Winds of courage

This evening, I was reviewing the chatbox history and was impressed by Windsurfer's comment.

If you don't know who Windsurfer is, he is a regular chatter I know from the old investssmart chatbox days a year ago but recently went away for a few months until today. I remembered him saying at least 2 interesting things to me: 1. Don't be a psycho Buffett fan (which I agree - critical, independent thinking is far more important than being a fan for successful lifetime investing results), and 2. "Greed is good" (which I also agree and disagree - a complex topic). Whilst our chats have been almost exclusively over the cbox, over the one year I interacted with him, he strikes me as a courageous young individual (e.g. his high Petroch CW holdings as % of his total capital) with a fair integrity. The latter is something I observe to be more likely to be true in registered cboxes, compared to unregistered ones.

And so, when I saw Wind volunteered his comments below, it spoke to me very loudly of Wind's character and I am impressed with this young man.

You may wonder why Wind would want to clarify that he is not "Wind chaser". The background is due to a mysterious individual who called himself "Wind Chaser" (not Wind Surfer). Since both names start with "Wind", I guess readers (especially new readers) could be confused as to who is who, since the real Windsurfer went away for quite a while.

But why the clarification by Windsurfer? Well, "Chaser" asserts that he used to chat in my cbox but has stopped chatting for some unclear reason, and then proceed to personally attack me left, right and centre. An anonymous enquired if he is Windsurfer, and Chaser carefully concealed his identity, leaving readers (including myself) wondering if it was Windsurfer. And I was impressed when I saw Windsurfer volunteered his clarificiation at 12:27 above.

In the 3 entries, I counted around 10 points. My immediate thoughts are in brackets below. There are no real feelings attached - just calm observations as it's not anything new to me. I have also invited him to chat with me to clarify his thoughts in Sam's blog (it may take some time, as the comment is moderated there). See his 3 entries below, and full details here (although I would advise to exercise one's own judgement when reading the entries here - https://www.blogger.com/comment.g?blogID=2900671137131972978&postID=2917137434145745191)

Entry 1 Dec 27, 4:27PM:

Entry 2 - Dec 27, 5:59PM

Entry 3 - Dec 28, 11:21 AM

If you are seeing these for the first time, such comments may seem confusing to you, and you may rightly wonder what this "bugger S" did to Wind Chaser that deserves such a treatment. But to be honest, I've seen these comments spread across the online investment community hundreds if not thousands of times (mostly repeated spams) over the course of the last 5-6 months. From my own perspective, they have no real basis (as someone wise once commented - "I am not afraid of my own shadows"), but I genuinely invite the commentators (and spammers) to come to my cbox to explain to me their basis for such accusations. I noticed that I haven't really addressed them here in my blog, so, it might be worthwhile to write them out here at least once for future reference.

1. "that S bugger know how to talk only". (my immediate thought is to ask Chaser if he has considered looking in the mirror recently.).

2. "the one who make accusations on sam, the thick fellow". (my immediate thought - what accusations? See point 10 also which is similar)

3. "the thick fellow". (my immediate thought - thick what? )

4. "just can't stand S talk" (I guess S is Seng, so, why can't you stand?)

5. "always claimed credit" (please give me an example of when I claimed credit. I find this comment amusing for a variety of reasons)

6. "without any say before hand calls" (should I give before hand calls? This is an interesting topic probably worth discussing further. I would like to mention that with my new investing style since mid this year, I honestly don't know how to give before hand calls in my cbox without altering/affecting the outcome in an adverse manner. Most of the time, I don't even have a split second when competing against other traders in grabbing timing opportunities, let alone give before hand calls. Further, it invites unnecessary competition in both grabbing limited opportunities and executing stop losses. Further, I don't charge fees for my blog nor chatbox. But I do immensely enjoy discussing and sharing principles, thoughts, opinions, with like minded individuals as well as new investors. And I do believe that timing skills is something that one must acquire for oneself.)

7. "once market plunged, he just kept quiet" (perhaps he refers to my losses. Well, I think I've been quite frank in talking about my Ramunia-LA loss, OSKVI loss and other losses in the chatboxes, which is more than what I've heard about Chaser's losses. I also remembered telling the cbox some time ago that I had losses in over 40 different stocks [and winners in over 160+ stocks] then [and the numbers for both are different now.] )

8. "really disgusting" (strong words but is it necessary? do you want me to lie to say I only just dispose instead of disposing a long time ago? I have already stated many times in my blog that you buy, sell, hold at your own risk. As early as mid this year, I mentioned repeatedly that I was transitioning into 5 different portfolios with radical rationalization. I will not hold your hand when it comes to disposing time since this is a free blog and i simply don't even provide that service for a fee.)

9. "the culprit is the one who sour on other people's success" (well said - have you considered looking into the mirror recently?).

10. "i cannot tahan seeing the bugger S accusing Sam of wrong doing" (you need to refresh my memory on this one. the only incident I can think of is when I was chatting with Dali, Maxforce, Random and someone mentioned the idea whether it could be just be the work of one person, and I said I shared the same suspicion too. If I compare that with #1 to 9 above, I wonder who is the accuser and who is the accused?)

So, I would like to invite "Wind Chaser" (as I have invited "others" who made the same, virtually identical, baseless spammed accusations) to explain to me his opinions better in the cbox. I have invited him in Sam's blog (since he might not read this cbox anymore ... right and cows do fly), and hope to see who he is, since I sincerely have no idea who that person might be. I sincerely hope this person - Wind Chaser - is a genuine individual who previously chatted in my cbox and not turn out to be an imposter in Sam's blog.

Kind regards,
Seng.

PS. Do let me know if my explanations here is still unclear. Better, come and chat with me in my cbox, and I will be happy to explain to you or anyone else my viewpoints. Hopefully, we both will come out wiser as a result of this interaction.

SINOPEC-C1 Case Study

Hello everyone and good evening!

Firstly, thanks for the many enquiries received. I'm doing well, and have been trading privately, and occasionally browing the cbox and find interesting comments made there. I should add that "tradester" is not me :-)

As I have a few minutes this evening and the cbox seems quiet, I thought I write something a bit different tonight to stimulate discussions there. I would like to share with you my recent actual trading experience with SINOPEC-C1. (Yes, I stopped chatting, but I haven't exactly stopped trading :-) ) I don't think it's a perfect trading experience - I made my share of trading mistakes there. But at the same time, I did a few things right, which contributes to the result. You may find it interesting and instructive to analyze each trade below and perhaps the traders amongst you might find it interesting to discuss what I did right and what I did wrong and can better improve.

For background, SINOPEC-C1 is not my largest trade, nor my largest profit. On both counts, it is smallish / moderately small. Hence I don't mind sharing it here.




Note the following:

1. At the start of Dec, I have zero position on SINOPEC-C1. I have traded SINOPEC-C1 before several times in and out completely. My first entry in Dec is on the 18th.

2. There are 11 transactions in total since Dec 18 to Dec 27.

3. On Dec 26, I exercised 100,000 SINOPEC-C1 shares. Dec 27 closing price in HK is HKD$12.16. Assuming an exchange rate of $2.37 (still not sure what this is exactly), the equivalent price is around 26.67 sen. The order to exercise was given on Dec 26, and you will note some arbitraging trades there.

4. You may notice a few very small trades and a couple of larger trades. You may wonder why the different sizes. (Hint: I personally find that when I execute trades however small, I somehow have a heightened sense for where the market might go, rightly or wrongly - do you have the same feeling?).

5. You may note that SINOPEC-C1 is traditionally regarded as a risky call warrant due to the short expiry date. Are all short-expiry CW risky? What defines risk?

