The asymmetrical nature of investing is a huge boom to investors. A share we own can go to zero with a 100% loss, but the flip side is that it can up go up multiples of 100%. So even the occasional loser doesn't derail a diverse quality investment portfolio.
The two key points, diverse and quality. If you have only one stock you're at massive risk and if you have a basket of dogs then you're still in serious trouble.
But a collection of quality stocks can survive the occasional blow out as they others run and we only needs a few real winners to make it all work and market beating.
Now in an ideal world we'll never see a 100% blow out because when it's time to panic we'll panic quick, right?
A last word on the asymmetry of trading (as apposed to investing). We have no real floor on loses as we also have no real floor on gains. So it is not asymmetrical and so we have to make it so by being ruthless with stop losses. I have long said my trading success is due to my always taking the stop immediately no questions asked.
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Our signature yearend JSE Power Hour presented by Just One Lap founder, Simon Brown.
Simon looks at what he predicted last year before embarking on his 2018 predictions that include;
Twitter poll for tonight's JSE Power Hour presentation ~ What's your expectation for the Top40 in 2018?
Time for my annual poll ..
What's your expectation for the Top40 in 2018 ?#JSE— Simon Brown (@SimonPB) December 4, 2017
Markus Jooste has also quit Stenihoff (JSE code: SNH), Star (JSE code: SRR), PSG (JSE code: PSG) and Phumelela Gaming (JSE code: PHM) boards.
Steinhoff CFO and Star CEO Ben la Grange has quit as CEO of Star, but seemingly stays on at Steinhoff, for now.
It's an oldie but it always true. Where there's smoke theirs fire and locally that is Steinhoff. Forever people have been in one of two camps on this stock. They either loved it or didn't understand the financials and stayed well away. I have always been in the latter camp and recently the warnings have gotten dire and now the CEO is out, results delayed and an investigation by PwC to try and understand exactly what's happen.
Now hindsight is easy, but there has been a lot of smoke around Steinhoff for ages, enough to scare away any investor one would think. I warned as recently as a month ago about this.
For traders the lesson is simple. Don't try and catch falling knives. Sure sometimes it works but when it doesn't you blow up.
Wiese took some R122million SSF exposure in early November at 6146c. This is why we largely ignore director buying.
The company did a share buy back also in early November for about R4,8billion, now worth R1.2billion.
Also a lot of hating on ETFs as Steinhoff was 2.35% of the Swix (which is a truly horrid index) and 1.88% of the Top40. Frankly active fun damagers who liked the company probably had a lot more.
The 7th largest stock in the South African SWIX index is currently down 61% amidst accounting irregularities and resignation of the CEO. pic.twitter.com/NEqwrsBGwo
— Delphine Govender (@Delphine_DG) December 6, 2017
Of course everybody now wants to know if it is time to buy? The answer is no because we simple know nothing except that what we thought we knew is not true. Never blindly buy something where everything is simple unknown. Some saying they have 2500c odd value in Star, PSG & Kap, but then they also have debt that is likely about the same.
Viceroy Research has published their report in Steinhoff and it makes for scary reading.
Lastly, what to do if you hold Steinhoff? Sell. The 'it can't get worse' trope is a lie. It can get worse, it can go to zero.
Trading is often very lonely, sure there's the people on Twitter or WhatsApp group you chat to - but mostly that's wild and wooly and not really any support. Your friends and partner are likely not much help either as frankly they don't truly get what you do or the pressures involved.
So we need a trading buddy, not just to keep us sane - but also to keep us honest and help us when we need it. we can use them to vent as required but even more importantly we give them access to our trading account for two reasons.
The real hard part is finding this trading buddy. Check around your circle of friends, try Twitter and other forums and be very selective when choosing.
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I want to aim this mostly at the newbie traders. Those who've been flirting with the idea of trading for ages. Maybe you've tried your hand at it but failed or perhaps you haven't dipped your toe into the water as yet.
Trading is not hard, the psychology is hard, but there are ways to deal with that.
First find a strategy you think makes sense, then start working on it. Test it with hundreds of back tested paper trades. Tweak as required and test again, rinse and repeat until you have something that seems to have a profitable edge. This may take you weeks of manual work - that's fine.
Then when you have something that seems to work, start with a small amount of money. Small as this will help reduce the stress.
Set the rules and risk management and get trading. Track your performance, your perfect trades and keep a journal. Importantly change NOTHING about the system. Ideally you should trade the exact same system for the entire 2018. If it is losing money badly, then your testing was bad. But by the end of 2018 you'll ideally have a working trading strategy and you can start increasing the portfolio size.
