market stocktake III

It's been almost exactly a year since the last time I tried to clearly articulate my investment strategy. It's interesting to look back at the last one, since I timed the market bottom almost perfectly and all my picks did very well. Unfortunately I exited way too early, so while I recouped most of my losses from the crash of 2007/2008, I probably could have made much more if I had greater confidence.

I guess the bottom line is, I'm still a bear. And while I've ridden some of the subsequent rallies, I'm still waiting for the final correction. But first let's take a quick glance at the opinions out there.

The Pragmatic Capitalist has a very nice summary of 2010 investment outlooks from a variety of sources. Among Investment Banks, most are predicting a slightly positive year, probably in the 10% range. The notable exceptions are Morgan Stanley and Credit Suisse. Among the Hedge Funds and Investment Gurus, the sentiment is far more negative. Probably the most extreme prediction is by Elliot Wave Theorist Robert Prechter, who is now saying that we will see a crash that will bring the market to an even lower point than we have seen so far.

I've been building up short positions since January, and over the roller coaster of the last month have been reducing long holdings. While a crash seemed quite possible a week ago, the last 5 days have seen the Dow and S&P recover more than half their losses for the month. But the volume is less convincing with higher volume on the declines than the rallies, so next week should be interesting. There remain a few black swans on the horizon: sovereign debt, consumer credit, (if I could name all of them they wouldn't be black swans) and unemployment and consumer spending are still far from comforting. But if we make a new high it's probably time to go back into waiting mode.

So what I have now is a portfolio of mutual funds and stocks in the hands of my financial manages (who are both still bulish). I am hedging the downside with short options, having sold almost all my own long positions. And by gut feel, this is how I should fare based on the following market outcomes for 2010:

• +20% or better: Profits on my long holdings should exceed short losses for a moderate profit
• Between -10% to +10%: Will probably have a slight loss due to the options expiring out of the money
• -20% or worse: Should make a pretty bundle due to the very high leverage on my short options

Well this should be an interesting year to test my understanding and application of some new financial instruments, maybe in another year's time I can look back and have another good laugh.

stock market stocktake II

The market has been trading sideways for almost two months now, and most of my expectations have not been met. I expected a correction in December to cash in my shorts, but that didn't happen. Then I expected a rally on Obama's inauguration, but that too was muted. And although the market did reject Geithner's initial rescue plan, the effect on the markets is still dubious. Nevertheless, I have also begun the process of slow accumulation, because I think we are bottoming out and it is time to start building my portfolio for the long haul again. I'm going slow, because I still think there might be one more major correction, but as yet it hasn't materialised.

So this is a chance for me to review the logic of the stocks and funds that I intend to accumulate over the next few months. This is really to capture a snapshot of my thought process for personal reference in the future ... read on at your own peril.

China

I really don't expect consumer growth to pick up in the U.S. (or even Europe) anytime soon, which is why I'm not particularly optimistic on Singapore's near-term recovery. It looks like the engine of growth for Asia will be China, so since everyone's growth will depend on China I might as well just invest directly in China. China has also been putting out some very aggressive stimulus packages to build up domestic demand, so although they have huge unemployment problems with all the factories closing, my money is on our motherland to recover first.

India

I'm pretty confident in India as a long-term bet (like 10 years) although I'm not entirely sure how it will fare in the next year or two. I just saw a report yesterday that the only three countries in the world to grow by more than 8% year to date are Brazil, Russia and China. That's the BR and C in BRIC. India has dropped almost 2%. So maybe instead of India I'll just focus on BRIC.

Vietnam

I first got interested in Vietnam when I visited it about 7 years ago. Back then, I wasn't into investing but applying the logic of Jim Roger's The Investment Biker, I was sure that this hardworking people just escaped from the grip of Communism would surely do well in the next century. They have potential very similar to China a decade ago, and they can also rely on China as a hinterland of sorts. The Singapore government evidently thinks so too, because they have invested in commercial districts in both Ho Chi Minh and Hanoi. My interest in Vietnam was rekindled with another visit to Hanoi last year where it was evident they have already come a long way. So now that prices are down, it's time to do a little shopping.

Australia

Australia has been badly hit by the current economic crisis. As the commodities boom ended, their exports have dropped tremendously. And in the current climate of fear, investors pulled out all their Aussie dollars and dumped them in the Yen instead for refuge. So Australia has been doubly-hit. In the months ahead, I expect both trends to reverse, so a strong recovery (at least in the stock market) should be on the cards. Maybe after all the fires go out.

