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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13 mars 2017

Zeal means going the extra mile to kill your darlings

Approaching the summer of 2013 I had a significant short position in the banking sector. During a sudden market panic which triggered the divestment of several long positions, I increased my bank shorts.

Not long after, the market bottomed. So did not least many bank shares. Unfortunately, every day for the coming six months I came up with some kind of new argument for holding on to my shorts for a while longer. Meanwhile a handsome profit shrank to nothing and inverted into a big loss.

Instead of truly questioning my previous research and conclusion regarding European banks, given the new information (of globally synchronized central bank accomodation), I stuck to my view of ever increasing European turmoil. I was both psychologically and mentally too weak to wipe the slate clean, change my vantage point and try to see what the buyers were thinking.

Very rarely there is such a thing as a stupid market reaction, which means you should always be open to investigate in what way a surprising move is actually the right one.

I "forgot".

I was too complacent, lazy and proud at the same time. I should have known better, should have known that there is no room for relaxation on the financial markets. I guess I didn't want to face my own shortcomings, and, what's worse, didn't care to make the extra effort.

I lacked zeal.

 

Proactively and diligently look for weak points

in your own research, arguments, timing and investment decisions

Challenge the premises of your investment opportunities,

and constantly look for threats to your current convictions

Identify and seek to understand the strengths of your antithesis

 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.


Zeal means internalizing the fact that the market devil resides in the minute details

Sometimes it's a question of going over every footnote in the available financial reports, checking for error, fraud or symptoms of hidden disease and danger. Sometimes it's a question of understanding other investors and their behavior. Sometimes the "detail" is of a more holistic character, e.g., how your investment stacks up relative to other investments, rather than its absolute merits.

No matter what the issue is or what the specific answer or solution might be, what I mean by investment zeal is not being content with having established a good case. Exhibiting zeal means that your well-researched absolute value investment case is just the beginning. Zeal means looking for holes and omissions, trying to understand what the sellers are thinking, wanting to find out you're wrong.

 


 

Actively strive to disprove your own ideas

and understand and prove your opponent's


The other day I lost 70% in a single day on an investment in a small Swedish biotech company (Peptonic).

I originally bought some shares in the IPO. The shares increased some 50-60% before crashing by 80% from there to about a third of the IPO price. In short, I then increased my position sixfold close to the low point and divested about half of my position when the price doubled, but kept the other half over the catastrophic study result. All in all, I did little better than break-even, thanks to trading around the position, albeit marginally.

What I did wrong was buying based on liking the underlying science and the people involved, rather than diligently checking the merits of the case, not to mention questioning my own reasons for buying and holding. Sure, I knew the risk of failure was high. I mean, the company had already failed once. In addition, biotech companies fail all the time.

What saved me was dumb luck due to guts and sizing. I took a very small position in the IPO, and a significantly large one after the first crash. My saving grace was divesting half of my enlarged position when the stock exhibited absurd surges. The stock's strong performance was entirely unwarranted, especially considering the inherent risks of investing in a one-product biotech company that had already manifested serious quality issues.

 

You do the math

 

I knew all this but still didn't want to do the actual math. I even convinced myself there was no math to be made (which in itself should have been enough to 1) not invest from the beginning, 2) get out after the first surge, 3) get out after the first crash, 4) definitely get out after doubling my money on the sixfold position [which I never should have taken to begin with, given my lack of zeal] instead of just selling half.

 

You're never done

 

"You do the math", is a typical rhetorical quip meaning "just add 2 and 2 and you'll see what I mean". It also means you should actually do it, and not just trust they're right. All too often the math never gets made at all, when

Not only should you do the adding - the math - but check the sources for the "2:s" as well. Getting to 4 still doesn't mean you're done. You're never done. That's the meaning of zeal. You should ask yourself, and others, what "4" means both from an absolute perspective and as many different relative vantage points as possible.

Don't be afraid of errors or of being proven wrong by yourself or somebody else. It's not embarrasing. You should want to find out you're wrong. The sooner the better - if you're lucky it'll be before the market does.

Avoid my most recent mistake, and check and re-check the premises of your investments. Do they hold up to external scrutiny or are they mostly based on chance and complacency?

 


If you manage to find flaws

in your reasoning

you should be glad

 


Zeal is the fifth installation in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous four articles you can find them here: StrategyPatienceResilience and Endurance.


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Taggar (blogg): 
13 mars 2017

Endurance - making sure you're there for the next round

Never go all-in on an investment. No matter how good a trade looks, always prepare for being wrong. There are no absolute truths, so you can never know enough , even theoretically, for all-in. You should always be uncertain. Mind surroundings, black swans, corrections. Make sure you keep reserves good as gold for the next round

 

I am not uncertain

-Bobby Axelrod


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.


Endurance means making sure you are still around to play the next hand. And the one after that. If you play your cards right, total time in the market works in your favor.

Endurance is purely about survival, about protecting the downside, about never being wiped out completely, whether struck by a 1930's like collapse, the Nifty Fifty surge, the 4000 per cent gold spike in the 1970s or gold's subsequent collapse, the 1987 Black Monday event or the IT and house bubbles and their bursting.

Endurance means investing in a way you never lose all, never risk all. Endurance is not about the alluring upside potential or triumph of hitting the jackpot.

Endurance means fully internalizing the inherent uncertainty of the future, thus understanding you can never know enough for an all-in position. People lie. Earthquakes quake, tsunamis hit, politicians change their mind, other people lose their nerve... If you lose all on an absolute certainty that turns out to be wrong, there is no way back. That can never be allowed to happen, if you actually want to predictably move forward rather than just gamble for kicks.

 

It ain't what you don't know that gets you into trouble

It's what you know for sure that just ain't so

-Mark Twain


Endurance is the bricks and mortar version of the psychological rule of Resilience. If you lose all, no amount of resilience is going to help you recover.

I often say Patience is the most important thing in investing, but if there's nothing left, patience won't help you. And if you wait and wait and wait, being patient to a fault, and eventually bet all on a 99.99% probability of success... and still lose, what good did that patience do you?

If you aren't familiar with the Kelly criterion for linking probabilities and warranted (optimal) positioning, google it. However, bear in mind that the good Dr. Ed Thorp advocates halving the bets for ordinarily risk-averse individuals, thus capturing some 75 per cent of the upside while significantly reducing the amplitude of drawdowns.


Shit happens

Make sure it doesn't affect your entire portfolio at once


Endurance

If the downside is unacceptable, don't do it.

Alright, I know, I know; airplane crashes and whatnot... You still need to fly, right? On the other hand, the risk of death really isn't unacceptable - you won't know you're dead anyway.

I'm referring to avoidable financial risk with a non-trivial likelihood of total loss. All-in at the poker table; or all your savings, plus debt, on one single options position, fit that bill perfectly. No amount of upside is worth risking all. Whenever feeling cocky, referring to "real men", "gun-slingers" or "all-in", make it a reflex to back off and perform an objective post-mortem analysis of your situation: Pretend the worst has happened, i.e., do the opposite of dreaming of hitting the jack-pot, of showering in gold coins, of being revered as a player and master risk-taker.

Talking of poker, I'm excited by the news about the AI DeepStack beating a few of the very best poker players there are. Chess, Go, Poker... AI is taking over anything remotely quantitative. Investing is definitely at risk, but with the right psychological traits and mental tool set, I think humans can prevail for some time more.

 

Risks of unacceptable losses are unacceptable

 


This was the fourth installation in my 12-part series of TAOS - The Art Of Sprezzatura. If you missed the previous three articles you can find them here: StrategyPatience and Resilience. Next week I'll publish 5 more.


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Taggar (blogg): 
9 mars 2017

Resilience - the ability to rise from the ashes

Investing inevitably brings losses. As long as you are ready, and have a plan for dealing with them, losses are but an opportunity to learn and grow as an investor.

 

Don't panic

 

The famous investor Mark Spitznagel has in his book "The Dao Of Capital" described how tactic one-point losses in the bond pit were but steps along the way of a strategy leading predictably to recurring 5-point, 10-point or higher order profits.

In value investing, the underlying strategy of paying less for assets than they can expect to produce means time works in your favor. Any loss on paper would only be temporary, and actually an opportunity to increase your holding, given your initial analysis were correct.

If you're adhering to a trend following, or similar Technical Analysis based strategy, knowing when to take a stop loss (and de facto doing it) is critical.

