally did that out loud.  It was very amusing if you would have seen me do it in person.

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Got my taxes done

I finally got my taxes done and I am getting a fairly substantial refund. 60% of that is because of the total loss I took on my condo this past year – apparently, it reduced my taxable income by $13,000.  Ouch.  That’s a lot. 

I started doing a bunch of math, because this same day I met up with a real estate agent to sell my place.  They told me that I would have to add about 9% to the selling price to account for the cost of selling my condo (fees, taxes, assessments, etc).  I had to figure out the money:

  • The best case scenario for me, keeping my rent the same, is losing ~$7700 per year.
  • My tax liability would be about $2000 per year higher without the condo, compared to that best case scenario.
  • In other words, all things being equal, I take a loss of about $5700 per year if I hold onto it and don’t raise the rent (~$7700 loss + ~$2000 in tax savings).
  • If I sell it and it costs me around $20,000, then that means I recoup the gains in 3 and a half years. 

Again, this assumes that I don’t raise the rent (50/50 odds on that), the property doesn’t appreciate in value (it hasn’t in two years), I have no repairs to make to the place (iffy, that’s why I decided to get rid of it – because sh*t kept breaking), it stays occupied, and I get the same deductions (iffy).  I think that a better estimate is a ~$6500 loss per year which means I recoup the losses in 3 years, or 2013.  Ironically, if I let the place stay empty for a year, it would cost me less than by selling it.  But what that doesn’t factor in is that I want to unload the place and take the money and invest it elsewhere.  I don’t think real estate is a great investment right now; the market is still too high and the home-owner dues are just a killer.

This is going to set me back financially quite a ways but I think I can still recover.  That’s the one thing about this that is good; when I went into it I had a plan to keep any catastrophic losses manageable in the event that I had to back out.  In other words, I didn’t stretch myself.  It turns out that my foresight is keeping me in the game.  You can’t win if you don’t play, but also as important is that you can’t win if you’re not at the table. 

I’m still at the table.  I lost a few hands, but still at the table.

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I’m still basking in the glory of Canada’s 3-2 win over the United States in the Olympic Gold Medal hockey game on February 28.  Oh, that was sweet.  But to rub it in even more, the Heritage Foundation just released its listings of the Index of Economic Freedom.  Not only is Canada better than the US at hockey, but we’re also a freer country!



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People sometimes ask me for investment advice.  It’s true that I like to trade stocks and I read a lot about the markets, but I am most a part time speculator.  I don’t think I am all that good since I am much more of a holistic technician – I mostly read the main articles on Yahoo Finance and read numbers of individual stocks.  I don’t read Investor’s Business Daily anymore and that’s a shame; there was a wealth of great information in there.

Still, the way I trade vs the way I invest is carefully crafted.  Here’s the differences and similarities:

  • In trading, I buy individual stocks.  In investing, I buy indexes (usually ETFs, or mutual funds if I have to).
  • In trading, timing is important both for buying and for selling.  In investing, timing is less important on selling, slightly important on buying.
  • In trading, selling is important.  In investing, I usually hang on for the long term.
  • In trading, dividends are not that important; potential for growth is.  In investing, dividends are very important.
  • I have switched my arrangement of capital.  In my Scottrade account, about 25% is devoted to trading while 75% is devoted to investing.  This used to be 100%/0%.
  • This should not be confused with my retirement saving.  In that, I have always been a passive investor and just thrown money in willy-nilly with little active trading.
  • Investing is more boring than trading.  And less stressful… most of the time.

The thing about trading that makes it more important is the second bullet point, which is timing.  I followed the stock Newmarket (NEU) since November 2009.  I finally bought it March 2010, a period of 4 months.  I made a note back on Nov 6 that it was very strong and watched it for some time.  After the market mini-swooned January and February, it was one of the stocks I targeted for a comeback.  I waited for the market to put in a potential bottom and start finding strength.  When it did, I went and picked up a few shares.  In two weeks, I am up 15%.

Gains like that are difficult to come by and are actually unusual.  I make most of my money when the market actually moves.  In this case, the market moved down quickly and snapped back quickly, and I was ready to take advantage of it.  But I had to wait a few months, and I was “lucky” that the market actually did rebound.  If it would have continued to downtrend from there I would have lost money.