Google

I've been a big fan of Google since I first read about it in 1998. Perhaps it is finally time to buy its stock. Firstly, tech stocks in general have high cash levels, which is why the NASDAQ has been doing pretty well. I'm also tempted to test the economic theory that periods of high inflation are good for employers because they reduce the real cost of wages. It looks like America's money-printing is finally catching up with it, and if there is any company that pays out most of it's operating cost in wages, it is Google - they hardly make any physical products (no raw materials) and 40% of their workforce are PhDs. The downside is that precisely because Google's ad sales continue to well, their stockprice hasn't been impacted as much so there is less upside potential. But I figure it is a decently safe bet. Reading Google Planet now reminds me why I have always been enamoured of this company.

Berkshire Hathaway

My Jan 2008 edition of Fortune said to buy BRK because in an economic downturn, you can trust a smart person like Warren Buffet to know where to put his money. Sadly, when the entire market crashed, there really was nowhere to hide. Good thing I didn't buy then, but I'm thinking now the time is becoming ripe. (I'm still really sore that I missed the boat when I tried to buy BRK.B for 2650 some months back. I think it hit an 52-wk intra-day low of 2651 that day.) And reading Warren Buffet's biography now, I really do get the feeling this is a business genius I don't mind putting my money on.

Apart from these, most of my previous stock picks still hold. The exceptions are CHK which I have liquidated, and NVDA which I anticipate will weaken in the near term due to weak consumer demand, so I may wait a while to buy more. I am basically in accumulation mode now, trying to put all my money into the market over the next 3-6 months so I can just sit back and enjoy.

accounting 109

Over Chinese New Year, I finally found the time to update all my investing records for the past 18 months. The trading has been so fast and furious, especially the last 6 months, I really lost track of my progress. Now I finally know how much money I've lost. Interestingly enough, it wasn't all that bad.

From the time I started investing in 2005 until now, I still have a slight net profit. So I actually could smile.

More interestingly, I realised that 2/3 of my losses came from my two financial managers. Considering that they manage less than half my assets, that's pretty damn pathetic! They weren't making as much money as me in the good times either ... so I thought they were risk averse and would weather the downturn when it finally came. They were supposed to be my hedge against my own brashness and inexperience!

Ok, no more money for them. I guess I shall be going solo from now on. And looks like pretty exciting times to come :)

I also realised that the lions share of my profits really came from investing in mutual funds. I invest mainly in country funds based on my understanding of geopolitical events. It's how I first started investing, and it looks like it is still the most profitable. So for the next few years, my money is on China, India, Vietnam and Australia.

It's been a bumpy ride, I hope we take off soon!

long with short stops

It's been almost a month since I first started recording my trading activity. In the current volatile market, a month is like a lifetime. The biggest change in my strategy stems from a friend introducing me to the concept of short ETFs. Short selling has been in the news a lot, especially when it was temporarily banned for financials. I'd always thought I needed special features enabled with my broker, but these ETFs allow you to short a wide variety of asset classes.

So my new strategy is that while I still believe the market is fundamentally undervalued and will go up significantly in the next 2-5 years, I have also adopted the strategy of using shorts to speculate on the volatility and reap some profits on the way down.

The strong rally in the last week of October also allowed me to pare down my portfolio to my core holdings, as listed in my previous post. Given the unexpected strength of the rally, I also took the opportunity of reducing some of my holdings, with the intention to repurchase them at a lower price since I expect the market to plummet.

Recent Movements:
POSCO: Sold half holdings at $70
NVidia: Purchased at $7.1, sold at $8.9 and repurchased again yesterday at $7.01, closed at $7.9.
Chesapeake: Sold at $21.5, it went quite a bit higher but too bad, I don't feel I understand it well enough to hold

Short Plays:
I started shorting Russell 2000 (TWM) on Oct 28, way too early. But since then, I think I've made good.
TWM: Bought at $125, bought at $105, cut loss at $94, bought again $98, halved holding at $133, closed at $106 on 13 Nov
Then I decided to be even more adventurous and play with emerging markets.
EEV: Bought at $81, bought at $92, bought at $93, halved holding at $99, closed at $75 on 13 Nov.

Having reduced my short positions, I'm just going to sit on the rest and see what the weekend brings. Last week the China stimulus package turned my portfolio red, I'm concerned that this weekend wither a bailout for the car industry or some agreement at G20 will do the same.

stock market stocktake

The past few months have provided me lots of excitement in the stock market. I was initially very gleeful at successfully avoiding the spectacular sub-prime crash earlier in the year. But since I started putting money back in the market, the subsequent declines have been no less significant. I am constantly reminded of one piece of wisdom that stuck in my mind from one of the market research reports I read quite a while back:

A stock that drops 90% is a stock that drops 80% and then halves.

