It's been a tremulous year. I think I need to record some of my thoughts and experiences during the period before my memories are completely distorted and rewritten by time.
On Aug 23, 2015, I found myself was thumb-sucking and expecting a major market correction on the next Monday. I was ready to embrace the impact, but the main question I was agonized at was whether the overall market valuation was be too high (SPY P/E ratio 17~18) and whether the global economics, e.g. China, EU, were slowing down or even heading to recession.
My general feeling, completely unscientific, was that economics were still sound. Many people were still living in the traumatic experience of 2008/9, and there were still plenty of fear from the past downturn lingering around. I don't yet see the crazy euphoria of 2000 or 2007. Major companies, especially major tech companies, were very profitable and siting on record piles of cashes. Even if there was a downturn, it wouldn't be as a free fall as 2008/9. Therefore, when a friend asked what to do tomorrow, my intuition was "buy".
However, I had no idea how bad the market would go before it turned back and how long the winter could last. Whenever I read news and listen to "experts", there were all kinds of explanations for doomsday predictions or confident predictions on how would happen next. Most of them were outright garbages, but some did make subtle arguments I couldn't dismiss easily. The fog was so thick that my mind was a bit clouded and I couldn't really see through it. I was full of fear and self-doubt and was tormented between the thoughts of jumping in right now in afraid of missing opportunities and of waiting for a while in hope of further safety margin. I realized that it's easy to say "buy" and much harder to actually executing "buy" orders.
I managed to buy some at the first dip before the market bounced back briefly by the end of October. The market went even lower in Feb, 2016. I had the fear that this might be the real beginning of a recession, but I also remembered that I was thinking, if the market just had an average return of 7~8% by the end of 2016, I could reap 40~50% if I started to buy. However, I already ran out of cash and I had to buy on margin. I hesitated to buy too much because I was worried at margin calls if the market fell as bad as 2008/9.
It was the first time since 2009 that I made significant trades in response to market fluctuations. Most of trades turn profitable today (Aug 23, 2016, +22% ), but, through the whole period, I was NEVER sure I was making the right calls.
In the past year, concerns over China, oil, Fed's interest rate decision loomed over the horizon. The most dramatic event is Brexit: UK voted to leave EU unexpectedly. The consensus was it's bad for UK and added uncertainty to global economics. The market dived on June 27/28, reminding people of the reminisce of 2008/9 crashes. However, the market bounced back quickly: not only recovering all shocks from Brexit but climbing another 6~7%. It turned out Brexit might be the last chance to enter market at the same level as July, 2014.
One thing bothering me most in the past year and more, is the long term, 5~10 years, perspective of S&P 500. The current low interest and low inflation environment is unprecedented. It probably won't last forever. I've been following some prominent central bankers and economists closely, but I don't yet see any convincing arguments on how the economics will unfolded itself in the next decade. Perhaps, no one really know. I'm trying to prepare myself over various scenarios: slow and steady growth, rapid growth into bubble territory, or panic triggered by another recession. I'm trying to develop some mental models to identify tell-tale signs of these scenarios so that I can be prepared to deal with them. What worries me most is a prolonged dead economics, S&P just oscillates around 0. I don't think I have the strategy and the temperament to deal with a lost decade like Japan.
Another thing I learned is making profitable trades is very hard. My side bets in the past year returned ~20%, but the performance is still subpar compared to my main leveraged do-nothing strategy, for example, UPRO and TQQQ return 30~40% in the same period. Therefore, even though I managed to initiate ~700K long positions, the gain makes only a small contribution to the return of my total portfolio.
Tuesday, August 23, 2016
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 my son 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 and leverage up a bit, 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 said "buy" but I didn't actually execute it myself. My excuse was I already ran out of cash, if I started to buy, I had to use margin and cross some parameters I set for myself.
However, looking back from now, I think the real reason was I'm still worried about further drop, and I would be more comfortable if the market corrected further and went back to 2013 level, but 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 talked to my wife 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.
My transaction in China 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 I didn't expect a liquidation event in China. I still don't know whether I make a right decision not not till today.
I find I 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.
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 my son 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 and leverage up a bit, 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 said "buy" but I didn't actually execute it myself. My excuse was I already ran out of cash, if I started to buy, I had to use margin and cross some parameters I set for myself.
However, looking back from now, I think the real reason was I'm still worried about further drop, and I would be more comfortable if the market corrected further and went back to 2013 level, but 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 talked to my wife 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.
My transaction in China 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 I didn't expect a liquidation event in China. I still don't know whether I make a right decision not not till today.
