Sunday, August 14, 2016

Fantastic Quotes from Berkshire's Letters

I picked up the following book from a neighborhood Goodwill a few days ago. The book is titled - The Essays of Warren Buffett: Lessons from Corporate America- by Warren Buffett and Lawrence Cunningham. I flipped through the first few pages while I was there and decided that it is a book I very much would like to read. The copy I have is the very first revised edition published in 1997 so it preceded the financial meltdown of 2008. The latest 4th edition is available on Amazon and from the reviews I gathered it covered Subprime crisis and financial meltdown of 2008. You can read the reviews or get a copy here 4th edition here on Amazon . I highly recommend you get a copy. I am only 1/5th through the book and I already know this is a book I would read and re-read many times (just so that I do not forget all the good advice when I invest and trade my own money and we humans have short memories and impulsive). I would definitely equate this book to my old time favorite - "Reminiscences of a Stock Operator" in quality/entertainment. Here is the link to a copy on Amazon if you wish to get one.

The most important thing this book has done for me is to remind me of what risk is when it comes to putting my hard earned money in shares of companies run by people you don't know, risks one should not be taking most of the time. I wish I had come across this book 20 years ago but it is better late than never.

1. Valuation is counting cash, not hopes and dreams. Page 22 of my copy of the book if you want to read the context

2.The challenge here is for us to generate ideas as rapidly as we can generate cash. In this respect, a depressed stock market is likely to present us with significant opportunities. Page 30
3. Indeed, we think very few large businesses have a chance of compounding intrinsic value at 15% per annum over an extended period of time. Page 29

4. The financial calculus that Charlie and I employ would never permit our trading a goodnight's sleep for a shot of a few extra percentage points of returns. I've never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need. Page 32

5. The intellect should be the servant of the heart, but not its slave - Comte. Page 46

This book and its latest edition is a MUST READ. I would strong recommend whether you invest your money yourself, work with an adviser, have an interest in the stock market and value investing or just want a sensible good read from one of the greatest investors of this century

Monday, July 11, 2016

Did you lose my inheritance again Pa?

Drawing with Wacom tablet is a lot harder than drawing with real brush or pencil, but it beats trying to draw with a mouse. Here is my first respectable attempt at poking some fun at the stock market also called casino, drawn with the help of ArtRage Demo.

Saturday, December 19, 2015

Confessions of a swing trader

It is Dec 19 2015 and a whole year is almost behind me. It has been a momentous 12 months for me and I have a learning experience to share. My trading account had gone on a nosedive and gave back my year to date gains and then some. How did that happen? I was over confident and sold more puts and were holding a few stocks at the top of the market when I should have been sitting on 50% cash knowing how frothy the market had become (hindsight is 20/20 but there was no excuse as I had gone through 2008). Considering the fact that I had close to 40K+ of realised gains (100+% ytd returns), the one thing I should be doing is scale back risks and not business as usual. I am no Niederhoffer, but what my portfolio went through the last 3-4 months albeit tiny compared to his billion dollar portfolio reminded me of Niederhoffer's trades before and after Sept 11 2009. This was told in the April 22 2002 New Yorker article titled "Blowing Up" by Malcolm Gladwell. Victor Niederhoffer was collecting juicy premium selling LEAP puts on S&P and when market crushed big and he was sitting on those upside down put options and his account holding decimated as a result. Niederhoffer would spend the next many years trying to rebuild his trading capital. Here is the article on a very entertaining read.

August was THE month that undo all the good deeds. I remember how in July I had noticed volatility was starting to pick up. Daily market range had gotten bigger à la summer 2008. As Aug 1 kicked in and summer boredom took hold and the angst was palpable. The market was not bored by any stretch of imagination on the contrary one could tell from the daily point swings that the amplitude was about to get bigger. Day traders, machines, algos, just about everyone were antsy (the smart ones had gone to the beach in the Bahamas). A lot of chatters, twitter rumors, anything to get the market to move bigger. Everyone was talking about a market top but no one wanted to be the first to get out of the door. In the mean time scalpers and day traders were still trying to trade and fade and trying to irk out a living every day.

