Trading

Portfolio Sell Off!

2010-11-25T07:06:00.000-08:00

On October 13 I sold off my entire portfolio. Thinking back to that date, I did it to purge myself of all the confusion that was circling through my mind.

It was an emotional response and, looking back at the positions I held and at their current price, my account balance would be unchanged if I had done nothing. I can't remember what particular decision drove me to the sell off, but I recall the feeling of relief when I did it. I had been grappling with the current holdings and was confused about what to do, so selling was the only conclusion I could reach.

Then on October 26 I bought ADBE again. 1000 shares. And then I bought BIOD, then more BIOD after it crashed from 3.61 to 2.16, then I bought NBG and SKF as a hedge, then I bought CHK and VLO because commodities were on the rise and the dollar was falling with the new round of QE2 announced by the Fed. Finally I bought SH as a hedge to the portfolio, and sold 500 ADBE shares to lighten that position.

So I have come full circle to being almost fully invested. With a vastly different portfolio. My total positions amount to 35% of my portfolio, with 28% of the portfolio invested in SH, so I am net long. My current positions arranged by size of investment are: ADBE, CHK, VLO, NBG, and BIOD. For hedges I have SH and SKF.

Per my calculations assuming the worst case scenario and every position get cut in half, I stand to lose 10% of the portfolio. Best case scenario I can make 28%. So it looks like a good profit to loss ratio.

So now I wait, until either scenario come to fruition or until I panic again.

The End of A Strategy

2010-10-14T13:33:00.000-07:00

Yesterday I sold off my entire portfolio. After nearly nine months of high churn and mediocre investments, I decided that I was lucky to be at break even and that it was time to chart a new course.

The market is rallying and I do not know why. I don't understand what the market is anticipating. I do not see 2011 as being a good year. The US treasury market is in a bubble, China is experiencing a real estate bubble, the labor market is not recuperating, and the Fed is about to start another round of easing by buying government bonds.

Does any of the above sound like a recipe for a buoyant stock market? I don't think so. I can't think of a single reason why stocks should continue to perform well. Well, what about the earnings?

JPM and AA reported earnings this week and were in line with expectations. As I type this AAPL has hit a new 52 WH. GOOG has just reported earnings and the stock is up nearly 10% after market. NFLX is just off its 52 WH. All three of these stocks have not been in my portfolio in the last 12 months. In general, these companies have done well on the bottom line. But are they reflective of the overall stock market? Perhaps they are and people are laughing their way to the bank as I write this blog.

But when I put my glasses on I do not see anything that remotely resembles signs of optimism. Cheap money is what is driving today's economy. And when money is cheap strange things happen. I think we are in the midst of the last sprint before the proverbial falling off a cliff. The same mistakes that were made at the burst of the dot com bubble are being made now. Except that now we have no new wars to stimulate the economy, no new tax cuts, no housing market to generate jobs and riches, and no breakthrough technology.

Furthermore the geopolitical tensions in the middle east are simmering. There is a high likelihood of another military incursion taking place which may embroil powerful nations putting further strains on the oil supply and ultimately leading higher oil. That is without taking into account the continued slide of the dollar because of the continued money printing by the Fed.

So where are the good news? Where are the bright spots? Perhaps this is the story of two Americas. The employed and the unemployed. Perhaps I am projecting my own fear into the investment landscape. But I just do not see what will move the economy forward. Where is the growth going to come from? I do not see it, which is why I sold off the portfolio.

Speaking of Profits!

2010-10-05T19:31:00.000-07:00

I took some profits yesterday when the market swooned 1%. I paired back my investments thinking that the market was headed towards a bad place. As soon as I paired my losses, I felt this nagging feeling that I was doing the wrong thing.

Today the market rallied nearly 2% and yesterday's nagging feeling turned today into real regret. Yesterday I sold RIMM at 49, BIOD at 4.75 and EK at 3.9. All were profitable positions, but less so yesterday than they were on Friday at the close of trading.