In trading, making money is more of a function of being prepared to jump on opportunities when they arise (by doing research and having sufficient trading capital on hand to make a move), by recognizing those opportunities, by cutting losses when you are wrong and by riding the winners when you are right.  It’s difficult to be right in trading because the market does so many unexpected things.  In order to survive in the market when trading, you really do need a money management strategy to mitigate risk.  My general strategy, among other things, is the following:

  1. Protect capital
  2. Consistently make money
  3. Hit the occasional home run

It’s tougher to do – consistently – than you think.  So, if someone were to ask me “What do I think of gold?” the question is multi-faceted.  I may think it’s going up due to inflationary pressures due to the Fed, or maybe going sideways (or even down) due to deflation and Fed tightening, but it still has to fit into those 3 goals.  If gold really does go much higher, then it falls into category (3).  It would be a home run but it would also be subject to the same risk mitigation as all of my other positions.

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In early January, the market started to go into a correction.  Yet on Friday, February 5, it made a pattern of what is called a hammer.  A hammer is a chart pattern where in a down movement, if a stock/index has a large daily range but closes in the very upper end of the range, it is referred to as a hammer.  It resembles a letter ‘t’ where the cross is near the top of the ‘t’.  It means that the market opened high, traded low, but rallied high.  It is usually interpreted as a reversal pattern.  When I saw this, I went and deposited a big chunk of cash into my trading account.

Yet I didn’t take action for several weeks.  The market is still kind of funky and wonky and so I wanted a bit more confirmation before I made a move.  It regained the 50-day moving average (a good sign) and has managed to maintain it.  Based upon this confirming indicator, I decided to put that cash to work.  It’s a bit late, about 4 weeks after the bottom, but I’ll take it.  The market is kind of overbought but the positions I bought are long-term positions.

Recall from my lazy portfolio I have four positions:

  • VTI, which tracks the US market (35%)
  • EFA, which tracks the international market (50%)
  • VNQ, which tracks real estate (10%)
  • BND, which tracks bonds (5%)

As of this writing, EFA was about flat for me, as was BND.  However, VTI is up 10% while VNQ is up 15%.  Normally I like to wait for a pullback before getting into the market (it makes me feel better to buy that one extra share) but whatever.  I should have, but didn’t, act two weeks ago.  Regardless, I am acting now.  Incidentally, that EFA is flat after 4.5 months and underperforming VTI is a reversal of history; normally the international market leads the US market.

Anyhow, I went into my trading account and figured out how much money to allocate to each position.  I wanted to leave a bit of money out there in case I wanted to buy another stock (I bought GMCR a month and a half ago and NEU on Tuesday… and it’s now up 10% since then).  I went to my Excel spreadsheet, put in the distribution and proceed to make four orders for the various ETFs I wanted to buy.  I entered in BND first, then VNQ, then EFA and finally VTI.

But I made a typo on VTI.

Rather than putting in 39 shares like I wanted, I accidentally put in 161 shares (!).  That’s 4x the amount I wanted to put in!  I looked at what I did and said “Oops…”  That was clearly a mistake and for the first time ever, I was trading on margin (borrowed money).  Margin is great if you know what you’re doing.  Not so great if you try to limit your risk.  So here’s what I did: I determined that 161-39 = 122, I immediately entered in a sell order for 122 shares of VTI.  I entered the order and it executed, thus reducing my overall position in VTI back to what I wanted it to be.  I breathed a sigh of relief and I decided to check out how much money I lost in the few seconds I had the shares.

Scottrade charges $7 per trade, so I figured I lost at least that much.  But as it turns out, in the 1 minute I held onto the shares, I made about 5 cents per share.  I sold them at a slight profit, so 122 x ~5 = $5.  That means that the $7 charge – the $5 gain means I only lost $2 on the trade.  My mistake allowed me to get off pretty easy.  I think I got lucky.

But sometimes you have to be lucky to be good.  I’ll take it this time.  Now let us never speak of this again.

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The more things change…

… the more they totally don’t change!

