I wanted to make a nice comprehensive post on what’s currently happening in the markets (at least my personal take on it), and to me, one of the best ways to tackle a less-biased view would be to read,read,read a lot. Frankly, what I noticed is that fund managers (those with 20 year consistently good performance track records) who handle Php in the hundreds of millions and billions of pesos, or say dollars and handle them with good risk management read a lot, have a respect for the markets and work very very hard (emphasis is mine). The people who rely on technical analysis alone and profit a lot (like hundreds of millions a lot)— is not many. Odds are against you. 1% versus 99%. And really, the ones who manage that much money, they don’t have a life. They work so hard, that they frankly gave up their freedom in order to manage that kind of money. The sight is not really pretty, but that’s the price you pay for wanting to manage money. I don’t really envy them.
Because when you make mistakes, those are going to be worth condos, and houses, and not merely some small amount. That $2 Bil JPM loss looks a lot, but that was on an asset size of $360 Bil. 0.5% of the assets. I think I actually am worse than that loss, risk wise, considering I just lost 4% of the capital this week in just the last two days , by mismanaging my trades in BLOOM and OV. I know, I suck and I’m not proud of the fact that I just lost that much money. I hate myself for not having the discipline to cut quickly. Fear matters sometimes, and there is fear in the air. One needs to listen to the markets. I’m writing this for myself, not for you.
“These were egregious mistakes…“They were self-inflicted and this is not how we want to run a business.” – Jamie Dimon (I concur. Error’s totally mine, and yes, losing money is not a pretty sight.)
Btw, if you have to read one article related to the JPM $2Bil loss- this is the article you read : The Tale of a Whale of a Fail
So, to basically trade/invest your money based on sentiment,fun,instincts, emotions and mood swings, isn’t really a recipe to consistently win over a long time from the really few handful of professional stewards of money. (Talks to myself —Haven’t I learned from all the losses over the years?) I don’t even know what “professional” means right now. It just simply boils down to managing risk these days. This reminds me of Mayor Bloomberg’s quote “Talent attracts capital more than capital attracts talent.” But more than that, this week alone is a reminder that discipline, caution and humility to the markets is of utmost importance.
So, let me try to make an assessment of the markets while heeding the advice and being a sponge of the more experienced financial bloggers, fund managers out forward, publicly talking about their thoughts in the markets, only if YOU’d care to listen and read about them. Frankly, a lot of people add me in Philippine related stock market forums, and due to the deluge of so many information, I really can’t read everything, every opinion etc. It doesn’t matter, because perfect information never exists. Efficient Market proponents of course, know deep inside there’s no such thing as an efficient market. So, during market hours, yes I only just listen to the purest of information – Price and Volume. It helps turn off all the noise. Too much information is— too much analysis paralysis.
To start with the market wrap up, I wanted to share Mr. Reformed Broker Joshua Brown’s excellent article as a good perspective in looking at the markets.
And so who is the beneficiary of this all?
The answer is you are.
If you can demonstrate skill in the stock markets and can perform, you will be the recipient of the fact that America is both scared of stocks and needs stocks to make it through retirement. if you can manage assets and take less risk while producing superior returns, you are going to make millions of dollars and then millions more.
Your services are required, ladies and gentlemen. The opportunity is indescribable, once again we’re talking about $40 trillion in liquid assets that require a professional to steward and oversee.
So get good and make your mistakes early and a nice chunk of that money will become yours.”
Warren Buffett used to say, “It’s only when the tide goes out that you learn who’s been swimming naked.” Do you really want to be caught standing around without your suit on?
Without further ado, let’s look at this week’s largest declines. Let’s assess the carnage that happened. I pasted below PSE’s Weekly Statistics. (All of this can be found at the PSE website, and it is updated weekly.)
The extent of the declines in this week alone is large, for instance OV (Philodrill) fell 23.64%, and NIKL (Nickel Asia) fell 17.98% this week alone. There are 174 losers compared to only 35 gainers and 19 unchanged ones for the week. While the PSEI only fell 2.63% for the week, a lot of “third liner” issues are getting decimated and creamed, due to the fact that there are no buyers. Remember, absence of buyers = falling prices. You don’t really need a huge selling pressure to make a stock fall. But the more people get caught holding the bag, one can quickly find himself in a quicksand grave. Be very careful out there.
