SpreZZaturian
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Före detta hedgefondförvaltare, partner och VD på Futuris som utsågs till Årtiondets hedgefond i Europa för perioden 2000-2009
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How to trade like a retarded hedge fund manager

TRADER

V

RTEADR

V

RETARD


ThemeOne way of investing (portfolio composition, and averaging in and out of long term holdings) 

Alternative theme: There is no secret sauce in investing, so go ahead and try.

Even a retard can do it (apparently, given my career). On the other hand, I have all but given up on the financial markets, but there is no reason why you shouldn't at least give it a go. Maybe you'll like it, maybe you'll be good at it.

Length: Not very long


Have you noticed that "trader" and "retard" are anagrams?

It's not a coincidence I'm a retard cum trader; after my stints as a broker, an analyst and a portfolio manager.

Given my experience from all sides of the market, as well as being a coder, a natural sciences nerd and eventually a finance major, how do I approach the financial markets?

What you take from the market
You took money from the many faced market
  • The most important thing to understand is that investing and trading are more about psychology (your own psychological resiliency to stress) than numbers. Guess how long it took my Aspberger-ish, scientific, coder, not to mention business school brain washed, mind to reach that conclusion...
  • The second most important thing is that investing is about minimizing losses, not maximizing profits
  • Your worst enemies are hubris, greed and envy. Your greatest assets are patience and agility of mind (the willingness to disprove your own theses)

That said, what is my current approach to investing?

Well to make it really tangible, the full extent of my investment portfolio looks like this:

  • Real estate (apartment)
  • Various private Swedish companies
  • Private Canadian gold royalty company
  • Listed assets (Bear certificates and stocks)
  • Cash and loans
  • Debt: 0

It's kind of a retard's version of the Quattro Stagione portfolio I often advocate:

It's one part real estate and living space (no loans), one part high risk private equity investments in software, services, healthcare, retail/fashion etc., one part physical gold, one part publicly traded securities (currently 80% bear certificates and 20% stocks [small cap, high risk and/or secular growth]), and finally one part cash and lent out money to friends.

You could compare it to a more traditional Quattro of Gold/real estate, Stocks, Corporate bonds and Government bonds, although there are many ways to put together an investment pizza. Also note that, in effect, my public and private stock holdings are more or less hedged with bear certificates (the Swedish instrument XACT BEAR with -1.5x leverage to be precise).

You took money from the many faced market, money that wasn't yours to take. Now a debt is owed

The rationale behind my portfolio composition is:

  1. You never know what's going to happen, that's why I choose to be diversified.
  2. Going back to square 1 is almost unacceptable (albeit would be a hefty BOOH!), so I make sure to own my living quarters and with no debt whatsoever
  3. The current monetary and fiscal experiments are unprecedented. It is thus more likely than not that we will eventually experience an epic record setting crash, and financial re-set. Hence the gold, physical gold.* When this goes south in earnest, cash and paper gold will be frozen, confiscated, substituted and in any case be practically worthless. The dice is thrown in this matter, meaning I can't really get out of my physical gold venture for a few years. Good, one less thing to think about. Now I can turn my attention to oil again, which might be a good buy in a few months.
  4. You never know what's going to happen; that's why I own stocks at all. I focus on small and micro caps, unloved deep value/secular growth, or hopium stocks with little or no revenues but theoretically huge market potential. My choice of stocks are rooted in a sort of surrender, where markets in general, and large caps in particular are grossly overpriced. Hence, I invest in stocks without valuation :p
  5. I'm a kind spirit and if I can help friends in need I lend them money (on paper, it's for apartments, houses and cars, but in practice I suspect I'm financing part of their investment portfolios, since they actually do own stocks at all). I do charge interest though. I also keep a little cash lying around, maybe too little right now...
  6. I'm a speculator at heart, and I want to be "right". Thus, I just can't stop myself from shorting the general market using bear certificates. It's expensive, it's hubris, it's not recommended, but it's retarded; it's me.

* please note, that back in early 2015 I was speculating in paper gold (ETFs like GLD and GDX, among others). In July 2016 I have sold all my ETFs and bought shares in a private Canadian company that owns royalty streams in gold mines, i.e., holding the rights to delivery of physical gold directly from the mines. That is several steps closer to actually holding the coins and bars myself.


There really is no need to talk about how I manage most parts of my wealth, so let's just focus on my publicly listed stocks (which to be clear make up but a few per cent of my wealth).

I own stocks in the following companies of which 5 out of 7 have less than 35m USD in market cap.

