So, it’s been 3 months since I published anything on this blog. I decided to take a bit of a break since I had consumed too much FIRE material and wanted to focus on non-FIRE related topics.
I’m still not in a mood to write, so I will just give a brief update:
My portfolio had a bit of a wild ride the last few months, reaching new highs, crashing down then making new highs again
The trade war and other news-related cycles provided some volatility and plenty of opportunities for the focussed investor
On news-cycle related dips, I bought Abbvie and Siltronic. Crazy that you can generate >33% returns in less than 2 weeks
I over indulged in my share buying spree and my margin grew to an uncomfortable 10% of portfolio value. I had earmarked some salary payments from the remainder of the year to offset this, but also planned to sell down some positions to pay for these purchases
Today was the day and I closed one of my biggest and longest held positions: Walmart. Somewhat sad to part with a solid blue-chip stock that has paid great dividends and produced even greater capital gains, but part of the function of WMT was to serve as a ballast in the portfolio and act as a pseudo ‘cash’ position to be sold when better opportunities arise. It also doesn’t hurt that the WMT share price has reached a level that is perhaps a bit too rich.
While my main focus companies have done reasonably well so far, one that hasn’t done so well as been Ensco ESV. I’ve been averaging down and down and down into a seemingly endless money pit. Let’s see if this thing ever pays off
That’s all for this update. I’ve been meaning to write a couple of articles and will see if I manage to find the time and energy to do so soon!
Posted on 2019-07-01
How much money do you need before investing?
People often ask “How much money do I need to start investing?”. And you get answers such as:
Only invest what you can afford to lose
Only when you have X emergency savings
Only when you have paid off your debts
Only when you have a minimum of $x so that the commission fees are not too much
While there are valid answers along the lines of the above, there’s also another angle which I wanted to get into. But before I get into that idea, I wanted to share a story that came to mind when I considered this question:
Billionaire Kerry Packer was gambling in Las Vegas when a Texas cattleman approached wanting some bigger action. Packer turned him down and the Texan grew annoyed boasting “Do you know I’m worth $US100 million?”. Kerry sized him up and said: “If you want, I’ll flip you for it.” Humbled, the Texan retreated.
Packer was a billionaire and while losing $100 million would be nothing to sneeze at, he could take the hit. The Texan, rich by any standards, could not afford to lose $100 million and so he had to back down.
Why is this story relevant? To invest successfully, you need to be able to put money at risk. You need to be able to hold onto investments in a downturn. Towards the end of 2018, I lost over 4 years of expenditure from peak (see: I lost 4 years), yet this didn’t phase me because:
The value of my investments doesn’t impact my day-to-day life (e.g. I don’t depend on dividends for income)
I was confident that my investments would recover
I was confident that if they didn’t recover, I could keep earning money from my job to make up for the loss
So I would say invest when:
You do not need the money that you invest and can lose it without impacting your life
When you have decent (and stable) income to replace a severe portfolio draw down; and
When you have sufficient other financial reserves such that the loss of your investments would not discomfit you
It is well-recognised that investor psychology is very important to investment returns. Having sufficient financial firepower in reserves and earning capacity is an important way to maintain a level-head when investing.
Posted on 2019-03-18
Never try to catch a falling knife?
A simple rule of investing is “don’t try to catch a falling knife”. I’ve broken this rule a lot recently with the following purchases:
Let’s see how each one of these worked out:
This is arguably not really a falling knife. The stock was beaten down due to accounting irregularities which are taking a ridiculously long time to resolve. The company has not filed with the SEC for a while and as a result got kicked off NASDAQ. Then a bombshell dropped when Bloomberg published an article stating that their servers had hardware backdoors inserted by China causing the stock to fall a further 40%.
To me, both issues are overblown though understandably some investors are required to sell when the company is suspended from NASDAQ. This is a golden opportunity for small investors who are not bound by these rules.
I managed to buy in the low $12 range so am up 60%+ on these holdings. I wanted to acquire much more but ran out of money at the end of last year. This stock was the second stock referred to in my post Temperament, patience, poker and investing. I picked up more at the higher price in the $15 range and those shares are up around 30%
Status: unrealised gains of 60% and 30%
Newell Brands (NWL)
I’d been watching this a while and was finally tempted when it dropped in late October. I managed to pick up for just over $16. I was doubly lucky as to fund my ZYXI and SMCI purchases, this was one of the stocks I sold off just before it tanked for over a 22% gain.
Status: realised 22% gain
I’ve had this stock on my list and was put off by the USPS risk. Lo and behold, this materialised causing the stock to crashed by 50%. So I bought it. I was in two minds about this stock. On the one hand, management had shown the courage to bite the bullet and take the short term hit to adapt to the changing environment. On the other hand, they bought back stock at double the current price knowing this was a likely scenario: hardly friendly to shareholders.