I wanted to hold RIMM for a significant time frame, but in the end I was only able to hold it from an average price of 46 to 49. Why did I sell it? Well, I did not want to see all the profits disappear. Some profits is better than a loss! Unfortunately, I did not pare back on my SH position. As a result, I am currently net short the market, and today's 2% rally set me back by $500. The loss of $500 did not bother me at all. It was the knowledge that if I had not altered my portfolio that loss would have been a net gain today.

Why did I sell on Monday? Well, I was nearly 100% invested on my retirement account. I was nearly break even once again, and I did not want to see the portfolio take another swoon if the market began to crack. In essence it was an emotional response driven by the news of the day. Nothing had changed other than my own perception of the news, and my perception turned out to be incorrect.

So now what do I do? I have altered my portfolio to the point of confusion and I feel like I should sell it off and wait for a more opportune moment or a few months to see how things play out.

This week is a big week. AA reports earnings, and MON reports earnings. If the past is prelude, the earnings are likely to be good, but the guidance poor. There are so many signs that companies are going to be guiding lower for the next quarter and the next year. Currently the game is turning towards what will happen in 2011. It's no longer about 2010. Perhaps that is what is bugging me at the point. I have no idea what is going to happen in 2011, at least I don't see anything good happening.

Euphoria has seeped back into the markets, and I truly think that the euphoria is about to end.

When To Take Profits

2010-10-04T02:17:00.000-07:00

Taking profits is one of the toughest aspects of investing. In many ways selling a stock is like parting with a friend with whom one has spent time and effort to know and to understand. After all, one never leaves when the relationship is going well and there is still much to give each other.

Similarly, who wants to sell a stock when it is making money? Who's to say the peak has been reached and that there are no more profits to follow? Why abandon a good investment?

In investment parlance, one is seeking to maximize investment returns, and if stock has reached the peak of its earning potential then it should be sold. The idea is elegant and straight forward, but in reality it's difficult to implement.

What after all is a maximized investment return? Is it 5%, 10%, 15% or some other percentage? According to the theory, the return needs to be risk weighted. A riskier investment should return more than one with less risk. Fair enough. But again the question remains: how can one implement this risk adjusted rate of return theory?

For example: BIOD was up 40% twice since I bought it. Most recently it was up 2K, and I did not sell it because I expected more. Now half the profits are gone and I only have 1K left. Do I sell? RIMM is up about 10% since I bought it. It's gone from 46 to slightly over 50. Do I sell?

How can I judge what is a fair price to sell these stocks? Before I answer that question I also have to state that both of these positions were down about the same percentage, 40% for BIOD and 10% for RIMM.

The market has no friends. It's a cold, erratic and often illogical amalgamation of opinions. The market focuses on one thing today and another one tomorrow. Bad news are greeted with price increases and good news with price decreases. In the mist of this madness, how is one to implement this elegant risk adjusted return theory.

Min-Max is my answer! As painful as it is to part with a good friend, profits have to be taken at the max level. For BIOD this would be the $6/share level and for RIMM it would be $55/share level. One of the fundamental rules of trading, one which I have not yet learned, is that before making the trade I should have a stop loss and a profit target. This rule makes sense but implementing it seems to require discipline.

Again, it's a nice theory, but then I would not have held on to NFLX, APPL or GOOD during their meteoric rise. How then to know when to use this stop loss/target profit idea and when to discard it? A small profit sometimes is not better than a small loss if it means giving up bigger profits. In retrospect this is always clear, but peering into the future to see this is what makes it difficult.

Turning Points

2010-09-30T01:40:00.000-07:00

Turning points, or inflections points, are crucial price points where the stock price begins to head in the opposite direction. If a stock price is declining, the turning point marks the bottom of the descent and if the stock price is increasing, it marks the top of the ascent.

