Wednesday, 30 September 2020

THE MONTH OF LIVING DANGEROUSLY - A PERSONAL REFLECTION


In trading, sometimes there's a fine line between daring and stupidity. Luck and skill. Gambling and.... self-denial about gambling.

When the goreng phase in the stock market reaches triple deep fried levels, it can be challenging to distinguish whether the fruits of your labour was due to beginner's luck or pro mad skillz. 

More than 300,000 new CDS accounts have been opened since the March MCO. There's new money, new talents, and new... well, for lack of a better word, losers. Trading is a zero-sum game, after all.

Oftentimes we delude ourselves into thinking that 'this stock made me thousands in profits, so I must be be a genius'. 

Bro, have I got news for you. And I say 'bro' because it is men who are far more prone to delusions of grandeur.

I have been in this industry for nearly a decade. Sometimes I trade and invest actively, sometimes I don't. 

Sometimes it's due to certain professional restrictions. Sometimes I stopped trading because I got wiped out. 

Yes, it happens, and statistically speaking, it will probably happen to you. The getting wiped out part.

I can also say unequivocally that I know what it's like to be in a truly shitty market. That means no big moves, no volumes, no liquidity, no easy profits. Just death.

However, beginning this year, specifically after the MCO began, the stock market went absolutely crazy. There are now so many stories of quick fortunes, and some that were squandered. 

Those with skin in the game will suddenly mention it during a conversation about something else. They will go into details about their stock portfolios and the easy profits that will most assuredly go towards buying a flashy car. It's always a car, I don't know why. 

Here's the thing about these people : their ignorance and boasting will likely wipe them out in the long run. Markets that go up will eventually come down. The ones who boast the most will become the most quiet when the big loss arrives.

I've been there and done that. I view the market from the perspective of someone who has made all the dumb mistakes. 

But I have never seen a market like in August 2020. New records were being broken every day in terms of total volumes and value traded. 

Fresh capital from the loan moratorium, coupled with work-from-home habits, tripled with the chase for extra income by those encountering financial difficulties (not to mention lack of job security), added fuel to the fire.


SPECULATION : A MORAL ISSUE ?


Goreng is the practice of active speculation for the chance to gain double-digit percentage gains in the shortest possible time. 

 'FIFO' (First In First Out) is an acceptable synonym.


You might think that what a professional trader does is to just trade all the time. But my real mandate is to make money and preserve capital, whether through ten trades a month or a thousand. My style is geared towards what works for me.

I do not particularly enjoy trading, at least not on an  active basis. 

I do not go into each and every day looking for things to goreng.  

I especially do not like the state of the markets right now. There seems to be excessive goreng activity, and  there is continuing detachment between hype and reality on a global scale. It really is the everything bubble. 

What I actually like is the intellectual challenge of long term, fundamentals analysis (FA) based investing. On occasions I can nail them quite well, in some others I'd fail spectacularly

But because of the current asset inflation and general detachment from sanity, it's becoming exceedingly difficult to establish new long term positions. I'm happy with keeping those I've had for years, just not new ones.

Generally, FA and long term is the combo that's considered morally superior. Short term speculation is reviled in public, but widely practised in private. Sometimes by the very same people. 

I keep this book on my desk at all times to remind myself of the perils of speculation. The general takeaway is to not end up broke and dead, like that guy. And to cut down on the kind of excessive, reckless, macho-based trading that people like so much.



But there are occasions in which the market conditions clearly suggest that a short term approach would pay off higher dividends (heh) than FA-based investments. 

I don't have much of a high horse to stay on. I refrain from having a sense of moral superiority or holier-than-thou attitude. 

So during certain periods, sometimes lasting several months, I'd explicitly shift the strategy from long-term FA investing to short term trading. 

The gist of that trading strategy is : stay in cash, prepare for opportunities, go for the jugular. And do the FIFO thing if the situation demands it.  

You can call it goreng if you'd like. I just try to stick to my strategies and understanding of certain quirks in the market.

To me, the real goreng is mindless, brainless speculation to satisfy those gambling urges. People consciously know it's wrong and irresponsible, but many succumb to the temptation of easy, fast profits. 

When the stock market can do ridiculous things like rising by 33% in just four months, the temptation to roll the dice is ever present.

All I can do is to always go into a trade with the right ideas, some intellectual justification, and basic parameters to abide by. 

The FBMKLCI's performance year-to-date up to 29 September 2020 (daily chart)

SOME EXTRAORDINARY TRADES

To illustrate what a wild month it was, here are some of our biggest winners in August 2020. These do not include the smaller gains, or the losers - but none of them came close to what happened here.

The reason I'm sharing these is to make a point about market manias, and market phases where short term trades can pay off in a big way. 

These trades are considered abnormal for my standards. I don't make these every day. These alone dwarf the entire cumulative profits from our TradeOfTheWeek entries. 

As the market skyrocketed, there were some situational developments that presented clear opportunities. My job is basically to interpret them, understand them, and be fairly quick with the trade implementation. I'll describe them in very basic terms here.

And of course, as a measure of conviction, these are very sizeable trades. Major lots, and major risk taking. 

They are all contra period gains, on a gross profits basis.

 1) KAREX 

Situation : The trade is deceptively simple. We simply bought the stock once it hit its limit up price. Then we sold it at the market open the next day for an immediate 24% gain. 

But there is some degree of thinking behind this. It's a combination of our understanding of the stock, the technical chart, and the context of the historic rally in healthcare and glove stocks.

We decided to buy into the stock at limit up on a precise date - 4 August 2020. Any other date and the trade would have been a bust. Understanding why is the key.