6. Please don't regard this article as a recommendation to buy SINOPEC-C1. This evening, SINOPEC-C1 closed at 27 sen. My unrealized gain is around $18+k, but I could easily dispose this tomorrow morning at 9 AM, or add more position. To be honest, I don't yet know at the time of writing.

Hope to see an interesting and productive discussion tomorrow. I hope there will be a few traders there. Unfortunately for me, I am most likely to be occupied tomorrow, but you might find reviewing the 11 trades above to be insightful. Anyway, I haven't tried this before, so, let's see if you find this useful or not. If not, we'll try something else.

Good night, happy trading, and have a Happy New Year!

Best wishes,
Seng.

PS. Do feel free to leave a message here and I'll try to respond to that next week if it's productive.

Temporary absence

Dear Readers and Visitors,

This is just a short note to let you know that I will be away temporarily from the cbox for say a couple of months starting next week.

Something has turned up for me this weekend, sooner than expected. It is not investing related but something very meaningful to me that I would prefer to put more focus on. Also, there are other personal projects that I have not started/spent enough time on. Hence this temporary absence.

When I looked back at 2007 year, I thoroughly enjoy investing and trading. Perhaps worthy to mention is that even if I don't earn a single cent from today onwards, 2007 will already be by far, the best investing year in my life. Looking back, investing has grown to occupy far more than what I had orignally intended at the start of 2007, so, this temporary absence seems timely to reseek balance.

I will still trade but occasional and private. I will miss the cbox. To me, the cbox has been a great learning place, very motivational and very enjoyable place to be. I could spend my time there all day, but it would be counter productive to my new goals …

In case some of you may speculate that my sabbatical has something to do with maximizing returns from a market timing perspective, the latter simply has nothing to do with my temporary absence.

So, do continue to chat in my cbox. Treat this like your own home, a place where you can make new friends, keep old friendship, exchange and explore new investing/trading ideas, a place where you generally find it useful for your own personal investing development.

For your information, the cbox still receives over 1,000+ views a day. There are 200 registered members there, and a few gurus such as Dali, Moolah, Newbie, Bullbear and others ... In fact, the first 2 were recently elevated by mainstream media to "super-star" status :-) So, I trust I won’t be missed that much as I have never blogged full-time, but only sometimes.

I would also like to take this opportunity to thank everyone for their fantastic support and for making this blog so enjoyable for me this year. I truly think everyone there is simply the best, and I wish you all the best in the near future!

Merry Christmas, Happy 2008 New Year and A Happy Chinese 2008 New Year to all of you in advance!

Cheers!

Seng.

Some thoughts on Stop Loss – CBSTECH

I was chatting with "CJLiew" this evening about CBSTECH and after our chat, it prompted me to write this article.

The background is that CJ and a couple of the other people on the chat box have the good fortune of buying CBSTECH when it was rising the last few days, and in his case, he managed to get some at an amazing price of 65.5 sen which is quite near the recent bottom! Anyway, with CBSTECH closing at 92.5 sen, that’s already over 40% return in a rather short time period. (see chart).



Anyway, originally, he was thinking of disposing this at $1. Today’s opening was 89 sen (a 1.5 sen gap up from yesterday’s closing) which was also the low for the day, rose to a high for 94.5 sen, and closed lower at 92 sen. Originally, he asked for my advice whether he should hold out for $1 before disposing all. Personally, he thought it could make $1.10.

Since I don’t own the stock and has not really followed it from a fundamental perspective, I don’t know. He asked me for my TA perspective.

Sometimes, I do give TA commentaries on the chatbox, but I noticed that often it doesn’t always generate feedback, so, I have no idea whether my comments were blindly accepted or ignored. Also, TA skills is really something one should acquire for oneself, rather than continue to rely on someone else. And after a while, it can get tiring to me as well. So, this time, I thought I’d ask questions instead of parroting out my (probably tiring) opinions.

Our conversation (slightly edited for better reading and clarity) went something like this. Note that since this is a popular chatbox with around 170 registered members and several conversations happening at the same time, it is very difficult to follow the conversation. So, for your simplicity, I have extracted them here.

cjliew: btw seng any chance to help me to look at TA outlook on CBS?

Seng: Well, CJ, what's your take on CBS?

cjliew: my take on CBS is there is strong chance it will take out its all time high at RM1.10 … looking the the way cbs is moving for the past 3 days …but my concern is i think there is a very strong resistence at RM1

Seng: What about today's price action for CBS? Sense some weakness?

cjliew: well high was 94 but it closed at 92 so not bad at all … vol wise day 1 was abt 13K, yesterday was abt 23K but today is higher at 33K

Seng: Well, not bad, but not (perfect) too ... especially if you compared to last 5 days – there (last 5 days) the closing was very strong, right?

cjliew: … the highest vol was 146K … tat was when it hit RM1.10 in july … so i m not sure just rely on vol …

Seng: … (that) is a good observation over the last 3 days ... but I wouldn't put too much (i.e. 100%) significance on things that happened a long time ago.

cjliew: ic so u sense cbs is toppish at 94.5? … i was thinking of selling tommorrow at near RM1 … wat do u think?

Seng: Well, to keep it simple, to me, ... today, we just saw the first day of possible weakness. That's a sign to pay attention to.

(It’s natural to) have "hopes" of (the price) repeating or exceeding previous high. But as a trader, you need to put those "hopes" aside (and focus on the price/volume tomorrow). (In particular, …) observe for price weakness. (When you see them,) be prepared to get out or get smaller immediately. E.g. at this stage of the game (with such a strong run-up), I would want to see good volume in the first half tomorrow (or earlier) ... if there isn't it's time to get smaller. Basically, if you sense some uncertainty, it's time to get out or get smaller. you can't pick the top always, but you can get smaller. E.g. what stop loss do you want to set for CBS?

cjliew: well my cost is 65.5 so sitting in a profit position … i just dont want miss the boat loh

Seng: Right, but you want a trailing stop loss which is better. To wait until it fall to 65.5 sen and then sell is too late. You'll be committing a very bad principle of turning your profits into nothing. So, you'll need to raise your stop loss to a higher price.

cjliew: any suggestion?

Seng: Well, what does the charts tell you as a possible support level?

cjliew: i m consider a newbie

Seng: Well, what about today's intra-day charts - does it give you any hint where you should put your stop loss? (the point of asking this question is not that stop loss should be automatically based on intra-day charts, but to get CJ to do the work himself – notice how I consciously didn’t want to give an answer).

cjliew: ok i m not very good at this i think the support shld b at 88 … then follow by 80 ctns … which is the high for the past 2 days …

today's low was 89 and high was 94.5 … so stop loss at 90 ctns?

Seng: CJ, that's fine since there's no single right answer. But there are some answers which are more "obvious" than others. E.g. recent low is one. The other is Moving Average supports. The other is recent highs (that are lower than current price). These are some of the obvious ones.

cjliew: so stop loss at 90 is right? …

sorry seng i m just trying to ride on the gain as high as possible … may b u can share wat shld b the stop loss price?

Seng: As a trader, it is important to keep it confidential to only yourself the exact stop loss level. never make it public, because (price manipulators or) syndicates can (potentially) take advantage of this. But basically, pick a point where it is slightly below obvious levels, or sometimes, above obvious levels (the goal is to vary it so that it is not obvious) . Basically (you have alternatives – e.g. one possible thing ) you could do when the upward momentum is still strong is not to execute your stop loss in full. instead, sell say 50% (or another multiple, which can be up to 100%) at the (first) predetermined stop loss level. This may not be optimum, but should let you ride at least 80%-90% of the upside.