Turning points is a theory based on Min-Max analysis. Barring bankruptcy, and any other unforeseen situations such as fraud like in the case of Enron and Worldcom, all stocks have a base price which can be determined by using the financial statements. Total share holder's equity, working capital, market cap multiple to sales, etc, can all be used to determine a stock's base price. Likewise, these ratios can also be used to determine a stock's top price based on the stock's historical averages and comparable against other companies.

In mathematics, most continuous functions have a min-max property. Stocks can be likened to smooth continuous functions, and in any stock chart it could be seen that these min max properties do appear in the charts. I think it is this belief that has shaped my investment philosophy.

As stated earlier, barring bankruptcy, I want to make a purchase at a min price and exit the position at a max price. Or alternatively, short a company at a max price and exit the position at the min price. This approach to investing implies the following:

IPOs are avoided

Research companies, such as bio medical companies with no financial statements, would be avoided

Stocks making new 52 week highs and new 52 week lows would be avoided.

With regard to IPO's, there is no historical price pattern to base a min-max decision on. With respect to research companies, there is no meaningful financial information to compute ratios. And with respect to 52 week highs or lows, the max or min is yet to be formed.

This would imply that my investment candidates would consist of mature companies or new companies that have been trading for at least one year, and I should focus on companies that are range bound and have a well determined min and max.

This analysis would explain my continued persistence in buying companies that are dropping in price and selling near their min point, and my constant shorting of companies making new highs near their previous high point. While this may sound like a great idea, in general practice this is a recipe for disaster!

From a market perspective, it implies buying companies the market is shunning (i.e. RIMM, BBI) and shorting market darlings (i.e. AAPL, NFLX). From an economics perspective, it implies buying companies with decreasing market share (YHOO), and shorting companies with increasing market share (GOOG). From a financial perspective it implies buying companies with decreasing profit or even loses (AMD), and shorting companies with increasing profits (INTC). Overall it, implies being a contrarian!

Min-max is great for mathematics, but if applied literally to stock investing it leads to losses instead of profits. In reality one wants to ride the bull and short the bear. Literally this would mean buy at the max and short at the min! This is what actually works in real life. Old mins get breached and go lower, and old max get breached and go higher.

In a way, investing requires a lot of optimism. It requires blind faith to believe that something that is going up will continue to go up and something that goes down will continue to go down, which in our gravity bound world does not work all the time!

After all, this blind optimism leads to tulip mania, dot com mania and housing mania. All of these manias have at their heart the greater fool theory in common. As Charles Prince, the ex CEO of Citigroup once said, "as long as the music is playing, one needs to keep on dancing". So keep buying as long as one is not the greater fool making the last purchase at the highest price!

Is it possible to reconcile min-max theory with the market reality? Perhaps it is, and I need to give it some thought. Eventually min-max does work. Stock prices don't continue going up forever, and eventually, aside from bankruptcy, most companies do have a bottoming out price at which they either recover (AAPL, F, YHOO, EBAY) or get bought out by other companies (PALM, SUN). The secret of applying min-max theory to stock investing would be determining how to avoid companies that either go bankrupt (GM, BBI, LEH, WCOM, ENRON) or get take under offers such a Bear Sterns.

A Pattern Emerges

2010-09-25T07:14:00.000-07:00

On Tuesday after the close, ADBE reported earnings. The earnings met and slightly beat the expectations. However, the company's forecast for the next quarter was lower than expected.

The stock tanked 20% at the open hitting a low of 25.81 on heavy volume, slightly dipping past its resistance price of 26. Shortly after making its new 52 week low, the stock price began to rise slowly, closing the day at 26.67. The next day the stock struggled to remain above 25.5. In the final hour of trading, along with the overall S&P index, the selling pressure increased and the stock dropped, closing at 26.41.

I followed the news and the price action for the those two days. On Wednesday, the day of the 20% drop, I read ADBE's SEC earnings report and focused on the balance sheet. I did a quick analysis and calculated different ratios: asset turnover, market cap to equity, working capital, and profit margin. By Thursday I had almost convinced my self that I wanted to buy the stock.