Many of my stocks have halved. Nevertheless, I am still very optimistic in the long term, and I thought that for once I would take stock of my key holdings, and review my reasons for holding on to them and averaging down, or whether I should consider cutting losses on some of them. I want to capture a snapshot of my logic so that in another few months from now, I can look back again and laugh or cry.

Gold (STI: GLD.SG)
Of all my holdings, I am most bullish on Gold in the short- to mid-term, and have been trading (mostly accumulating) since June. There are a lot of reasons for this:

• With the announcement of the bailout plans, the US government will reach unprecedented levels of debt. I expect the US dollar to go down, and historically this will drive the price of gold up.
  
• If the bailout plan is successful, I expect high inflationary pressure in the US to increase demand for gold.
• If the bailout plan is not successful, the impending recession will also cause people to retreat to gold.
• Recent weakness in the price of gold is attributed to fund managers being forced to liquidate their holdings to pay off other margins
  
• The other interesting fact is that there is a huge shortage of physical gold. I'm not exactly sure how this relates to the price of futures and ETFs (since the disconnect has existed for quite a while), but the natural inference is that high demand should bring prices up somehow.
• The price is down 25% from its high in Mar 08.
  

Posco (NYSE: PKX)
Posco is a South Korean steel company I have become quite attached to, having made quite a bit on them over the last 2 years. The have a proprietary steel-refining process that is supposed to be the most advanced in the industry.

• My investment in this company is premised on the continued demand for steel from the developing countries.
  
• The stock dropped sharply this year, firstly due to high oil prices and then the global economic decline, but I expect this to recover in the mid- long-term once growth in China, India and Asia resumes.
• Warren Buffet has called this the best steel company in the world and he owns a 4% stake.
• The price is down 70% from its high in Oct 07.

Alexco Resource Corp (AMEX: AXU)
Alexco is an American silver mining company, with large operations in Canada.

• Silver is supposed to be the poor-cousin of Gold, and the two usually trend together although Silver fluctuates more. Currently, the price of Silver has been beaten down much more relative to Gold.
• Unlike Gold, Silver also has industrial applications, hence demand is also affected by the general economy. Hence, the longer-term outlook is also optimistic similar to steel.
• The price is down 80% from its high

Chesapeake Energy Corporation (NYSE: CHK)
Chesapeake is one of the largest natural gas producers in America. The price has fallen sharply lately, but I think the price of energy will remain high in the long term.

• The stock has dropped substantially with the falling price of oil
• The company has cash flow problems in the current tight credit market
  
• The CEO had to liquidate his stake to cover other margins, leading to further price drop
• The price is down 70% from its high in Jul 08

NVIDIA Corporation (NASDAQ: NVDA)
NVIDIA is the leading maker of computer graphics chips. I've been toying with it for a while, and will probably look to buy in over the next few days.

• It is strengthening its dominant position in the graphics industry
  
• The company has a very strong cash position, although the importance of this has lessened slightly
• It has a strong historical annual ROE of 24%
• It has been incorporated into the latest line of Apple computers, which will likely increase demand greatly
• However, the company is facing recent lawsuits over GPU failures, which could be costly
  
• The price is down 80% from its high

SIA (STI: SIAB.SG)
I first bought this expecting the price of oil to fall in the short term. The price of oil fell, but so did everything else! I've since reduced my holdings (contrary to popular sentiment that this is a good stock to accumulate) because I think the airline industry will be hit hard by less travel (esp on the major carriers) in the short term. In the mid- to long-term, bankruptcies and mergers within the industry may improve the buying proposition. So for now, I'll just hang on to a small stake and watch.

UBS (NYSE: UBS)
When I first bought UBS, after GIC had already lost tremendous amounts of money on it, I was optimistic on a quick recovered. Since then it has dropped much further, although the government interventions in both US and Europe have helped stabilise the price. I'm just going to hang on until more positive signs emerge, or perhaps I will diversify by financial holdings with another American bank.

Well, these are my core holdings for now. Most of them are in America, because I figured the American market was a lot closer to bottoming out (although the STI has since caught up significantly). I'll just continue to shop around for now.

One major strategy I've adopted is to decrease the size of my lot purchases. I used to buy about $3000 of stock at a time to minimise the % impact of brokerage fees, but with the ridiculous fluctuations I've decided it is a lot wiser to buy smaller, more frequently. Fortunately, the volatility also makes the brokerage fee less significant as a percentage of expected gains.

So let's see how this goes ...