My trading strategy over the last 2-3 years have not changed much. I would pick a stock I don't mind holding if it gets put to me and sell cash covered puts on. If it ends up getting put to me, I would turn around and sell calls, thereby generating my own dividend income so to speak. My criteria for stock selection is one that has a good beta, and higher beta stocks are usually associated with high risk stocks. High beta can also come about if there is upcoming earnings or anticipated news. My rule of thumb is one where the option premium will pay me at least 5%-6% or more over 1-2 months and stock price of anywhere from $4 or $5 to $10 a share. Unfortunately, this only exists in stocks that are highly speculative, and usually one with debts and risks. These stocks are also the ones shorts like to target which means they can be subjected to pretty relentless shorting and inversely occasionally a huge short squeeze. I do not ride my put options till expiration so I can make 100% gain if they expire worthless. I typically close out my options once they have decayed sufficiently and don't quiver over the last 5 cent decay over 3 more weeks. This protects me against an unforeseen big shock and I can take advantage of the next volatility spike when it presents itself. In short I sell volatility. This strategy works fine until a broader market shock happens quickly and there is a stampede. In addition, if this is a biotech or pharma speculative stock and had a disappointing trial result, shorts will be feasting on the stock and decimating the stock. Similarly if someone had written a damaging article and publish it online for everyone to read, the Twitter world and everyone would be all over it and its stock price would move sharply lower swiftly. This is what the US stock markets have become, every man and woman for his or her own greed.

In my case there were only two culprits: namely XOMA and PVA. XOMA, a case of a 30 year old Bay Area pharma company not being able to successfully develop a working drug after 3 decades but somehow manage to chuck along and survive. PVA, a case of everything that can be wrong with the management of a natural gas exploration company and is wrong, a company not executing the right plans, taking on debts when the going was good for the firm. I was overweight these two stocks having made money trading and selling calls and puts on them. The option premiums I collected over the past 16 months had more than zeroed out my cost in XOMA's case so everything I made from that point was a mice steady income. This was true until the stock got decimated by shorts on bad trial data one morning I woke up to, The move was swift and there was no time to exit any options, they were upside side. My put options were exercised and I was holding worthless XOMA shares once expiration day came. In the case of PVA, I was awe struck by the speed at which the stock sank, as oil price went from $70 to 60 to 50 a barrel in a few months and natural gas price sank to fresh 52 lows each week. I was like a deer frozen by the headlight, in disbelief. You asked why didn't I use stop loss, I do not normally use stop loss as I don't want my stop loss to be hunted (now NYSE has done away with Stop losses and GTC orders). . PVA share price went from mid 6 to 5 to 3 and soon to $1 in the span of a few weeks. The mistake I made here was liquidating both positions walking away too late only when I realised that conserving trading capital is RULE ONE.

It looks like I broke my own money management rule in 2015. Lessons learned and I shall strive to be a better trader in 2016.

Here is a book I recently read and found it to be entertaining and helpful to my trading. I highly recommend anyone interested in being a better trader to read it.

Here is an excerpt from the back of the book - "Trading is a battle between you and the market. And while you might not be a financial professional, that doesn't mean you can't win this battle". Through interviews with twelve ordinary individuals who have worked hard to transform themselves into extraordinary traders, Millionaire Traders reveals how you can beat Wall Street at its own game.

Saturday, December 12, 2015

Three Books I Hold Dear

I love books and we have a great library at home. We frequent book sales on weekends, without shame we call that our favorite past time: friends of the library sales, Goodwill stores and we have two favorites (Mercer Island Thrift Store and Santa Barbara Goodwill which are often filled with good books). We are often rewarded with good finds in the book section to add to our library which has grown by leaps and bounds, it must be over 1000 books by now. My reading interests are still broadly the same: finance, business, food, photography, but his interests cover a wider genre.

Let's start with the three finance books I hold dear:

Reminiscence of a Stock Operator by #Edwin Lefevre. If you trade or are an investor, this is the one book to read and read it from cover to cover. There are many gems in this book and you will not be disappointed

I thoroughly enjoy reading these books, given that I love all things finance and I trade my own account for a living. The Antifragile book is an easier read than The Black Swan. It is such a good book that we have his and hers copy :)

I shall close with one quote: "In old days books were written by men of letters and read by the public. Nowadays books are written by the public and read by nobody." - Oscar Wilde What has the World we live in become, sad indeed.

Friday, December 5, 2014

Reading The Tape, Jesse Livermore and Nassim Taleb

I am a momentum trader and I watch the tape like a hawk. To me the most important skill a trader can have is to be able to read the tape as there in lies the collective greed and fear of the masses. Knowing the tape intimately also helps to identify tricks such as a small cap or penny stock pump and dump. This is especially important in today's "Man Vs Machine" computer algorithum driven markets.

In my opinion, profitable trading is not so much that you the trader get the price of a stock right, but rather it is the ability to anticipate correctly what the masses will do and be ahead of the crowd, whether that is to buy into or to sell out of a position.