On Friday, the market opened very strong. Everything was going up. The durable goods report had been released that morning and, ex transportation, increased more than expected. Additionally, an influential fund manager was interviewed on CNBC before the open and he stated that now was the time to buy stocks. All of this pushed the market to close 2% higher.

During this intraday rally I decided that ADBE had to be in my portfolio. I took a 500 share position and liquidated NBG to raise funds for the purchase. Also, on Thursday, I had sold S and AONE to raise funds and ADBE took up most of those funds as well.

Today, my portfolio consists of a few stocks with concentrated positions. Ordered by decreaing percentage, they are SH (hedge), RIMM, ADBE, AA, VLO, BIOD, and EK. This is quite a marked difference from a month ago when I held several small positions on different stocks. In particular, all these stocks have something in common. All of them are previous high fliers that have fallen out of grace. Basically, they are contrarian plays. I buy stocks from the discount bin when the market decides that companies are no longer worthy of high multiples.

Through out this gradual portfolio shift, a pattern has reemerged. Concentrated positions on value plays. Try as I may, it seems that I always revert back to the same investing strategy. I have never owned a stock that is making new 52 week highs just about every week or that has gone up 10 fold in a year's time, like NFLX. I have to think why it is that I can not buy into growth companies WHILE they are growing. I need to go back and examine why this value investing strategy is so ingrained in me. Is it my education? Previous investing mistakes? Is it risk aversion? Could it be a combination of all these elements?

Investing is a very rewarding business when it's done well. But it's a game, and like any game I have yet to learn all the rules. And like other games, it's a game which causes a lot of introspection and a lot of self questioning. There is a pattern in my investing, and I need to figure out what drives it and why.

The Aftermath

2010-09-17T13:48:00.000-07:00

RIMM opened near its after market close of 48.61. Immediately after the open, the selling pressure began. The stock finished the 10AM trading hour at 47.15 and meandered between 47.75 and 47.30 for the next few hours. I decided that I should not let this opportunity slip away, even though my current holding was close to 10% of my trading account.

I still had cash left in my main trading account, but to raise more cash, I sold my position on NOK and used all my cash to triple my RIMM position. I bought additional shares at 47.32, at what seemed like a great bargain. I entertained the idea of buying RIMM for my other accounts because I did not want to liquidate more positions. Fortunately, I stopped myself.

At the low of the session, around 3PM, RIMM traded for 46 - briefly going negative for the day. It closed at 46.64, nearly unchanged after reporting strong earnings. MY P&L took a hit because I lost some of my original gains. I now hold a RIMM position with an average price of 46.30, close to today's closing price.

Why did I increase my position to 23% of my account when my rule is not to exceed 10%? Because the fantasy of huge profits took over my will. I still expect RIMM to trade up to 56 in the near future. That is nearly 20% from where I bought my last position. I think that it will be very easy for RIMM to trade up to that level, even though today the price was nearly unchanged.

I rarely like to hold concentrated positions, but I concluded throughout the trading day that if RIMM goes down by 5%, my trading account will decrease by 1.1%, but my portfolio will only decrease by 0.65%, because RIMM is only 13% of my overall portfolio. I won't go broke even if RIMM decreases 10% from my average purchase price. It will hurt, but I won't be out of business. Six months from now, I do not want to see that RIMM increased to 60 and that I could have bought at today's closing price of 46.75. That would be too much of a regret!

The Earnings Report, the Fantasy and the Reality

2010-09-17T00:52:00.000-07:00

RIMM reported earnings yesterday after the close. The EPS and revenue were better than expected. The Q3 forecast is also better than expected. The stock rose after hours to a high of 50.43 on heavy volume. After the earnings call, the stock stock lost a bit of its new found luster and settled at 48.50.

