Thursday, July 28, 2011

Breaking out of my comfort zone

These days, I haven't been really interested in finding out in detail about my personal financial statements. I mean I do record all my expenses in excel in my hp and track my cash in and out of my account but I do so out of habit and discipline. This is rather different in the past. Instead of feeling the passion and excitement whenever I tallied up the numbers at the end of the month, these days, I'm barely interested in even transferring the information in my hp to my computer. I wonder why there's this sudden disinterest in doing this...okay, maybe it isn't sudden at all. Afterall, I've been tracking it since 2008 - a total of 4 yrs - so it isn't exactly 'sudden'.

I can think of a few reasons why I'm no longer so excited about filling up my personal financial statements. I think the most important reason of all is that things don't move that fast in my life. I track my expenses every month but there isn't much changes from month to month. With the exception of a few months where I've to pay a lump sum (usually insurance payment, or some one-off items), my expenses are nearly the same. What about savings? I used to transfer any excess immediately whenever it drips into my account. However, I realised this is a waste of time, so when I have a bigger sum of money, then I'll transfer them over another account. I still remember me being so anal about meeting that monthly savings target (I broke up my yearly savings goal into monthly targets and since my income varies per month, the savings goal also varies per month) but I no longer do that. I also used to compare my monthly income with past years to see if I've been slacking but again, I no longer do that.

I stop being so obsessive about such things because I've never failed to achieve the monthly saving goals I set for myself. I may struggle over some months but I've never failed to achieve the target. So either my target are too low for me now or I'm getting comfortable with this level of 'tightness' in my belt. Or both. I stop being obsessive about meeting my monthly income targets and bench marking against my past 7 yrs of income (broken up into months) because I've never slacked. The income I get is either the same as the yr before or more. Thus, I think I've reached a level of comfort in my current level of work. Of course, I complain now and then about my harsh work schedule but overall, there's less complains about it now then before because I got used to it.

This is rather scary, even to myself. I know I'm a slavedriver and all, so working hard for extended periods of time can slowly become comfortable for me. I know I can handle that. I remember that when I started working, my hours are like 20+ hrs per week. Now? It's 40+ hrs per week, including sat and sun AND I'm getting comfortable with this?? Something needs to be done to get me out of this 'hardwork cycle'. Yes, I earn more now than before, and that's because I work longer and harder than others. That's nothing to be proud of.

It is possible to work less and earn more. I will have to believe and do it. I want to reduce my working hours to low 40 hrs per week, then 30+ and finally 20+. That would mean breaking out of my comfort zone, even though my comfort zone is actually more work. The big irony is that in order to break out of my comfort zone (which is doing more hours of work - remaining status-quo), I've to put some work now in order to reduce my working hours. Maybe then, I'll have more time to enjoy the excitement of tallying up my personal financial statements again.

I need to be challenged constantly to feel alive.

Tuesday, July 19, 2011

The 2% / 6% rules

I was reading my usual diet of blogs when I chanced upon OT's comments on this article, regarding Elder's rules in his sell and sell short book. It mentioned that there are two important rules to follow when trading:

1. Limit your loss on any trade to 2% of the equity in your trading account

2. Whenever the value of your account dips below 6% of the closing value at the end of last month, stop trading for the rest of the month.

The 2% / 6% rules are designed to prevent two kinds of ways that the market can kill you. I've written about piranha bites and shark bites before here, and the idea behind these two rules are based on these two ways too. The first way that the market can kill you is to kill you quickly and taking a big chunk of your capital in a single trade. That is why we have to limit the loss on any trade to 2% of your equity. I was reading the comments in OT's post and realised that there is a misconception regarding the 2% rule. The 2% rule is to limit your losses to 2% of your equity, and that is not the same as cutting loss if the shares drop 2% in price. What's the difference?

Before you begin a trade, you should have an idea of where you need to cut loss. Let's say you have $50,000 cash and you wanted to buy a stock priced at $1.00. Suppose that the cut loss for that stock is at $0.90. The potential loss is $0.10 (1.00 - 0.90). Since 2% of your equity of $50,000 is $1,000, you can at most lose $1,000 on any trade. We can thus calculate backwards to determine the position sizing of this particular trade in order to limit the loss to a maximum of $1,000. We'll take $1,000 divided by the potential loss of $0.10, and we get 10,000 shares, or 10 lots.

So take a look closely - if we buy 10 lots of the stock at $1.00 and if the price drops by 10% (0.1/1.00), the loss is just limited to $1,000, which is just 2% of our total equity. Thus the 2% rule is not a cut loss rule. By following strictly to the 2% rule, you'll prevent any one trade from wiping you out. In fact, you'll need 50 such trades before your whole capital is wiped out, if you un-wisely choose to enter 50 positions in one go.