Tailored Brands (TLRD)
Not really a typical stock I would buy, but it stock price is beaten down and some potential upside… if the stock doesn’t bomb out completely. Decent dividend, but question mark over the sustainability and potential for cuts.
Psychemedics Corporation (PMD)
This fell 25% on uncertainties in the Brazilian market.
Status: up 5% (but probably a dead cat bounce)
WPP plc (WPP)
Perhaps the most ridiculous one in the list. It was a stock that I didn’t even want to buy! The stock has a lot of negative sentiment and probably slightly undervalued. I’d placed a speculative limit order which I thought I had cancelled along with other orders which I had pruned to bring more discipline to my trades. Well obviously I missed it and only realised I bought it when I checked my portfolio some time later.
Status: unrealized 7% gain
There’s a saying in poker that goes something like: “It’s not enough to know how to play good poker, you actually have to play good poker.” And so it is the same for investing. We know not to buy high and sell low, and yet we do. We know not to try to catch a falling knife, yet we are tempted.
In my case, SMCI is not really a falling knife, it was a good entry point for a stock which I expect to make significant further gains. NWL was a lucky catch and discard of a falling knife. STMP and TLRD remain unknown gambles that could make or lose money. Although I didn’t intend to buy WPP, it was on my list as a potentially undervalued stock and so I will now hold the position and see if it improves.
After a batch of knife-catching, I will try to be more disciplined and re-read my 2019 game plan and try to stick to it!
Posted on 2019-03-06
Investment with infinite return?
Imagine if I offered you the following investment:
For every $100 you invest, you will receive back $159 every year until the day you die
The amounts will be guaranteed by the government so it is a ‘risk-free’ investment
As a bonus, the $159 will be increased by 2.5% each year that you receive it
As a further bonus,if consumer prices, or wages increase by a rate higher than 2.5% your $159 will be increased by the higher of the consumer price increase or wage increase (whichever is higher)
These increases will happen every year
Are you biting off my arm yet?
Can you get more boring?
In my previous posts, I talked about some of my ‘speculative’ investments which, truth be told, I do not consider too risky given the potential returns.
It is ironic then that this investment, although backed by the UK government and having fantastic returns, is perhaps the investment that I am most pessimistic about yielding a positive return.
After 35 full years of contribution, you would be entitled to a weekly pension of £164.35 for the rest of your life once you hit the age of 67.
So what are the problems with this investment:
As with many social security schemes, the #1 enemy is demographics. The pension age was previously set not far off from the average life expectancy thereby giving a net years payable of zero. Increasing life expectancy is putting a heavy burden on social security systems.
On top of that, the aging population means fewer workers contributing to the pension scheme and more pensioners claiming from it. In 1976, 61% of the population was aged 16-64 and 14% aged over 65. By 2046 this is expected to be 57% and 25%.
Indexing the benefit by the greater of 2.5%, earnings inflation or consumer price inflation is insanely generous and completely unsustainable. This will inevitably need to be addressed but it would be a brave politician who throws himself onto this political grenade.
What this means is that:
Benefits must be delayed;
Benefits must be reduced;
The amount paid in by workers will need to increase; and/or
Some combination of the above.
We can see that some of this is already happening: retirement age is already increasing and I suspect will continue to do so. Pension Credit tapering also reduces the cost to the government (but maybe with the side-effect of dis-incentivising savings).
It hasn’t happened yet, but I believe the generous indexing will need to be reduced or eliminated. The worse thing for me personally would be if the actual pension benefit itself were to be means-tested and that I receive nothing as a ‘rich’ pensioner.
Even with these risks, I am happy to pay into this pension scheme not as an investment, but rather as an insurance (if I lose everything else, I will have the pension to fall back on).
Those familiar with the UK pension scheme may notice one particular thing doesn’t seem to make sense, but I will address that in a future post!
Posted on 2019-02-26
Time to roll the dice!
Today, I received a notification on my smartphone. As a rather boring person, this was not a reminder to go to a party or some other such fun thing, but rather a reminder to buy shares ahead of an earnings report. I was waiting for cash to arrive and wanted to invest prior to potential positive earnings which could lead to the share price rising. The downside of investing before earnings is that if the earnings are bad, I could end up with losses.
I’d started accumulating a position last year and am currently up 93% from the early positions. My later additions are also up 37%, but of course, without the additional margin of safety, these short term gains can evaporate with a single bad earnings result.
Posted on 2019-02-25
Investment psychology: FOMO
Warren Buffett once said that as an investor, you should be “Fearful when others are greedy and greedy when others are fearful.” This nugget of advice can capture multiple ideas when it comes to investing:
Taking a contrarian view
Not following the crowd
Maintaining control of your emotions
Here, I’ll consider the third aspect.