Seng: E.g. if (and it can be a different number), you decide to have a stop loss at say 88 sen, then, when the price hit 88 sen and is going down fast, you put a sell order to sell at 87.5 or even 87 sen for half of what you got. You just must run (execute your first stop loss) at all cost and fast. Then, wait ... if it keeps falling to 80 sen, and let say your 2nd stop loss level is 80 sen, this time, you don't have to execute it hard because you already got half out at 87 sen. The first stop loss is often not negotiable, but in this situation (where you have lots of profits), the second one, you can give a bit of leeway depending on downfall strength (although not encouraged for beginners), because sometimes, manipulators do this to scare off the weak holders. but I don't have a necessarily fixed strategy for stop loss.

E.g. if price falls below 80 sen, this means you got out 50% at 87 sen and 50% at 80 sen, with an average out price of 83.5 sen. You have protected a lot of your gains since your buy is 65.5 sen. It is decent for a stock that makes a rapid decline. And if your first stop is hit but your 2nd isn't, you've bought insurance and can ride the rest up without fear. The key is never turn a profitable position into a losing position. If you can do this, you'd be hands up above a lot of other people.

In other words, by tomorrow morning, you must already know for yourself 2 important numbers (= the 2 stop loss levels). And when you watch the intra-day ticks moving tomorrow morning, it's a chance for you to revise your stop loss levels. Remember, stop loss levels can never be revised downwards, only upwards. … Even if price falls much faster than you can catch, you must execute it to the best of your ability. Else, you'll be in trouble.

Seng: I nearly got into trouble with my Petroch-C1 (recently) .. I made a mistake of giving a bit of leeway to my first stop loss of $1 that Monday morning. but when it fell below that fast, I execute it fast and only managed to get out completely at 95 sen. And that act protected me a lot, as you can see today (51 sen). If you find this skill a useful one in future, then, I hope you use any future profits to make this world a better place for us to live in ...

Another reader commented on this, which is why I am writing this article for future reference.

ks: Seng if u would hv mention abt this stop loss method earlier,I would not hv lose back all my Petro c1 gain sob sob

So, that’s roughly the gist of our conversation. I don’t pretend that I gave the best possible response, as this is just a chit chat sandwiched in between other conversations, and I haven’t really stopped and think critically how I should best phrase my responses as they are off the fly. So, there could be valid criticism to this sort of advice.

Upon writing this, I reflect a few additional things:

1. There is nothing necessarily wrong to sell on strength as CJ originally planned. E.g. the market might give him the chance to sell at $1 tomorrow, and this could be better than 50/50 chance in view of the recent momentum. Perhaps it’s worth mentioning that the risk of course is that if he sells at $1, and it then goes up to an even higher figure, then, he might kick himself for “selling too early”, whereas a properly set stop loss still allows full exposure to further orderly upside and limiting downside risks.

2. But countering 1. is that price rises tend to be more gradual (although CBS price rise in last few days is anything but gradual), whereas price downfall tend to be very quick, so, for someone who can’t monitor every minute during trading hours, maybe it is a better and more practical strategy to just sell some on strength. E.g. take a quarter’s profit (or another number), and leave three-quarter’s on the table to bring the average cost down to well below 62 sen. (Aug 17 close).

3. It is often said that “the first stop loss is often the Best stop loss”. So, someone might argue that my advice to sell half on the first stop loss and another half on the 2nd stop loss might not be efficient. That’s true, and I won’t debate which is better since this is an individual decision. If we all have the same decision, then, the price manipulators can easily manipulate the market. Let’s make his job a little bit more difficult …

4. I suspect many CBS players will be "hoping" for a repeat of 9 Jul where volume topped 14.6 million and the price rides to a wonderful $1.10. That’s a natural hope - it could happen, and $1.10 could even be exceeded. But let's not kid ourselves. At the time of writing, all this is is just "hope". And in serious trading, “hope” really has no place during trading hours. During trading hours, never be stubborn and cling to “hope” when the price action shows otherwise (even when volume action shows a repeat). Always listen to Mr Market, and never try to argue with him.

5. During trading hours tomorrow, please don't ask me whether it is time to execute stop loss - you won't have the time.

6. Remember that all numbers mentioned here are simply hypothetical. You must assume the price manipulators exist, and have read this article, and not only that, but have already planned what to do in this coming days when it comes to distribution time. So, keep your stop loss and your plans confidential. I would prefer if the chatters would not adopt the alternative strategy of confusing readers in the hope of confusing the price manipulators, since this latter strategy have the effect of misleading innocent readers.

Anyway, I personally don’t have any position in CBS (which is why I can write this article with full conscience). As usual, trade (buy, hold, sell) at your own risks.

Happy Trading and don’t forget your stop loss!

Lower Unregistered Chatbox Removed

As you will have already noticed, I have removed the previous "lower unregistered chatbox". If you have been following this blog every day, then, you will already know the reasons.

For those of you who don't, my original purpose in setting the chatboxes was a positive one, and it still is. Amongst other things, it is to promote a positive learning environment, to promote constructive discussions of mutual topics of interests, etc. However, it is clear especially in the last fortnight, that it has not only failed to achieve any of these positive objectives, but instead fostered destructive comments.

One individual, who called himself by various names - "snail", "lansi", and later morphed into respected members of the above boxes by calling himself "newbie", "bullbear", etc. - was very persistent in "spamming". He has been spamming persistently - nearly everyday over the last fortnight, as well as in the past. Each spam typically blocks out the entire conversation of the chatboxes with multiple comments of the same message, sometimes up to 20(!) identical comments to completely block out the chatbox, leaving only his spam. This typically happens at least once a day, sometimes twice or even three times a day! Over the last fortnight, easily 80%-90% of the entries are his alone.

I don't keep a copy of the contents of the spams. Suffice to say they are destructive and in no way useful if one is genuine to seeking improvement to his investing results.

Actually, I thought that some of the spam contents could have been interesting topics of discussions. I invited him to discuss rationally several times. He would ignore and sometimes, even increase the intensity of the spam, personal attacks and verbal abuse.

Everyone in both chatboxes tried to ignore him, but his persistence in spamming eventually got some fed up. Attempts to tell him to stop fell on deaf ears. Kind and generous advices were ignored and received intensified abuse. A few - perhaps out of desperation - gave him a small dose of his own medicine. That made it worse and created a war. If you think I was describing a verbal warzone, you would not wrong - the words used by and to describe lansi are crude and disgusting to say the least.

Whilst I am appreciative of the many supporting comments and attempts to return the lower cbox to sanity, it had become tiring and impossible for everyone.

Chances were given many times to stop or discuss rationally. Finally, after the most patient trying attempt, last night, I let him decide whether he want to stop or face the consequences (that the cbox would be removed if he continued his antics).

When I logged in this morning, he chose to continue his irresponsible behaviour without care nor regard to the rest of the online community. Hence, I had no choice but to remove the chatbox. It is a real shame that he had chosen to do this.

Notwithstanding this, the person is still most welcome to present his views here. All he has to do is to register with me to chat at the top chatbox. And I can still be contacted on my email - fusion.investor@gmail.com - as stated above. I would urge him to be respectful to everyone there. Basically treat others how you would like to be treated. Certainly, irrational and irresponsible behaviour has never been, and will never be acceptable nor welcomed in this blog.

Take care and happy trading!

Some thoughts on Position Sizing

“[Soros taught me] it’s not whether you’re right or wrong that’s important, but how much money you make when you are right, and how much you lose when you’re wrong.” – Stanley Druckenmiller

When novice invests in the stock market, they are usually full of hope and optimism. They tend to only consider the upside (and target price), and usually ignores stop loss, before putting on the trade.

