I have not yet formulated a complete trading strategy. Hence, that is the first warning sign! I have however a few guidelines that I will follow:
1st) No more than 30% of the portfolio at stake.
2nd) 5 positions at all times (expectation is 4 losing position and 2 winning
positions)
3rd) All postions will have an automatic stop loss of 10%
4th) Winning positions will be held for as long as possible with a trailing stop
5th) Stay away from stocks where multiple loses are incurred. That is, avoid stocks
that keep burning me!
More gudelines to follow regarding:
a) Holding period
b) Technical indicators
c) Industry and sector
d) Hedging
e) Earnings
Monday, December 14, 2009
Sunday, December 13, 2009
Back in the saddle!
After a brief hiatus, most of 2009, I am back to the world of active trading. This will allow me more time to concentrate on the wisdom of the markets and to tune off CNBC.
During my first serious attempt at trading, CNBC was my financial guide. I listened intensly to the different shows, their hosts and their guests in an attempt to dicipher what was happening in the market and why it was happenning. After not listening to them for nearly a year, I've learned that things are more clearer without all their reporting and analysis.
My favorites were Squak Box, Fast Money, and Mad Money. But now I realize that it was all fast, mad, squak! Occasionally, I still tune in to listen for general themes, but no longer do I listen to them for guidance. I realize now that they are just as confused as anyone else!
This time I will listen to the things that matter most: financial reports, economic indicators and the most important of all - stock price! Perhaps this time I will be able to hear the message behind the numbers - now that I am no longer clouded by the noise of CNBC.
Don't misunderstand my message: CNBC matters, but only if you are a reporter, or intested in being entertained. But, when it comes to making informed trading decisions - tune them off. They were not able to identify March 9th as the turning point - as no else was, but they sure made it hard to convince myself that it was a turning point in the market and that market sentiment had changed.
So what I am investing in now - or rather, what am I speculating in right now?
My current holdings are Valero, Nokia, and MBIA. The rational? Price. All of these companies have prices that have dropped while the market has increased substantially. While that is always a recepit for disaster, I think this is a world of opportunity. The theory is that is the market collapses, these stocks have already paid their price and the downside is limited. If the market continues to rally, these companies should benefit from an improved economic condition.
Prices:
VLO 16.54, stop loss 14.03, target 20.5
NOK 12.59, stop loss 8.5, target 16.26
MBI 3.64, stop loss 2.19, target 6.69
The next stock that I am looking to acquire is NYSE Euronext (NYX) but I am looking for a small pull back to the 25 range from it's current 25.6 price.
During my first serious attempt at trading, CNBC was my financial guide. I listened intensly to the different shows, their hosts and their guests in an attempt to dicipher what was happening in the market and why it was happenning. After not listening to them for nearly a year, I've learned that things are more clearer without all their reporting and analysis.
My favorites were Squak Box, Fast Money, and Mad Money. But now I realize that it was all fast, mad, squak! Occasionally, I still tune in to listen for general themes, but no longer do I listen to them for guidance. I realize now that they are just as confused as anyone else!
This time I will listen to the things that matter most: financial reports, economic indicators and the most important of all - stock price! Perhaps this time I will be able to hear the message behind the numbers - now that I am no longer clouded by the noise of CNBC.
Don't misunderstand my message: CNBC matters, but only if you are a reporter, or intested in being entertained. But, when it comes to making informed trading decisions - tune them off. They were not able to identify March 9th as the turning point - as no else was, but they sure made it hard to convince myself that it was a turning point in the market and that market sentiment had changed.
So what I am investing in now - or rather, what am I speculating in right now?
My current holdings are Valero, Nokia, and MBIA. The rational? Price. All of these companies have prices that have dropped while the market has increased substantially. While that is always a recepit for disaster, I think this is a world of opportunity. The theory is that is the market collapses, these stocks have already paid their price and the downside is limited. If the market continues to rally, these companies should benefit from an improved economic condition.
Prices:
VLO 16.54, stop loss 14.03, target 20.5
NOK 12.59, stop loss 8.5, target 16.26
MBI 3.64, stop loss 2.19, target 6.69
The next stock that I am looking to acquire is NYSE Euronext (NYX) but I am looking for a small pull back to the 25 range from it's current 25.6 price.