I talked about experiencing emotions while investing in the post: Temperament, patience, poker and investing. While I typically avoid investing under emotional influence, when I have no choice, I try to take the following mitigating actions:
Recognise the emotional influence – being aware is half the battle. Knowing I am under emotional influence allows me to ask my question, is what I am doing logical? Would I make this trade in neutral conditions?
Fall back to objective criteria: I go back to my fundamental analysis, what is my valuation of the stock and risk/uncertainty attached to it? Does the price still provide an adequate margin of safety? Technical indicators could also be used
For the stock in question, I was driven by the ‘fear of missing out’ or FOMO. I had prepared for a race I was likely to win, but the starting gun had fired while I was walking to the starting line. I was concerned that the share price would run away from me. I had to balance two points:
Risk of the opportunity slipping away as the price rises higher and higher; versus
Staying calm, waiting for a better price to buy in, not being motivated by FOMO
In the end, option 1 won: the price still gave me enough headroom for profit, but unfortunately did not have the margin of safety I would have liked, but I didn’t expect to get a better price. RSI was also not terrible.
I hate to buy on FOMO as it leads to doing stupid things like joining the dotcom boom bandwagon or buying bitcoin at 19k. In this case, it was not motivated by crowds, but fear of not being able to execute on my 2018 investment plan. Time will tell whether it was a good decision or not!
Posted on 2019-02-11
Temperament, patience, poker and investing
I have said many times that there are a lot of similarities between poker and investing and you can bring lessons from the poker domain into the investing domain.
In poker, “steaming” can be said to be a state of anger, mental confusion, or frustration in which a player adopts a less than optimal strategy, usually resulting in poor play.
To be successful in investing requires several things; chief among these are patience and calm temperament. While I am calm, I am not naturally a patient person and so this requires some discipline on my part.
Well, yesterday, I was steaming. I have one speculative investment that I had started building a position in but it was only 1/10th of my desired position size. I was already annoyed that in Q4 of 2018, I was not able to add to my position (due to cash flow issues) when the price was low, but in January, I received my bonus and had funded my account on Wednesday and was ready to place my order after work.
When I got to my computer, I noticed that the stock had jumped moments before by some 5%-8% due to an announcement that I was anticipating (but expecting to happen later). Ordinarily, I would have been a bit annoyed, but thought “no big deal, let’s wait for the price to recede after the news is digested and buy when the price is right – in the worse case, there will be other opportunities”.
But not yesterday. I was frustrated. Maybe it was a bad week due to everybody at home being ill, but I just lost it and decided to buy my full position at the new high prices and not content with that, also revised the buy order on another speculative stock from my target price to the market price and bought that at a higher price too.
That seemed enough to get it out of my system and I shut down my computer and went to bed.
Maybe in future, I need to take some valium before starting any trades! 😂
Posted on 2019-02-08
So I finally got around to consolidating my brokerage account results from 2018 and figured out how I performed. In the last quarter of 2018, I was down over 6 figures from peak, but of course, I had made solid gains earlier in the year.
Overall, I was down in 2018 by about 7.5% – all of which has already been recovered in January of 2019. The loss was annoying as a single trading error in 2018 was responsible for 10% of that loss.
Worse still, a series of unfortunate events meant that I had no cash in the last quarter of 2018 so was unable to take advantage of the great buying opportunities that arose.
At least 2019 has started on a more solid financial footing and I hope further opportunities will arise!
Posted on 2019-02-04
Investment on autopilot
I did something that I haven’t done before: I put buy orders in for my entire year’s worth of stock purchases in January. I figure that this way, I can set it and forget it and maintain a better price discipline.
An interesting question is what happens if the stock market tanks and all my buy orders trigger in the next weeks and I end up in a huge negative cash position?
I guess my answer is: that’s good, I would have managed to buy everything at the price that I targeted! I could try to accelerate deposits (hopefully from bonus) and in the worst case, just pay the margin fees.
Posted on 2019-01-30
Is Nvidia a buy after the recent price crash?
I thought of buying NVDA just under the $100 range, believing it would rocket on AI hype but then crash after it is over. I didn’t in the end as I was not confident in being able to time this. While AI is a good business, there are uncertainties as to whether NVDA will adapt to this market. I doubt GPU will be the mainstay of AI compute in the future and on any switch to dedicated compute for AI, NVDA would lose the synergy with its gaming market.
On the gaming market front, NVDA runs the risk of losing this business in the long term due to commoditization of gaming (except at the top end) with GPUs being brought onto the CPU package. 7nm NAVI could already be the start of this trend.