I got back into trading recently.  I did a bunch of scans and found a few stocks that I liked.  I ended up buying a couple of them.  One of them is Sociedad Quimica Chile (SQM), a chemicals company.  The sector is extremely strong and contains other titans like Neumarket Corp (NEU) and Braksem (BAK). 

I was tracking this stock for a while, waiting for it to breakout.  It did so I waited for a pullback and bought at 42.40.  I thought that was a good deal.  Then the market decided to crash on me.  Yep, I had been waiting patiently for this stock and guess what?  I bought within a proper buy zone and now it appears that I am going to have to sell it and take a loss. <sigh> Frustrating.  Stupid markets… why do I do this again?

Oh yes… because I love it.


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Balancing my portfolio

I’ve been wondering for a long time what to do in my portfolio for investing.  I have too many accounts.  I have three RRSPs from back in Canada, my 401(k) here and my Scottrade account.  I have a big chunk of change sitting in my Scottrade account but I have not been actively moving it.  I finally sat down over the past few weeks and decided to allocate portions of it according to the following guidelines:

  1. I need exposure to US markets
  2. I need exposure to International markets
  3. I need a little exposure to the bond market.  I’m 30 years old now; if I were 25 I wouldn’t bother but the experts tell me I need this, so I did it.
  4. Anything I buy needs to have low expense ratios.

I have reviewed countless numbers of lazy portfolios.  A lazy portfolio is when you buy something and forget about it.  Every once in a while (every six months, maybe) you rebalance your portfolio.  This forces you to sell high and buy low.  Whether or not I do that, we’ll see.  While prices are up 50% since the March lows, they are still off 40% from the Oct 2007 highs. 

I decided to throw in a bit of a wrinkle to my portfolio creation.  Some experts recommend diversifying across multiple types of index funds or ETFs, dividing into value or growth.  I said “Forget that.”  I want to keep things simple.  However, the little wrinkle that I tossed in is that if I have to choose between a fund that doesn’t pay dividends and one that does, I go with the one that does.  The second wrinkle is that there is a method to my domestic/international distribution.  Most of the portfolios I saw either split the US with the rest-of-the-world (ROW) 50/50.  I decided to break it up by GDP.  So, since the US is 1/4 of the world’s GDP, I decided to only invest 25% of my funds in the US markets.  Actually, that was my plan but I chickened out.  I’m slightly overweighted in the United States, but it is still the most stable market in the world.

And thus is born the Cool Spot Lazy Portfolio

  1. 35% in the Vanguard Total Market ETF, VTI.  This is currently paying a dividend of 2.02%, the expense ratio is 0.09%.
  2. 50% in the iShares MSCI EAFE Index Fund (Europe, Asia or Africa, Far East), EFA.  This is paying a dividend of 2.71%, the expense ratio is 0.34%.  The comparable fund from Vanguard is the World ex-US, which has an expense ratio of 0.25%, but it pays no dividend.  Therefore, the iShares one wins. 

    I considered the value vs growth distribution, but decided there probably wasn’t much point.  Value sometimes leads, and then growth sometimes leads.  I just bought the whole thing.  The expense ratios for the others were higher or the dividends were lower.

  3. 5% in the Vanguard Total Bond Market ETF.  This is paying a dividend of 4.19%, the expense ratio is 0.15%.

    These last two entries for me are difficult because there are so many more options.  How do you divide up the remaining 15%?  Well, since I am still relatively young, I don’t need much exposure to bonds.  But, this one has low expenses and a great dividend yield and therefore I bought it.

  4. 10% in the Vanguard REIT (Real Estate Investment Trust) ETF.  This is paying a dividend of 5.58% (!), the expense ratio is 0.14%.

    This one makes me nervous.  There is another fund out there, the iShares World ex-US Property Index Fund ETF, that has performed much better than my Vanguard fund, probably because my Vanguard fund includes the US.  The dividend is lower, though.  However, what makes me feel better is that Nov 27, 2007, the funds have about the same return.

    What also makes me nervous is investing in real estate.  All of the investment experts insist on investing in something other than domestic and international stocks.  About half of them recommend real estate, the rest pick fixed income (bonds, treasury securities, etc).

