Fusion Investor Chatbox

This chatbox is for fundamental, technical and related discussions on investing in Bursa Malaysia. Registration is required to join. Please email me at fusion.investor@gmail.com with your preferred name and password and I will inform you when registration is confirmed.

Disclaimer: As usual, you are solely responsible for your trading & investing decisions.

Thursday, January 1, 2009

Happy New Year and Welcome to the Year of the Investor!

Here's wishing you and your family a Happy New Year for 2009, and may all your wishes comes true!

As with all new years, this is the traditional time when people give some thought as to how they plan to improve their lives for the coming year. Personally, I don't have a fixed New Year Resolution, but rather, I prefer to implement change as soon as I am convinced that it is needed, rather than wait until the next year.

However, one area that I would like to rumble about is the era of being an investor versus a trader.

These are not mere labels, but different styles of trying to make money from the financial markets, such as the stock market. To me, they involve very different levels of risks, and different expected returns, and my own view is quite different from traditional investing textbooks.

My own personal view is that the ideal investor is a flexible investor who is largely an investor when markets are "low", and ride the bull all the way to the top. When valuations then becomes extended, he switches to become a trader, and would cut loss or hold cash as the bull markets crashes. Then, when it founds bottom or when valuations are compelling, he becomes an investor again. Such an approach is optimal and efficient, and involves minimum effort.

This contradicts traditional dogma, that says that you must choose either to become an investor or a trader, and not both. I don't know who first came up with such dogma, but presumably, like all rules of thumb, I'm sure initially, there's a good reason for it.

The biggest theoretical cricism levied on such changing styles which varies according to bull or bear markets is that no one can time markets perfectly. I have no wish to argue with the theoreticians. My own personal experience tells me that one can sense when one is in a bull market or a bear market. Not with 100% accuracy of course - this is the Holy Grail which can never be attained. But with 70%-80% of the time, and there are ways to manage ones portfolio if one doesn't get it perfectly right. In fact, one doesn't need to get it perfectly right to make money.

My general view is that if 2008 is the Year of the Trader, then, 2009 may be viewed back as the Year of the Investor.

In many sectors, valuations are attractive by long term historical standards. (Of course, what is cheap can always get cheaper, but from a long term risk/reward perspective, it borders on "cheap" than "expensive", as a general comment).

The fastest and most efficient way to greater wealth is now through an investing approach, rather than a trading approach. Theoretically, it doesn't make sense to cut loss when valuations are low and compelling, but rather averaging down. I also like to be a contrarian at this time, when news are bleak and everyone now says that Buy and Hold is dead.

In sophisticated financial markets such as the US, the participants are highly skilled in execution. I'm surprised to learn that something like up to 70% of the volume are attributed to program traders and robots. Recently, I have experimented day trading in the US markets and have found that trying to compete with them on an extremely short term basis (e.g. using 1 minute charts), is futile, when their execution is much faster than what retailers can even react manually.

So, I believe that the easiest way then to make the biggest buck with minimum effort is to go beyond the 1 minute trading horizon, and extend the time-frame to 3 to 5 years. For example, if one has a 12 month horizon, I've said that any price to buy crude oil below US$40 is considered cheap, and last night, crude shot up past $40 easily. There is no need to apply a minute-to-minute trading with stop loss, when an investing approach with averaging down at key pivot levels makes much more sense, and is also easier.

I think crude oil's recent performance in the last 2 weeks provides an early glimpse of what we can expect for the rest of 2009. There are still many markets which haven't yet rallied as much.

Averaging down is a highly skillful art, and can provide either FAST returns, or FAST loss. In terms of technique, it entails a HIGH degree of risk, with high rewards, when compared to stop loss. Averaging down commits increasing amount of capital into something, so, you BETTER be right, or else, you suffer HUGE losses, or it ties up your capital for a very long time, and this is the trader's greatest fear - the fear of not having enough capital to make future trades. Cut loss assumes that one does not have an idea of where the floor price is, and so, traders try to get out when they are uncertain of that.

For example, if a stock bought at $10 starts to fall to $8, do you cut loss, or do you average down? If you have no idea of where the floor price is, then, logic dictates that you cut loss, because to you, it is possible it could go down to $5 or even $2 say. But if someone else - through a careful study of the situation - personally believes that the floor is around $7, and maybe very very unlikely to be below $6, he may instead choose a different route to back up his view. For example, he would wait until he sees the price becoming closer to $7, such as $7.05. Then, he would start to monitor closely, looking for clues such as whether the support will hold at $7, and whether the price will bounce off $7 ... and be ready to average down when the price has bottomed, showed classical bottoming indicators, and then, average down at $7.20 when it is higher odds that it will bounce back up. And if it then goes down to $6.2, he does it again. And every move is preplanned before the word Go, before he entered at $10 originally. In short, by averaging down at $7.20, his average cost might be $8, and when it goes back to $8, he breaks-even. Whereas the trader who cut loss at $8, and still waiting to reenter might end up with a loss. Whilst the trader has peace of mind after cuting loss, and the investor in emotional turmoil as price fell below $8, and smart investor who knows his stuff and have a long term horizon, simply treats the same price fluctuations as merely "noise". And 3 years later, the stock price zooms to $20, and he's glad he kept the stock all these times and ignored the "noise". He doesn't need to stay glued to the 1 minute screen every single day. In this sense, it is very easy for the investor.