Wednesday, November 4, 2009
FHA in Shambles and Fed Leaves Rates Unchanged
In the WSJ, an article talked about how the FHA is close to being under capitalized and may require money from the US goverment. Fannie Mae and Fredi Mac were taken over by the US government and instead of curving its lending and running off it's portfolio of bonds, it continues to make loans. The FHA does not make loans, but it gurantees the housing loans made by lenders. Althought the guarantee is not a credit default swap, the effects are pretty much the same. Lenders give money to risky buyers, collect fees and profits, and the US government, that is, the tax payers, foot the bill when defaults occur.
Yet the Fed leaves rates unchanged, and promises to do that for the foreable future. Home prices will tumble. The buying that is taking place today is buying at an artificial price. Without FHA guarantees, the home sales numbers would be horrible, and home prices would have dropped even more.
I know the Fed wants to stabilize the economy, but there are too many artificial price signals that are occuring in the market place. Take banker bonuses for instance. According to the current thinking, bankers need to be rewarded for results, and if they are not, they will leave for a competitor. How ironic that the people most responsible for the economic collapse are complaining that they are not being properly compensated.
The economy seems to be on the mend but without true price transprarency, that is, real rates that reflect the economic reality no true recovery can last. After all, what will the Fed do after the FHA fails? Will it start to underwrite the home loans that the defunct government agencies are no longer compable of subsidising? Maybe the Fed will need a bailout itself.
Yet the Fed leaves rates unchanged, and promises to do that for the foreable future. Home prices will tumble. The buying that is taking place today is buying at an artificial price. Without FHA guarantees, the home sales numbers would be horrible, and home prices would have dropped even more.
I know the Fed wants to stabilize the economy, but there are too many artificial price signals that are occuring in the market place. Take banker bonuses for instance. According to the current thinking, bankers need to be rewarded for results, and if they are not, they will leave for a competitor. How ironic that the people most responsible for the economic collapse are complaining that they are not being properly compensated.
The economy seems to be on the mend but without true price transprarency, that is, real rates that reflect the economic reality no true recovery can last. After all, what will the Fed do after the FHA fails? Will it start to underwrite the home loans that the defunct government agencies are no longer compable of subsidising? Maybe the Fed will need a bailout itself.
Tuesday, November 3, 2009
A Reminder of Things to Come
CIT filed for bankruptcy over the weekend. RBS received more money from the UK government. India bought 200 tons of gold. And today Warren Buffet bought out BNI railways? The market did not rally. It is in a state of limbo. Bad news don't make it crash, good news don't make it rally. How long can this last?
At this point, my theory is that the market will crack and crack hard. Buy why? Take a pick: commercial real estate failures, further home price declines, continued depreciation of the dollar, warfare, political disruptions and the most important - lack of new technologies.
But before that happens: the bond market crashes, and we have a few more bank failures. CIT is not an isolated incident. More companies will be brought down because of their excessive leverage. But this is the painful medicine needed to get the economy growing again.
Oddly enough, the only way to get rid of leverage for many companies is to have its debt wiped out and restart all over again. This is what GM did, this is what CIT is doing. Other companies will find that they will need to expunge the debt to get a new start.
Individuals will do the same as well. In a world where no one needs credit, the credit score does not matter. In the US, we have been ingrained to believe that a bad credit score is the ultimate scarlet letter. But when everyone is wearing it, then there is nothing to be ashamed of.
Devaluation of the dollar is the only way to pay back the national debt. I think that should be obvious to anyone that is watching current events. But nothing is as obvious while it is happening. Sure, foreigners continue to buy US bonds, but at the current yield, it is a losing investment. Rates will rise, eventually, and when they do, US government bonds will deflate much like the stock market deflated in March.
Is devaluation possible even though rates rise? Of course, it's called inflation. And there in lies the future of the US bond market. We have become a debtor nation, and when the risk of repayment is at stake, yields rise. Hence, there will two forces moving against the US: inflation and default risk. Sure, the US government itself will not default, but paying its debt with printed money is as good as defaulting.
At this point, my theory is that the market will crack and crack hard. Buy why? Take a pick: commercial real estate failures, further home price declines, continued depreciation of the dollar, warfare, political disruptions and the most important - lack of new technologies.
But before that happens: the bond market crashes, and we have a few more bank failures. CIT is not an isolated incident. More companies will be brought down because of their excessive leverage. But this is the painful medicine needed to get the economy growing again.
Oddly enough, the only way to get rid of leverage for many companies is to have its debt wiped out and restart all over again. This is what GM did, this is what CIT is doing. Other companies will find that they will need to expunge the debt to get a new start.
Individuals will do the same as well. In a world where no one needs credit, the credit score does not matter. In the US, we have been ingrained to believe that a bad credit score is the ultimate scarlet letter. But when everyone is wearing it, then there is nothing to be ashamed of.
