Melynn Investment Experience
1. Stock Bought
Ezra (Singapore stock)
2 Reason for making the trades
This trade is mainly of a speculation type and there's no actual reason why I bought this. It is more of a random entry. Thoughts which flow through my mind before making the trade is to try to ride the strong intra day trend and this was derived based on looking at the speed the sell bid is cleared..
I intend to sell half of my positions within the clearing period(T + 5) and for the rest, I will set a cut loss at 3%. Eventually, I didn't stick to my original plan and sold them earning a total profit of 7%. Reason for not holding longer is because I am no longer comfortable holding such a larger position as I believe any type of negative news will trigger a massive selldown due to people taking profit from the recent surge.
This decision was made partially also because of the upcoming release of stress test results for US banks. Personally believe that a wave of bad news might be coming thus I would rather miss a profit than "blowing"(lose my capital) myself..
Points to ponder
- Am I risking too large of a position such that in the event a rare event happened , I wont have enough capital to pay up my losses. Some rare events might be stock suspension, bankrupt and etc.
I have risked quite a bit for this trade without considering the worst scenario. This is a point which I need to take note of for my future trades.
The stock market direction throughout the day is generally based on economic indicators, analyst comments , interest rates and etc (in short it might be random) therefore a trade which has been doing well in the morning might rock in no time for some reason. All these risk is something I need to take note of for my future contra trades .
Risks can be mitigated by i) Tight stop loss ii) Try to ride the profit but sell half of position when the situation is favorable (like 10% profit)
1) Considering the worst scenario
2) Time horizon too short
One most important thing I need to remember is to always differentiate investments and speculation. Never mix them together by holding on to losing trades which are of speculative nature.
Stock Pick (Google) Summary
This will be a page where i will be modifying weekly to update several values like stop trail, relative ratios, ATR as discussed in previous post.
Google as of 01/05/2009
Stock Price : US$393.69
Quantity bought: 17 shares
Price Paid : US$370.69
Total Cost (inclusive brokerage) : $9596.09
Brokerage Fee : $42.77
1R(Downside) = US$762(? of equity)
Highest Price since I entered the trade : US$403.75
ATR(50 day) : 13.925
Stop Trail : 399.82 - (3* 14.805) = 361.975
Fundamental relative valuation as of 01/05/2009
Stock | Industry | Stock's 5Yr Average* | |
Price/Earnings | 29.6 | 26.2 | 67.1 |
Price/Book | 4.4 | 5.9 | 10.5 |
Price/Sales | 7.1 | 5.3 | 13.6 |
Price/Cash Flow | 19.7 | 23.5 | 21.7 |
Dividend Yield % | --- | --- | --- |
Put/Call Open Interest (3 months)
- Based on the chart, it seems there are lesser interest on put options indicating optimism on stock. Might sell in strength later on.
Short Interest (3 months)
- Steep decrease in short interest thus indicating optimism as well.
Buy/Sell/Hold recommendations by analyst
FOR GOOG
| Strong Buy | 17 |
| Buy | 3 |
| Hold | 1 |
| Sell | 0 |
| Strong Sell | 0 |
- Gauge sentiment and potential buying demand. Currently very bullish thus it might be top heavy leading to heavy sell off. Need to take caution in this.
Stock Pick (Tat Hong) Summary
This will be a page where i will be modifying weekly to update several values like stop trail, estimated value, ATR as discussed in previous post.
Tat Hong as of 23/04/2009
Stock Price : $0.80
1st Transaction (06/04/2009)
Quantity bought: 14 Lots
Price Paid : $0.695
Total Cost (inclusive brokerage) : $9763.59
Brokerage Fee : $33.59
1R(Downside) = $664 (2.6% of equity)
Highest Price since I entered the trade : $0.875
ATR(50 day) : 0.032
Stop Trail : 0.875- (3*0.03) = 0.78
2nd Transaction (13/04/2009)
Quantity bought: 14 Lots
Price paid : $0.760
Total cost (inclusive brokerage) :10676.72
Brokerage Fee : $36.72
1R(Downside) = $1387(5% of equity)
Highest Price since I entered the trade : $0.875
ATR(50 day) : 0.032
Stop Trail : 0.875- (3* 0.032) = 0.78
Profit/Loss = $1347.85
My stop loss was hit and as such, I have cleared my positions. I have realized this system has quite a few drawbacks like getting whipsawed. Will post more on my thoughts in the upcoming post.