So there you have it, that’s my current retirement portfolio for the way I am managing it on my own.  I still have to figure out what I am going to do with all of my other retirement invesment accounts.  If I could, I would roll them all into passive portfolios the way I have it set up here.  Given that one of my RRSPs charges a sh*tload of management expenses, I think I am going to close that one down or collapse it into something else.

I’m also not putting all of my money into a passive portfolio.  I only put 85% in so I have a little bit of money to trade with. 

Finally, next year I am going to sell that crummy real estate investment that I own next.  With the money that I am saving every month, I will put a chunk of into the market and the rest I will spend.  I did a cost/benefit analysis and the projections say that over the long term, that “investment” will pay off but the market will pay off better over the long term.

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Yesterday, me and one of my colleagues were talking about the stock market.  My co-worker remarked to me “For some reason, so-and-so thinks you are really good at investing.”  He then proceeded to rattle off his list of successful trades this year, many of which were in the financial sector (Citigroup) or real estate (Fannie Mae).  He also cited Apple as an example.

I have not been in the market this year other than trading SSO (double-leveraged SP-500 ETF) and RSW (inverse double-leveraged SP-500 ETF).  The reason is that I don’t really have time to trade much these days as I have other activities that prevent me from doing active research.  I just sold my SSO position for a 28% gain, though my RSW record is 1 win and 3 losses.  But the point is this: does a few successful picks off a market bottom make someone a better trader or investor than me?

I don’t think it does.  Investing, and specifically trading, is far more about right stock selection.  It involves the following:

  1. An entry system – Good stock pickers need a way to identify stocks and then need a way to buy them.  If you’re throwing darts at a dartboard and then entering, that’s one method.  If you’re picking beaten up stocks you’ve read about in the news and then buying them because they can’t go any lower (like my co-worker), that’s an entry system.  My entry system is fairly narrow and I wait for low risk/reward points.  I don’t buy willy-nilly.
  2. An exit system for taking losses – Buying a stock is one thing.  Holding onto a loss forever is a mistake.  A huge one.  I have a couple of ways to cut losses, one is with the percent traceback (if it goes below a certain % after I buy, sell it).  Lately I have been experimenting with other loss-cutting scenarios.  My co-worker doesn’t have one of these.  He just holds it until he can’t stand the pain anymore and then says “I may as well cut my losses.”
  3. An exit system(s) for taking profits – This is the hardest for me.  You need a way, or more specifically a series of ways, to take profits.  I have several of these and they usually involve avoiding turning profits into losses and are a percent retracement of the up-move.  My co-worker does not have this, either.
  4. A position-sizing strategy – Position sizing is the art of allocating money such that a large move against you does not cost you too much money that you cannot recover.  This is one of the most important aspects of a trading system.  The ability to set stops and gauge how much you can afford to put into a stock is what will keep a trader in the game over the long run.  Most people who I know that invest have no idea how much money to put into a particular stock, let alone having stops.  Without this, you will lose.  I have a very rigid position-sizing strategy.  My co-worker doesn’t.

So, as to the question about who the better trader is, I say it’s me.  I have a trading system, he just picked a few stocks that went up.  There’s an old saying in the investment world: Never confuse a bull market with brains.

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It’s now been about a year since I signed the agreement to buy my real estate "investment."  In the interim one year, I’ve discovered that I don’t like owning real estate directly; I’d much rather invest through a trust if that’s possible.  I’d like the benefits but don’t want to do any of the work fixing up the place or chasing after mailbox keys.

Sometimes when people talk about real estate, they say that land is a good investment because after all, they aren’t making any more of it.  The implication is that land is a commodity and is subject to supply and demand.  Since the population of the world will keep going up, people will always need a place to live will therefore demand more land.  Since land is a fixed commodity and is non-renewable, its value will continue to rise.

As the current financial crisis has shown us, the value of land most assuredly does not continue to increase indefinitely.  Land, like oil or gold, is a commodity like anything else and is subject to bubbles and busts.  But I want to look at the underlying assumption – that the population of the world will keep going up.  Is this a valid assumption?

The short answer is no.  The world’s population is increasing but the rate of growth is decreasing.  This is because of advances in technology.  In the 3rd world, population growth is very high but in the developed world, it is quite low.  Western Europe has a very low growth rate, less than 1%.  Places like Bangladesh breed like rabbits.  The reason for this is that in underdeveloped nations, children are necessary because they are "free" labour.  You need a large family to work the grain fields and provide for you in older age.  Having a large family is a survival tool in order to produce.