I find I 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.
Thursday, July 30, 2015
Richard Feynman
The Feynman Lectures
To live with doubt and uncertainty
... Are you looking for the ultimate laws of physics? No, I’m not. I am just looking to find out more about the universe. And if it turns out that there is a simple ultimate law, so be it. That would be very nice to discover. . . I don’t believe the special stories that have been made out about our relationship to the universe at large because they seem to be too local, too provincial.... To me, a very fundamental part of my soul is to doubt, and to ask ...
... I can live with doubt, and uncertainty, and not knowing. I think it is much more interesting to live not knowing than to have answers that might be wrong. I have approximate answers and possible beliefs with different degrees of certainty about different things but I am not absolutely sure of anything. And there are many things that I don’t know anything about. But I don’t have to know an answer. I don’t feel frightened by not knowing things, by being lost in a mysterious universe without having any purpose — which is the way it really is, as far as I can tell. Possibly. It does not frighten me.
Friday, May 15, 2015
Risk taking
I like to watch "No Big Deal" Alex Honnold doing his free solos. Most people in the world would consider he is taking extraordinary risks, if not outright suicidal attempts, but he always seems so calm, just like going out for a walk.
Two thoughts on Alex's risk taking: 1) Different people have different skill set and inside information. The risk of free solos for Alex Honnold may be less than the risk of walking on street for many people. 2) Different people have different appetite for risk. Someone may enjoy working in safe cubicle and receiving stable income while others don't mind dying in free solos. You cannot put the same value on the same risk taking activity for different people.
Every time I watch his clips, I remind myself that risks mean different things for different people and I shall be aware of the pitfall of accepting the risk defined in most of investment textbooks.
The world is led by risk seekers and built by risk avoiders. The edge of frontiers are littered with corpuses of risk seekers, but, whenever risk takers make break-throughs, risk avoiders follow and build the new world brick-by-brick. It's kinds of like how evolution works in biological world.
Two thoughts on Alex's risk taking: 1) Different people have different skill set and inside information. The risk of free solos for Alex Honnold may be less than the risk of walking on street for many people. 2) Different people have different appetite for risk. Someone may enjoy working in safe cubicle and receiving stable income while others don't mind dying in free solos. You cannot put the same value on the same risk taking activity for different people.
Every time I watch his clips, I remind myself that risks mean different things for different people and I shall be aware of the pitfall of accepting the risk defined in most of investment textbooks.
The world is led by risk seekers and built by risk avoiders. The edge of frontiers are littered with corpuses of risk seekers, but, whenever risk takers make break-throughs, risk avoiders follow and build the new world brick-by-brick. It's kinds of like how evolution works in biological world.
Sunday, May 3, 2015
Fear and Insecurity
I think people with similar (+/-15%) talent, education and putting into similar efforts are capable of achieving similar things. However, in real life reward system, the final result is disproportionality affected by some random factors like luck. All things are equal, the desire to win, the extra mile a few people are willing to walk, play make-or-break role in the making of legend. They are mainly driven by emotional factors such as fear, pride, greed, etc.
For a long time, I often had nightmare that I had to re-take China's College Entrance Examination. Like my mom, I'm always worried by the worst case scenarios and driven by fear. For all things I get, I attribute more to my sense of insecurity than my intelligence or anything else.
For a long time, I often had nightmare that I had to re-take China's College Entrance Examination. Like my mom, I'm always worried by the worst case scenarios and driven by fear. For all things I get, I attribute more to my sense of insecurity than my intelligence or anything else.
Sunday, February 22, 2015
Galilean moons
When I was a kid, I dreamed of seeing the four moons of Jupiter, just as Galileo did 400 years ago. I always wonder what Galileo was thinking when he looked at Jupiter's moons at night. Did he realize that he is the first one spotting some little secrets of the universe? Did he ever doubt what he found out?
But, the price of a decent telescope was kind of an astronomical number for my family and I never thought of owning one.
Last Christmas, I bought my son a telescope and my daughter a microscope. For the first time in their life, they can see the moons rotating around Jupiter and the cells underpinning the life on the Earth. To my disappointment, they don't seem to be impressed. I hope they would remember such a moment someday.
Human brain can only intuitively understand a very narrow spectrum in terms of space and time because it's been evolved in such environment. The imagination of nature is far, far greater than the imagination of man. It is science that broadens our understanding of the universe. Scientific thinking should be a way of life for anyone living in the new millennium.