Last updated on 23 April 2009
Reproduced with permission from http://melynn-lynch.blogspot.com
Is the recent market rally sustainable
The recent market rally has let many people wondering if the economy is recovering?
According to an article I read online , it mentioned two out of four conditions need to be met for an economic recover to begin and for the moment , only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging.
i) House prices need to stabilize
ii) Banks must start lending again
iii) Consumers must start spending again
iv) Rest of the world must pick up
Reasons why I think economy has not bottomed out yet.
1) Inventories of house for sale remain high and house prices continue to tumble. The Case-Shiller Home Price Index dropped in January by 19% from a year ago, following an 18.6% year-to-year decline in December.
2) Job losses have been accelerating in recent months
3) Unexpected drop in retail sales as reported on 14 April 2009
4) GM/Crysler bankruptcy repercussions have not even hit yet
5) Standard & Poor’s reports there was a record high in the first quarter for the number of companies cutting dividends (367) and a record low for the number raising them (83)
6) Lot of speculation about which corner of the economy is likely to implode next and start to write the next chapter in the current financial crisis. Credit card debt and commercial real estate are two of the most frequently cited potential culprits
Based on the above, I will still play the momentum game by trading short term and also take more precautions in risk management (i.e not taking excessively large positions and profit take when opportunity arises) or cut loss when my stop loss is hit.
The above info are consolidated from the website http://seekingalpha.com
Reproduced with permission from http://melynn-lynch.blogspot.com
2 indicators to measure investor sentiment
There are 2 indicators which are often used to gauge the market sentiment . They are put/call ratios and VIX. Both are calculated based on US equities and Index options.
In most cases these indicators are used as contrarian tools: when market participants are most bullish, the likelihood of a downside reversal is greatest; when investors become overly bearish, a market rally may
be on the horizon.
PCR Ratio
Put/call ratios provide us with an excellent window into what investors are doing. When speculation in calls gets too excessive, the put/call ratio will be low. When investors are bearish and speculation in puts gets excessive, the put/call ratio will be high.
It might be more accurate to use equity-only put/call ratio as professional money mangers might use index options to hedge portfolio of stocks.
VIX
VIX is a measure of the level of implied volatility - not historical or statistical volatility - of a wide range of options based on the S&P 500
When the VIX (which is related to the S&P500) is under 20, there is excessive complacency, and over 30 is excessive fear. But just as the Nasdaq is more volatile than the S&P500, the VXN is also more volatile, so anything under 25 is excessive complacency, and over 35 is excessive fear which usually happens when we are close to a bottom.
The importance of these 2 indicators cant be discounted as non economic factors are increasingly becoming important elements and they are best used in conjunction with other indicators. I might consider to use this as one of the factor to determine my entry/exit point (i.e wont buy if its overly bullish) but this might contradict with momentum style so I guess an optimal balance in mixing the strategy can only be achieved through real time experiment.
Free tools to gauge the sentiment can be found at schaeffersresearch.com .
Reproduced with permission from http://melynn-lynch.blogspot.com
Stock Pick (Google Part 3)
3. Exit Point
Fundamentals
- I will sell Google when its fundamentals has deteriorated like decline in cash flow and also when, I am no longer optimistic on its growth. I will compare the quarterly result against the previous quarters and also the annual result too .. Will probably come up with a list similar to the one I did for entry to decide again. (This will be an exception whereby I will sell off the stock without adhering to my below stop trail set),
- I will also sell Google if its relative valuation like (P/E , P/S) has ballooned excessively.
Momentum
1. Relative Strength
Weaker 3, 6 and 12 month relative strength.. Anything below 50 will be considered weak
2. On Balance Volume
OBV is downward sloping
3. ADX
Anything between 13 and 14 indicates a weak trend
4. Moving Averages
When Occurrences of fast moving averages go below the slow moving average.