To make it clearer, suppose that instead of buying the $1.00 stock with a cut loss of $0.90, you decided to make the cut loss level tighter at $0.95. The potential loss is now reduced to $0.05 but the absolute loss is still 2% of equity, which is $1,000. We can calculate the new position sizing for this particular trade - which works out to be 20 lots. You find that this rule allows you to vary the position sizing or the cut loss, but keeping the absolute amount of loss per trade at 2% of your equity. This means that if you're more confident of the trade, you can increase the position sizing but you have to tighten the cut loss. If you're not too confident of the trade, you can reduce your position sizing but you can also slacken your cut loss. The absolute amount is the only constant here.

The 2% rule can be implemented with sector allocation / diversification rules too. Suppose out of the $50,000, you only want 10% to be in this $1.00 stock. Having a cut loss level at $0.90 will allow you to have a position size of 10 lots of shares. However, having 10 lots of shares means that you have 20% of your equity in that position, which may be risky in terms of portfolio diversification. Since using the 2% rule allows me to have 10 lots, I'll reduce the position size to just 5 lots, so that I'm only 10% into this trade. When I reduce my position size, I have the liberty to slacken my cut loss level to $0.80, which would limit my loss for this trade to be $1,000 (2% of my equity of $50,000). Actually, I wouldn't even slacken my cut loss level, which is silly. But this is based on a maximum loss basis - meaning that you can lose up to $1,000 but not more than that. Again, I must also remind readers that the 2% rule does not mean that if the price drops by 2%, you'll cut loss.

After discussing at length about shark bites, there's still a problem about piranha bites, which is the second way that the market can kill you. If you keep limiting each trade's losses by 2%, you won't get killed by any particular trade but you might be wiped out if you made a string of small losses. So to prevent you from bleeding to death by a thousand small piranha bites (instead of a single shark but heavy shark bite), we have the 6% rule. The 6% rule is stop you from trading whenever you make too big a loss accumulated from many small losses. There is something obviously wrong if you keep making losses - either your method doesn't work in the present conditions or you're getting more emotional about your trades. Whatever it is, the 6% rules stops you from continuing to do silly things.

Saturday, July 16, 2011

Difficulty of arriving on time

Recently, I had a class which I arrived earlier than the scheduled time. I was early by 10 mins but the parent questioned me on why I was so early. In the end, the parent told me a whole lot of story about how the child had to rush back from school and had to run back and that it was so worrying and all that. After all that, she reminded me to try my very best to be on time.

Maybe that parent had been too used to driving, because if she had taken public transport (like I do), the frequency that the bus arrives is hardly something that can be controlled by me. If I didn't come before time, I'll most likely arrive later than scheduled. Long ago, I had been late 15 mins before (to the same parent), but she called me and asked me where I was and that the child was waiting for me. Seriously, some people are just hard to please. I think it's easier to be late and easier to be early but it had to take a lot of luck to arrive just on time. A lot of factors had to be just right in order to arrive at the appointed time.

I think the same thing goes for people in the market who wants to get the peak or the trough of a market movement. Aiming for the bottom-est price just before it reverses is a fool's game. You can aim for the region but if you really get the lowest price, it's more a matter of luck than skill. As you narrow down the time frame, the price movement gets more and more random. Likewise, it's a fool's game to aim for the peak before selling. You can sell a little earlier or a little later but to hit the highest price before reversal, you need lady fortune on your side. This doesn't mean that TA fails - it just shows the limitation of what timing the market realistically can be.

Psychologically, I think it's better to sell earlier and buy earlier, since we cannot sell at the peak and buy at the trough consistently. Selling earlier means that you'll always see the price go up higher after you had sold the stock. Selling later means that you'll see the price go downhill after hitting a maximum. Chances are that after you've seen how high the stock had risen, you've already anchored that particular price in your mind. You'll be less reluctant to sell and you'll end up hoping that the price will still rise up to that particular level. I don't like that and I had several experiences of me ending up turning a profitable positions into a neutral or losing position. Likewise, buying earlier means that you'll see the price go down lower after your purchase, but I feel that this beats seeing the price goes up higher after hitting the lowest price, anchoring that particular price in your mind and missing the whole boat altogether while waiting for the price to come down to that level again.

*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

Tuesday, July 12, 2011

Charts with potential for reversal

Listed out some charts that have the potential to reverse. It's okay to buy when it's expensive, just make sure it's reversing when you buy them.

Noble is showing my favourite setup - breaking downtrend line combined with an impending bullish divergence on macd histogram. I'll look at it when the time is ripe.

** Updated on 12-July after market close:

NOL is dropping too fast. Let's see how it finishes its divergence before deciding on what to do with it. The downtrend line is going to make it hard to rise up, even after its reversal. If I enter this, it'll be a quick one.