No matter the source of your losses, be it bad luck, poor execution or sub-par analysis, the losses per se are not that important (unless they are total); it's the post-mortem action you take and what you can learn from them that count.


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

I am currently in the process of going through and explaining some of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits.


Resilience means gaining from adversity, being antifragile, learning from losses and coming back even stronger and more knowledgeable.

It means understanding losses will occur for every investor. It means preparing for those losses. It means knowing beforehand how to deal with losses when they occur. It means understanding your thinking can change radically when going from an ordinary situation to one of losses and a sense of urgency, and how to prepare for that cognitive shift. 


Kübler-Ross's model for the psychological reactions to adversity lists Denial, Anger, Bargaining, Depression and Acceptance. As an investor you should strive to get through to Acceptance as soon as possible, preferably skipping all the other stages altogether.

My advice is to deal with just one issue at a time. Identify exactly what is wrong, which positions. Then start with just one of them. Often, divesting the entire position is the best you can do. Sure, it will cost you the spread and commission. It may also prove to be a poorly timed decision. However, in any case, not having the position anymore means a guarantee of no more losses, and room to think rationally about what the next step should be.

 

Remember to inspect the ashes

thoroughly

before rising again

 

After dealing with a loss, update your investment commonplace with a detailed note about why the position was initiated, what made you keep it, why you incurred losses, why you didn't get out sooner, what you plausibly could have done differently, what the actual lesson learned was.

Ultimately, you want every loss to make you a better investor; always calm, composed and rational in the face of calamity.


 

Prepare for losses

Deal with losses as directly and quickly as possible

Learn and grow from your losses through scrutiny and commonplacing


Resilience

Investing is so much more than a numbers game.

It's typically not about being the best mathematician or statistician, not about making the best macro or micro forecasts, not about being the best earnings announcements trader or profiting from special situations.

No, investing is often mostly a game of psychology.

If and when you are struck by losses, you need to avoid panicking, need to accept the losses as quickly as possible in order to stop the hemorrhaging and start looking for remedies, perhaps even turning the current bloodshed into an opportunity.

Most of all you want to learn from the process and build on the foundation for more profits and less losses in the future.


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Taggar (blogg): 
8 mars 2017

Patience is paramount for reliable investment performance

Investing is easy

At least some say it is.

You just buy and hold, and then you retire rich.

Well, it's not quite that easy - at least not for mere humans, since we tend to lack the required patience.


A history, and future, of waiting for Godot

In just the 8 years between 2009 and 2017, the S&P 500 index surged from 666 to almost 2400. Including a few per cent a year as dividends on top, the annual total return of some 17% (including dividends of ca. 2% p.a.) turned one dollar into around four.

On the other hand, if you bought at the peak in March, 2000, you would still have been down by about half even nine years later, and just about break-even after a full 13 years. Over the full 17-year period, 2000-2017, your annual return before dividends would have been 2.5% (compounding into a 50% return), and approximately 4.5% including dividends.

I'm tempted to include that the NFMC/GVA multiple for the median company in the S&P 500 index is now the highest it has ever been. Were it to revert to its mean within a year or two, you would still be down on your investment in S&P 500 from almost 20 year earlier.

Were it to undershoot as it has done many times before when financial bubbles have unraveled, an even quarter century is probably the eventual tally of years for getting exactly nowhere. The positive news is that after that you can look forward to some 5-10% annual returns on average.


Fortunately, there is another way.

Several actually.

They all require patience though, just slightly different strains.

Instead of investing blindly and waiting for decades upon decades for a half-decent return, you could start with the waiting.


Bide your time and wait until the target manifests your desired margin of safety

Never rush your decisions

Chasing an investment means you're already too late

You don't have to write monthly reports to investors, just a life report to yourself

Use that advantage


Whether investigating an index position for an industry, an entire market, or for an individual stock, don't rush after the impatient fools. The inexperienced investor is more easily led astray by the herding instinct and social proof bias. In addition he tends to think, or feel rather, this is the last opportunity to get on the train.

Since everybody is rushing to invest every last dollar, and then some (borrowed), it's easy to get the impression this really is the last chance. That, however would imply future generations will be left out altogether, a wholly implausible postulate in an industry that is known for its volatility and fluctuations if for nothing else.

Instead, wait for a good opportunity, nay a great opportunity. Keep your powder dry while accumulating useful knowledge, and turning data into information and reliable investment decision support. When the time is right, for the single stock or an entire index, you pounce. When others are selling in panic at bargain basement prices, when margin calls make bubbles revert to the mean, or invert to even lower levels, you make good use of your patient cash.

Wait

Study

Wait

Pounce

 


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Over a period of two weeks, I'm going through and explaining some of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits, not to mention a tool for post-mortem analysis, should an investment turn sour.


 

Patience means being able to withstand the herding instinct when the fundamentals are wrong. It means the ability to wait for a good entry point as well as a good exit opportunity. It means trusting your own system enough to actually invest according to the applicable time horizon, not just paying lip service to it.

 


There is no one optimal investing strategy, but you need patience to reap the rewards from the one you've chosen.

If time runs out on one investment,

simply turn the hourglass

and

investigate another


Patience

As a value investor I'm used to waiting; sometimes when buying a cheap company in the middle of a bursting bubble, sometimes when other investors are chasing story stocks instead of deep value, sometimes when everything is expensive, sometimes when cheap stocks get cheaper by the day or stay cheaper for longer.

Patience:

Right now the stock market is insanely expensive and technicals point to a trend change downward. Hence, I'm underweight listed stocks (actually net short including my XACT BEAR position). Nevertheless I'm long a few gaming companies with strong momentum, a hype/hope biotech stock, a nuclear energy consultancy stock and the Uranium ETF: URA. In my portfolio of private companies I have high hopes for my gold mining options, my jet engine driven surfboard company and my HR software company, not to mention the mortgage broker start-up and the investment company (small family-owned manufacturing and services companies) I'm about to invest in later this month)

 


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Taggar (blogg): 
7 mars 2017

Sticking to your strategy is much harder than forming it

Strategy

Investing isn't easy.

Investing involves a multitude of various investors, consumers, companies, managers, employees, fiscal and monetary policies, weather, disasters, your own psychological biases, and not least chance. Investing is thus like playing a multi-dimensional board game, with considerably more moving parts than in a game of Go.


In my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Over the coming weeks, I intend to go through and explain twelve of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits.


Strategy means having, and systematically and consistently complying with a system for investment decisions, rather than relying on intuition and gut feeling.

Some prefer a fundamental, value-based stock-picking strategy. That insures against permanent losses if market momentum suddenly turns negative.

Others prefer value-agnostic methods, based on, e.g., momentum or specific share price patterns. In theory, you could make money that way in any market environment. Yet others rely on asset class diversification with fixed rules for adjusting the relative weights.

Some investors focus on macroeconomic information, while some prefer pair trading, focus on special situations or risk arbitrage. A select few have chosen more or less complicated derivatives strategies.


There is no one optimal investing strategy. You can get rich or poor fast with any of the mentioned strategies.

Many strategies can carry the required load on the financial markets; and different strategies work better for different individuals or institutions. It's consistent execution of the chosen strategy that leads to exceptional results.

Hence, you should choose a strategy - logical, rational and back-tested - and modus operandi that you are comfortable with trusting in good times and bad, neither amending your sizing, risk tolerance, asset allocation or positioning during streaks of good luck, nor in streaks of bad luck.

Practice

Form a strategy

Stick to it

However, do adjust the strategy deliberately if needed; but don't deviate from it in ad hoc fashion based on emotional reactions to particular circumstances or stress.


Strategy.

My own strategy is based on thorough fundamental research on individual companies. I want to buy fair companies at a fantastic (low) price, including unproven start-ups with great ideas at very low market capitalizations. I tend to find it difficult buying great companies at great prices, mostly since I find it difficult to identify truly great companies without their prices being insane - a price point I've never been able to stomach.

I typically trade (buy or sell) in increments over a fairly long period (sometimes weeks, sometimes years), mostly to avoid the psychological blow of buying or selling the entire position at the wrong price right before an important (unknown) event, partly to enable trading on share price overshooting, and finally in order to learn more about the company before becoming psychologically stuck.

In addition, I trade around long-term positions whenever the share price overshoots or undershoots due to news or movements in the general market.

