Friday, November 6, 2015

Thumb sucking

Warren buffet calls unnecessary sitting and thinking “thumb sucking”. I find that 99.99% of my time is spent on sitting alone and thinking. I read a lot, almost indiscriminately, but most of things just pass through my brain and rarely register with me.

In rare occasions when I feel the urge to act, I still find it's very hard to pull the trigger. I'm not sure whether my “thumb sucking” helps or hurts my investment. I want to document my latest episode while it's still fresh.

My portfolio doubled in 2013. At the end of 2013, I felt uncomfortably excited and was thinking whether I should change my asset allocation and leverage ratio. But, I concluded that I'm fine if 2014 is a flat year. As long as I didn't see immediate crash, I should continue sucking my thumb and doing absolutely zero trade.

The market continued its climbing in 2014. At the end of 2014, I got another ~35% boost for doing nothing but my anxiety level became almost unbearable. For the first half of 2015, the dominating question in my mind is whether to deleverage or not.  My inclination was still thumb-sucking if I cannot convince myself with overwhelming evidences against doing nothing.

The market seemed clueless, too, jumping from one excuse to another to justify some movements.

In the middle of 2015, the fear for lingering Euro crisis was resurrected and people were talking about Grexit and potential repercussions. On the eve of Greece vote, the news coverage was playing doomsday scenario similar to 2011, when euro crisis first broke out.

I happened to dine with my family at the same restaurant where I was in 2009. I discussed with my kids how the restaurant looked like in 2009 and what's unfolding in Europe at the moment. I told them the crisis was largely man-made and the fear was not as real as it was in 2011. But, they seemed not very interested, Only Leo half-jokingly said I should wait for crash and then jumped in.

It turned out European were just playing the game of chicken and the market eventually shrugged it off. There was only 3~4% changes in S&P and I was not comfortable to act in such small changes. The margin of safety was just too small.

Another big theme of 2015 is the slowdown of Chinese economy. There was a big rollercoaster ride in Shanghai stock market in the firs half t of 2015. I decided not to play big in China long long ago. so, the ups and downs in China hadn't affected me directly.

China economy seemed to continue deteriorating. Anxiety was building up. On Aug 11, Chinese government decided to devalue RMB. People became nervous. I was trying to digest the news while the market declined steadily. Fear was building up. On the night of Sunday, August 23, it's obviously that there would be blood everywhere on the next morning, but it's too late for me to get out. DOW dived another 588 points and S&P posted the worst day in 4 years on the next morning, Monday Aug 24.

I now tend to think of market fluctuation in terms of time rather than price. So, the market on Aug 24 is equivalent to temporarily send my portfolio back May 16, 2014. I felt it might be a good opportunity to buy, but not sure whether there was more room to drop.

Before the market opening of Aug 24, one of my friends asked me what to do. I intuitively said "buy" but I didn't actually execute it. My excuse was I already ran out of cash, if I started to buy, I had to us margin.

But, I think the real reason was I was still worried about further drop, and I would be more comfortable if the marker corrected further and went back to 2013 level.  However, the market bounced back for the rest of the week.

For the past few months, I've been trying to close a deal in China and I was expecting $500K in cash. On the week of Aug 24, I thought of buying on margin before the deal was officially closed. I struggled for the whole day and couldn't make up my mind. I eventually decided to do nothing if I don't have strong conviction.

I was debating myself I might lose an opportunity. I had to talk to Xufei that night, trying to justify why I didn't buy. I declared that I shall not try any significant margin unless the market drops more than 20%. It served a reminder for myself that I must be principled and shall not cross the line easily,

In the next few days, I managed to free $200K 1x from my 401K account and leverage them to 3x, but UPRO was already back ~10%. In the week of Sept 21, the deal in China was finally closed and I started to think that I might miss once in a couple of year's opportunity.

On Sept 24, the market briefly dropped to Aug 24 level. I was thumb-sucking as usual. On one hand, I feared, but hoped at the same time, the market would tank further. On the other hand, I'm afraid this won't happen and it might be my last chance.

The China deal was finally closed, but China impose capital control and I still couldn't get the cash. It gave me some excuses for not acting. However, I finally concluded that I would get the money eventually, but I might not have the opportunity to deploy the capital at the level of May, 2014 any more.  So, I decided to use margin to buy on the condition that the margin won't exceed $500K. But, the market was already back a lot (3x UPRO was up 15~20%), and I'm a bit late now. I had to choose the more beaten down ERX. After bought  ~$250K, I had to stop because I think the market was back too much.

It is the first time I've chosen to trade non-significant amount since May, 2009. I probably would do nothing if there were no liquidation event in China. I still don't know whether I make a right decision not not till today.

I find most people, including myself, tend to revise your own memory when looking back, and forget how hard it is to make right decisions when the events are still unfolding. It's why it is so important not to act on daily, monthly, or even yearly market fluctuations because the margin of errors was too small.

Another lesson is, even though, it seemed I bought at nearly the bottom of this correction, it's still higher than the beginning of 2014. If I had chosen to exit the market at the beginning of 2014 or 2015, I don't think I could re-enter the market at a time to beat the strategy of doing nothing.