Perhaps this is due to the prevalent myth of a “perfect stock-picker” or “perfect stock-tip” – the perfect investor or tip that always pick winners and never makes mistakes. Sadly, that is a myth. Invest long enough, and soon, everyone will have a loser in his hands. This is stock market reality. Show me someone who has made 100 trades with 100 winners and he/she is a liar. :-)

It is not common to read this, but even the Best of the Best, the master investor and the world’s 2nd (or 3rd) richest man – Warren Buffett – has made his share of investing mistakes and continues to do so even today. Don’t believe me? Well, take a look at this site and look at the first entry – BAC (Bank of America). BAC is a relatively recent purchase (mid this year), and to date, Buffett has an unrealized loss of 13%. So, even the Best in the world still makes mistakes.
http://www.gurufocus.com/StockBuy.php?action=buy&GuruName=Warren+Buffett.

So, if Buffett continues to make mistakes, and we lesser mortals also make mistakes, how is it that Buffett has managed to amass such a huge amount of wealth that far exceeds our own experience let alone our wildest imagination? Remember that Buffett starts from nothing, like most of us. What is it that truly separates Buffett from the vast majority of investors?

Well, we’ve heard many reasons mentioned elsewhere such as his unparalled ability to determine intrinsic value of a business, margin of safety, ability to accurately assess business future prospects and risks, ability to assess management honesty, integrity, competency, understand company financials and business models, amazing memory, his infinite patience to wait for the “fat pitch” even if it means waiting for decades for the right opportunity to come along, his people and business management skills, etc. etc. etc..

But despite all these wonderful abilities, the bottom line is he still makes mistakes. Period. His recent BAC purchase is a timing mistake – 13% loss. His recent Petro China sale at $12 which is well below the peak of $20 is a timing mistake. And many, many more. But despite these mistakes, how is it that he is worth billions of US$ and his millions of “twin investors” (in the same 55 years investing period) aren’t ?

I believe the main and the least understood reason is because he is also a Master in “position sizing”. Bottom line is that when (not if, but when) he makes mistakes, his mistakes tend to have minimal impact on his total capital. But when he is right, his bet has a huge impact to growing his net worth. He aims to preserve capital and score home runs by only betting big in situations that he has the most confidence in. And he avoids bets that don’t meet his strict criteria. When he is winning, he adds more to his winning positions including not selling his winners which has grown to become even bigger % of capital over long periods of time (e.g. Coca-Cola). When he is proven wrong (e.g. adverse earnings results on Pier 1), he doesn’t throw good money after bad ones by averaging down, but instead sell out.

Buffett is well known to have infinite patience and waiting for the “fat pitch”. What does a “fat pitch” means? Well, it is a baseball term, where the batter will only swing at the ball when it is at the most favorable zone. In other words, he will swing only when the ball is at the ideal position for the batter to score a home run. He will not swing until he gets the perfect pitch, or the “fat pitch”. In other words, he will only invest in situations that meet his strict and successful criteria.

But occasionally, he will be presented with more than 1 opportunity that meets his criteria. E.g. he may be looking at several eligible opportunities, each with different % return on capital. In such a situation, I believe Buffett will automatically puts bigger amounts on the higher % return on capital opportunities subconsciously and without hesitation. His frequently quoted yardstick is to always compare with his best existing investment (such as Coca-Cola). He will not invest in a new venture if the return on capital is lower than Coca-Cola. Instead, he will prefer to add more Coca-Cola if the pricing is right.

It is also worth noting his “buy and hold forever” approach. When he is right and a stock price starts to appreciate, does he sell? Unlike most of us, he doesn’t sell. Again, Coca-Cola is the most obvious example. He has held that stock for decades now that Coca-Cola has grown to become the number 1 stock holding for Berkshire for many, many years. As Coca-cola grows to become a higher % of Berkshire’s capital, he is happy to do nothing and just let his winners grow. He is not concerned that Coca-cola has grown to become “too large” a % of Berkshire’s capital. All he is concerned about is making a meaningful amount of money when he is right.

And indirectly, this is also a passive form of “position sizing” for him, since he continues to hold even bigger positions in his long-term winners like Coca-Cola which continues to make even more money over time.

So, what can we learn from the above? Can we break down the main principles of position sizing? How do we mortals decide how much to invest in a trade? To me, mathematically it boils down to 3 things:

1. The odds of winning and losing. Other things equal, you want to bet larger amounts in trades with the highest odds of winning. This means you must acquire and learn the ability to distinguish and rank trade opportunities since not all trades have equal odds all the time. And you want to avoid trades where the odds are simply 50/50 when you are simply uncertain. Here, Kelly’s Optimization Formula for even-money bets may be useful for value investors who like the precision of mathematical formulas. http://en.wikipedia.org/wiki/Kelly_criterion. In fact, the Motley Fool calls it “the Most Important formula in investing”. See http://www.fool.com/investing/value/2006/10/27/the-most-important-formula-in-investing.aspx.

2. Risk/reward trade-off. Besides the odds of winning and losing, there is also the amount which one expects to win when one is right (=Reward), versus the amount that one expects to lose if one turns out to be wrong (Risk Amount). Value investors demand bigger margins of safety to bet big, since the bigger the margin of safety, the bigger the potential reward and the smaller the risk. Traders sometimes calculate these as Reward = Target Price – Current Price, and Risk = Current Price – Stop Loss price. Mathematically, there is no real distinction between how a value investor and a trader calculates Reward – the difference is definition and semantics. Basically, other things equal, you want to bet bigger amounts when the Rewards substantially offset the Risks. The Kelly general formula gives an optimize formula to maximize equity growth to determine this.

3. Your accuracy in assessing 1. and 2. above. In the investment field, there are surveys and studies that show that most investors tend to over-estimate their ability in sizing up the winning odds, and tend to under-estimate the odds of losing. It’s a bit like surveys showing that most drivers tend to think that they have “above-average” driving skills – this is clearly impossible, since objectively, “the majority cannot be above-average”. For value investors, a formula like “half-Kelly” (or a fractional Kelly) could be useful here, to compensate for the initial over-estimation. As one becomes more competent later, the formula could be fine-tuned to tailor to the individual.

Whilst Kelly is typically applied to value investors, the 3 principles above can also be applied to traders, although the details usually differ due to the different approaches. E.g. for 1., some traders avoid trades with less than 60% (or another %) chance of success and only focus on trades with more than 60% chance of success, based on technical charts or some other criteria. For 2., some traders avoid trades when the Rewards are less than twice the Risk (or some other parameter). For 3., the actual position size is sometimes calculated based on a constant % of capital at risk approach (instead of Kelly’s). Basically, this approach starts off by setting a certain fixed % of capital which a trader is willing to lose from a trade if his trade goes wrong – typically, 0.5% to 2% of capital. E.g. if one has $100,000 capital and one is willing to risk 1% of capital or $1,000 in the event of a stop loss, then, the amount one would invest will depend on the gap between current price vs the intended Stop Loss. If the Stop Loss is near the Current Price, the position size is larger than if the Stop Loss is further away from the Current Price. E.g. if Current Price is $1, and Stop Loss is $0.90, then, the number of shares to buy = $1,000 / ($1 – 0.90) = 10,000 shares = $10,000 = 10% of capital. The idea is that if the stop loss is executed at $0.90, the loss = 10,000 shares x 0.10 loss = $1,000 = 1% of capital. This assumes perfect stop loss execution with no slippage. In reality, some allowance must be made for these. Depending on the perceived odds, they will vary the amount of capital at risk, such that on trades with the most confidence, one may place more capital at risk, and vice versa.