I'm always prepared to lose money, albeit not bond-pit trader style like Mark Spitznagel, but rather as part of reality's natural tendency toward an unpredictable range of outcomes. To insure against too large losses, I diversify across a range of assets, such as my apartment, physical gold and platinum options, private companies in a range of industries and stages, private bonds/loans, and listed stocks in various sectors.

I combine my bottom-up investment style with a top-down view of the general economy, as well as an overall view of the stock market (in particular the median valuation level, and trend convergence of technical gauges), in order to decide on my overall risk level and how to weight the various slices of my investment pizza.

In short, my strategy can be summarized thus:

  • Fundamental bottom-up value-based stock picking
    • Averaging in and out
    • Position trading
  • Overall market valuation
  • Overall market trend
  • Top-down macroeconomic overlay
  • Quattro Stagione asset class diversification pizza portfolio

My Strategy:

Right now the stock market is insanely expensive and technicals point to a trend change downward. Hence, I'm underweight listed stocks (actually net short including my XACT BEAR position). Nevertheless I'm long a few gaming companies with strong momentum, a hype/hope biotech stock, a nuclear energy consultancy stock and the Uranium ETF: URA.

Real interest rates are negative, and fiat currencies seems overdue some kind of re-set, explaining why I'm overweight precious metals (options on physical) as insurance against long term mayhem.

I have lent out money, with a large margin vs. policy and market rates. If the economy improves and interest rates rise, my rates rise too. If the economy weakens, I'll just have to hope my friends can keep their jobs. I'm overweight this kind of junk/friend private bond market due to extremely good rate margins, despite a half-decent macro outlook for Sweden.

I'm neutrally weighted private companies, even if it sometimes feel like I'm overweight - probably due to my low current weight for listed stocks. Listed stocks are expensive, while certain sectors and classes of small private companies are quite cheap - not to mention restricted to few well-connected investors. Hence, I have focused my investments during retirement more and more toward private companies within, e.g., HR software, consumer motor/water sports, medtech, retail and a few others.

My guess is I'll keep increasing my weights in private companies in tandem with the economy getting weaker at some point in the future, and me thus getting more and more calls for investments. After that I hope to reap handsome rewards starting in 2020 and going forward. Hopefully several of my private investments will become public around then. In 2022 I'll turn 50 and some time around then, my strategy is to do more travelling and spend less time on risky investments again... for a while.


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Taggar (blogg): 
7 mars 2017

The ultimate answer to everything in investing and in life

Topic: The length of a piece of string

Summary: There are no clear cut answers to important questions. Embrace the ambiguity of life as well as the world of investments.

Style: Inspirational and philosophical think-piece connecting investments, golf, dieting, life, career, job interviews, and the superpositioned state of reality


The psychology of investing

I'm preparing a series of articles on the psychology of investing that I will start posting shortly. The series is meant as a reminder and an inspiration for traders looking to improve their game -not based on better number crunching but on managing themselves and their emotions better. It's based on the top insights from my e-book about managing a hedge fund but much more nuanced and practical.

The psychology of investing is much the same as the psychology of living, not least when dealing with problems and adversity or striving for long term ambitious targets. Noted exceptions regard maximizing volatility and the total upside in life, living impatiently and embracing strong emotions. In that regard, the preferred investment mindset is based on the diametrical opposites of living: minimizing error, managing and minimizing emotions, dealing with profits and losses with equanimity, and most of all being patient to a fault.

Wait, what - I went from saying, and credibly so, that investing and living follow the same general game plan, to claiming almost the exact opposite. Explain yourself, please!

Invoking the Douglas

I'm sorry. Inspired by the great Douglas Hofstadter I wanted to demonstrate by example: Sometimes it's all too easy to believe you have discovered the ultimate answer to every important question. I do that all the time, thinking "this is the way" and applies to all facets of life, be it relationships, investing, lifting weights etc. Luckily I rarely run with that thought for very long before realizing it's not that way at all, and actually understanding there's not even just one answer or solution to the single issue I started out with.

Instead, I often end up concluding that "it's a 'how long is a piece of string', or 'superposition' situation again". By that I mean the answer to most important question is "it depends, it's not black or white, it's both black and white at the same time, and at any particular moment a superposition of all possible answers collapsing into just one of fifty different shades of gray".


Do you want to lift?

Lifting weights is all about making perfect repetitions, it's about making the right compound exercises, it's about intensity, it's about programming, it's about making few and heavy reps while aviding failure, it's about making longer and lighter sets to failure, it's about eating enough protein, it's about timing your food - and yet it's not about all of those or of one of those things.

Living isn't about always investing, always being strategic, always planning ahead, always analyzing your every move, not trusting anybody else. Living can be that at times, but at other times it's about living in the now, quieting your inner narration, about trusting completely -and often you need to simultaneously combine two seemingly paradoxical tactics.

To diet successfully you need to strictly control your food intake and your exercise volume. At the same time dieting is best done on autopilot, preferably not thinking about yourself as dieting at all. Living on a diet is probably best done at both extreme ends of that range, as well as somewhere in between with the occasional cheat meal, with periods of strict control followed by periods of full autopilot once the habit is set.

Putting it in terms of golf, e.g., you need deliberate practice on the game and the swing. At the same time, however, you shouldn't think about the technical details at all once you're playing - except for sometimes. What can I say, it's complicated.

When investing, your gut instinct can lead you to the right decision (since your subconscious has access to all your knowledge and experience at the same time and can deliver its best response taking all those things into consideration at the same time in a way your million fold more limited conscious self can). On the other hand, you should never invest based on that 'blink' instinct, but take it as merely the starting point of your investigation of competitive position, valuation, trend, and other relevant and time tested factors.

Most importantly, you need a lot of relevant experience and deliberate practice and focused studies in order to have a subconscious able to make sense of an investment situation.

Trust your blink instinct for close friends and lovers. It's only in the blink real intimacy can thrive. On the other hand you shouldn't trust anyone, unless you've done a thorough background check, as well as observing their behavior, decisions and M.O. first hand for a significant amount of time.

In short, whatever you do, you benefit from oscillating between the extremes end of the spectrum every so often, while also welcoming the time spent in between.


How long is a piece of string?

Life is a superpositioned state of both black and white and all the grey in between, simultaneously. Just as in quantum mechanics, the truth is revealed by taking action, by the act of observing the outcome of an experiment.

There is never one final truth, a platonic ex ante truth. The answer to all questions vary from occasion to occasion and is decided ex post.

And, yet, A is A; i.e., it is what it is and nothing else - once it is decided. This seeming paradox illustrates the quantum nature of life. Everything and nothing is fixed - at the same time

How long should you stay in school, at a job you don't like (Whore Village), with a partner you're not passionate about? How much money do you need to retire? Do blondes have more fun? Are drugs bad for you? Is love all you need, or is it 'laughter'? When and how much and how to rest; when to sow, when to reap?

Heeding the 'no spoon' rule

First, you must realize there is no spoon; there is no definitive answer to any important question.

Then you can start exploring the ever changing options in between yes and no. Often, in my opinion, the answer is "try". Dare experiment, unless trying involves a significant risk of permanent and unacceptable loss.

 

What is 'unacceptable'? Well, I have this piece of string somewhere...

 

Quitting your job or relationship isn't dangerous, does not involve unacceptable losses. On the contrary, staying put, dwelling in homeostasis all but guarantees wasting your life.


Cityboy

Several years ago, I asked the author of Cityboy, Geraint Anderson, for advice on when to quit my job as a hedge fund manager. He told me to hang on in there, until staying two more years was more or less inconceivable, and then quit right away. So, I kept pushing a 30-month deadline ahead of me, until I in January 2014 just up and left*

*In practice I stayed on for another year, but only as the managing director with no investment responsibilities or partnership in the firm. As a perverse turn of fate, the fund was unexpectedly closed down in September 2014.

What if I hadn't quit? Had the fund been closed down with me in it? Then I wouldn't have been the (voluntarily) Retarded Hedge Fund Manager, but the Dismissed Doofus instead. Not quite the same legacy, or ring to it for that matter.


Summary

So, take the proverbial fork in the road, i.e., explore both extremes of your range of options before deciding.

Say yes, take action; say no, keep your integrity. I promise your life will be more interesting for it (which? yes or no? -Both!), although it just might contain a tinge of hurt and regret too.

However, don't be gullible just because you are a yes:er. And never fall for the "come on, dare say yes" lure. That is just not daring to say no, which is a no-no.