Throughout the post report hours I felt that I should have taken a larger position on RIMM, and I began to fantasize on my Excell spreadsheet about the money I could have made if I invested my entire portfolio on RIMM. That's investing for you - when you lose you regret the loss, and when you win you regret the missed profits!

That's one aspect of investing I have to get better at. I need to control the emotions of a loss and the regrets of not investing more when it's profitable.

Now the question is, do I hold on to RIMM, buy more, or sell what I own for a profit? That is the second aspect of investing I also need to get better at. I need to control the emotions of loss and regret and learn to reevaluate the position as though I did not already have an investment on the stock. To that end I dedicate the rest of this blog.

The EPS for Q2 is 1.46, and the twelve month trailing PE is 9.2. It's incredible that RIMM is being treated with such disdain. After all, isn't it one of the leading companies in the cell phone industry? With a 12 month trailing PE of 9.2, investors are basically saying that RIMM is no longer a growth company. Is this plausible? Well, the revenue growth is slowing even though the profits are quite robust. Is the market fearing that the revenue growth will stall and RIMM will lose out to APPL just like NOK, MOT and all the other once high flying telecom companies?

If the price and the PE is a sign of investor sentiment, then yes. RIMM is done as a growth company. Could it be true? Perhaps, but I think I will take my chances with an ex-growth company selling at a PE of 10 than a growth company selling for a PE of 30. And in case I am wrong? Well, I'm not investing my entire portfolio on it, despite of what my fantasy might be. So do I hold, sell or buy? At this point, my emotions tell me to hold even though my analysis says buy. Unfortunately, I am already at 8% of my account so no matter what my emotions or analysis says, I can not buy any more, as no single position should be more than 10% of my account.

RIMM, NBG and more SH

2010-09-14T04:36:00.000-07:00

To practice what I preach is the way I like to invest. And that is exactly what I did by buying the above positions.

I bought RIMM because the price is entering a support area with a price range of 39 to 42. I could have waited for the price to get closer to 40, for another %10 decrease, but, with the earnings report only 2 days away, it seems that now is right time to strike.

As posted a day ago, the price forecasting illusion is telling me that RIMM will continue its downward spiral and that the support zone of 39 will not hold. However, from a probability perspective, I think that the probability of a price increase has gone higher at these levels. A bad Q2 earnings report and a bad Q3 forecast would probably result in in the price testing the resistance level of 39, for an 11% decrease. If on the other hand, the earnings report and forecast is better than expected, or not as bad as expected, then RIMM could rally to the 48 - 57 resistance level.

NBG follows a similar line of thought. I bought it at 2.36 after it announced a capital raise of 1.2B Euros. The price declined after the announcement, and it fell short of its 2.12 support price. Even after the capital raise, the stock is not decreasing past its support point. Is that a good sign? I don't know, but I think the probability of a higher price just improved.

And just in case all I am wrong in my analysis, I bought a little SH as a hedge. I did not hedge the entire RIMM and NBG position because lately these two stock have not been correlated to the market. But if the market were to take a sudden tumble, I want to protect myself at little bit. A hedged position is the only way I can sleep at night any more!

The Price Forecasting Illusion

2010-09-12T04:43:00.000-07:00

There have been many times when I looked at a stock and noticed that the price was reaching a support level. On several of those occasions, I wanted to buy the stock but was afraid the support level would not hold and the price would continue to deteriorate. This happened with MOS, BP, NOK, VLO, ZQK and several others. In only one instance, with BP, the price did not hold at the support level and the price continued to decline another 20%.

A similar situation, but in reverse, has happened as well: I looked at a stock and saw that the price was reaching a resistance level, and I told myself not to buy it, but went ahead with the purchase because I expected the stock to break out of its resistance zone. Shortly after making my purchase, I watched the stock retreat from my purchase price, as though it hit a ceiling and could not go any higher, and proceeded to reverse its upward trend.