I trade stocks and sell covered calls and puts. Some days I am just scalping a stock if I can see which way the momentum is. Other days I swing trade and hold on to a position for a few days or weeks if an opportunity presents itself. Otherwise I am just as happy to be in cash until the risk rewards is good enough for me to risk my chips. I don't have fancy software nor can I afford Bloomberg terminals. In the picture below, you can see my set up - A six year old 14 inch Acer laptop tethered to a 18.5 inch monitor, and a 12 inch Lenovo Thinkpad (which is also my "mobile" trading station when I am on the road). I use TOS (Ameritrade's ThinkOrSwim) platform and also Fidelity Active Trader although less on the latter. It is a very basic setup, nothing fancy, but it works and I trade profitably for a living from 5am to 2 or 3pm PST. I love being on the west coast, as I am done by 1 or 2pm most days and have the whole day ahead of me still to do everything else.

One of my favorite trading books is "Reminiscences of a Stock Operator" by Edwin Lefèvre - a book about a legendary stock operator by the name of Jesse Livermore. You can read more about the book and Jesse Livermore Here on Wikipedia. It is a book I read and re-read many times. The tales in the book as related by the writer taught me more about the psychology of trading than any other trading books I have read. The greed and fear of the masses is what makes an irrational market stay irrational for a long time, much like what we have today - a market that is far removed from fundamentals and the real economy on Main Street.

If you are serious about making a living trading the market. You have to get yourself a copy of the Jesse Livermore book and read it from cover to cover. You won't be disappointed.

The other book I highly recommend is "Antifragile: Things That Gain from Disorder" - by Nassim Nicolas Taleb. It is an easy (or rather easier) read than many of Taleb's books. If you are adventurous and up to the challenge, I would suggest also picking up a copy of "The Black Swan -The Impact of the Highly Improbable" another book by the same author. Both books are about "fat tails" and unexpected event risks. The first book has a more personal tone with the author's real life stories, the latter on the other hand has lots of technical charts and analysis.

These books are indispensable to me. It is funny that I enjoy reading them more than books of any other genre (except for photography), but that is me I guess.

Trade with caution. Have a profitable trading week.

Sunday, December 22, 2013

What Bitcoin Is and Is Not & The Ominous Chart of the DOW

There is an excellent explanation on what Bitcoin is and is not in layman's term if you scroll down to the middle of this article on ZerooHedge. The article talks about "How To Steal Bitcoins In Three Easy Steps" 1. Copy the keys 2. Getting Away With it and 3. Get Rich. At my last check, Bitcoin is trading at $658.20, with a low of $615 and a high of $700. The trading band has narrowed considerably, low volume on an up day, and much higher volume on a big move down. Are we about to witness a big break south on big volume?

On another topic, market participants have been talking about the eerie similarity between the DOW in 1928-1928 and now (see chart below). With the Dow, Nasdaq and even S&P hitting record closes even in the face of the first Taper last week, the comparison of the two market indices may seem laughable to many bulls but Black Swan event needs no warning and that is why it is called a Black Swan. Severe market corrections do happen as history tells us unfortunately we will only know when we look back. Irrational exuberance has taken hold, major bears have bailed, some have even turned bullish. Market multiples artificially supported by 4 rounds of QEs and mountain heap of cheap liquidity, the big correction could just be around the corner. You know how sometimes one can smell the rain even though the storm clouds are still forming in the Pacific ocean, that is how I feel now about the state of the market. Buyers beware.

Precious metals have been under pressure since the very first hint of Fed taper this summer. Physical gold in particular is looking very attractive, here or $100 lower from here presents a very good entry point for the next leg up. I bought gold when it was $680 in 2006 (still own it, physical is not something I would sell), and I loaded up on Half Franklin at $9.98/oz of silver that same summer and sold them when silver hit $45. I like silver here, it has a commercial component and if I must be invested at this time, silver etf would be a good place to park some money short term. It also looks to be finding and building support here. I have been trading smaller silver miners as a proxy to the Silver ETF (SLV) and Silver Wheaton (SLW). Have also added to my 1 OZ silver eagle collection, although I rather not to have to pay for the $2-4 spread but coin dealers have to make money so I am cool with that. As for gold coins, supply seems tight at the local shop guess they have all gone overseas to the Chinese and Indians who have been stocking on them.

Wednesday, December 18, 2013

Before & After Fed Policy Announcement - Gold and Silver Spot Price - The Expected Taper

Every trader was probably ready to pounce.... just to be whipsawed. The cool headed stays away in period of high volatility and let market participants digest the news and the trend to show itself.

GOLD SPOT, chart courtesy of Dukascopy

SILVER SPOT, chart courtesy of Dukascopy