All in all, no matter if you're an investor or a weight lifter and are looking to excel, or if you're just aiming to lead a happy life; don't be too rigid, but don't slack off too much either. Try to alternate between the two to gain perspective and iteratively increase your level of wisdom.

By the way, over a decade ago, when interviewing applicants for the position of in-house analysts, speaking partners and would be portfolio managers at my hedge fund, we asked whether all the physical legal currency in Sweden would fit in a certain famous building. The question is pretty easy but takes a certain kind of triangulation and ability to shift perspective between a bird's eye view and a down to earth focus, while keeping legible notes. In that simple case we captured all there is to know about investing and living a meaningful and happy life. Or, perhaps we didn't learn anything useful at all.

How much is too much? Well...

Finally, in the spirit of the international "Trypod" movement, please recommend any podcast (or blog for that matter) to a friend that hasn't tried one, or that could use a new one. It doesn't have to be mine.

Taggar (blogg): 
23 februari 2017

The case for value investing vs. momentum trading

Topic: Value investing vs. momentum trading

Summary: Value investors can, and often have to, be truly passive. Momentum traders, on the other hand, have to stay alert and treat their market presence as a job.

I'm a value investor and I'm not at all interested in spending much time on my listed holdings. I've got 17 private holdings that are much more interesting.

Length: Very short, basically just a comment on a remark in TIP about value investing being essentially a front running tactic


Billions

Recently, a guest at The Investors Podcast (We Study Billionaires) said "both value and momentum investors need to wait for others to come around to their view", i.e. , that both styles imply a sort of front running game.

WRONG!

I don't agree at all.

First, even if nobody ever comes around to the value investor's view, he will still get his dividends no matter what others think.

Case in point, kind of: I own a small share of an online credit score assessment company based in Holland. It's private and there is no market in the shares. However I'm getting annual dividends giving me an annual dividend yield of around 65%. Sure, I hope to be able to sell it at a fair value before I die, but until then the dividends are enough.

And, don't worry about me, there is a sort of gray market, or at least interest in buying out the minority, so I could sell at 30x the dividend now if I wanted to.

Second, momentum investors on the other hand suffer permanent losses when their holdings take an unexpected wrong turn, since there is nothing backing it up long-term. There is zero staying power in momentum trading, and you simply have to take your losses quickly if the trend changes, whereas a value investor can simply wait, and add more to the position if desired.

There is nothing wrong in being a momentum investor (well, actually there is, but let's not go there). I'm sure it's a very good strategy for certain "investors". I, however, stay firmly rooted in the value camp.

Why? See below.

By the way, talking of Billions. Season 2 is not holding up well. It's forced, lacks nuance, feels like a caricature of itself and have no resemblance with any large or serious hedge fund. Season 2 is like a pale copy of "Boiler Room", which by the way was like a documentary of a pretty common practice at the time. Axelrod is supposed to manage billions but he trades in the low single digit millions triggered by 1-10% moves. Laughable.


Value investors can wait, have to wait, are allowed to wait - that's what I like

  • You can both catch falling balls (not knives), or chase them after the bounce, and be secure in keeping them "forever" if they initially move against you, whereas a (long) momentum investor will get permanently hurt if his momentum stock is subject to negative news or just breaks its technical pattern
  • Value stocks provide passive income (vs. trading being an actual job and the more frequently you trade the better; and it's the workload I want to get away from when living off of investments)

PS: if you say you actually love researching and trading stocks, then why not do it with fake portfolios?

My guess is you do it to become wealthy enough to do what you actually like doing. Well, a very small minority love sitting in front of their little screens, but that's not for me - and most likely not for the majority either. Most of us just like sun, travel, good food, drinks, speed and excitement, but end up in cramped offices watching colored numbers and charts on a computer. Sad.


In short my method for value investing is:

  1. filter stocks for fundamental value (topic for a whole book, but do check out my finance posts here)
  2. filter those stocks for technicals (e.g., momentum or other TA patterns)
    1. I usually don't like chasing stocks even if they are attractively valued
    2. I want to avoid too big an adverse move right after purchasing a stock
  3. buy maybe 1/4 or 1/8 of the position you're ultmately looking for
    1. gradually increase your stake as you get more comfortable and knowledgeable
  4. hedge the position if the overall market calls for it
    1. i.e., short the market or temporarily sell some of your shares if the stock price surges for no reason; increase again on plunges
  5. take a total pause sometimes, for a week, a month in order to reset psychologically, to divorce from holdings and market calls you are married to
  6. never short, there is no hurry; look for a buying opportunity elsewhere instead
    1. very rarely I actually do short single stocks, but it's not part of my strategy

I am planning to write a longer post on my actual method, a sort of synopsis of my coming book (not the one I'm writing right now, but the one after that). In it I intend to detail how I go from a hunch or a drive to invest to actually diving in, i.e., how I screen for stocks, what key ratios and other information I check, including the macro environment (overall stock market, overall economy, sentiment, interest rates, other asset classes etc.).

Stay tuned for that, i.e., SUBSCRIBE now.

Taggar (blogg): 
8 februari 2017

Becoming Buffett. Why?

Topic: Finding your drivers, your purpose, your why

Length: Short

Summary: Start with why you do things, instead of just going through your daily and weekly motions on autopilot. Is Warren Buffett a good role model?


WHY...

...did you just check your social media (or the stock market)?

Availability/proximity bias? Just because it's there? Happened automatically; couldn't think of anything better to do?

If you ask yourself that question - and answer - right before clicking on Twitter, Snapchat or trading platform, you might save yourself the trouble. More important, it's the first step to break an ugly habit, and save time for better things.


What's wrong with right now?

What's wrong with your state of mind, your situation that makes you want to change it by going online to check your news flow of soundbites to see what others are saying, thinking or liking? What good can come from checking your stocks if you're not trading actively?

-Oh, I've got 97 likes on that retweet of a snappy comment about Trump! I wonder if it can get to 100. Yes, it's 98 now; getting cloooser.


Buffett

Warren to the B says a lot of things: "Ohhh, this is so good" about a mug of coke, "Taking care of your body and brain like it's a car you have to make last your entire life is paramount" and then driving to his daily breakfast at McDonald's.

He also says "managing your own future worth while still young is your most important asset allocation and investment decision".

"How much is 10% of all your future earnings worth? What would you sell it to me for?" is another of WB's spiels that makes the issue tangible. (ignore the recursivity and moral hazard issues). So, what would you sell 10% of your future earnings for? That amount times ten is what you have to allocate today so choose wisely.

Morale: Investing in yourself is the most important thing you can do, according to Buffett

But what has Buffett himself done?

Sure, he's the world's wealthiest man (give or take a few billions or decades), but what is his WHY? What was his purpose of getting rich? What's his purpose with his amassed fortune? How did making all that money make his life worthwhile? What was it he was able to do, and de facto did, over the last 60-70 years?

  1. Use the same office in a small village
  2. Drive the same short commute, including a fast food breakfast
  3. Hold annual meetings and write annual letters
  4. Give it all away to cure diseases after he's dead

Everything else have been circuitous, with just one endgame: make more money.

I'm sure he is happy, it's not that I'm after; he found his purpose early on and stuck with it:

Accumulate wisdom in order to become the richest man in the world and thus be able to accumulate more wisdom. He could of course have just stayed in the same office in the same village for 60+ years without making money, in effect doing the exact same thing - except for the fame. What I don't quite understand is why he is so laser focused on making money, when he doesn't seem to want to use it in any other way than to get hold of more money.

Sure, he'll give it to charity, and that's quite something. I think it's really good that he takes money from ignorant people buying coke and burgers, and gives it to Bill Gates to deal with some of the worst troubles in the world. But he himself doesn't seem to do anything else with his life than eat the same McD breakfasts and sit at the same office reading company statements.

He obviously doesn't care about the money per se. Perhaps he likes the fame, but first and foremost he probably simply enjoyed the game of investing - much like many enjoy playing Candy Crush, Angry Birds or clicking on their social media accounts for the 100th time.

Anyway, enough about Buffett; there are no good reasons to watch the recent HBO documentary. If you are serious about gaining some practical wisdom you should instead check out this speech by Charlie Munger (or episode 526 of TrendFollowingRadio with Michael Covel for a shorter version of Munger's most important observations regarding psychology).


What's your why?

So, Buffett found his why, which amounted to daily dopamine kicks as he rose to investment fame and fortune. His purpose was no better or worse than watching TV or playing video games all life. He had fun. He became nr 1. He sat in an office.