Why is it that instead of doing the first - buying at support, I do the second - buying at resistance? My explanation is price forecasting illusion. When a stock declines and comes into a resistance level, the mind focuses on the price down trend and projects further decreases as opposed to focusing on the probability that the price slide will cease. The illusion is created that the stock is being sinked by an invisible force and nothing can hold it up. The illusion of a lower price is created and the mind ceases on this and blocks it self from any action. It must be a survival mechanism of sort. After all, why buy the stock if it will continue to decline and go to zero because of the momentum it carries?

The opposite is also true. The mind anticipates the continued price increase, although the price is entering a resistance area. All stocks that continue their climb have to clear this resistance area, but very few do, or only do so after several attempts. Instead of focusing on the probability that the stock price will stall and reverse, the mind fixates on the recent price increase and expects the force which lifted the price to its current level to boost the price higher.

There has to be a way to disassociate the mind from the price forecasting illusion and help it focus on the potential price reversal. Perhaps the disassociation can be achieved by rephrasing the down or up price movement. To dissuade the mind from focusing on the price forecasting illusion, each day one should ask, "What is the probability that the stock will be higher than where it is today given where it has been in the past?". Then compare this self assessed probability, which is either decreasing, stable, increasing, with the actual price action of the following day. When the actual price action and the self computed probability are in sync then that is the time to act.

In other words, when the price enters a resistance area, after a protracted decline, wait for the area to prove itself out. The logic should flow as follows: If the price will reverse, then the probability of the price being higher is increasing with each subsequent price decline. If the price is higher on the next day, then buy near the support area price. Likewise, if the probability of the price being higher is decreasing with each consecutive price increase, and the next day the price is lower, then sell an existing position or short near the resistance area price.

The purpose of phrasing this way the movement of a stock price, is to train the mind to treat an increase or decrease in price in the same manner. The mind will focus on a positive thought (what is the probability of a price increase) and assign a strength factor to this thought (decreasing, stable, increasing)

Hence, instead of asking whether the S&P 500 is going to be down or up, I would ask, "Is the probability of a higher S&P 500 index decreasing, stable, or increasing?" By phrasing the price movement this way, I am training the mind to focus only on the strength of a one event, as opposed to forcing the mind to consider whether a down trend or up trend will be reversed.

September Has Arrived

2010-09-11T04:38:00.001-07:00

The pundits foretold that September would be the decisive month. Summer lacked direction and commitment, and that it showed in the low trading volume. After the Labor Day Weekend, the professional traders would take over from the Junior traders and give the market direction. Either up or down, the month of September would set the tone for the remainder of the year. It's almost mid September and the pundits prediction is yet to materialize.

Now we are told to wait until the November midterm elections and, after this decisive event, the market will take off after a purported Republican win at the polls. I wonder what we will be told in November. Wait untill January when Q1 stats and December sales show the strength of the economy?

There does seem to be a lot of waiting in investing. Unfortunately, one needs to invest and then wait as opposed to wait and then invest. There is no reward for investing after the news is published. The real money is made by reading the tea leaves and placing a bet on a positive or negative outcome. Is investing then tantamount to gambling? Well, in a way, except that in gambling the house always wins, and in investing one may win too. In both cases, a choice is made and then the outcome appears.

For example, today I bought 1K shares of NOK because it had a appointed a new CEO. The embattled CEO will be replaced because he is costing NOK market share in the lucrative smart phone market. NOK is yet to develop a product to compete with all the shiny music and movie players posing as cell phones. I do not know if replacing the CEO will have an impact on the future of NOK. Currently in the U.S., NOK is an aging brand without much appeal to the young generation. Any device NOK introduces is likely to be expensive, and with $200 iPhones available in the market, NOK will have to develop a true killer product, which is very unlikely.

So why did I buy? Well, the new CEO is going to clean house and change the strategic direction of the company. Maybe the Android operating system will be adopted and NOK Symbian's experiment will be terminated. Building out Symbian and asking software houses to develop applications for it is a pipe dream. The market will not support more than two operating systems. NOK passed up the opportunity of buying PALM and, with it, eliminated the opportunity of relaunching its own operating system.