5. Trend
- Parabolic move is fully developed (three or more success trend lines)
- Stock price is near vertical
I will asses the above factors weekly and if there's a need, I will consider to sell the stock even when the current price is higher than my pre defined stop loss trail.
Reproduced with permission from http://melynn-lynch.blogspot.com
Stock Pick (Google Part 2)
Momentum - 3/4
Total of 10 points : 7/10
I will only enter f the total points is more than 5.
I will be using a 50d ATR to estimate the volatile and it is currently at 15.137. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
For a start, i will set a 2% risk.
- Find out the ATR
Multiply ATR by 2(static)
15.01* 2 = 30.02
- Derive the position by taking amount to risk divide by the above sum
500 / 30.02 = 16.65 shares
~~ 17 shares.
3 factor model (Volatility)
The position size of each trade I take will be based on volatility and the indicator which I will use to measure is ATR.
ATR is the difference between the high and low price on any given day. It reveals information about how volatile a stock is. Large ranges indicate high volatility and small ranges indicate low volatility
One weakness of using this strategy to determine stop loss is that it might cause my system to be susceptible to noise resulting in unnecessary brokerage costs incurred. To overcome it, all 3 factors which I discussed earlier has to be implemented together..
3 factor model (Momentum)
I don't really know much on this area yet so if anyone happened to come across this blog, please feel free to comment on it or contribute.
As of now, following are the indicators which I used to check the stock's momentum .
1. Relative Strength
Relative strength, or RS, measures how a stock has performed compared to the overall market over a specified time frame. This info is only easily accessible for US markets.
Six-month relative strength >= 75.
Three-month relative strength >= 65.
For example, a 6 -month relative strength of 75 means that a stock has outperformed 75% of all stocks, in terms of price performance, over the past 6 months.
2. On Balance Volume
OBV attempts to detect when a financial instrument (stock, bond, etc.) is being accumulated by a large number of buyers or sold by many sellers. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. Finding a downward sloping OBV while the price of an asset is trending upward can be used to suggest that the "smart" traders are starting to exit their positions and that a shift in trend may be coming. (By investopedia)
If the OBV is moving in the same direction as the existing trend, it is a signal that the strength of the trend remains. When the OBV starts to move against the trend, it is a signal that the existing trend is weakening and may reverse.
3. ADX
Analysis of
A low ADX value (generally less than 20) can indicate a non-trending market with low volumes; a cross above 20, on the other hand, may indicate the start of a trend (either up or down). If the ADX is over 40 and begins to fall, it can indicate the slowdown of a current trend. This indicator can also be used to identify non-trending markets or a deterioration of an ongoing trend. Although market direction is important in its calculation, the ADX is not a directional indicator.
4. Moving Averages
Occurrences of fast moving averages crossing over the slow moving average is a bullish signal while the vice versa is a bearish.Current moving average I'm using is 14,25 and 200
Pitfalls of Momentum Trading
Here they are:
Based on the above, i personally think momentum has to be done in moderation cos I never want to be the last one holding on to it therefore for my future trades, I will try not hold on to it based on greed (Not willing to profit early) or fear (Not willing to cut loss). Reproduced with permission from http://melynn-lynch.blogspot.com |
3 factor model (Fundamentals)
My entry/sell point is currently based on the following 3 factors Fundamental, Momentum and Volatility. I will be doing trial and error to adjust the weightage of each factors but for a start, I will allocate more weight to fundamentals.
For fundamentals, it will be categorized into 2 section, valuation and operating history. For operating history, I will use both quantitative and qualititave analysis to assess the company's management, financial health, profitability and cash flow.
For valuation, I will use p/cf , p/b, p/e, p/s and compared them against other similar industry competitors or the company's own 5 year historical average. One thing to take note is that companies with low ratios might be value traps and it may take years for the market to find this value and the stock can stay priced at these undervalued levels for extended periods, resulting in opportunity cost incurred as capital will be tied up on the stock.