What's your purpose?

Why do yo do what you do? Why do you drink what you drink, eat what you eat, eat where you eat, dress the way you dress?

Why do you check your social media dozens of times a day?


When I was young, including when I went to college, there was no internet, no mobile phones, no social media. There was nothing to check to get that dopamine kick. Instead I read books, thought, did sports, or played.

I'm not saying life was better, since it wasn't. Internet connected smartphones have their uses; a lot of them. However, mindlessly wasting time on updating likes, reading memes for a second's amusement or smirk aren't among them.


I'm sure you wouldn't bother to turn on a turned off phone to see "what's going on" in your Twitter flow. But when the phone is already on, the kick is just a second away, hence you do it again and again.

Short meaningless kicks with no motion forward. But what should you do instead, what do you really want?

What are you waiting for? Why are you just passing time? Or is Twitter, Angry Birds and dinner all you care for?

dinner


Are you wasting your life in a similar fashion?

Why do you live? Why did you go to school? Why do you work so hard? Why are you building that life "platform", of house, car, boat, work, status..., so intently?

What is it that really drives you? What makes you happy? (see my previous article from December 2015 on everyday happiness) What do you enjoy doing without posting it on social media?

  • Just make money like Buffett
  • Quality time with your closest friends
  • Work hard, play hard; essentially buy expensive toys and travels
  • Experience as much as possible, through, e.g., various travels and trips
  • What would you actually change if you had a billion, i.e., after buying a house, securing transportation and getting a better computer or phone, how would you change what you do in a given day? Do you really need (much) more money than you already have to to that?

Start with your why

(an inspiring book and TED talk about identifying and pursuing your true drivers). The book deals with how to be successful by knowing your ultimate purpose, but I've interpreted the question a little more freely.

Once you've fulfilled your basic needs in terms of internet connection, food and shelter, what is your WHY for getting up in the morning, for going through the motions?

Which people do you want to spend time with? Doing what? How do you plan to feel good, to feel relevant? How do you want to express yourself? Who do you want to be?

On that topic, by the way, Buffett had this to say in the clip in TrendFollowing: "Think of a few character traits you admire in others, and a few you loathe. Act to become the person you admire the most"


Summary: Just ask why

Ask WHY before checking your phone (app that counts how much you check)

Ask WHY before accepting that invitation

Ask WHY you'd do A, and thus miss out on B (alternative cost)

Ask WHY you want more money, status, fame, in exchange for your limited time

Ask WHY you are a member there, why you go to the gym, why you keep postponing what you really want to do, WHY you keep investing but never reaping?

Ask WHY you post things online. Wouldn't you enjoy your food, your vacation, your expensive car, your tour on a yacht if you couldn't get any likes?

Then what is it really worth to you?


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Taggar (blogg): 
2 februari 2017

Harbinger of sorrow - divergence in 2016 leads to crash in 2017?

Executive summary: I asked about weird market patterns but got a lesson in humility instead. Stay disciplined, resilient and patient.


"You need to be willing to take (many) small losses to make big gains"

Those words describe the essence of famous investor Mark Spitznagel's philosophy of investing, that he elaborates on in his book Dao Of Capital.

From Wikipedia: Paul Tudor Jones has said of Spitznagel’s book that “Mark champions the roundabout,”

and “shows how a seemingly difficult immediate loss becomes an advantageous intermediate step for greater future gain, and thus why we must become ‘patient now and strategically impatient later.’”

Spitznagel likens his process to “life’s roundabout road to success”—“the art of taking a circuitous path to an endpoint,” delaying gratification and taking small setbacks now to gain enormous positional advantage later.


The pain of 2016

I've been getting quite a few letters and comments regarding my request for personal stories about the financial markets and trading patterns of 2016.

Specifically I asked about big losses and how and why they think those occurred.

I had an idea about traders identifying patterns of divergence between specific stocks, industries, sectors, durations and asset classes. I thought "weird" patterns, only discernible by a crowd, could point to a trend reversal downward in 2017.

I didn't get any of that.

What I did get was a nontheless interesting psychological snapshot of a motley crowd of investors and their various strategies and tactics to stay level headed no matter what the market did to them. Many stories actually described winning in 2016.

Here are some of the messages I got:


Not worried

I agree with your observation that 2016 has seen more divergence, but I disagree with your assessment that this is some sort of bearish harbinger.

IMO this is a very reasonable response to a rising interest rate environment. In fact, I would be more convinced that this was a “blow off” top if all sectors of the rally rallied together indicating some sort of capitulation or irrational buying.


Sizing is key

The big loss? Not cashed in yet. I have a lot of exposure to interest rates through CEFs (Muni bonds, High Yield bonds, Preferred shares) and REITs and I’m down on paper by a nice 8% this year.

Where I bite my fingers is that I put in my notebook to hedge with TBT at the right time, every day from January onwards. In June the interest rates where at the lowest and my portfolio was in the green by a fair percentage and I completely forgot about it. And it was a perfect and easy trend reversal.

I got distracted by these bloody elections.

I also manage a trading account for fun and profit. I have about 20 positions opened at any time of a small size $ 2,000 to $ 3,500. I have one negative month and so far was able since October 2015 to extract about $ 1,300 every month.

I use momentum (macd or Ichimoku) to enter and Parabolic SAR to exit. My hit rate is around 50% but parabolic SAR takes you out of a bad transaction pretty quickly so losses are small.

However, I had one big loss in September. I was short NXPI, perfect short set up and going down quietly. I go walk the dog, come back and look at my positions; trading halted, the stock is up $ 10. Things like that happen, position sizing is key to keep your shirt.


High savings ratio instead of trading

One year later in August of 2015, I had enough of the permanent portfolio bear market. The portfolio didn’t live up to its promise for me as a Swedish investor. The losses were small so I withdrew all my capital. The small cap funds had been going up for a while so I bet my money on these instead. I regained all my initial capital and got out of the market.

Shortly thereafter in September, I got laid off from my Computer systems development job and I had a lot of free time on my hands. All I ever had read on investing was Harry Brown’s book on the Permanent portfolio. So I knew nothing about investments, trading or risk-management at all.

During my time as unemployed, I decided that I wanted to make a living as a capitalist rather than an employee. So while I was frantically applying for all jobs I could find. I was also for the vast majority of my free time reading books from the famous authors on trading and investing, watching a lot of interviews of finance personalities and amateurs on youtube. Engaged with the communities of bloggers and forums on the internet and learning everything I could get my hands on about trading and investing.

I ran backtracking simulations and experimented with everything one could possibly think of such as swing-trading, day-trading various stocks, trend traded using mutual funds, quantitative investing strategies, index-investing, dividend-stocks investing. I learned about risk-management, how the big guys trade, portfolio theory and pretty much everything else one can think of. Learning and experimenting in a bear market was really stressful.

In Q4 of 2015 I traded mutual funds on a momentum basis.
At the end of 2015 I sold everything for tax-harvesting purposes. Then in January when the market furiosly crashed, I could feel the fear from markets from within myself. I realized this was the perfect timing for a bet on Gold and TLT. So for Q1 of 2016 I was long GLD and TLT.

I vowed to never lose my initial capital I had earnestly toiled for and earned through many hardships as an employee.

My total gains were never substantial and long-lasting. The winnings was soon consumed by losses in the choppy markets following in Q2 of 2016. Many days went by when I was high on adrenaline. Trying to predict the next move of the market would turn out to be nigh futile. Sometimes I took a lot of profits on one bet just to loose it all in on the next trade. Sometimes I let the trade reverse back on itself and ended up with nothing. In the end, tallying up the totals I was pretty much back to where I started.

Around the time of brexit I recon the the market had turned bullish again and am for the moment fully invested with leverage in the stock market. Still trying to decide if I want a trailing take-profit stop or if I am simply going to be a passive investor. I know the risks of not taking profits while the opportunity is still available. The market can take a large nose-dive to never return for decades like in Japan or the great depression.

In Q3 of 2016, I was finally reemployed yet again. From the fire-hose of money that a at a regular job provides, I will be growing my AUM with a few percentage from my roughly 50% saving-quota. Days when I have a difficult time motivating myself to go to work after the alarm-clock rings in the morning. I chant to myself that I am doing it for the portfolio.

My dream is still to become a full-time capitalist and live off my investments. If I want to do it by passive index-investing or dividend-investing I will need a much larger portfolio then I have now. Earning a living through active trading seems to be almost impossible.