 

 

The 'why' is also deceptively simple. Look at the daily chart below: it's a price gains comparison among a selection of first-tier and second-tier glovemakers. Notice the highlighted part.

 

From a secular trend standpoint, the gloves rally peaked the day after we bought into KAREX.

Our timing was spot on because we watched the day's proceedings on 4 August. There were some massive moves in the larger players like SUPERMX and TOPGLOV - they reflected our earlier analysis about the gloves sector having more of an upside than previously thought. 

It's easy to misremember that back in June 2020, skeptics were already calling a peak for the sector. We had a different (and correct) view, and eventually the analysts came around and revised upwards their earnings projections for the glove counters. That also sparked the massive rally in early August.

From an individual standpoint, KAREX broke the 2-year-high mark on 4 August and stayed at limit up for the rest of the day. 

Our initial impression is that it was swept up by the gloves mania and was heavily speculated to be entering the business. It's not much of a stretch to expand from manufacturing one type of rubber to another, was it?

That may have been leaked intel which turned out to be accurate.

The trade worked because the pieces were all aligned at once. The stock made a big move, the underlying sector was making a big move, and everything was caught up in the (big) buying mania. We consciously knew this and put on the trade.

This was the kind of situation in which it was plausible for KAREX to achieve an extraordinary overnight gain.

 

2) NICE-WB

Situation : Between 5 and 8 August 2020, gold staged a historic rally to breach the $2,000 per ounce mark. 

NICE was the clear and obvious proxy after we identified multiple breakouts based on our price-volume analysis approach. 

The stock's cheapness, in itself, holds a lot of appeal as a trading instrument. The warrant is even more so, and the breakouts resulted in a brief interval where the entire market seemed to jump in. 

We got into the warrant at a good price and at an opportune time. The real time movements in spot gold (XAUUSD) acutely influenced the movement of this humble Bursa Malaysia stock. The retail gold proxies like TOMEI and POHKONG were also making big moves at the same time. 


Spot gold v.s. NICE-WB daily chart. Shaded area is the main momentum phase when the trade was made.
 

NICE was the most volatile of the lot. And on 7 August - when this trade was initiated - gold hit its all-time high of $2,075.

It was simply the best time to trade the best proxy, and the yield outcome was a massive one. 

The position was bought and sold within a day. 


3) BINTAI

There was the gold rally. There was the gloves rally. And of course there was the vaccines rally.

After the initial announcement of a venture on 17 August, BINTAI was anointed as a member of the vaccine crowd. In a few short days it would go for the moon.

Again, the situational context was important.  PHARMA hit an all time high of RM6.65, while DPHARMA hit its own all time high of RM4.32 on 25 August. On that very same day, we established a position in BINTAI.

So what triggered the vaccine rally? It was really mostly irrational exuberance, and prolonged detachment from actual fundamentals. It was consciously a sentiment-based rally, and not much more. 


In the end, we managed to realise another extraordinary overnight gain amid this extraordinary backdrop of market activity. 



So what's the point of sharing these three distinctly different trades? It's really about what they all have in common.

The market sentiment was overly bullish and there was buying interest across all the 'hot' sectors.

We knew the sentiment was overly bullish by virtue of the stock market hitting record highs in both trading volumes and trading values, with new records broken each day.

This environment meant that it was the right time to attempt and execute the trades mentioned here. They look different, but they all responded to the same stimulus : a market mania.

To sum it up:

If it wasn't for the market mania,

If it wasn't for the wild market swings,

If it wasn't for the market's speculative excesses,

If it wasn't for 'market boosters' like the loan moratorium and short selling ban,

If the stars weren't completely aligned,

None of these trades would have been plausible.

 

THE KEY TO SURVIVING

Having been in this field for a while, I can say that market movements do not elicit much emotion from me, aside from incredulity and amusement.

I do not get happy when I make RM10k in profits. Neither do I become 10 times happier when I make RM100k in profits. 

So what does it feel like to lose RM100k? Well, it sucks, but only for a day or two.  The asymmetric nature of emotion is like that : you feel worse about the losers than how good the winners feel. But feelings generally go away. 

Trading is hard. There are better things spend your time doing, really. But I'm decent at what I do because this is my vocation. Not a hobby, and not a passing phase.

There will always be temptations to overcome. The urge to chase the current hype stock. Or the Fear of Missing Out, especially after seeing other people make easy money.

The key to survive as a trader is this : restraint.

In all of my trades, I'd consciously force myself to reflect and to admit when dumb luck is just dumb luck. 

Lucky, skill, dumb... as long as you make money, right? Wrong.

Trading is a skill. But knowing when to shift gears - between active trading and total restraint - is the key to keeping the profits.

So in September, it all suddenly stopped. There were still sporadic sector rallies and tradeable opportunities, but nothing like what we saw in August. For what it's worth, all the really big sector rallies - in gloves, gold, and vaccines - have deflated. 

For the three stocks mentioned above, the trades were concluded at the very peak of their recent price movements. They have not broken new highs since. 

My view is that the euphora has well and truly ended. Trading volumes have evidently fallen from their August peaks. The end of the loan moratorium was a clear ticking clock for some retail investors who can either afford to play the stock market or pay their loans, but not both.

As a happenstance, global markets took a dive as well. And as September 2020 comes to a close, we are getting a barrage of new developments that can impact the market in unfavourable ways.

We might never see another month like August 2020 ever again. But it was a good ride while it lasted. 

For the time being, I'm going back to plain old value investing.....

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