Therefore to mitigate the risk of value investing, I will add a momentum filter to improve returns by avoiding the problem of waiting for the market to recognize the undervaluation. This will be discussed in the next section.
Not too sure if the above has already been mentioned before in my previous posts but the most significant change which I am making to my current system is to use relative valuation instead of absolute.
Have gotten my inspiration from investopedia .
Reproduced with permission from http://melynn-lynch.blogspot.com
Thoughts on valuation
I have decided to abolish the use of forecast values as one of my entry criteria after giving some thought reason being :
1) Future is uncertain. The model requires one to project most of the inputs much ahead (like 5,10 years) which is not realistic in my opinion.
2) Tendency to use them to reinforce my decision when faced with uncertainty regardless of its relevancy.
Therefore instead of relying on forecasts, I will value the stock based on real results(i.e trailing p.e) even though this only tells me what the stock "should" have been worth based on earnings from the past . This is a trade off I'm taking but I believe the risk of relying on my own forecasts is much more dangerous.
Melynn - Philosophy on investing part 6
I have mentioned on the theory of reflexity in my previous posts and even though I have yet to grasp hold of the concept but just the initial understanding has already intrigued me to find out more. I did an extensive search on the net and found an article discussing on this..
This concept is founded by Soros and he attempted to explain his concept of reflexity in the following statement :
"There is an active relationship between thinking and reality, as well as the passive one which is the only one recognized by natural science and, by way of false analogy, also by economic theory. I call the passive relationship the “cognitive function” and the active relationship the “participating function,” and the interaction between the two functions I call “reflexivity.” Reflexivity is, in effect, a two-way feedback mechanism in which reality helps shape the participants’ thinking and the participants’ thinking helps shape reality in an unending process…”
Example (Extracted from the article)
Consider the relationship between a company and its publicly traded stock under normal business conditions. It is intuitive that when the fundamentals improve the share price rises. However, does it make sense that a changing share price might, in turn, impact the fundamentals? Sometimes the answer is yes.
A simple and timely example is seen from the effect of credit ratings. When Moody’s or S&P downgrades the credit ratings of a given financial institution (think AIG), it can have an impact on the amount of collateral the company must pledge to back its obligations. A downgrade also increases the cost of capital for new debt issuances. The view of the S&P analyst is, in part, subjective. The perception of the company’s future prospects and current financial condition plays an important role in the assignment of the credit rating, and and a falling stock price gives a bad impression. The negative feedback loop between capital requirements (fundamentals), stock price, and credit ratings (perception) causes a vicious cycle.
Common to all recessions are forces that cause dynamic disequilibrium between fundamentals and prices.
Some of these are,
A. Jobs losses --> declining consumer spending/confidence --> contraction in businesses targeting consumers --> more job losses due to business contraction, etc.
B. Credit crunches: Business and consumer balance sheets deteriorate --> tighter lending standards and less credit available --> business/consumer spending slowdown --> worsening balance sheets, etc.
C. Stock market declines --> reduced “wealth effect” --> decline in consumer spending --> business contraction --> more stock market declines, etc.
D. Stock market declines --> lower capital gains tax revenues --> rising government deficits --> decreasing investor sentiment -- > more stock market declines, etc.
Details can be found here
His ideology is often mistaken as trend following but one contrasting difference is that he always managed to enter/exit at the reversal point so from this, I gather a clue. I need to come up with an objective view by looking at a bigger picture and in order to do that, I must constantly remind myself not to be distracted/mislead by the daily reports and news.
Reproduced with permission from http://melynn-lynch.blogspot.com
Melynn - Philosophy on investing part 5
I have been looking at my past trades stretching back to the first very trade I have made since year 2007 which was the bull period. Back then, I always thought I am good stock picker whereby nearly all stocks I bought were multi baggers earning me 20-30 % return in a few months leading me to have an illusion that everything is within my control. During that period, I also tend to think stocks will move as per my expectation, ie picking stocks which is fundamentally sound and buying them no matter how over valued they seem to be by coming up with an estimated price near the present as a support. Therefore whenever I have made a decision, I will find evidence to support it rather than finding ways to refute it. This might sound counter intuitive as the norm will be buying stocks based on evidence instead..