Perma bear turned bullish

I'm one of the newbies you talk about. For the last few years, I have been a permabear (reading too much zero hedge which now I stopped doing because it's a waste of time) and never invested a single cent in the stock market.

This year I got tired of missing out and opened a small brokerage account. I got my family to invest in a sovereign gold bond with a crappy interest rate, hoping to sell it to the next greater fool before maturity.

Other than that I bought GBP thinking that brexit couldn't happen due to the rigged political system in the U.K. So that's been down. It was down from the normal when I bought it and but now it's down even more. I may hold it till it picks back up.

Cal-Maine foods has been down thanks to it being a solid value but it was down and now it's back to where I bought it.

I also bought Apple during the dip earlier this year and that has been up 20%. Same for Urban Outfitters, rode the ride up.

I'm now learning more about Options as well.

Also I missed an opportunity in Bitcoin. Missed the ride this year from $470. Now it's above $900.


Lost it all on leveraged shorts

Bought Sandvik at 65-70, sold above 80. Subsequently shorted with 4x leverage at 90+ and lost it all. Did the same thing in Atlas at the same time.

Lesson: never go short

Bought Rusforest, but that got taken out at just 4% premium.


Bear giving up on market timing

Family Office: Throughout 2015 and 2016 we were convinced that US equities had topped, based on many valuation measures (Schiller PE, market cap/GDP, price/sales) as well as credit market cycle warnings (rising defaults, etc), and we thought that there was also much political risk ahead, which turned out to be correct (Brexit, Trump, etc.).

We had largely moved out of equities and into mainly money market and lots of short-term US treasuries, as well as TIPS. Lots of TIPS. And some risk positions in GLD, and long term US treasuries (risky in the sense that yields are at historic lows)... we thought that deflation pressures would continue (too many are structural like robotics, aging demographics, pressures to service US government debt affordably, etc).

Personally I was convinced this was a great portfolio in case Trump was elected too, because obviously the stock market would tank if he got in... I saw the dips in equities when his poll numbers did better, and also thought this guy is such a loose cannon with protectionist trade policies that of course stocks will tank worldwide if he is elected. We know (so far) how well all that turned out.

The strong dollar has pummeled the gold position, and we missed some very solid gains in equities in the last month. And, inflation expectations seem to be a driver behind increasing long term rates, which has hammered the long term treasury position so far...At least that is what all the analysts seem to be writing, that it is inflation expectations.

Personally, I am starting to think that Trump is such an unpredictable retard on Twitter, and so unpredictable in general, that actually what is happening is that US treasuries are now getting a 'risk premium' built into them... especially by foreign holders (who do seem to be dumping them too, but hopefully that is mostly from the strong dollar). A 'risk premium' for treasuries would be hard to quantify, but I suspect that it may be occurring and would be a major shift if it were happening. I am still convinced that, with the median US stock at all time highs based on an aggregate of valuation measures, now is a very bad time to be in US equities. So we are sticking with our positions, but it is painful.

I am an avid reader of Hussman like yourself, but I am also starting to appreciate that market timing may really be for fools (as my uncle a retired bond trader always says).

Until this year I was a bit of a market timer in my investment outlook. Hussman writes great stuff but his funds have not done well over the years ... one of these days he will be a genius again but until then I think he is just calling it too early, over and over. My fear is that I just did the same thing, and the animal spirits under Trump will drive equity markets even higher and higher over the next several years, despite the crazy valuations. And that bond yields really are at an inflection point upwards. And central bankers may buy even more equities than they currently are to keep it all propped up too. If so then our positions now are just plain bad.


Micro caps: all-in, despite lesson of 2008

I was down by 20%, but finished at +40%

I bought heavily in the nanotech battery company Insplorion, inspired by Druckenmiller (go all in if you believe).

I experienced the financial crisis but I'm nevertheless all-in in micro caps and don't care for macro. The only thing I use for risk management is the 12 months moving average on OMX


2016 was normal and easy

As a technical analyst myself, I can say that the patterns and usual trends work pretty much the same this year, didn't find any real problem reading the markets so far (except that trump rally, which is fundamental event and not pattern related).

I wish I could give you a story about my terrible trade, but the only ones i can give you are the trades I didn't take and should have, this is because I was in gold juniors... which did very well.


Lost on shorts

My worst trade was the Italian referendum. I guessed right and spread betted the italy 40 index and was 100k up. However i had so many individual sub bets that i needed many partial closures and by the time i closed i had virtually lost most of the profit.

The problem was that my ego could not accept this so i shorted again waiting for a profit but it did not happened. Even so i held onto the position until a large loss accrued.


Did not follow his own plan

2016 could have been wonderful sticking to the mechanics. I made two major errors:

1. March - Aug there was no volatility out there and market kept up going up. I did not sell enough premium against my bearish core positions hoping volatility was just around the corner. 
Remember: stick to the mechanics.

2. Nov: I had the clear plan to be basically from bearish into cash when the election is done (and Clinton makes the race) and to keep my shorts a couple of days with Trump elected which did not work out at all. 
Remember: stick to your plan incl. your exit plan.


Lost on hope stock and short position

Bought short index ETFs (XACT BEAR) too early and didn't realize how expensive they would be over time if the market traded sideways or up. It was the wrong tool considering my long term investment horizon.

Instead of sticking to my strategy of buying quality companies I bought a small insurance company, Vardia, without a real track record

Both investments lost more than 50% each. Even if the total loss amounts to approximately 10% of my portfolio, the psychological hurt is much worse.

Now I'm eager to learn about investing for real, or maybe learn that I shouldn't do it at all.


Short but happy, despite losses

Like you, my short positions killed me in 2016.

My individual stock picks did well. I never would have predicted the post US election rally. I never had time to cover my put options on Wednesday after election Tuesday.

I am happy though that I can still pay for a nice bottle of wine tonight after a day of skiing at the Montage in Deer Valley. Makes my losses on my 2016 short positions a little less painful....


Listened too much to others

Bought oil at 31 with a horizon of at least a year, but sold after listening to MacroVoices - my worst decision in 2016!

Bought XACT BEAR after reading your blog but eventually sold out at a 15% loss

After that I've focused on higher quality, lower risk stocks like Investor and Industrivärden. They are up by 5% since then

Unfortunately I bought Fingerprint the day before the cmd and profit warning. I lost 15% on that trade (which luckily wasn't that big, but I learned a lesson)

All in all I lost a few per cent in 2016 while everybody else seem to have made 10+%. I only have 35% of my savings invested on the stock market.


Given up on bearish view due to PPT

I lost 10% on XACT BEAR x2 leverage

I thought Brexit would amount to a black swan but I wasn't aware of the Plunge Protection Team, eller ”Working Group on Financial Markets”. Since 1988 the PPT works to prevent market crashes like the one in 1987.

No matter what happens in terms of terror attacks, elections, macro statistics etc., the PPT makes sure the market rises. Buy the dip is thus likely to prevail in 2017, even if, e.g., Marine Le Pen becomes the President of France


Learned day trading isn't for him

128 trades, 70% wins.

85% of the 40 loss making transactions were short positions

In 5% of the loss-makers I didn't stick to my stop loss levels

I'll stop trading and go back to investing. Trading isn't for everyone

I'm ashamed, but at least I made one good deal that saved the year; I made over 100% in Bitcoin and got out before the mini crash at the end of the year.


Too ambitious sizing: blew up account

My first year in the casino started great. I managed to time the bottom in silver/gold with mining stocks, almost exclusively thanks to dumb luck (just finished a book on the history of gold), which netted my portfolio a 100% return on paper. Needless to say, I didn't seize any of the profit - you've got to love hubris and inexperience. I just closed the portfolio today with ~40% gain, still not bad (including other small losses on bearish ETF's like short HY and small gains on some companies)

My real losses came through futures and CFD's. I made a 100% return in a few days (2-3.....), when I started daytrading the S&P with a bearish bias.

Of course, I got struck by the god complex and upped my already insane position-sizing. Unsurprisingly I managed to blow up the entire account in the course of the next week or two. Way to go.

Lesson learned? Far from it. In order to enter the Danish daytrading course/contest, I opened and credited a new account.

This time around my sizing was more sane and I diversified a bit. I could've closed my new short on S&P with a decent profit on several occasions like Brexit, but while I saw doom & gloom, the algos bought the fucking dip and got on with it fairly quickly - so I missed the window(s).