The value of Science by Richard Feynman
But, the price of a decent telescope was kind of an astronomical number for my family and I never thought of owning one.
Last Christmas, I bought my son a telescope and my daughter a microscope. For the first time in their life, they can see the moons rotating around Jupiter and the cells underpinning the life on the Earth. To my disappointment, they don't seem to be impressed. I hope they would remember such a moment someday.
Human brain can only intuitively understand a very narrow spectrum in terms of space and time because it's been evolved in such environment. The imagination of nature is far, far greater than the imagination of man. It is science that broadens our understanding of the universe. Scientific thinking should be a way of life for anyone living in the new millennium.
The value of Science by Richard Feynman
I stand at the seashore, alone, and start to think.
There are the rushing waves
mountains of molecules
each stupidly minding its own business
trillions apart
yet forming white surf in unison.
Ages on ages
before any eyes could see
year after year
thunderously pounding the shore as now.
For whom, for what?
On a dead planet
with no life to entertain.
Never at rest
tortured by energy
wasted prodigiously by the sun
poured into space.
A mite makes the sea roar.
Deep in the sea
all molecules repeat
the patterns of one another
till complex new ones are formed.
They make others like themselves
and a new dance starts.
Growing in size and complexity
living things
masses of atoms
DNA, protein
dancing a pattern ever more intricate.
Out of the cradle
onto dry land
here it is
standing:
atoms with consciousness;
matter with curiosity.
Stands at the sea,
wonders at wondering: I
a universe of atoms
an atom in the universe.
Thursday, October 16, 2014
Think differently
There was a big drawdown in my portfolio last month. The analytical part of my brain tells me it's fine and keep calm, but all indicators suggest that my stress level is shooting up: My shoulder muscle stiffens. Small things start to irritate me. Worst of all, I cannot help yelling at kids, the last thing I want to do in my life!
To help myself cope with stress, I devise a different way of thinking market movement.
Most investors would probably love it if time travel were possible. If we think the market movement not in terms of price but time, price fluctuation is exactly equivalent to time travel.
For example, the market bottom in March, 2009 just offers us a rare chance back to 1996. As long as we don't believe the world will be stuck in 1996 forever, we should probably buy some stocks before we're back to future again.
People often talk about 1987 Black Monday, the largest single daily loss, as a 6-sigma event. But, if we think it in terms of time travel, we're just visiting a year ago briefly. It just sent the market back to the beginning of 1987. The market ended at almost identical level at the end of 1987, which is a tremulous in term of price movement but a boring and uneventful year in the eyes of time traveller.
Most of market drops or rises just move our fortunes back and forth a few months or years. Another way to comprehend (cope with) the changes of fortune is to think, we're just as poor/rich as a few months and years ago. We probably haven't changed our lifestyle during the same periods. So, why bother to worry that much?
If we always make long term investment decisions (>10~30 yrs), our decisions to long the market a month ago should still be valid when market fluctuation move us back a few months. If the decision is truly long term and correct, we should buy more rather than feel stressed out when the market is dropping.
Anyway, the new thinking gives me a different perspective of market movement and sometime remind me of rare chances to seize lost opportunities or correct past mistakes.
To help myself cope with stress, I devise a different way of thinking market movement.
Most investors would probably love it if time travel were possible. If we think the market movement not in terms of price but time, price fluctuation is exactly equivalent to time travel.
For example, the market bottom in March, 2009 just offers us a rare chance back to 1996. As long as we don't believe the world will be stuck in 1996 forever, we should probably buy some stocks before we're back to future again.
People often talk about 1987 Black Monday, the largest single daily loss, as a 6-sigma event. But, if we think it in terms of time travel, we're just visiting a year ago briefly. It just sent the market back to the beginning of 1987. The market ended at almost identical level at the end of 1987, which is a tremulous in term of price movement but a boring and uneventful year in the eyes of time traveller.
Most of market drops or rises just move our fortunes back and forth a few months or years. Another way to comprehend (cope with) the changes of fortune is to think, we're just as poor/rich as a few months and years ago. We probably haven't changed our lifestyle during the same periods. So, why bother to worry that much?
If we always make long term investment decisions (>10~30 yrs), our decisions to long the market a month ago should still be valid when market fluctuation move us back a few months. If the decision is truly long term and correct, we should buy more rather than feel stressed out when the market is dropping.
Anyway, the new thinking gives me a different perspective of market movement and sometime remind me of rare chances to seize lost opportunities or correct past mistakes.
Subscribe to:
Posts (Atom)