Devaluation of the dollar is the only way to pay back the national debt. I think that should be obvious to anyone that is watching current events. But nothing is as obvious while it is happening. Sure, foreigners continue to buy US bonds, but at the current yield, it is a losing investment. Rates will rise, eventually, and when they do, US government bonds will deflate much like the stock market deflated in March.
Is devaluation possible even though rates rise? Of course, it's called inflation. And there in lies the future of the US bond market. We have become a debtor nation, and when the risk of repayment is at stake, yields rise. Hence, there will two forces moving against the US: inflation and default risk. Sure, the US government itself will not default, but paying its debt with printed money is as good as defaulting.
Thursday, October 29, 2009
The economy takes a dive
There were certain assumptions I had made when it came to trading. First, a company is always worth something to someone. Second, trading is the way of in which thousands of individuals determining the price of a stock. And third, the price will always reflect the accurate value of a companies fundamental worth.
All of these assumptions were chattered in one year: 2009. More specifically in March 2009. That was the month in which all publicly traded stocks reached a low that I would have thought impossible. GE was selling for $6.5 a share on that month on speculation that it would incur heavy losses on its Eastern European loan portfolio. Citibank reached $1 a share, Bank of America was at $2.50 a share. Alcoa was trading for $5 a share.
I could not believe it. The S$P had hit 666 as its intraday close. I should have been a buying opportunity. But on that month I turned bearish. I have chased stock prices down and lost at every step of the way and was not willing to chase them anymore.
I was convinced that Citibank would be nationalized, that GE would experience massive losses, and that more companies would file for bankruptcy. It was the age of error as far as investing is concerned. What was to be trusted, who was to be trusted, who was lying and who was telling the truth. Everything was a big collage of confusion. In the middle of this uncertainty the assumptions I made seemed to be dead.
I turned bearish at the most opportune time to buy! But of course, I only say that now that I have see the outcome of the last few months. Since March 2009 to date, stocks have rallied 50%, some individual stocks have doubled, others tripled.
What happened? How could so many securities be worth zero at one point and then at another point in time double in price? Nothing makes sense to me in this environment. Financial statements are not to be trusted, management of companies is not to be trusted, government officials are not to be trusted, and financial experts are not to be trusted. How then can I operate in this environment?
Price and price alone seem to be a very good source of information. The question is then, how to read that price, how to read those fluctuations, and make an informed decision. It is very easy to look at a graph and see when one could have made money but is not easy to look at the current price and determine when one will make money. Somehow, valuation and price needs to be fused into a theory that can lead one to a better decision when it come to trading securities. Then there is the added catch of being right at the right time.
A friend bet that a company would file bankruptcy when the price of a security dropped to 0.40 cents overnight. I reasoned that the company had not filed bankruptcy and yet the price was reflecting a fact that had not yet happened. I bought a small portion of shares and I made money. But I sold it before I could maximize my profits. I doubled my money, but only in a small stake.
In this particular instance I used price and fundamental analysis to make a decision. I was right at the time, and he was also right but not at that time. The company filed for bankruptcy this weekend. We were both right but only one us made money.
Back to March. 2009. I froze all trading activity that month. I should have been buying! I did not. How can I explain my behaviour at that point? Quite easily - fundamental analysis had failed me. I could not trust the financial statements. In addition to this, I could no longer trust the management of these companies. I had been on so many earnings calls where the management swore that everything was fine just to find out a few days later that they were filing for bankruptcy, or being acquired at a substantial discount to their stated book value.
I will never forget the earnings call with Bearn Sterns. Management was asked what the the book value of the company was and the CEO stated that it was around $64, yet the stock was trading at 8. What a bargain I thought. If the book value was impaired the CEO should have disclosed that on the call. But he did not. Over the weekend Bear Sterns was sold to JP Morgan for $2/share. It seems to me that the book value was obviously impaired.
Then the same thing happened with Lehman. There was news on Friday that Lehman would be bought out, just to wake up on Monday morning to a bankruptcy. Washington Mutual was the same story. Wachovia was very similar. Management and government officials were lying about the severity of the crisis.
That is why I did not buy on March. I was completely repulsed by the entire financial systems and was in complete disbelief when the CEO of Bank of America and the CEO of Citibank stated that they would have a profitable quarter after a little less than a week earlier being bailed out by the government. I watched the price go up everyday thinking that it would come crashing down any moment. Prices did not crash, but the economy had. Even Warren Buffet made comments about the economy falling off a cliff.