I held on to the trade all the way until the Donald euphoria (I expected a sell-off) shot us to new all-time highs and I got stopped out, yet again. I lost almost 50% of my account's capital on this previously profitable trade.

I gained a little bit on Tesla, Crude Oil and EUR/GBP shorts, but this was offset by stop-losses on both gold and silver longs, where I once again positioned myself too aggressively, which caused me put the stop-losses too close.

Judging by the repetition of my mistakes I might be clinically insane.


Bought 1 dip too many and gambled the rest in depression

I had 200 ksek in cash and 40 ksek in shares. I bought Africa Oil years ago and just left them there

I bought Saniona, bought more when it fell after breaking off its collaboration with Pfizer as well as wanted to raise more capital. By then I was literally all-in, all my capital in one share.

And then it turned and suddenly I was 45% in the money and sold all. I made a few more profitable trades in Saniona and other companies and suddenly had 380 ksek.

An injury made me depressed and reckless. I bought shares in Xintela, bought more and more as it fell. Lost in other shares as well where I futilely just tried to make my losses from Xintela back - not a good strategy. Tried some daytrading too, with no luck.

What little I had left I lost on sports betting, thinking I might get rich - and if I lost it all I couldn't feel any worse than I already did.


Mark again

Mark Spitznagel has said this about the key to investment success:

The most valuable things you’ll need to learn to be good at investing are patience, resilience, and self-discipline. You aren’t just going to learn these in school. My best financial advice: practice yoga

The trick (a few of them) is to make small predictable losses, by sizing correctly, using sensible stop-losses (read how Mark was trained to always take one-point losses in the bond pit as a young man), and not getting emotional.


Summary

As you were, nothing to see here. Circulate... Make sure you get to stay invested for the long run. The following three rules are a good starting point.

  1. Patience: Wait for good opportunities; as long as it takes to find opportunities as identified by your system
  2. Resilience: have a system that won't blow you up under any circumstances; whether you use stop-loss rules, anti-leverage rules, diversification rules...
  3. Self-discipline: Follow your rules of patience and resilience. Don't let your SL-levels glide. Specifically, don't let others or your emotions interfere with your strategy.

As for the markets of 2016 and 2017 respectively, I'm quite agnostic. And this exercise certainly didn't add any relevant information regarding the asset markets.

Most of my investments are in private companies anyway. My listed instruments are mostly considered hedges against my other assets which are all long the economy (or gold and housing).

Regarding listed companies, I focus on hated micro caps with little or no revenue or profit, hoping for breakthroughs, takeovers, turnarounds, spin-offs and other exciting stuff.


Investment reading recommendations

For the fundamental value investor: Howard MarksSeth KlarmannTim RichardsEdwin Lefèvre  

For the aspiring VC/angel investor: Peter Thiel CS 183

For the big picture macro guy: Peter SchiffJames Rickards

Other good investment reads: link


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Taggar (blogg): 
23 januari 2017

How to capture the next +50% for the stock market

Fault lines and opportunities

(the next +/-50% for the stock market)

Summary: 1) a short update of my (poor) adherence to this year's plans, 2) the equity bull case (+50%?), 3) the bear case (-50%?)

Featuring: why Goldman Sachs considers a hard landing in China a marginal event

Conclusion: I'm still net short the stock market, but gradually less so, as I keep finding better investment opportunities in unlikely places outside the public space.


Winners decide more often

(losers keep New Year resolutions)

First things first:

I've already done some for me unexpected reshuffling of my investment portfolio, despite aiming to trade less in 2017, not more.

For example, I've increased my positions in GIG (online casino platforms) and Stockwik (a tiny investment company), sold a little in Peptonic (oxytocin pharmaceuticals research company), and bought a significant amount of GDX (senior gold miners, see next paragraph). I've even bought some BrainCool again (cooling technology to reduce infections), not to mention URA, the uranium ETF.


Gold

I thought I had outsourced my gold exposure once and for all, but it turns out, "Canada" hasn't invested my money yet (that's been a good thing so far, but I'm getting worried a serious gold rally is about to get underway).


Less short

All of the above, as well as lending out more money for real estate projects, mean I've reduced my OMX short position yet some. I'm actually no less bearish than before (read the rest of this article and you'll see). It's just that I think I've found better investments, probably due to my investment fatigue receding after a few years off.

 


To lift or not to lift

In other news, I'm already having second thoughts about my exercise regime for 2017. Instead of going after PB:s in benchpress and deadlift, I'm entertaining thoughts of bodybuilding or even going back to martial arts after a 22-year hiatus.

It's a principle of mine not to pay much attention to my younger self, no matter how recent his plans are. Winners decide more often.


Reasons to buy this market

Sharmin at Goldman Sachs recently (g.s. podcast) elaborated on her reasons for recommending U.S. stocks in 2017.

The perhaps most retarded argument was that "although stocks have only been this expensive 10% of the time since WWII, selling at the current valuation level would have left a cumulative 200% return on the table over the last 72 years"

In effect she would have recommended buying at the arrows, since there actually was a little upside left before the crashes.

Not only was the risk /reward ratio retarded, but capturing a cumulative return of 200% over 72 years amounts to a measly 1.54%-2.78% per year, depending on the method of compounding. Considering a typical 35-50% downside from peak valuations (top 10%, remember?), the all but negligible upside she's talking about seems more like a perfect trap than an opportunity. 

A hard landing in China would be a "marginal event"

The second most retarded thing was stating that: "We actually see an impact (at all), if there is a hard landing in China, despite the direct U.S. exposure to China being a marginal 0-1% in terms of, e.g., exports and profits".

Pretending to be overly cautious and responsible, Sharmin said that there are other market-based and sentiment factors and quirks to take into account that could have an impact, even if China's economy crashing in and of itself would be irrelevant.


Sharmin half empty

Sharmin actually demonstrated a couple of important points on macro analysis in her Exchanges interview, not least the issue of cherry picking, as well as how you can always choose a positive or a negative macro spiral, no matter the starting point. Macro feedback loops, no matter if positive or negative, are typically self-reinforcing, rather than stabilizing and mean reverting. 

Macro research can always go any which way you'd like

When discussing macro variables, there's always a discretionary choice of whether to assume the variable at hand will continue its trend or mean revert, and whether a high level is good, or implies a risk of going lower:

Low unemployment was a good thing in her view, but at the same time she thought a low job participation rate meant there was plenty of room to grow.

You could just have well said that the low UE rate could go higher (bad), or that the low rate in itself could cause inflation (bad).

In a similar fashion, a low participation rate could be interpreted as large cohorts of the population having obsolete skills, and thus being a long term burden on the economy (bad). Even worse, the trend toward lower participation could continue (bad) due to, e.g., an accelerated pace of automation and export of jobs.

Productivity growth is the most important variable for economic growth and rising living standards. The last ten years it has fallen to below 1% per year, from earlier levels of 2-3%. Sharmin predictably assumed it could magically rise again (good), despite all the low hanging fruit (leverage, cheap capital, the IT and internet revolution, globalization etc.), of the last 10-20 years having already been plucked (few easy wins left=bad).

Sharmin pollyannaishly assumed higher productivity, higher gdp growth, higher job participation rate, low inflation, low interest rates (positive returns on bond investments in 2017), and on and on.

Further, although she admitted the upcoming French elections might be a small risk, she thought Brexit was a marginal event since the EU would take a tough stance to prevent more countries from leaving. Pretty naive, in my humble opinion. She may be right of course, but in my view a hard stance against leaving could ignite a non-trivial level of nationalism and voices for leaving the EU and euro.


Summary of the positive view

  • Productivity and growth accelerates: they admittedly are at very low levels and could bounce back. The last Philly Fed reading, e.g., was quite positive
  • Profit margins remain at record levels, or increase to new highs: they have already climbed this far and stayed higher for longer than expected so why not even higher or longer? Accelerated automation could have that effect
  • Interest rates remain low, perhaps fall even lower: again, they fell this low, so why not even lower? Resuming/accelerating QE and even lower policy rates could make bond yields fall back from the recent surge
  • Trump optimism prevails throughout the year, making equities the asset of choice, providing support for record high valuation multiples.
  • Capital inflows (due to repatriation as well as follow-on capital) boost the economy, stocks and the dollar. Despite low interest rates, the dollar keeps appreciating due to tariffs and repatriation efforts. A strong dollar attracts foreign capital and flows into both the economy and the stock market. The Swedish stock market follows suit as always, not least helped by a strong dollar boosting our export companies, but mostly just mirroring the S&P 500 index as per usual.