  • Brain Cool - medtech for cooling down tissue
  • Gaming Innovation Group - gaming and betting platforms, operations and affiliates
  • Opus Group - (vehicle) testing
  • Peptonic Medical - biotech (oxytocin based pharmaceuticals)
  • Simris Alg - nutrition (algae based omega-3 etc.)
  • Stockwik Förvaltning - nanocap investment company
  • Studsvik - nuclear energy related consultancy

I don't recommend anybody copy my portfolio of stocks. They are high risk, volatile, and not least most likely very vulnerable in a stock market crash and market liquidity crisis.

In any case, I am currently (July 28, 2016) thinking about taking my profits and selling off all of my publicly listed stocks. Then again, you never know...


Opus is a case in point on how I typically handle a share holding

I bought my first shares at 7.10-7.30 SEK in January 2015, being adamant that I expected it could fall by 50% in value in a stock market crash. Instead I rode it to 10.70 and down again without doing a thing.

I then added significantly at 4.40-5.50 SEK between August 2015 and February 2016

Then I traded parts of my holding a few times, making some 0.40 SEK per trade, selling at three different occasions at 4.87-4.97 SEK, and buying it between 4.37-4.62 SEK; all based on gut feeling, on large unwarranted daily/weekly moves and an overarching strategy to stay invested in Opus for the long run. I was aiming to lower my average purchase price, as well as stay up to date with the stock.

I had said publicly that I would buy with both hands if/when it fell to 4, which I fully expected it to do in the anticipated stock market rout.

Well, the market didn't crash..., but Opus did. Consequently, in the first half of May 2016, I picked up significant amounts of stock at 4.37, 4.07 and 3.98 SEK respectively, bagged a 0.10 SEK dividend, and sat back and waited. For what? For an opportunity to either buy more even cheaper or to sell some of the excess holding I had accumulated.

In June and July 2016, I sold Opus stock on 10 different dates at prices ranging from 5.00 to 6.40 SEK, thus taking my holding down to a little below my target exposure.

My average purchase price is 4.87 SEK, and I freely admit that the first marginal profit taking at 5.00 SEK was somewhat of a panic relief sale after buying a little too much around 4.00 SEK. Hey, I'm only human!

Now, I want the market and not least Opus to fall again. If not, I'll look elsewhere for value. I still own Opus stock, but long term I want to own more. On the other hand, the run-up from 4.00 to 6.50 doesn't really make sense. As you can tell, I'm conflicted at this point and share price.

No, I won't go through the actual case for Opus. Do your own homework. Trust no one.


Silly me

 

My strategy can be summarized as follows

  1. Find a stock (several in parallel) that you want to own [this can be tricky of course, but this post is not about fundamental analysis or stock screening. This however, kind of is]
  2. Buy a little right away if it's cheap enough (again, it's up to you to define 'cheap')
    1. don't buy all you want, unless it's a certified steal, or the technicals look perfect
  3. Buy more if it falls. Keep buying if it keeps falling
  4. Trade a little around the position if you think the trading patterns allow for it, i.e., sell some of what you buy, even if it's below your average purchase price and your value target, and buy whenever it falls by a lot.
    1. Put in shamelessly out of the money long term buy and sell orders in the market. Sometimes you just get lucky in a choppy, algo-beset market. I've often come home from the gym or a dog walk and found new, welcome, transactions on my account.
  5. Sell to below your desired position, if the stock appreciates a lot for no apparent reason
  6. Sell all; if the stock is no longer a fundamental Buy, get out altogether
    1. Too high stock price
    2. Falling fundamentals

It's so elementary I actually feel silly for spelling it out, but maybe, just maybe, you or a friend of yours could get inspired by exactly that. Unless you're aiming to be a day trader, investing definitely doesn't have to be any harder or more complicated than the above.

retard 27 april
Silly

Actually, it should be less complicated. You should be able to just buy and hold the right assets for several years at a time, instead of wasting valuable time trading stocks back and forth like a rodent in a cocaine or pleasure electrode experiment. However, at this point in the economic and market cycle hardly any public investment makes sense, and that makes it difficult to buy anything for the long term.

The important thing to remember here is, that at every price point I'm buying, I'm ready to hold the stock forever, as long as fundamentals don't change radically. I only buy at prices I think will produce a long term satisfactory return, and I sell to either make room in the portfolio, reduce risk, or if the price has risen above the point where I wouldn't buy the stock (due to too low long term returns).

A trader (human or AI/algo) could buy or sell at any price or valuation points.


What works and what doesn't

I have kind of given up on markets, on what works and what doesn't.

This whole QE era apparently doesn't agree with me. That's one reason I finally left the hedge fund industry, just as I left the sell side in Q1 2000 partly because of the ridiculous IT bubble.