I felt that I was being duped as prices went down and now I was being duped as prices went up. My assumptions had been slained by the system and the officials I was supposed to trust. The economy had taken a dive and it was bouncing back but my assumptions are still dead and may never come back to life again.
All of these assumptions were chattered in one year: 2009. More specifically in March 2009. That was the month in which all publicly traded stocks reached a low that I would have thought impossible. GE was selling for $6.5 a share on that month on speculation that it would incur heavy losses on its Eastern European loan portfolio. Citibank reached $1 a share, Bank of America was at $2.50 a share. Alcoa was trading for $5 a share.
I could not believe it. The S$P had hit 666 as its intraday close. I should have been a buying opportunity. But on that month I turned bearish. I have chased stock prices down and lost at every step of the way and was not willing to chase them anymore.
I was convinced that Citibank would be nationalized, that GE would experience massive losses, and that more companies would file for bankruptcy. It was the age of error as far as investing is concerned. What was to be trusted, who was to be trusted, who was lying and who was telling the truth. Everything was a big collage of confusion. In the middle of this uncertainty the assumptions I made seemed to be dead.
I turned bearish at the most opportune time to buy! But of course, I only say that now that I have see the outcome of the last few months. Since March 2009 to date, stocks have rallied 50%, some individual stocks have doubled, others tripled.
What happened? How could so many securities be worth zero at one point and then at another point in time double in price? Nothing makes sense to me in this environment. Financial statements are not to be trusted, management of companies is not to be trusted, government officials are not to be trusted, and financial experts are not to be trusted. How then can I operate in this environment?
Price and price alone seem to be a very good source of information. The question is then, how to read that price, how to read those fluctuations, and make an informed decision. It is very easy to look at a graph and see when one could have made money but is not easy to look at the current price and determine when one will make money. Somehow, valuation and price needs to be fused into a theory that can lead one to a better decision when it come to trading securities. Then there is the added catch of being right at the right time.
A friend bet that a company would file bankruptcy when the price of a security dropped to 0.40 cents overnight. I reasoned that the company had not filed bankruptcy and yet the price was reflecting a fact that had not yet happened. I bought a small portion of shares and I made money. But I sold it before I could maximize my profits. I doubled my money, but only in a small stake.
In this particular instance I used price and fundamental analysis to make a decision. I was right at the time, and he was also right but not at that time. The company filed for bankruptcy this weekend. We were both right but only one us made money.
Back to March. 2009. I froze all trading activity that month. I should have been buying! I did not. How can I explain my behaviour at that point? Quite easily - fundamental analysis had failed me. I could not trust the financial statements. In addition to this, I could no longer trust the management of these companies. I had been on so many earnings calls where the management swore that everything was fine just to find out a few days later that they were filing for bankruptcy, or being acquired at a substantial discount to their stated book value.
I will never forget the earnings call with Bearn Sterns. Management was asked what the the book value of the company was and the CEO stated that it was around $64, yet the stock was trading at 8. What a bargain I thought. If the book value was impaired the CEO should have disclosed that on the call. But he did not. Over the weekend Bear Sterns was sold to JP Morgan for $2/share. It seems to me that the book value was obviously impaired.
Then the same thing happened with Lehman. There was news on Friday that Lehman would be bought out, just to wake up on Monday morning to a bankruptcy. Washington Mutual was the same story. Wachovia was very similar. Management and government officials were lying about the severity of the crisis.
That is why I did not buy on March. I was completely repulsed by the entire financial systems and was in complete disbelief when the CEO of Bank of America and the CEO of Citibank stated that they would have a profitable quarter after a little less than a week earlier being bailed out by the government. I watched the price go up everyday thinking that it would come crashing down any moment. Prices did not crash, but the economy had. Even Warren Buffet made comments about the economy falling off a cliff.
I felt that I was being duped as prices went down and now I was being duped as prices went up. My assumptions had been slained by the system and the officials I was supposed to trust. The economy had taken a dive and it was bouncing back but my assumptions are still dead and may never come back to life again.
Tuesday, October 27, 2009
First Blog
Here it goes!
Perhaps there are too many blogs in the world. And certainly the world does not need mine! But after thinking about it for some time, and being inspired by others, I decided that I had to do it, if for no other reason than to have a diary as well as an outlet for a mental purging.
For some time now I have taken up an activity that only the crazy or very lucky decide to take up. Nothing physically challenging or intellectually difficult, but nonetheless, all consuming, addictive and emotionally draining.