There’s also the lack of technology.  People would have a lot of children because the mortality rate is so high.  Children often didn’t live past five years of age so parents would be "forced" to repopulate their stock.  However, with medical advances, children didn’t die so often in infancy and so families became larger; replenishment was now enlarging the brood.

But as technology extended the lives of children, it also decreased their necessity for the labor pool.  It became easier to grow crops with herbicides, pesticides and modern agricultural techniques.  Tractors and refineries increased production.  At the same time, the cost associated with raising children increased.  When you have to raise a child for 18 years and bear the cost of feeding, clothing, sheltering and educating them, suddenly having 12 kids (all of them surviving) is an economic burden.  The children are no longer paying for themselves and the reasons for having a family changes from basic survival to one of choice.

Today, European women have far fewer children than women in the developing world.  But during the middle ages they were having just as many.  When technology started to extend people’s lives and make basic survival easier, the birth rate declined as the economic costs of having children increased.  As the birth rate in Europe declined, the overall rate of growth of world population slowed as well.  And so it will be in the developing world; when technology starts extending people’s lives and makes basic survival easier, people will realize that reproducing no longer makes economic sense.  And then, the population will stabilize.  The UN estimates that by around 2050 or so, the world population will stabilize at around 9 billion.  They may be off by a billion or two, and the year may be out by a decade or so, but the point remains.  Population will not continue to rise indefinitely.

And if the world population does not continue to rise, then it doesn’t follow that land will become more and more scarce.  Businesses and people will want more land but the fact that "they aren’t making any more of it" will not be a relevant indicator of value.  It won’t matter that they aren’t making more of it because they aren’t making more people either sufficient to boost demand beyond it’s current level.

Real estate is valuable but human population growth is not something to bet on in the distant future.

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People are often puzzled at the behavior of the market.  A company can announce an increase in earnings year over year, and the stock sells off sharply.  Conversely, a company can announce a decrease in earnings, or even a quarterly loss, and the stock goes up!  What gives?  In fact, why does the market even go up or down at all?

To oversimplify things, the market looks at the future ability of a company to make money.  When a company announces earnings and it is different than what most people were expecting, the market reacts by selling off.  So, when Microsoft two months ago announced that they had the first year-over-year drop in revenue (for the first quarter) in company history, the market responded by driving Microsoft stock up.  The reason, I believe, is because investors were thinking Microsoft was going to announce even worse results.  When they weren’t as bad as believed, they decided to buy the stock.

That’s partly how the market works.  When investors believe things are going to get worse, or when there is uncertainty, the market performs poorly.

Now, if I were a stock, then I would have been in a steady downtrend since March 2008 for the following reasons:

  1. Poor investments – I bought a foreign currency CD at the worst time, right when the US dollar was bottoming.  That caused me to lose a good chunk of change.  Since that CD expired, I have bought a lower-interest US currency CD.  Slower growth but predictable.
  2. Housing – I bought a condo and it was sitting empty for a long time.  This was a period of uncertainty.  Remember that the market hates uncertainty and if I were a stock, the bleeding money of empty real estate would have sent my price into a tailspin.
  3. Extra spending – I was never broke from month-to-month, but there were a couple of expenses that I either had to incur (medical bills) or chose to incur (private dance lessons).  Those are behind me now, so I am spending less.

All of that would have caused investors to think that I was a risk.  But since then, things have turned around:

  1. Real estate bandage – I am still losing money on my real estate "investment" but it is a lot less now.  Investors would see this and be able to calculate that my forward earnings would be more than they were previously.  I also refinanced and got a lower rate, so that also goes towards my bottom line in that the refinance charge would pay for itself in 13 months.
  2. Investment groove – I recently made an investment where I doubled my money in a few weeks.  It was only a small amount, just $100.  But it doesn’t matter.  a change in fortune is a change in fortune.

Thus, just like the market, I bottomed in March and have been in rally mode since then.  If I could somehow get that condo slow bleed into a revenue neutral state, that would really send my value soaring.

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