Some Concluding Comments

The concept of position sizing is not usually obvious to beginning and average investors. It is only too common to hear the average Bursa investors asking their tipster or “gurus” WHAT stock to buy. Visit any investing blogs with chatboxes, and the most popular question when it comes to tips by far may be “WHAT STOCK to buy?” The second and third most common question is “WHAT PRICE to buy and WHAT is the Target Price?” It is less common to hear “what is the stop loss price?”. And perhaps a question that we almost never hear is “how much” to buy, or what % of capital to buy. And unfortunately, the last question may in fact be the most important question of all, in terms of the impact on total equity growth.

Why? Well, imagine you’ve made 3 trades – the first 2 successful and the 3rd unsuccessful (67% success rate is not a bad rate). Let’s say 10% gain, 50% gain and 5% loss respectively. If your largest position is the 50% gain, then, you should come out well on your total equity. But if your largest position is the 3rd trade with 5% loss, and your first 2 trades are very small positions, then, you can actually end up with an overall net loss. Despite scoring 10% and 50% gains!

Don’t believe me? Well, prove it to yourself mathematically. Imagine you invest $3k each in the first 2 trades. And imagine you invest $50k in the 3rd trade. Your net loss is 3000 x 10% + 3000 x 50% - 50,000 x 5% = - $700 (or $700 loss).

So, in conclusion. As you become more competent in investing and trading, pay more attention to position sizing. Better, learn from the masters (whether master investor or master trader) how they approach the issue of position sizing.

On a personal note, I want to share with you my own personal investing experience recently which has convinced me the importance of position sizing. I am very proud to say that my recent Petrochina Call Warrants trades have given me the largest $ gains I have ever had from a single investment ever in my entire life. Petroch-C1 has the most amazing run from a low price of below 5 sen on Aug 17, to a high of $1.11 on Nov 5. I first entered PetroCh on June 8, but it was a very small position. On Aug 17, I managed to get a very small position at rock bottom prices, but sold too early, and then, kept buying more on its way up. On Nov 2, PetrochC1 & C4 represented nearly 30% of my entire capital! (this is by far the largest amount I have ever had on a single stock, when my previous principle is never to have more than 5% of my capital in any single stock, let alone a Call Warrant!). Finally, on Nov 5, due to its uncertain price action, I decided to sell all of my Petroch-CW holdings at around Nov 2 closing prices. In $ terms, the returns from Petro CW alone (in 3 months) is more than 3 times my largest gain to date then (MAYBULK, after nearly 2 years of value investing). There are 2 critical lessons for me from this experience. First, when you are right about a stock, don’t be afraid to keep adding more on its way up – I was adding Petroch-C1 at increasing prices, even when it was trading at 80+ sen at new highs. I have actually done this many times before with other stocks, but the difference with Petroch-CW is the stark difference in “position size” – I was around 80% confident in Petrochina, and according to half-Kelly’s formula, I should aim to have around 30% of my capital in it. Second, when you are in an uncertain position – and this happened on Nov 5 when the mother share could not sustain its rise past $20 – I quickly liquidated as much as I can. I had no business playing CWs when I am uncertain on its future outlook – again a Kelly formula with 50/50 odds suggests nil holdings. Again, I have practiced this many times before, but the difference this time is that I am willing to let go 100% (or as close to it as I can) when I am uncertain, as opposed to the normal practice of retaining half. And this is an important aspect of position sizing too. As a result of an overall much improved position sizing experience from entry to exit, I have already observed a substantial and almost immediate improvement to my own personal equity results.

It is also worth noting that I did reenter Petroch-C4 at prices between 65 to 70 sen after Nov 5 (after having sold them at close to 90 sen on Nov 5), but this time, because the outlook is much less certain, my position size is much smaller at less than a third of my original Petroch-C4 position. Naturally, I am expecting a worse price tomorrow due to the prior day weakness in HK, but in the worst case scenario (assuming I can execute my personal stop loss without much slippage), I still expect to keep around 90% of my Petroch-CW gains. From my peak gain in total equity in late July, my total gain is now close to double the peak in roughly 3+ months as a result of improved focus on position sizing. Naturally, I am happy with my Petroch-CW gains, but the personal satisfaction of a successful trade with improved position sizing is beyond description.

Good luck in your future trades.

Disclaimer: As usual, trade (buy, hold, sell) at your own risks.

Investment Competitions, PBBANK-CB & CC

By now, some of you are aware of Bursa Malaysia's investment competition here - http://www.bursapursuit.com/ It seems, this was discussed in not just this chatbox, but in more than one cbox around the Internet.

Personally, I am not a fan of investment competitions because they do not involve your own real money. One could take the craziest level of risk (e.g. 100%+ asset allocation, no diversification, just invest in 1 warrant with highest level of gearing, etc.) in order to generate chances for obtaining super-normal returns, which one would not normally consider doing in real life.

However, since a few of you are interested in investment competitions, I thought I'd share with you my own observations about the 2 Call Warrants for PBBANK above. Under certain conditions, I think such type of CWs may generate the chances to generate super-normal returns, albeit with large amount of risk :-)

However, before you read on, I assume you are already experienced and familiar with Call Warrants and how they work. If not, I strongly urge you to skip this article, and stay far, far away from trying to punt these sorts of Call Warrants! Losing 100% of your capital is not an impossible event. Buffett and Graham I believe will most likely stay clear from these instruments.

Firstly, looking at the mother share first, PBBANK closed $9.50 this evening (price chart below).

Both call warrants (CB and CC) closed at identical prices of 5.5 sen today. Both are also nearing expiry. Whilst technically not much use to you for Bursa Pursuit, the same principles or situations might be useful later. I should also mention that some of the faster running HK CW could be a better bet, albeit with risks also and requires good timing to obtain super-normal returns.

PBBANK-CB Condensed Fact Sheet

• Issued by OSK
• Exercise Price = $8.85
• Exercise Ratio = 10 for 1
• Expiry Date = Wed, 3 Oct 2007
• Closing Price at Expiry Formula = Arithmatic Mean of Last 5 trading days Closing Prices before 3 Oct 2007. (i.e. 26, 27, 28 Sep, 1, 2 Oct)

Typical calculation

• "Simple" Intrinsic Value (SIV) based on mother at $9.50 = (9.50 - 8.85) / 10 = 65 sen / 10 = 6.5 sen.
• Last price traded = 5.5 sen.
• Typical "Potential gain" calculation = 6.5 / 5.5 - 1 = 18% in 3 weeks time.

PBBANK-CC Condensed Fact Sheet

• Issued by CIMB
• Exercise Price = $8.90
• Exercise Ratio = 10 for 1
• Expiry Date = Tue, 2 Oct 2007
• Closing Price at Expiry Formula = 5 day Volume Weighted Average Market Price before 2 Oct 2007. (i.e. 25, 26, 27, 28 Sep, 1 Oct)

Typical Calculation

• SIV based on mother at $9.50 = (9.50 - 8.9) / 10 = 60 sen / 10 = 6 sen.
• Last price traded = 5.5 sen.
• Typical "Potential gain" calculation = 6 / 5.5 - 1 = 9% in 3 weeks time.

Now, the reason I am highlighting these "Typical Calculations" is because I've seen these sorts of calculations before, I've even performed them before, and to highlight that these sorts of calculations alone is INCOMPLETE and POTENTIALLY DANGEROUS.

Why? Because they are simply based on a single scenario, which assumes that the closing mother price (based on either 5 day arithmatic mean, or 5 day VWAMP as the case maybe) remains a constant $9.50 at expiry. They simply ignore the fact of investing, that the closing price is more likely to end up being a different number than $9.50, and the final number could vary hugely from $9.50 under certain conditions.

In other words, it doesn't tell you the potential RANGE of losses or gains if PBBANK closed lower than $9.50. For example, for PBBANK-CB, AT ONE END, if the closing price is below the exercise $8.85, you could lose 100% of your Capital! AT THE OTHER END, if the closing price is $9.95, then, you could double your capital since the SIV then becomes (9.95 - 8.85) / 10 = 11 sen, which is double 5.5 sen purchase price!