I pity the person that is consumed by this passion. I have concluded that nothing good can ever come of it, even if one were to be successful.
So what is this self flagellating field that I have chosen and will be the subject of this blog? The answer: Stock Trading.
I first came across the topic when I was in college during one of my accounting classes. I had prior to this class taken calculus, physics, chemistry, philosophy and economics. I was at the peak of my intellectual abilities, but these subjects never caught my attention the way the subject of security valuation did when I first heard about it in this accounting class.
A new world opened up before my eyes in which anything and everything was possible. All the hard work that I was enduring finally seemed to have a tangible application - the analysis and evaluation of companies, and the ability to profit from that analysis.
Suddenly there was a reason to work hard. It all involved finding the leading markets, leading products and the companies which manufactured those products. The reward for all this work? A big pot of gold at the end of the rainbow. It was as though as alchemy truly existed, but it was in the form of taking public financial information, dissecting it, analyzing it, and making a decision to buy the stock of a company and watch the company's profit and price of its share levitate to the sky!
I was hooked! And there began a long, arduous journey to try to find my way into this world of trading. But try as I may I could not get the proverbial foot in the door. I could not find a job as a trader, and I did not want to go the financial analyst route. So I took a detour into another world which I learned to like and enjoy.
Then as technology advanced democratization came to trading. Companies sprouted all over the place to give anyone the ability to trade stocks on their own. Additionally, financial information had been set free from the exclusive realm of financial brokers. Now any individual could have access to all the financial information they could stomach and had the ability of buying the stock of the company to profit from all the information that was now readily available.
And so I embarked on this journey. It is a journey, not a destination. There is no end to creativity, and as such there will be no end to the potential products which teams of bright, driven, and well funded individuals will create.
Microsoft, Nokia, Yahoo, Amazon, Ebay, Palm, Research In Motion, Apple, Google and all those other innovative companies that now dominate their fields have arising in my lifetime. Some of them have stumbled, some have transformed and some will be consumed by stronger players.
Many more will come, and my only question is will I be able to recognize them without having the benefit of hindsight?
Perhaps there are too many blogs in the world. And certainly the world does not need mine! But after thinking about it for some time, and being inspired by others, I decided that I had to do it, if for no other reason than to have a diary as well as an outlet for a mental purging.
For some time now I have taken up an activity that only the crazy or very lucky decide to take up. Nothing physically challenging or intellectually difficult, but nonetheless, all consuming, addictive and emotionally draining.
I pity the person that is consumed by this passion. I have concluded that nothing good can ever come of it, even if one were to be successful.
So what is this self flagellating field that I have chosen and will be the subject of this blog? The answer: Stock Trading.
I first came across the topic when I was in college during one of my accounting classes. I had prior to this class taken calculus, physics, chemistry, philosophy and economics. I was at the peak of my intellectual abilities, but these subjects never caught my attention the way the subject of security valuation did when I first heard about it in this accounting class.
A new world opened up before my eyes in which anything and everything was possible. All the hard work that I was enduring finally seemed to have a tangible application - the analysis and evaluation of companies, and the ability to profit from that analysis.
Suddenly there was a reason to work hard. It all involved finding the leading markets, leading products and the companies which manufactured those products. The reward for all this work? A big pot of gold at the end of the rainbow. It was as though as alchemy truly existed, but it was in the form of taking public financial information, dissecting it, analyzing it, and making a decision to buy the stock of a company and watch the company's profit and price of its share levitate to the sky!
I was hooked! And there began a long, arduous journey to try to find my way into this world of trading. But try as I may I could not get the proverbial foot in the door. I could not find a job as a trader, and I did not want to go the financial analyst route. So I took a detour into another world which I learned to like and enjoy.
Then as technology advanced democratization came to trading. Companies sprouted all over the place to give anyone the ability to trade stocks on their own. Additionally, financial information had been set free from the exclusive realm of financial brokers. Now any individual could have access to all the financial information they could stomach and had the ability of buying the stock of the company to profit from all the information that was now readily available.
And so I embarked on this journey. It is a journey, not a destination. There is no end to creativity, and as such there will be no end to the potential products which teams of bright, driven, and well funded individuals will create.
Microsoft, Nokia, Yahoo, Amazon, Ebay, Palm, Research In Motion, Apple, Google and all those other innovative companies that now dominate their fields have arising in my lifetime. Some of them have stumbled, some have transformed and some will be consumed by stronger players.
Many more will come, and my only question is will I be able to recognize them without having the benefit of hindsight?
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