TINA

Tweaking the above variables for the better, it's not at all impossible to imagine 50 per cent higher stock prices over the next three years. If the average investor can't conceive of an alternative to stocks, then there is in fact no alternative. It does take quite a leap of imagination though.


Fault lines - the cautious view

There is a a plethora of things to invest in this year:

  • peer to peer lending (Lendify, To Borrow etc. offer ca. 10% annual returns)
  • semi-private market places (Pepins offers stocks in a stream of small and promising local private companies)
  • crowd funding (Kickstarter, e.g., where you could really channel your inner Peter Lynch and buy whatever product interests you and your friends)
  • venture capital (for accredited investors there are endless possibilities)
  • record number of IPOs (even the ordinary retail investor has a lot to choose from, albeit often loss-making)
  • real-estate projects (Tessin's cases often offer 10% yields)
  • House and apartment prices are soaring (at least in the US and Sweden)
  • Gold has corrected downward, and might bounce back up soon (I think so)
  • Crashed southern European stock markets (national markets rarely fall more than 90-99% before bouncing hundreds of per cent)
  • Stock markets in general are trending higher, rallying to new highs and indicating a strong appetite for risk, despite a slightly less dovish Fed and record high valuation multiples. Why not follow the trend for a while?

What could possibly go wrong?

Well, there are a few danger gauges that used to be useful that are flashing red:

  • Flat yield curves point to low growth or recession (however, central bank policy have distorted the yield curve to irrelevancy so it's hard to tell what the yield curve is saying)
  • Market internals are diverging. The bull-market pattern of indiscriminate buying of all things is breaking down. When valuation ratios and price trends for various companies, industries, sectors, asset classes and regions stop moving in concert, it's typically a harbinger of a trend change from bull to bear. Further emphasizing the divergence, the market advance is narrowing (see advance/decline measures), and investors are rotating more intensely between sectors in search of what few investments and strategies that are still working.
  • Interest rates are rising (it could reflect better growth, it could reflect a budding inflation. No matter which it is, together with the other gauges rising rates year-over-year typically signal weaker markets ahead)
  • Rate spreads are widening (meaning smart investors, that worry about the return of their capital rather than the yield on paper, are selling or hedging their exposure to riskier debtors)
  • Buybacks and insider purchases are at highs (insiders are typically at least as "stupid" as the average investor when it comes to euphoric buying at market peaks)
  • NYSE margin debt is at highs (whether measured nominally or as a ratio to market cap. high stock market margin debt signals pak optimism and creates a vulnerability that feeds on itself as a price drop begets forced selling and yet more price falls)
  • Government debt and corporate leverage are also at highs, only sustainable as long as interest rates are held at zero. Sure, there is no reason why the current situation where central banks are holding themselves and their countries up by the hair can be prolonged indefinitely. It's just that it has never worked before.
  • In-synch: Individuals, corporations and governments are already stretched in terms of debt burdens, meaning all sectors wold struggle hard in a downturn. In addition, the world has become more synchronized than ever before, and there are no new BRICS countries left to halp pull the global economy out of a tail spin should it commence
  • Real market liquidity and trading volumes have dwindled, despite a new generation of happy, carefree newbies that thrive on back slapping internet forums and have never seen a market downturn, let alone a serious correction or crash. 80-90% of the trading volume is mechanical, algorithmic computer trading that could disappear overnight, not to mention start playing the market on the downside.
  • The median valuation on the US stock exchanges is the highest it has ever been, despite rapid technological evolution causing a higher churn of companies in the top 500.
  • Speculation and malinvestment. Ever more resources have been poured into speculative activities (financials and rate sensitive industries) rather than actually productive endeavors. In parallel, ever more debt has been used to prop up asset prices. Both these trends have acted together to set the stage for much lower economic growth as well as asset valuations going forward.
  • Record high profit margins. Sure, profit margins can go even higher - technology, globalization, low interest rates etc. - but over the last century, and basically as long as there has been capitalism and more or less free trade, margins have been reliably and strongly mean reverting (coming back down to average levels), not to mention inverting (periodically undershooting their long term average - which is a mathematical imperative, lest the average permanently shift upward). All this means profit margins (and profits) are due for a significant drop

Other known fault lines include:

  • China's build-up of bad debts in the wake of unprofitable infrastructure products. Whenever a country has increased its debt ratios as quickly as China, some kind of financial crisis has followed
  • Brexit paves the way for more exits and a collapse of the EU
  • Unusually long time since the last cyclical downturn typically means there are widespread fault lines throughout the economy
  • Record high amounts of covenant light loans (i.e., debt with relaxed safety measures and collateral) signals any and every investment gets funding and thus inevitably many unprofitable ones (malinvestment)
  • Record high number of IPO's with loss-making companies typically coincides with market peaks.
  • Flash crashes
  • Desperate central banks (negative rates and QE, hello!) signal something is afoot

Known unknowns should be discounted at all time

Those were the known knowns, i.e., indisputable facts that are out there for everybody to see.

In addition to those, there are unknowns that manifest from time to time, and thus can be considered known phenomena. It's just that we don't know when they'll strike, or how hard; although we can be fairly sure they will during the typical 25-50 year period duration that equities exhibit (currently closer to 50 years).

This category includes for example the following power-law distributed occurrences:

  • war - should we extrapolate the unusually peaceful period, or expect some kind of mean reversion?
  • natural disasters: earth quakes, tsunamis, extreme weather, volcanoes
  • ponzi schemes
  • terrorism
  • pollutionspills
  • product recalls
  • Cyberattacks

Ideally, all of the above should be discounted in today's stock prices. We know they will happen every now and then over the coming 25-50 year discounting period, and thus should be taken into account by any serious long-term investor. Surprisingly enough, that's typically not the case, except for some time right after a catastrophe.


Unknown unknowns

As if the known fingers of instability weren't enough, despite having sown the seeds of future financial earthquakes and avalanches, there are the unknown unknowns and black swans to take into account as well.

The reason stocks on average are priced at levels promising some 10 per cent returns per year is that known fault lines sometimes trigger negativity and significant downturns, that known unknowns more or less regularly reduce sales and profits or even cause financial crises -and that sometimes, albeit vary rarely, something completely new and terrible strikes.

Every once in a while (e.g., 1929, 1972, 1987, 2000, 2007, 2016?) the investor collective forgets why stocks are "cheap", when they seem to always promise better returns than other assets. Not long after they are often reminded of why, i.e., that inevitably bad things happen to good stocks and thus should be discounted beforehand. And you, you shouldn't buy stocks for the long term unless their price reflects that reality. Sometimes that means waiting for several years, or having to look in unfamiliar places.

Again, there is never any reason to hurry when investing in stocks. Every new generation gets its opportunities. The most important thing when investing is the price you pay -not how early you get in. Make sure you pay a price that compensates for future shocks. If you don't you're really just picking pennies in front of a steam roller and hoping for the best.

P/S-type multiples are twice what history tells us is reasonable. Once a re-set gets underway, the market often undershoots (it has to, at least sometimes, due to math), but I would nevertheless start buying publicly listed companies in earnest 50% lower than today.

That, however, doesn't mean I don't try to find something else to invest in in the meantime.


SummaryWhy I'm short (but less short)

Short: Record high valuations and multiple macro fault lines, in combination with risk aversion gauges in the form of increasing divergence between various market variables

Less short: I've found other offers that were too good to refuse, not least my investment in a private motorized watersports start-up. Expect to be wowed sometime around this summer.

In addition, my market fatigue since my time as a hedge fund manager is diminishing, which means I have more interest again in managing my money more effectively than just keeping a single large and quite expensive hedge.

Finally, I've partially given up, due to the market's strength prevailing longer than I ever considered likely. I'm actually looking to places like Venezuela for inspiration of what might happen in the west. You wouldn't have wanted to add insult to injury by being short their stock market the last few years.

Where I see opportunity: southern Europe, private companies, gold (negative real rates, streamlined mines, correction coming to an end), Swedish house construction, true innovation, true growth niches.

I'm not entirely sure about stocks in Japan and parts of SE Asia, or bonds.

That's it for today.


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Do you want more free and valuable analysis and inspiration?

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Limited. Sooner or later I might introduce some kind of a latecomer fee to finance the growing list. However, it will always be free for incumbent, active subscribers.

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