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Saturday, June 7, 2008

Losing Streaks

They say that 13 is an unlucky number. I don't know if this is necessarily so. But I do know that 13 is a really unlucky number for this Research House.

You see,
in a 10 month period, I know this Research House to make 13 Buy calls on the same stock. Yes, THIRTEEN buy calls on the same stock! Not different stock.

And all 13 has high Target Prices. If the Analyst Target Price has came out to be true, then, you could have made spectacular gains! It was a wonderful dream. The minimum gain was 37%, and the maximum gain was 153%. Wow!

But of course, reality was harsh. The dream wasn't meant to be reality. It must have been very sad for the Analyst and his Boss.

You see, in his first initiation coverage report, the report was writen extremely well.
18 pages long. Anyone reading it will say it's written by an expert. Very persuasive arguments. Every potential problem that I could think of was anticipated and explained. In fact, problems that you don't even think about was raised, and explained. Anyone would say this demonstrates "deep insight" into the business. Beautiful charts. Solid tables and figures. And it appears to be very, very transparent. You couldn't argue against it. I remembered printing out the report (all 18 pages) and studied it in detail.

In short, I couldn't do half as good a job as he could. Honestly.

And the Analyst is persistent too. Maybe it was his Boss who forced him to be persistent. Or maybe, as the Share Price falls, the Company forced his Boss to be persistent, which forced the Analyst to be persistent. And that may be because the ultimate boss owns a lot of this stock. Company -> Boss -> Analyst -> Report. Or CBA. As simple as reversing the letters ABC.

His first report was dated 28 May 2007. His last report was dated 31 March 2008. 10 Months period. 13 Reports in 10 Months.

And I cannot describe his Track Record verbally. You must see the following table - line by line - for yourself here. And as you read each line, remember that the latest closing price is $1.71.

You may wonder why I'm writing this article?

Two reasons.

One, I had a really bad trading experience with this stock, and I want to share it with you so that hopefully, you can identify with my experience and seek ways to avoid it, or learn from it.

The problem started on 21 June 2007. I bought into the stock at $4.15. I really believed in the Analyst then, and since the Report Price was $4.48, with a Target Price of $6.15, I thought my Buy Price of $4.15 should be good. (maybe even got chance for 50% return if TP is achieved!)

And remember, I was 80% FA then and not afraid of paying for growth, if growth is achieved. The analyst painted the China and global potential, and I'm technologically challenged, and decide to trust this "professional"! After all, what did I really know about SON-this, SON-that? (smile) So, when the price fell the next day, I averaged down naturally at $4. So, my Buy Price was between $4-$4.15. I felt comfortable. Why? Because I studied the report religiously! I carefully read every single sentence, pored at every chart and tables. And based on his persuasive arguments, I couldn't come to any conclusion except the stock looks cheap right?

Actually, I then had a good experience with this stock. Soon after I bought it between $4 - $4.15, the stock rebounded and went up! I sold at $4.14 (relief sell), $4.40 (profitable sell), and $4.64 (even more profitable sell!). It was a profitable operation in just 2 weeks! I could do no wrong! And I "prudently" kept a small amount in anticipation of the stock split, and the stock consolidation. After all, the analyst said the TP is $6.15. That's still a long way to go! Why not keep some? I remembered feeling happy and optimistic then!

And then, as prices rise and then fall, I ignored the warning signs. The stock splitted, and consolidated on 13 July. Price fell. I re-read the report on 28 May to reassure myself. The analyst came out with a 2nd report and I read that even more thoroughly! (Yes, I was a diligent investor/trader). And felt reassured.

But I made the cardinal mistake of ignoring the warning signs. There were many and they were very loud, but I was euphoric with my other gains, that I just had to ignore all the signs. (smile)

And then, like a true FA investor, I averaged down! I bought more at 4.88 new price (= 3.66 old price - that's cheap right when you sold at $4.64 old price right?). And bought more at 4.46 and 4.10. And sold at 4.48. Then buy more at $3.7. And sold $4. And then buy more at $3.76. And sold $4. And kept some.