There are many reasons why I believe this year will be the Year where the Investor will match the performance of a Trader, and quite possibly beat them in the longer term.

When compared to the counter-trend trader, a strong up move like what crude oil did last night will leave the counter-trend trader with nothing in hand. They would have sold at resistance levels, and last night's move is so strong, it would have taken out most if not all their holdings.

When compared to a trend following trader, the trader would only have jumped in at a higher price compared to an investor.

These are just general comments of course, but personally, being an investor is easiest amongst the 3, during these times. Of course, when crude oil is $140+, when DJ is 14,000+, when KLCI is 1500+, it is not the same situation when crude oil is below $40, DJ around 8.5k, KLCI around 880.

There are MANY risks of being an investor too.

For example, one of the biggest risk is to appear to BE WRONG for an EXTENDED PERIOD of time. This to me is a time-frame issue, rather than an absolute issue, if practiced properly. When markets appear to have bottomed, and things appear to be relatively cheap when measured against long term historical average, it is appearance rather than true substance for the genuine investor.

Another risk is to be overcommitted too quickly. The counter-risk is to be less committed and the market shoots up. At the time of writing, I don't expect the latter to occur, so, better to err on a smaller allocation, than a bigger allocation in stocks. Cash is still king, although it's time for me to put my capital into work for the longer term.

Related to this is to average down too quickly. This one is an art. Lower fixed price is appealing because of its simplicity and can be executed mindlessly, but might not be most optimal. Averaging down based on Major Key Support levels, following by price action around these key support levels are technically more optimal, but requires more work and monitoring and you can always still be wrong. There are Masters of Averaging Down, and there are Amateurs of Averaging Down, and there is no short cut to knowing when to average down, and how much to average down. The general idea is to keep remember Buffett's maxim, that as an investor, when you think you have bought near the bottom, be prepared to see your investment holdings shrink by 50%. Well, maybe he didn't quite say it like this, but if one used Crude Oil as an example, I had earlier thought when crude first broke below $60, that $40 would be a floor. Well, I was proven wrong in that expectation, but here, being wrong is not catastophic because I then expect the floor to be $20 = 50% x $40. And if you are really unsure, plan for another 50% fall i.e. a floor price of $10. In other words, if you plan your averaging down so that the maximum worse case scenario is an extremely small probability of happening, then, you will always have cash to average down. The corrolary is that you won't be fully invested by the time bottom has occured and price starts to run upwards. This is the trade off.

Even more important is selling. Again, at bottom, the price run up can be fast and furious initially. This is evident recently, in many stocks in the US, such as DRYS (shipping sector), GS (financial sector), GM (auto sector), etc. Don't get me wrong - most analysts believe the financial and auto sector have not yet seen the worst and there is more downside, and individual stocks carry huge risks when compared to sector index funds, or a basket of carefully selected stocks to represent that sector. The main point is to be selective in selling when price runs up. Forget about selling at first resistance level, because the run up will be so fast, you will not have captured the most of the possible run. A fast run up means to balance the time to hold and the time to run. Most times, it means accepting the possibility that it could come down again after a small run up. You can't win all the time, but if the goal is to capture the BIG moves, then, when it's a bull run, the best course of action is to just sit tight.

The problem is that when prices are at the bottom, or at the lower 10%-20% of the cycle, news and analysts believe there is more worse news to come, and there is no one who rings a loud bell to say that the bull is coming. The truth is noone knows whether a bull is going to come in 2009. I also don't know.

But I am definitely alerted to the possibility that the bottom might have been found. There are more signs showing that the bottom is there, although all of these could end up being false bottoms (e.g. systemic reasons), in which case, I will still have my cash to average down below the last bottom. The goal is to not be greedy to try to have 100% shares when the bottom isn't clear yet.

For example, a crude oil recovery without a Baltic Dry Index recovery or other signs is somewhat meaningless, and is unlikely to be sustainable.

Another risk of being an investor is that you know for certain that market prices are going to show you that you are going to be wrong, and that in some time-frames, being a counter-trend trader would have given better returns. That is certain to happen. The question is will you have the discipline to execute your plan? Will you set aside a small portion of your funds for trading for pocket moneys, whilst keeping your eye on the long term Gold in 3 to 5 years time from now? One of the worst thing an investor could do is to sell off his permanent holdings too soon, in the first quarter of the long term bull leg, and not have any permanent holdings for the 2nd, 3rd and 4th quarter run which should run for years.