Maybe the new CEO will steer NOK into a new path, or maybe NOK will become the next MOT or PALM. The former being a market leader turned lagger, and the later a killer innovator turned prey.

In either case, I made my decision on two factors:
1) NOK stock price of $10/share is at value levels and its downside is $8/share
2) NOK has the potential of turning itself around and possibly regaining its post crash high of $20/share.

With a profit/loss ratio of 10/2 NOK should be a winner. So now I sit back and wait for the November elections and, thereafter, the pundit's prediction of what to wait for next.

Summer Pain

2010-08-31T02:06:00.000-07:00

Last I blogged on April 29, I was probably $5K richer!

I have 5 positions with serious percentage losses:
AA (-17%)
AONE (-18%)
BIOD (-15%)
S (-9%)
VLO (-20%)

On a cumulative basis though it's only about $5K losses. I've decided to keep them for the purpose of teaching myself a lesson. Waiting! I am so quick at taking losses that I decided this time to unlearn that lesson, and give my conviction a chance to prove itself.

However, I am not entirely foolish. I have a position in SH that is equal in size to my total stock position. Hence, I am hedged. So far the hedge has not worked. Since I put the trade on the hedge has only returned 1%, or 277 gain to my $5K losses.

There are days like last week in which I am completely despondent. PAR is a company caught in a biddng war between HP and DELL. I first heard about it a little over a week ago and did not bother to look into it. The original DELL bid was about $18/share, which is close to the IPO price of the company 18 months ago. It's in the cloud computing space (perhaps I should know something about that since I am in IT!) and apparently it has the next best product.

HP came in with a bid that was 100% higher than DELL's original bid! Hence, summer pain. Coulda, woulda, shoulda looked at PAR as soon as I hear the announcement and I coulda, woulda, shoulda participated in such a sweet rally.

But instead, I'm stuck with my current lesson! Sell all positions and regroup? No, what for? To get a chance to jump into the next possible 20% loss? Not a chance!

Three Months of Hindsight

2010-04-29T00:19:00.000-07:00

Not having blogged for three months, here is the hindsight analysis.

AONE - down to $12.50. After repeated attempts to buy, I gave up on the stock.
PALM - bought with an average price of $4.90 and sold a week ago. Today I found out that it was being acquired by HP for $5.70. Only had 2K shares, so no serious regrets.
ZQK - this is a heart breaker story! Had 20K shares with an average price of $2.15 and sold all shares at $2.00. My $3K losses wiped out my previous gains on ZQK. Stock is trading at $5.75.
VLO - bought an additional 1,000 shares pre earnings, and after earnings report on Tuesday sold it for break even. Issue? Greek default fear sent market down 2.5%, and thought holding a large concentrated position would be too risky.
S - bought several times unsuccessfully, but decided to go long yesterday with and additonal 3,500 shares. After watching PALM being taken out, I can not stand on the side lines with S, even though yesterday I decided not to hold a large concentrated position on VLO. Logical? Well, for the same dollar value of of my 1,500 VLO now I hold 500 VLO and 2,000 S. I do admit that this was an emotional trade for me, but, with the M&A market picking up and S performance improving, I can see S reaching $8/share

In summary, analysis is not terrible, but the implementation of the strategy is horrible!

As for Greece, I hope it defaults on its debt. It's the only way it can balance its books again. It will be a painful process, but I think it is the best course of action for the European Union. This is no different than if California goes bankrupt. I will not be happy if the federal government bails out the state. Why should savers bail out the spenders? Moral hazard is real, and bailouts of insolvent companies, states or nations need to stop. Failure of weak institutions is the only way to police the financial system.

However, knowing that there is a small chance of a bailout, I will buy 1,000 NBG @ $3/share with a stop loss of of $1.50 to participate in the Greek bank rally that would follow a bailout. Worst case, lose $1,500.00+; best case make $3K if it rallies to $6/share.