I'm always looking to get more of this. The charts show that there's a very high chance of it going down. The question is till where? I'm wiling to get a batch near 1.46, regardless of divergence or not.

It's important that in the heat of battle, we do not fire recklessly. Bullets are always always in short supply, so it's better to wait patiently for the enemy to come closer before firing a shot. Even if there are 3 enemies coming my way, likely I'll just choose the one that I'm most confident of sniping. Going by the seasonal nature of STI, August/September might have a wave of enemies swarming over, so it's better to keep my powder dry and high.

Thursday, July 07, 2011

First reit

First reit weekly:


First reit had been very good to me, with its high dividend yield and the very low capital cost after the rights exercise. But I had parted ways with it for the time being. The charts both at weekly and daily level doesn't look good. Both weekly and daily show a bearish divergence with today (7th July 2011) showing relatively higher volume plus a doji (you candlestick experts might have a different name for it, pardon me).

I've been doing partial divestment of first reit since June to reduce my position, but it went up and up. It's ok, I don't have to capture the peak and I'm super happy with the returns. Will get it back at another opportune timing again.


As a sidenote, after weeks of queuing everyday after market hours to sell, the queue finally hit around afternoon today. Why today? Perhaps it was after a lunch treat by CJ at his family's Hainanese curry rice stall at Maxwell food centre, no. 68, that brings the luck to me! After eating it, sure 1-6-8 (say it in Cantonese)! In my line of work, I've eaten all the nonsense curry rice all over the eastern part of Singapore, so trust me when I say that CJ's brand of curry rice is among the best. If you intend to beat the lunch crowd and try, do order the curry chicken wings and especially the pork chop. Especially especially the pork chop. The curry is thick and fragrant, and all the dishes are not very oil at all. I'll go back again one day for sure if I've need to make sure money in the market, haha!

Monday, July 04, 2011

Mentor-student relationship

I was thinking to myself about my motivation to share with people about my little knowledge in the stock market. It takes time, energy and effort to go back and fro in the cbox after working for a good part of the day. The time spent could be used to do the things that I like - reading, watching drama series, playing games and to basically relax, so the opportunity cost is actually quite substantial considering that after the whole exercise, I ended up not indulging in my own relaxation time and actually feeling more tired and drained. But don't get me wrong, it's utterly satisfying to do so, which is why it puzzles me. I'm left wondering what motivates me to spend time, energy and effort to share with others.

I think that the reward of teaching people comes not from the money, or from the lunch treats but for the satisfaction of enriching an eager, humble and open mind. I can't say the same for others, but that is what I know of myself. I don't think it's altruistic in nature - I'm not lawfully good in alignment (I'm lawfully neutral). Perhaps when the satisfaction that I desire is not 'repaid', then the satisfaction of getting paid for my time, energy and effort will be somewhat used as a replacement reward. Why is sharing such knowledge satisfying? I think I've this phenomenon I call "teacher's complex" that gives me the kick when sharing about things that I am passionately involved. Perhaps in the beginning it's like a mentor-student relationship, but when the student gets equal or better than the mentor, it'll become more of a two like-minded people who share the similar view of the world. I find that idea immensely satisfying, and I would conclude that this is ultimately the reason why I would forsake immediate gratification of spending my own time to hopefully spread what I know to people who do not.

But do notice that my criteria of teaching is towards someone with an eager, humble and open mind. What is meant by an eager mind? It is the willingness to learn and this can be exhibited by how much effort the student puts in with reference to how much effort the mentor puts in. I think an eager student would put in much more effort than the mentor. I suppose a mentor wants their student to at least show a certain standard of effort before he would willingly spend more time on his part. It's really a relationship marked by reciprocity. Nobody is willing to give and give and don't take. Such relationship would never be sustainable. What about humble and open minded? I think if a student's mind is fixated on an idea and he is very sure that he is right about that particular idea, it's not too incredible to deduce that the person do not have an open mind (at least with regards to this aspect of thought...I do realise that people can be open in one aspect but closed in others).  I think showing a mentor that you have a open mind and is willing to try out new ideas is one of the main reason why the mentor would even want to share with you in the first place. If you insist that you're right about certain things, I don't think anybody would approach you to share with you what they knew.

Thus in discovering my reasons for sharing with people my knowledge in the stock market, I've also uncovered how to find a mentor in different aspects of life. I've a few mentors whom I model after. They might not even know I'm their student, but I am indeed modelling after their thought process and how they behave in different circumstances. But that is being a silent student, quietly observing his mentor at work. If you want to find a mentor in life, or want mentors to approach you to share what they know, remember the three criteria as a student - eager, humble and an open-mind. Only then - and here I would like to paraphrase bro8888's words - would a master come down from the mountain to impart his skills to you.