Eventually, when stocks started to plunge a few basis point everyday, I will still see it as a form of correction and cost average it as I believe the value will revert back to the mean eventually. I was apparently suffering from gambler's fallacy where I thought a stock will recover after a few days of consecutive big plunge when in fact, it wont. All these are said on hindsight but i hope I can improve my investment by acknowledging my mistakes soon and correct them.
Nevertheless, i never doubt value investing despite not practicing it firmly. I hope to improve this method by mixing momentum and value together to avoid from incurring opportunity cost by holding on undervalued securities that languish a long time before recovering. Instead of bottoming fishing where a price can always go lower than my estimated price, why not wait for the price to raise a bit (momentum) before entering? Ideally, I would want to pick the highest momentum stocks with the cheapest valuation.. Possible? Downside is that by adopting this strategy, I will inevitably follow the fool game so an important thing is to exit when the expectation is different from the reality on a large scale.This is easier say than done and its something which I have yet to figure out
Firm fundamental investors will buy/hold a stock in an indefinite period and assumption is that large emphasis is placed on the stock fundamentals and not the price volatility but thinking from another perspective, a prolonged plunge in stock price will affect the fundamentals too isn't it.
I will share more thoughts on Soros reflexivity philosophy in the next post which I happened to come across a few days back. Also note that each of my posts might be jumbled up or not related to one another as I am just trying to pen down whatever thoughts that came across my mind so I will like to apologize in advance if it causes any confusion.
Reproduced with permission from http://melynn-lynch.blogspot.com
Stock Pick (Google) Part 1
1. Entry Point
I am assessing the fundamentals based on the materials and analyst reports in MorningStar therefore to ensure consistency, I will be using their fair value estimation as well. They have come up with 2 numbers.. 1) fair value estimate, 2) target price with the margin of safety element. For my estimates, I will be probably using the latter which is at 250 now.
Technicals
Moving Average : Used 3 mv lines (14d,25d and long term 100)... This is still in experiment phase therefore numbers might not be ideal. Note that up to this point, the short period mv line crossed the longer period one which symbolizes a bullish trend.. Curently the price is trading above all three lines which is a bullish indicator
ADX : Currently at 16 which indicates a weak trend.. Strong trend if its above 40. When adx begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.
Based on the above 2 factors, I think this stock may be gaining momentum, consolidating and an uptrend might soon prevail..
Deducting the estimated value from the current , its approximately $119.78 difference.. Its a 47% variance therefore as for now, I think I will track this under my watchlist
2. Position Sizing .
I will be using a 50d ATR to estimate the volatile and it is currently at 15.32. Below are the steps I need to take to derive the position.
- Determine the amount of money in account
Assuming I have $25 000
- Determine the amount to risk
Note that there is a 47% variance between my estimated value and the curent price .. Following is a table which I am using to set the risk.
OverValued (Estimated > Current)
<10% variance = 3% risk
>10 % and <20% variance = 2% risk
> 20% and <25% variance = 1% risk
>30 % = wont invest.
UnderValued(Estimated
<10% variance = 3.5% risk
>10 % and <20% variance = 4% risk
> 20% and <25% variance = 4.5% risk
>30 % = 5% risk
Therefore in such a case, I wont invest as the variance exceeds my predefined threshold (30%).. I will only buy if the price reaches my target (Thats assuming, the fundamentals are intact and there's a hint that momentum will be building up soon).
One downside of this is that the valuation is a laggard as this number wont be updated accordingly to the current economic situation.. In the event if I foresee the economic to recover, should I attempt to readjust the valuation accordingly? I shall think about this at a latter stage but for now, I will stick to their valuation rigidly.
Target Price
<10% variance - set 3% risk if the price is between 250 to 275
>10 % and< 20% variance - set 2% risk if the price is between276 to 300
> 20 % variance and <25% variance - set 1% risk if the price is between 300 to 312.5
I will continue my exit point and hypothesis of a good case and worst case scenario in my next post.