Decision and Hindsight

2010-01-14T18:45:00.000-08:00

In stock trading the result of every decision is only kown with hindsight. Today I woke up to news that AONE had signed a deal with an electric car company in the US. The stock was up 10%, after I increased my share count by an additonal 250 shares yesterday.

At first, I thought about not selling the position and holding on to it for the longer term, but the charts were telling me differently. I sold 250 shares at 22.15 thinking that I would hold on to the the other 250 shares for the rest of the day. However, within an another 10 minutes I decided to sell the remainig 250 shares at 21.93. Immediately after I sold it, I felt that I had acted hastily. However, the chart indicated that 23 was a point of resistance and it also indicated that 19.60 was a point of support. The price had certainly jumped a great deal on the news, but more importatantly, it had jumped close to a resistance point which was to be used as an exit point.

Turns out that I made the right decision on this trade. But I only know that because the price closed at 20.40. How was I to know for sure that this would be the right choice to make? I did not, I only made a choice with the information I had. From this I conclude that instead of suffering over every trading decision I should be a bit more relaxed when I make my trading decision and live with the consequences.

The truth is that there is no way of knowing for certain if the trade is the correct trade until after the facts. And that is the art of trading! Making the best decision with the information at hand and living with the consequences, whether good or bad.

And so, I decided to buy VLO again. I shunned it when it was at 17.9 but decided I had to have it when it was pushing towards the high of the day at 18.31. I think this was a premature trade but I don't want to wake up tomorrow to find out that I missed out on VLO rallying back to 19 after forming a decent support at 18.

Gains and Losses

2010-01-13T16:14:00.000-08:00

Blogging is more difficult than I thought! It really is a habit that I need to get myself into. It's been difficult in the last three weeks but I will try to be a bit more consistent.

Earnings week got started with a thud! Alcoa reported lower than expected earnings and the stock sold off heavily. I will wait for a further pullback before getting some shares.

My portfolio has churned a lot more than I anticipated. I already have made more trades in the last four weeks than I intended to. My biggest position is ZQK, 10,000shares. This is a specialty retailer selling for less than half its working capital of $400 million. It has equity of $400 million and total assets about $1.5B. I already made about 2.4K on the position but I bought it back and I am currently down 1K. I think that this stock can easily go to 7/share in the next year, so this is going to be a core long term holding for me. Another position that I acquired is AONE. It is a battery company based in China and its IPO came out this year. So far I have a 500 share position and I think I can also make this a longer term position as well.

Today I sold BIOD at $5/share. I planned to hold it but I was afraid that it might tumble down to the $4.40 range. So far I had only held a 1K share position in the company because it is a biotech company. I will buy it back if if breaks below 4.5 or if it closes above 5.2

At this point I want to limit the size of my position because I think there is a crisis coming. What will it consist of? Higher rates, falling home prices, higher unemployment, bigger deficits, and yes - missed corporate profits.

I have not been tracking my day to day performance like I did before but I will start doing that next week once I settle into my new office.

So far I think I am up about 3% for the year, having lost 2K yesterday alone! My goals are very modest. No home runs required but no active trading either. Study the company, the price motion, make a call and watch the results within a day or two. My target holding period will be about 3 days after a major news event. It seems that is how long it takes for the market to fully price in the news before a major reversal.

Trading Strategy

2009-12-14T10:53:00.000-08:00

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

Back in the saddle!

2009-12-13T16:16:00.000-08:00

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.

FHA in Shambles and Fed Leaves Rates Unchanged

2009-11-04T15:04:00.001-08:00

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.

A Reminder of Things to Come

2009-11-03T17:12:00.000-08:00

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.

The economy takes a dive

2009-10-29T15:52:00.000-07:00

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.

First Blog

2009-10-27T17:47:00.000-07:00

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?