Losing Streaks

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

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

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

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

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

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

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

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

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



You may wonder why I'm writing this article?

Two reasons.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You decide for yourself.

GPACKET and OSKVI

(courtesy of tradesignum.com)

Yesterday, GPACKET continued its downtrend from Feb 26 peak of $5.85 to close $4.02 May 18.

May 18 day seems significant, not purely from the size of the price fall (18 sen) but volume traded. Volume is highest in last 3 month, 2nd highest over last 12 months at 3.8M shares traded (Highest = 4.4M on Dec 20, 06), and is the 2nd "high" volume to follow May 11 first relatively high volume (6 trading days ago).

It is worthwhile to zoom in into GPACKET trading history yesterday. Unfortunately, since I don't know how to capture the picture of the intra-day chart, I need to give you a verbal description.

GPACKET Intra-day Price and Volume commentary

- GPACKET closed $4.20 the prior day.
- At 9.17 AM, opened at $4.18 with a slight gap down.
- At 9.55 AM, price started to decline further, albeit at low volume initially.
- At 11.17 AM, the stock has fallen to $3.80, and volume started to pick up at around 11.17 AM. This indicates possible intra-day fear selling.
- At 11.23 AM, the stock touched a low at $3.68 (12.4% and 34% fall from prior day close and Feb 26 peak).
- During 11.17AM-11.23 AM, it must have felt very scary to own GPACKET if one just look at market prices.
- At 11.24 AM, the bulls stepped in and drove the price back up.
- At 12.30 PM, the stock closed $3.88.
- Upon reopening at 2.30 PM, strong buying interest on higher volume stepped in at $3.90.
- The afternoon session sees the bull having the upper hand, and the price closed at $4.02.
- However, for the whole day, one would say that the bears still have the upper hand, driving the price from $4.20 (prior day close), down to $4.02 (yesterday's close). Therefore, it is possible the intermediate downtrend might not be over yet, and one would need to watch GPACKET price on Monday morning/next week for confirmation of further downtrend, or otherwise.


Effect of GPACKET on OSKVI on Share Price and Volume

(courtesy of tradesignum.com)

Since OSKVI owns a large amount of GPACKET, what was the impact to OSKVI, after the large drop to GPACKET, at least to $3.68 at $11.23 AM yesterday?

1. From a volume perspective, not much. In fact, the total OSKVI volume traded is very low from the last 12 months perspective, well below average daily volume, almost minimal. (but watch next Monday to next week for possible time-lag/time-delay effects on OSKVI).

2. From a price perspective, a slight fall. Price fell from $2.40 close May 17, touching a low of $2.34 on small trade (2% fall), before rebounding and closing at $2.38 (<>


Effect of GPACKET on OSKVI NAV

1. This is important to understand, since GPACKET forms the majority of its NAV (or 56%, using May 18 closing prices), and OSKVI NAV is directly dependent upon market prices of the securities it holds (like a closed-end fund).

2. Using updated May 18 closing prices, OSKVI NAV = $3.65. Still a decent gap above $2.38 OSKVI closing price.

3. Using intra-day low price for GPACKET of $3.68, OSKVI NAV = $3.48. Still a decent gap above $2.38 OSKVI closing price.

4. For the NAV to match yesterday's closing price of $2.38, GPACKET would need to drop to $1.55 (using May 18 closing prices for the rest of the securities).

The Importance of Technical Analysis

A couple of days ago, Ben Gan from Wisdom Wise blog made a timely comment on one of my earlier OSKVI post on a TA perspective. It led me to think whether I have sufficiently warned my readers about the importance of TA in deciding an appropriate time to enter and exit a trade.

Let me reiterate that I firmly believe that when one supplements fundamental analysis with an accurate application of TA, then, one can get superior results than merely employing one method alone. It may seem obvious and redundant to say this, but if you can read TA accurately, don't ignore TA.

Yet, you may wonder why I don't provide TA advice on OSKVI even though I believe in that. One reason is because I don't regard myself as an expert or advanced practitioner yet, but merely a beginner-intermediate student of TA (my TA results, whilst positive in a bull market, is nothing to shout about). At best, I would just make a fool of myself several times on this stock due to mistimed calls. Worse, I could cause harm to others as a result of my ignorance. Also, I would be lying if I said I used 100% TA when I bought my own stake at OSKVI.

Notwithstanding that, let's take a look at OSKVI's chart - please use your judgement, and form your own conclusions:

Observations:

1. June 30 - August 24, 2006: Nice strong uptrend. I believe if one monitors the stock in the morning of July 3, 2006, there should be a strong buy signal. Note that just 2 days prior (June 29, 2006), the buy signal wasn't there yet. This highlight the need to update charts at least once a day.

You might rightly ask why is it correct to buy on July 3 at a higher price than on June 29 (just 2 days ago)?

To a trader who focussed purely on share price and volume, July 3 provided confirmation of an uptrend. June 29 didn't.

However, to a value investor, a situation like June 29 is not a bad day to buy since the stock is on a bargain.

It is important to keep both concepts clearly in mind. There is no right and wrong answer, just different styles.

2. Aug 24 - Nov 16, 2006: Share enters consolidation phase.

3. Nov 16 - Today: Share appears to enter a mid-term downtrend.

Here, it's worthwhile to point out the benefits of being a trader. A trader would have noticed the downtrend signal around Dec 4-5, or maybe even earlier. On the other hand, a value investor that ignores TA could still be holding on to the stock as it should still appears under-valued, although clearly less under-valued than on June 29. In this instance, a trader would do better. Again, it is important to appreciate the benefit of different styles.

4. Mar 16 - Today: There may be a possible side-ways trend, but at the back of a longer-term downtrend bias noted in 3. above, it is still not clear. Certainly no clear uptrend visible yet.

5. On May 16 07, the stock showed a small green candle, with a small green volume (i.e. slightly volume increase). To be honest, on May 17, I mistook that for a potential bullish TA signal in investssmart chatbox - a TA beginner mistake. In retrospect, it was clear that I was wrong in interpreting the charts in at least 2 respects. First, the price increase is small, i.e. it pays to be suspicious. Second, the volume increase on May 16 is small, and it pays to be suspicious, especially with point 3. Third, on the next day (May 17), there was already clear sign that the upside observed on May 16 might not have much energy left, as confirmed in May 18. In other words, the strong uptrend sign is clearly not there yet. It is important to continue monitor for that sign, be patient, and wait for the signal to show itself (or more accurately, for all signals to align themselves to give compelling reason to buy), if one wants to time one's entry well.


CONCLUSION

1. If you have the skills, use TA to supplement your entry into OSKVI.

2. From a business perspective, OSKVI shows a compelling value, despite the potentially large fall of GPACKET. Certainly, as a value investor, I would consider acquiring OSKVI in its entirity at current prices.

3. Other things equal (and bear in mind real life is rarely equal), GPACKET would need to fall from $4.02 to $1.55, before OSKVI trades at 100% NAV.

4. There needs to be strong catalysts that will unlock its potential value, before one decides to invest. A reader has just commented on a potential catalyst. I have provided some potential catalysts in earlier posting, but since the post is long, I will comment on that in a later post. Hopefully, I'll get the time to do this, but there should be no hurry, as the catalysts may take some time before it happens.

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