So that you understand the range of potential results - here is a typical table that I prepare for my own consideration:

So, what does this mean?

Well, a few key points:

1. The CB and the CC warrant whilst different, is almost nearly identical in features, Intrinsic Value and potential gains if both are bought at the same price of 5.5 sen. (And personally, it doesn't make sense to me as to why one would prefer to own the CC warrant at 5.5 sen, when, the CB warrant at 5.5 sen is cheaper. The differences in returns is nearly 9%!)

2. More importantly, both CW have less than a month to expiry - in fact, they will cease trading in approximately 3 weeks time, or say 15 trading days time. Since prices in the short term (say over the next 3-4 weeks) are rather unpredictable, the operator who purchases these warrants are in effect "gambling", since the outcome of the closing prices near expiry date could be similar to "throwing a dice" - it's pretty hard to predict.

3. A small change in mother closing prices gives a large change in potential gains. Just one tick down by mother share, and your potential returns is 9% lower! On the other hand, just one tick up, and your potential returns is also 9% higher! Not for the faint-hearted, or those with poor or less developed risk tolerance.

4. In an unexpected scenario, it is very possible that you could lose 100% of your entire capital! E.g. PBBANK-CC has an expiry date of 2 Oct. If for some unexpected reason that say on the last 5 days before 2 Oct, US market has a large correction / a market crash, funds could decide to dump PBBANK mother share, and mother share could temporarily closed below $8.90 for a few days, with high volume. This is a terrible event, even if mother price were to recover after 2 Oct. Why? Because the calculation of the CC closing price would be done on 2 Oct, and it would be weighted by volume. So, the final closing price calculated could be below $8.90 at 2 Oct. In other words, you could lose your entire capital at expiry, even though you have paper gain 9% today, and mother share recovered and stayed at $9.50 level after 2 Oct! The timing is critical.

5. Those are some of the bad things that could occur. However, for investment competitions where 100% loss of capital is rather meaningless (since it's not real money), you might want to consider punting in situations like PBBANK-CB since there is a chance that your potential gains could rise to 100%, if mother share rise to $9.95 say.


CONCLUSION & DISCLAIMER

The above are just merely my own observations on investment competitions and call warrants. There are other tricks to generate chances to win investment competitions, but the right selection of call warrants should give you that edge over others. However, in real life, call Warrants like PBBANK-CB and CC are potentially very dangerous and risky instruments, despite the potential gains since 100% loss of capital is not entirely impossible. In real life, only punt with these provided you know what you're doing, and you can easily afford a 100% loss of capital. If not, then, better to stay away from them, and preserve your capital for a safer, less stressed investment.

For those of you planning on investment competitions, good luck and have fun!

The Retirement Number

From reader "bullbear"

"Seng, I am wondering, for a modest lifestyle requiring 3 to 5 k per month, how much savings should one have at ages of 50s, 60s and 70s to retire comfortably. Base the figures on your projection that one may "unfortunately" have to plan for a life of 100 years. : )"

My Dearest Bullbear,

This is a popular financial question. I have received similar questions several times before. There are many free resources on the web, and I encourage you to explore the topic fully elsewhere too. For example, MSN (and others like it) has a whole section on Retirement Planning- see http://moneycentral.msn.com/retire/home.asp. Locally, there are many forums discussing similar questions. Some calls it "The Number" since the question is always "how much do I need to retire comfortably?"

I believe the Number varies with individuals. Even for a specific individual like you bullbear, the number will also be a range since it depends on the future which is inherently uncertain. Conceptually, you are not wrong if you noticed similarities between valuing a stock and valuing this number, since both depends on projecting future cashflows, and then discounting them to today's value in order to derive a number. So, there is no single right figure, but a range of possibly right figures.

However, valuing this number (unlike trying to put a value to stock) has great practical importance - if you put too low a figure, you could end up living poorly and that's not much fun :-) So, you probably want to be prudent, and prefer a large number with a large margin of safety rather than a small number. You don't want to be broke, suffer and then die - much better to die first with a lot of money left :-).

A disclaimer first. You already know I am not a licensed financial planner. Everyone is different in so many ways, so, my view is only mine. If in doubt, always consult a licensed professional. And always exercise a large dose of common sense.

Ok. Let's tackle the problem of determining this Number from a conceptual manner first. What does this number depends on? What are some of the obvious factors and less obvious factors?

The Obvious Factors

1. Planned Retirement Age. At what age do you plan to retire? Retire early, and you have two problems compared to your imaginary "twin" who retires later. First problem is you have shorter period to save. Second problem is you have a longer retirement spending period. So, you must save a lot faster (since shorter period to save) and a lot more (since longer spending period) if you plan to retire early.

To illustrate, let's compare a Retirement Age of 50 vs 70. Let's say you are 35 years old today. To retire at 50, you only have 15 years "savings period", versus 35 years to retire at 70. In short, less than half the period.

Then, as a 50 year old, there is a longer period to spend. If you and your twin dies at age 100, then, your savings must last 50 years, versus only 30 years for your twin who retire at 70. So, you need a much larger amount than your twin.

2. Your Life Expectancy. Life irony is that to live longer, you need a bigger Number, making it even harder to achieve. MSN above has a life expectancy calculator, although they are for Americans and not necessarily the same for Malaysians. Perhaps your parents and grandparents age of death might provide a guide, although even then, there are potential problems. I guess you just need to be prudent and assume a big number just to be safe.

3. Your planned Spending Amount. Smaller spending, smaller Number, other things equal. In practice, tough to estimate, since so many "hidden expenses". Important to both keep track of past actual expenses (to provides accurate data) as well as think ahead carefully. Need to differentiate between regular expenses and once off expenses like a new house, a new car, etc. I believe large expenses like replacing a new car every 10 years needs amortization. Similarly with large overseas holiday expenses every few years, etc. MSN above provide some tools and checklists to determine this.

4. At zero interest (not realistic) and zero inflation (not realistic), anybody can calculate the Number. E.g. If Retirement Age = 50, Life Expectancy = 100, Monthly Spending = $3,000. Then, the Number is simply
= (100 - 50) x (3,000 x 12)
= 50 x 36,000
= $1.8 million.
Maybe too large for most people intending to spend $3,000 per month.

5. Interest helps reduce the Number. Higher interest on capital means you can do with less capital to fund your retirement lifestyle.

6. Inflation means you need a bigger Number to maintain the same quality of life.

7. More obligations means more spending, and so, a bigger Number. E.g. if you are also saving for your spouse, and she is expected to outlive you by another 10 years, you then have a longer spending period (although possibly lower spending after you die). If you want to leave something behind for your children or grandchildren, the Number gets bigger. Etc. you get the idea.

The Less Obvious Factors

1. Your spending pattern is not necessarily fixed, but varies over time and age. Overall, it is prudent to assume one's spending inflation gets higher as one gets older, since medical and health-related expenses rise faster. It is prudent to assume rising inflation that exceeds reported CPI, as one gets older. Unfortunately, most retirement planning tools on the web do not model this.

2. Your investing ability and results (assuming you invest in stocks and cash equivalents) are also not necessarily fixed over time. I believe once you are over say 70-80 (this is arbitrary), you can reasonably expect declining returns % over time. Again, most retirement planning tools on the web do not model this.

3. Before and after you retire, you need to regularly review your Number to make sure it is still adequate. This is very important in practice.