Why a time-frame of 3-5 years? Nothing scientific, but if you believe in a 7 year bear-bull-bear cycle (peak to peak, or trough to trough), and if now is close to the bottom, then, a peak should be around 3-5 years time. Long term cycles are not scientifically exact - e.g. there is a 10 year trough-to-trough cycle from 1987-1997-2007 for example, but 3-5 years should cover most of that long term bull run.

Another big risk of an investor who plans for the long term is that in the short term, he forgets and strayed away from his long term plans, and becomes say a shorter term trader. This is especially when he has changed to be a trader for the whole of last year. This change of behaviour and flexibility is very difficult to implement, even with awareness. This is what makes investing very challenging.

The choice of stocks and markets are very important for an investor. Personally, my thinking leans towards preferring US markets for investing reasons. Similarly, my thinking leans towards a basket of stocks / index funds for exposure to critical sectors, rather than a single stock to represent that sector. I have already decided what index and what group of stocks to buy. You have to make that decision yourself.

The arguments against US is often its currency which is expected to weaken. Most likely, I will enter the forex markets this year to hedge against that. One doesn't need a substantial exposure since forex markets are highly geared. Or I may end up trading forex for side pocket money. One of the good things about forex is that it lends itself to technical analysis very much. The charts is all you need to know and it's all that you need. And there is always a bull run in forex markets - just need to switch to a different currency pair. Naturally, stop loss is the only protection you have in forex, since averaging down indefinitely is impossible due to high gearing. You simply run out of capital eventually.

Another thing is I'm most likely to be less involved in running my chatbox in 2009 than 2008. Compromises have to be made, if I wish to pay more attention to US markets and to forex markets. For forex, I'm not in a rush to get in. I intend to try a demo account for a few months first, and I have just signed up with one last night. I have quietly ambitious goals with forex, but I want to make sure that I can substantially increase my demo account first before committing real monies. Apparently, many traders have doubled and tripled their accounts in months through forex, and strict discipline and strict adherence to entry/exit signals are the key. Anyway, these are just plans, random thoughts, call them New Year Resolution if you will, with nothing concrete to show for yet, and like all good plans, are flexible and can be changed when circumstances demand it - it doesn't have to wait for the next year.

Eventually, I expect to have only a small exposure to Malaysian stocks. However, I will continue to monitor on a macro basis, for a change in investor sentiment towards Malaysia. The key driver to pushing up our markets is foreigners - without them, our markets might not even break 1000 or 1100 in 2009. The recent drying up of volume and intra-day opportunities does not make our local market exciting at all, with less reason to spend all day monitoring our local stock market prices. Perhaps, this "drying up" and "quiet" period is a necessary period for our local market to consolidate and build base, so that after a prolonged period of consolidation, it then has the ability to go up again either later this year or after 2009.

In short, if you haven't made plans yet to be an investor, consider making one for 2009, at least with some of your capital like 50%. Split this into 3 portion, plan to enter around current / slightly below current levels, the 2nd third at prices below existing bottom, and the rest at below the lower bottom. For example, with crude oil, a third at below $40, another 3rd below $20, and another 3rd below $10 and you might split that into thirds or quarters further. You may fine tune it since 50% is a huge gap, and if you believe the chances of hitting $10 is almost nil, then, adjust your capital allocations accordingly. Be fluid, be flexible, but never forget the longer-term goals. Short term, it might not seem exciting, but over the longer term, I believe with the right approach, you should be well rewarded.

Best wishes for 2009 and beyond!

5 comments:

mydreamgetrich said...

A nicely written piece of writing, truely agree with your view on investor and trader. There is no right or wrong in making money. One needs to be flexible and change according to each scenerio. There is no rule saying one should stick to be an investor or trader. Share market teaches us that even bluest blue chip will fall when market turn bearish. (e.g berkshire). Many a times, people will not want to trade because they are afraid being named as a gambler. So its foolish to think that being a trader will definitely not make money or the right way to buy share is to hold it in a very long period. The key to being a good player in share market is to be fluid and change according to circumstances. FUYOH THANK YOU!

Moolah said...

Seng,

May 2009 brings you much success and happiness.

Bullish on oil, eh?

Did you manage to profit from it?

(ps. one does not have to trade oil itself and if one had picked an alternative such as an ETF, one should be easily up a nice 55% since...... xmas! :D )

guston said...

I agree with you. In the current situation it is better to go for investing rather than trading. I think long term investments would fetch us desired results in the long run.
http://shortcuttoprofits.com

Seng said...

Moolah,

Thanks for the well wishes. Best wishes for the New Year to you too!

Yes *grin* but it could and should have been more ... *grin*

Locally, the warrant has also done fantastically well ... again, my only comment is I didn't have enough ... *grin*.

Anyway, what others earn is irrelevant. What's more important as usual is our own bank accounts. Others don't pay for our expenses, only we do. *grin*

Cheers!

Blogger said...

eToro is the most recommended forex broker for beginner and professional traders.