In the year 2000, apart from being tired of being an analyst, I just didn't want to be associated with Buy recommendations on overvalued stocks. And had the bubble kept inflating, I would have been left standing on the station anyway, with my Neutral/Sell recommendations.

In 2014, after 14 years at a hedge fund, it was much the same story again. I couldn't find enough worthwhile investments on the stock market, and I would have made a fool of myself had I been short. That, and I had had enough; and had enough ;)

OOU!

Only half-joking, I used to say, I could just as well be one step behind as one step ahead the markets and do equally well. Talk of losing one's mojo...

 

Anything works?

In a similar vein, today I'm mulling the idea of "anything works":

Firms like Goldman Sachs and McKinsey famously work according to the Up Or Out model. OOU means you are either rising in the ranks or being pushed out a window. Oou! They hire a lot of talent and simply see who survive. It's actually a kind of Ponzi scheme, but all the losers have gone on with their lives (and joined the zombie crowd forever mumbling "I used to be at Goldman. When I worked at Goldman...").

You can apply the OOU model to stock market investing as well. Several very successful hedge funds simply allocate more and more capital to whatever manager is on a winning streak, while losers get less and less and are eventually kicked out. Algo funds do the same, albeit with their models instead of human managers.

In the game of plants

you either win or die

And then there are the infamous examples of ordinary plants doing the trading, based on water and sunlight feedback on winning trades.

Howard Marks talks about first and second level thinking on the markets, where a first level thinker buys a stock after a strong report and a second level thinker sells the same report based on it being strong, but weaker than expected. A first level thinker would also say, money is being printed and interest rates are low, let's buy stocks today too (since that 1% rate differential per annum [!] is worth at least 1% per month)...

vissen

Apart from the fact that first level thinking usually works fine in bull markets; these days, I think it works just as well as anything else, unless or until it doesn't.

You could use first level thinking (or second level if that's your game) on momentum, on P/E, on P/S, on growth, on Philly Fed, on ISM. If it works it works. If not, try another basis for your trading (or "investments" if you want to call it that).

It's not really that I've given up, gone out to lunch or done a Hugh Hendry. I'm just saying that at this point in time; with synchronized abysmal global macro, the turn of a multi-generational debt cycle, and among the highest, if not the highest, stock market valuations in history, all coupled with the positively craziest monetary experiment ever; it's futile to say anything firm about the financial markets.

It's all in flux. So why not try whatever? Personally, I think that's a strategy doomed to fail, but hey, you'll be in good company as you all took money in the short term from the many faced market.

Just make sure you go big enough to be bailed out.


Before I go I just want to mention one more "adaptive" approach to markets that just might work, just as anything else might work:

A friend of mine works at The Algo Quant Group.

lorenz 2lorenz

Among other things, their investment strategy has zero overnight risk, use actual trading pit behavior as the base for their trading strategies, and here's the kicker, utilize chaos theory and Strange Attractors à la Lorenz, to identify when a model is going into or out of a sweet spot of high correlation and predictiveness (e.g., think in terms of the bundles in a 3-body animation chart).

What little I understand from my morning walks with him, it sounds convincing and perhaps a little less risky than pure momentum+OOU.

algoquant

The chart looks impressive, but unfortunately AlgoQuant only has 7 months of history. I'm enticed nevertheless, although I haven't gone into any detail of their set-up. As usual this is emphatically not a recommendation (see disclaimer page)


Summary

  • There is no (one) secret to investing. Anybody can do it. Experiment and see if you find a way. Seth Klarman's book, however, should be a mandatory read before beginning.
  • An investor is not a trader and vice versa (what are you?)
  • Find your own style, trust no one (I, e.g., invest according to long term fundamentals, plus trade a little on top)
  • Winter is coming, be prepared (diversify [Quattro], manage your leverage, protect your principal instead of chasing yield this close to the top.

P.S. I'm seriously considering clearing out all my listed holdings, but in the spirit of diversification I'm trying not to.

Share this article with anybody daring enough to go long the stock market, and tell him or her they don't have to change their mind, but they must seriously entertain the opposite side every now and then. And why not read or forward my free e-book with my best rules of investing. All you have to do is subscribe to my free newsletter to get it.

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Anonymous's picture
Victor (ej registrerad)

Do you still own stocks in Simris Alg? Have you seen this interview with the CEO Fredrika Gullfot? What do you think?

SpreZZaturian's picture
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SpreZZaturian

Yes I do

Yes I have

Work in progress. Nothing new yet. Looking forward to seeing real sales.

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