The Spreadsheet

Here is a simple spreadsheet model that you can consider developing on your own, which incorporates all of the above factors. There is no complex maths involved. Like all financial models, they are only as good as the assumptions that goes into it, as well as the wisdom and conclusions that one takes out of the model results. So, treat this as merely a starting point for further consideration, and always rereview to see if it makes sense.



Some quick observations:

1. The spreadsheet above suggests that a 50 year old retiree today with $4,000 per month spending needs to have $1.4 million, assuming initial interest rate of 7% on capital and initial spending inflation of 3% p.a. This suggests a multiple of 29 times initial annual spending. But this number alone is useless.

2. His number ($1.4 million) is heavily dependent on the interest rate assumed. E.g. increase his interest rate to 8% instead of 7%, and his Number reduced to $1.15 million. This has important implications on the Investment Objective and the Investment Plan.

3. His number ($1.4 million) is heavily dependent on the inflation assumed. E.g. increase his inflation to 4% instead of 3%, and his Number increases to $1.75 million. Unfortunately, sometimes, the rate of future inflation is outside your control.

4. For practical purposes, it is critical to ensure that every year, one's actual spending remains lower than interest earned over the same period. E.g. in the above number, Interest remains higher than Spending for most years from Age 50 to Age 81.

Then, at Age 82, Spending first exceeded Interest. I call this the Critical Year. It is at this point when the Capital starts to shrink. And they shrink fast.

To ensure financial peace of mind during retirement, you should adhere strictly to this important principle - never spend more than what you earn in interest. Preferably spend less than half the interest. And if your spending has risen, then, you need to make sure that your interest earns rises. This gets riskier, since the opportunity for higher returns don't always come around, and they tend to come with higher risks, especially for the vast majority of investors.


Conclusion

I believe there is no single magic Number that is the same for everyone. We are all unique, and our Numbers will be very different for various reasons mentioned above.

I am reluctant to give a magic number, because prudence varies by individual, and more prudence requires too large a number that is not realistic for the vast majority of people looking to retire, especially retire early.

Furthermore, those who invests in stocks know that their returns fluctuate from year to year. Furthermore, the rate of inflation varies over time, and is never fully within your control in the long-term. If your returns are poor in one year, then, you need to immediately review your situation to make sure you still have enough to live on. With a large margin of safety, probably you can retain your lifestyle and monthly spending. However, without a large margin of safety, then, your spending must come down immediately. Else, you will not have enough to live on in future years.

The above table assumes someone who retires at age 50, which is considered early by most people's standards. Unfortunately, not everyone can do so, and some might not want to do so. Some do keep on working on their own business and continue to earn income. Some are very traditional, and expect their son/grandsons to not only take over the family business, but to take care of them in their old age. But not all of us can be that lucky too. From a financial planning and perspective, the safest is to assume self-dependency (for both you and your spouse), and plan accordingly.

At retirement, expect to live modestly below your means (e.g. spend less preferably only half of what you earn). If you have them, teach your children and grandchildren to be financially independent, so that they don't have to be financially dependent on you later in life :-) And should your children and grandchildren later support you in life, consider yourself blessed.

In my experience, determining the Number is only one step, albeit a very important step. To put the Number into context, there are many other important implications to consider before deciding whether to retire early or not, but this would be well outside the scope of this article. But don't forget them, as they have great practical importance too. And they would be outside the scope of this blog to discuss them.

I sincerely hope you and other readers here will find this article useful.

Cheers,
Seng.

Welcome Boon!

Yesterday afternoon, the chatbox has another pleasant surprise, with - Boon - from Trade Bursa Malaysia - dropping by to chat.

I believe most of you knows Boon, but for those of you who don't have the privilege, Boon is the author of another highly instructive and popular investment blog on the web - http://tradebursamalaysia.blogspot.com/. From his writings, it is clear that he is a highly passionate and professional trader, and is very focussed on his trades. He also manages a team of traders. He is currently based in the UK, and trades mainly in the futures indices (Dow, S&P, and Russell 2000).

If you are a trader keen on Technical Analysis, I have no doubt you will have already appreciated Boon's blog. In fact, even if you are not a 100% trader (e.g. yours truly), I am sure you will still appreciate Boon's blog. If you are a new investor, you will be immediately struck by the dual simplicity of his trades, and confusion - that you're not quite sure how he does it. Don't believe me? Try this simple and short exchange in his live trade with Maxforce - http://tradebursamalaysia.blogspot.com/2007/07/5k-to-250k.html I don't pretend to fully understand that trade to the extent of being able to duplicate it, but it's clear his understanding of trading goes for beyond merely simple TA indicators like MACD. And his exchange definitely inspired my August 17 chatbox and trade.

I have many favorite investment books, and one of them is by Jack Schwager called "Stock Market Wizards" published in 2001. This is basically an excellent book with interviews with America's Top Stock Traders. In there, you will see many higly successful traders (with high double-digit, or triple digit % returns spanning years, some even longer) who developed their own unique trading systems that clearly went beyond textbooks. Also, it is not uncommon to find some of these traders previously being grounded on Graham and Dodd. To me, Boon is no different - he has his unique style of trading, and continues to be inspired by the writings of Buffett (and James Simons). And there is no question that he reads Soros, another one of the Master investors - http://tradebursamalaysia.blogspot.com/2007/08/george-soros-reflexivity.html

I can probably go on and on writing about the things I like about Boon's blogs, but I think it's better for me to stop here, and let you visit his blog yourself to do a deep study of his past writings. I don't think Boon likes to have followers who follows him blindly. He doesn't try to defend his stock calls, and instead listens to the market. He is constantly aware of the risks of trading, but being human, also makes and admits his mistakes, and more importantly, learn from his mistakes in order to not repeat them.

A quote from his blog profile: "Most new traders win in their first couple of trades. They are very careful when they are new to the market and it takes them months to research and to think of what to buy. As time progresses, they become sloopy and want to do 5 trades in a week! This is when things start to go wrong. The worst is they have forgotten these 3 very, very important prerequisites -- (1) risk awareness; (2) planning; and (3) patience. Be a responsible trader, only trade when you knew you can win!" - Boon, Trade Bursa Malaysia blog. (Large font underline mine - note the past tense "knew" - this is a sign of someone who already knows that he will win, before he puts on the entry trade since he has already planned his exit).

On that note, please join me in welcoming Boon to this chatbox! Like Moolah and Dali, I am sure Boon is very busy, and I hope from time to time, they will be able to join the chatbox to share their views and wisdom with us.

Cheers,
Seng.

Was Friday the bottom for KLCI?

We know it is practically impossible to pick market bottoms before they appear. Those who claimed they do it all the time are likely to be liars. However, almost everyone can identify market bottoms after they appear on the charts - but usually, they are not much use since prices would already recovered quite far. And in between, we have a situation like yesterday where KLCI touched 1141 just before 3 PM, and then, recovered strongly by 50 pts to close at 1191. So, a question may be "was yesterday a bottom?"

Firstly, let me say I don't have a crystal ball - so, I don't know for sure. However, I would like to share with you some interesting observations, and my own practice. You can then form your own opinion accordingly.

1. KLCI technical candlesticks observations

- After Friday closing, many indices regionally formed a "hammer" (small body, lower shadow at least twice the length of body or longer) after a prolonged downtrend.

- The prior days (e.g. Thursday and prior), the force of the downtrend was stronger (longer body), indicating panic selling. Prior days panic selling combined with a hammer is suggestive that the downward pressure is losing force significantly.

- On Friday, KLCI temporarily pierced through the 23.6% Fibonacci retracement support level of 1161 temporarily, but staged an amazing recovery of nearly 50 pts to close above it. This is also suggestive of a technical rebound.

- Relatively high volume on the hammer day, suggesting Friday could be a critical day.