Fat tails, both downside and upside are hard to quantify. Mathematical techniques like oversold indicators, RSI and other momentum price indicators will not suffice because markets can move like drunkards and psychotics. A capitulation , if it were easy to identify, would have made a lot of people rich. No, volatility reigns so beware. Bottom fishing— is a brutal exercise. Make sure you know what you’re doing, with a really big appreciation for managing risks. There’ll be tons of failure, whipsaws, shakeouts and what nots. That’s why people love trading in and out of these things. Opportunities to make and lose money are gargantuan. Position size matters.
Actually, what’s currently happening right now reminds me so much of September and October 2011. While a lot of stocks are tanking, a lot of opportunities also existed. AGI traded at 8s and 9s during that time. People who thought they were getting a bargain buying at 9, when AGI was trading at 12 just a few weeks had to suffer drawdowns till 8, and everything else was also getting decimated. This was when LC and MA (some of the most loved stocks during that time) fell from their glories of 1.80s and 0.07 to 1.08s and 0.042. Absence of buyers. I tell you, bottom fishing is never a pretty sight. Oh no. Whether it’s luck or some sort of good fortune, the stocks bounced maybe 10-20% from their lows. AGI from 8-10, LC from 1.08 to 1.25, MA from 0.042 to 0.052 but these are all hindsight. 20-20. Bluest of the blues suffered as well , with Metrobank falling from 80s to 62. The market is psychotic, I tell you. Appreciate the fact that this spells opportunities. An abundance of value investors with longer investment horizons, deeper pockets and sound risk management strategies will win this. One can probably adopt the “An Apple a Day system”-aka peso cost averaging during these times, on selected issues of course. It works wonderfully. I talked at length about this style in this September 26 2011 post here : Humbled by the markets, money management strategies.
Nice Reminders: (Stuffs taken from Buffett and Charlie Munger’s 2012 Annual Shareholders Meeting)
1.) Investor sentiment — a mood — carries these stock prices up or down to a degree that cannot be explained by fundamentals like earnings and revenues.
2.) The important thing is that you make a buy decision based on what the business is worth. Stick with businesses that you think you can value and you will make money in stocks. The market is a very obliging place because you don’t have to do anything. Prices change every day and you don’t have to do anything.
3.) Generally it pays to stay away from declining businesses. If you really think a business is declining, most of the time you should stay away.
4.) We should stay away from things that we don’t understand.
5.) In investing, you don’t have to be able to spell 500 words in a row to win the spelling bee. You just need to have some investments that do really well and don’t turn into huge disasters.
6.) To a man with a hammer, everything looks like a nail. In other words, people twist the problem based on the desired solution. These mathematical techniques have created a lot of false confidence. Now, even people on Wall Street have thrown away the Gaussian curve but have only shifted the curve. In reality they don’t know what curve is right. They know about fat tails but they don’t know how to quantify them.
1.) Practice patience with the redeployment of proceeds.
2.) More caution is warranted. Adapt and listen to the markets. Don’t insist on your opinions. No one is larger than the markets, no one.
3.) Fundamentals add confidence, but not necessarily in the timing. Hone both. Technical analysis allows us to objectively apply an indifferent eye to our analysis. The hardest part of success is the actual implementation of our analysis in a disciplined way. Regulate emotions, rather than fall victim to them at the hands of a market that doesn’t care about us. Value today is often in the messy, the illiquid or simply a recognized opportunity that investors are having problems “timing.”
4.) Don’t spend too much time on mistakes. Prepare for all possible outcomes before entering a trade. Yes, you will lose money. It’s part of the game. Just control it.
5.) The “unexpected” seems to happen on a fairly regular basis in the markets.
6.) Don’t fall in love with stocks. Being an atheist, skeptic and disloyal trader helps one from marrying opinions (fundamental, macro, flows) too strongly. It helps in trading the markets. No faith. No loyalty = better risk management. Even if you’re betting with or against the largest whales in the country, remember that only price pays.
This is not a “let your winners run” environment. Gains are short-lived, breakouts are vulnerable, and mean-reversion trades from overbought and deeply oversold conditions offer higher probabilities of success. The trendless choppiness could frustrate even the most experienced traders. You have to be really nimble if you want to time the current market. – Ivanhoff, Stocktwits May 14, 2012 Wrapup
– Faceless Trader