And I tell you, getting into a difficult spot and trying to trade your way out of it is extremely, extremely tiring emotionally.

And finally, out of tiredness, frustration, disgust, and when I started to become more dependent on the price charts than FA for timing my entries and exits, I sold all at $2.75 average price on 15 Nov 2007. From the charts, it was a breakout on the down side, after the last possible support was broken.

Interestingly, at the same time, the analyst thinks the Target Price should be downgraded from $8, but still thinks it should be $5.72 at the time. Or nearly 100% Upside should still be had if you still believe in the Analyst!!! Of course I had long stopped reading his report by then. And I was being generous too, because by then, he has made 5 wrong calls already. Consecutively. (of course, nowadays, I would act differently, but that's hindsight).

Long story short, I should have suffered a tremendous lost. After all, my initial foray was $4.15 old price, equivalent to $5.53 new price. And my final sale was $2.75 average. That's a loss of 50%. I should have been spanked well and truly with a 50% loss.

Looking back, you might not believe this, but from the first day that I bought the stock, to the last day that I sold the stock, my TOTAL loss is 1% capital. Yes. 1%. There were 3 reasons why it's not bigger. First, my initial foray was profitable. So, that cushioned the loss. Second, I had subsequent periods of profitable trading, which cushioned the loss further. Third and most importantly of all, even though the Analyst was persuasive, I followed my Money Management / Position Sizing rules. And when it reached 1% capital, I cut.

So, it was a good and fairly expensive lesson for me in $ terms.

So, you can say that I'm somewhat of an expert on this stock, and on this Analyst Reports. (smile)

The second reason for writing this article is a cautionary one for all readers. And I will touch only on the title which is "losing streaks"

My main question is - Is this a Random Event? Could the Analyst has gotten 13 wrong calls in a row simply due to a statistically random event. After all, we know that it is possible to lose trades 10 times in a row, just due to statistical fluctuations and nothing inherently wrong in a positive expectancy trading system.

So, my question is how difficult is it to get 13 Wrong Calls IN A ROW over a 10 months period? Is this possible at all due to random fluctuations?

Let's imagine an average Joe first with a 50/50 chance of getting it right / wrong. He knows nothing about stocks. He knows nothing about businesses. If he randomly choose a stock without looking at anything, then, the random chance of getting it wrong 13 consecutive times = (0.5) ^ 13 = 0.0001. Or 1 in 10,000.

Wow. Only 1 in 10,000? For comparison, the chance of an average 40 year old dying within the next year is probably much higher.

Now, this analyst and this company doesn't strike me as someone with only a 50/50 chance.

The local company - in their advertising, website, annual reports, everywhere basically - presents themselves as a professional company with a professional image. The reports written are so persuasive and clearly written by an intelligent guy. Surely, they must have an edge in Fundamental Analysis. Otherwise, why listen to them?

So, let's say their edge is 70%. 20% higher than the Average Joe. So, the odds of getting it wrong 13 times in a row now becomes = (1-0.7) ^ 13 = 1 x 10-7 or 1 in 10,000,000.

Wow! 1 in 10,000,000! Some thinks the chance of being knocked down by a Yellow bus in your lifetime is many, many times higher than this.

Do you think this losing streak is a random phenomena? That they are just so damn unlucky, that with their kind of luck, they would have made a killing by gambling?

Or is this a systematic, deliberate, carefully planned and thought-out issuing of "Analyst Reports"?

I don't know about you, but it is very hard for me to conclude that this is a statistically random event.

You decide for yourself.


lgcsdv said...

Just curious, what is that stock name? Thanks

valuelife said...

Hi Seng,

Nice write up again. I personally enjoy your writings and hope to see more write ups on individual stocks such as EUROSP and EPIC.

I just started blogging today and the first topic is on value investing.

Feel free to give some comments to this newcomer at


Thanks in advance.

Foowin said...

Thank u for sharing. I absolutely agree with yr suspicion. There r some professionals trying to paint a good prospect of the company w ulterior motive..(so the B of the CBA can sell at good price ?? or get good rating in other exchange)
I never buy into the story, just trust my instinct. Have a good day