- But KLCI is still below 260 day EMA and 38.2% Fibonacci retracement, both of which are around 1205. Not a confirmed bullish signal yet.

- So, what do you think?

- Me? Based on this point alone, my guess is say 50/50, i.e. 50% chance we might be seeing a "local bottom", 50% chance not yet. Odds improves slightly (say 55%-60%) if KLCI closes well above 1205-1241 (38.2% and 50% Fib retracement support) convincingly next week. Odds also improve slightly with other observations below.

2. US Financial Stocks Positive Divergence?

- Divergence is a very important concept in Technical Analysis. The opposite concept is convergence. Normally, when a bad news is announced, we expect to see the stock price to fall. However, when the stock price rises instead, it is often worth a closer look.

- I first noticed a positive divergence Friday morning, when Countrywide in the US announced a sub-prime related problem the prior night. I mentioned this in the cbox at 11.29 AM yesterday (see below).

- Now, technically, Countrywide did not show a divergence - the stock price took a significant fall, around 11% after the sub-prime bad news announcement. However, related sub-prime stocks - namely Bear Stearns and Goldman Sachs stock price actually rose! So, this is not strictly divergence.

- But I find Bear Stearns stock price behaviour particularly interesting. Despite the continued poor sub-prime news (for Countrywide), its stock price rose 13%! See the circle in chart below. (Actually, the green candle on Thursday night took out last 5 day falls, not 3 days as I mentioned to Goldman).

- But some qualifications: First, a single financial stock doesn't mean entire sector moved. Second, a "bullish reversal" doesn't necessarily mean subsequent rising prices - it could also mean further sideways movement and volatility. Third, the high on Thursday is lower than the week before, although last Friday high is marginally higher, so, touch and go whether we'll see better / worse results soon.

- So, what do you think of this? Is this a significant observation to predict possible local bottom?

- My guess: when combining 1. and 2. above, the odds have improved slightly - say 55% yes, 45% no.

3. The Fundamental's case becomes compelling

- At 3.06 PM yesterday, "grabber" (a regular investssmart chatter) voiced out something which I have been privately thinking all morning on Friday, that maybe the KLCI has fallen a bit too much from a fundamental perspective. See 15:06 entry below, where grabber raised the ANALABS example, but this could have been another fundamental stock:

- My public cbox reply was cautious (I don't want to be blamed again). But for my own personal account, I had already entered buy orders prior to grabber's comment at 3.06PM.

- For ANALABS, the fundamental case looks compelling. At 3 PM, Mr Market was valuing it at only $43m. The stock has $35m in cash, with liquid securities valued at $5m, or a total of $40m, suggesting the profitable business is valued at a paltry $3m. Last year's earnings alone is already $8.4m, i.e Mr Market is valuing ANALABS business at a P/E of well below 1x!!

- You could make similar cases to other fundamental stocks (or at least, the one I was eyeing). In my mind, it was clear Mr Market was behaving more irrationally on Friday, especially just after lunch time.

- My guess: Combining 1., 2., and 3., I think the odds of seeing a local bottom gets better slightly.

4. Yes, my Buy Orders for Friday was executed
It has been quite a while since I had executed orders like last Friday, but see below.

A few points:

- No stock tips and no personal details. But these stocks are real - I only show the first letter of the stock name.

- Yes, Net buy is 17 stocks. Of the 20 stocks bought, 3 were closed before end of day.

- I had originally intended to just "rebalance" my asset allocation on Friday (I was and became more underweighted as a result of the stock price falls the last month). However, the stock price fall after lunch was quite dramatic, and took out ALL my open Buy Orders. I also bought more of others after that. I had some idea, but only properly realized after the trading day that I had bought more than what I had intended. But despite the slight over-trade, I still hold significant cash by many investor's standards.

- To me, all 17 stocks are "Trading Buys", and not "Buy and Hold". I.e. depending on how the market behaves, I could just as quickly close all 17 positions by 9.02 AM, Monday.

- I reserve the right to change this to "Buy and Hold" depending on market conditions. Similarly, I reserve the right to dispose all without informing anyone.

- In short, you buy at your own risk. Me, I intend to be extremely fluid.

- And just in case someone says that I didn't tried calling it for others, here's a snapshot of the cbox at 3.12 PM, and a reminder at 3.19 PM.

- Ok, it turns out I over-traded more than 10% capital last Friday, but not significantly more that would cause me to lose sleep over it.

5. US markets closed strongly on Friday night

- Dow +1.8%, S&P500 +2.5%. The S&P chart shows a better picture:

- You can clearly see the hammer on Thursday. Friday long green candle is a bullish continuation candle, suggesting more upside. Ideally, I like to see the S&P500 close above the 200 day EMA, and cross and stay above the downtrend line at around 1475-1480. If S&P500 closes above this figure convincingly early next week, then, the odds that we've seen a local bottom on Friday for the KLCI gets better.

- As the odds of S&P500 showing a bottom gets better, I expect the odds of KLCI to show a "local bottom" to be roughly aligned.

6. Asset allocation and market timing may turn out to be more critical than stock selection during this correction

- This is not related to the question, but has practical implications on investor's actions.

- Don't get me wrong - stock selection is always important, but the most common investing errors I saw during this correction is the tendency to be fully invested (or be on margin) when KLCI was at 1392.

- It should be clear to all, that had one carefully watched one's asset allocation at market highs and prudently held cash, one would not be completely killed from the current correction. There is a loss, but not so severe.

- Also, once the market starts to correct, it is important to get the timing right before rebalancing. The temptation is very strong to rebalance at anytime over the last fortnight, but that would have been a mistake.

- I emphasized all this repeatedly in the cbox in the last 2 weeks. An example from Friday is below:

- Risk tolerance (the ability to not let temporary unrealized loss to cause you to panic or not sleep soundly) is also another important topic, but that would be outside the scope of this article. My hope is that the current correction and high volality will lead you to become better investors in future. I have certainly learned a lot from the chatboxes and the writings of others.

7. If you haven't bought yet, should you buy next Monday?

- To be honest, I can't answer that question for you. The main purpose of this article is to share with you my observations, and what I actually did last Friday. You have to make your own decisions.

- Another view is that I have been waiting since last month to rebalance, and last Friday gave me that opportunity to rebalance - it turns out I rebalanced more than I needed. So, it is highly doubtful that I will personally buy more next week. So, I don't feel qualified to advice you here. Sorry.

8. Conclusion

- From my own personal perspective, naturally after having bought on Friday, I am glad and slightly relieved to see US markets closed strongly on Friday night.

- If KLSE and Asia regional markets stays true to form, then, we can expect the Asia to follow suit next Monday morning. So, if there is strong divergence, then, I would not hesitate to cash out completely what I had bought on Friday.

- On balance, I think the odds may be better than 50/50 (say 60/40), that we've seen a "local bottom" on Friday. To avoid ambiguity, I define a "local bottom" as KLCI not making a lower bottom than 1141 within next week. Remember, this are just odds, i.e. I could be proven wrong quite easily. And note, my definition only refers to a very short period.

- Based on all these observations, I have bought on Friday, originally intending to just rebalance, but turned out to have over-bought due to the large unexpected market correction. (i.e. lucky).

- But all are trading buys. Why? Because the high volatility is still there. I intend to monitor the markets carefully to make exit decisions if necessary. But I reserve the right to change this to "Buy and Hold" later without informing anyone, depending on how the market behaves.

- Do remember that you make your own decisions based on the observations I have shared with you, and you always buy at your own risk.

- Please feel free to comment if you agree or disagree. Contrary opinions are welcomed. Do feel free to share your own observations if I've missed them.

- Best wishes during these turbulent times.

Disclaimer: Always use your own judgement, and invest (buy, hold, sell) at your own risk.