Point is start and have modest expectations. Aim to break even in year one - that's winning.
Online resources;
My grandfather introduced me to markets in the 80's and one of his key sayings was "when it's time to panic, panic fast".
When bad news breaks (yes we looking at you CIL) and a stock crashes the immediate response is that it's too late to do anything. Maybe, but often times the will be continued weakness because news and response is not instant. It takes time for everybody to respond. The bigger issue is if the news markedly changes a view and saying the damage is done is not an answer.
This is especially true if the issue is management related and also in cyclical and small/mid cap stocks.
Importantly I am not talking about panicking when the market crashes. This is about exiting a stock forever and moving on until it proves its bonafides again. Selling crashes is nice in theory but never works. Stocks are different because they can go to zero worse case or spend years, decades, forever languishing around little or nothing.
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Brait (JSE code: BAT) has valued their UK New Look business at zero. They paid R37billion just under two years ago. Woolies* (JSE code: WHL) and Famous Brands* (JSE code: FBR) both struggling with big deals and now Firstrand (JSE code: FSR) spending some R20billion buying Aldermore.
How many big deal really work? Sure they work eventually, but at what cost and never as management promised.
I suspect it has two key problem. Firstly they buyer typically over pays in their eagerness to get the assets, this is especially true when the target is listed and the premium has to be agreed on by shareholders and is hence usually 20%-30% or more. Secondly merging two business is never easy. Some easy wins such as centralised costs like HR can be lowered, but actually extracting value a lot harder. The third of course is the ego of management. Who wants to be boss of some regional business when you can be a global titan over seeing a vast network of losses?
My memory says very few ever work very well. Have you got some examples of large deals working? SABMiller worked, BHPBilliton* (JSE code: BIL) worked. Any others?
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Your trading system is one of the least important parts of a successful traders arsenal. Yes you need one and yes it need to be profitable. But it is not what is going to make you the money. That will be your discipline, your money and risk management - this is your trading edge.
So stop trying to find the best system in the world. Stop tweaking your system every tine it loses some money and stop jumping from one system to another.
Find a system that makes money, test it and learn to trust it. Become the absolute pro at the system and then trade it; unemotionally and with discipline.
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Every trader will at some point have a drawdown when a string of losing trades sees your once lovely equity curve head south. Or worse an ugly equity curve get even worse.
Typically the gut response is to either; change system, tweak the system, reduce trade size or just panic. None are a good idea.
August saw me have a horror week with four large loses (within system expectations, but not expected all at once). My immediate response was some Amazon shopping but then I got into my drawdown mode.
First I check every trade to make sure I did everything right. Now every trade I do is marked for a 'perfect trade' but I double check. I also go back to my initial system checking and see if this was expected. I use the Mark Douglas method of system testing and this process is very important. Firstly it gives an expectation of what the system can deliver, tests if it works and also shows what sort of drawdown you can expect.
The point is drawdowns are a part of trading and veery trader will have many of them over a life time of trading. We need to expect them, manage them and not have a knee jerk response to them.
I was interviewed by Duncan McLeod from TechCentral on local and offshore tech stock, interview below or here.
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A recent flurry of emails from people shorting stocks and getting burnt. In particular shorts on Capitec*, Naspers and Kumba. A side note that emailing me is a form of confirmation bias as the emailers wanted me to essentially confirm they were right and the market was wrong.
First rule is don't.
Second rule is don't short on fundamentals. Short on price action, if you want coupled with fundamentals. But don't just decide a share is expensive so now it must go down, it can get way more expensive.
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The first question no new trader asks is which time frame should they be trading in. Typically one starts looking at daily charts but quickly drops to shorter time frames because we want the rush that comes from each trade and we get more at shorter time frames. Yes trades happen in all time frames, but it's our ability to manage and profit from them.
But truthfully can most people manage an intra-day time frame unless this is all they do? Markets is pretty much my life and an hourly chart is still tricky for me as I miss some entries (stops are automated so that no problem).
Shorter time frames;
Forget about getting a rush from trading and find a time frame that works for you and potentially use multiple time frames. Start with a weekly chart, if you get a tigger wait for it to confirm in the daily chart.
Now if you not using technicals but more about price then tie frames become less of an issue, but you're then having to watch the market consistently hence no other day job or trade at night.
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Why does everybody hate highs? If we're an investor highs are a great thing as it means we're richer then before?
I once had a trading system that one of the rules buy new twelve month highs, and it made money.
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Remember Greece? I don't mean as a holiday destination, I mean as the country who's debt levels caused years of panic that were going to crash the global economy? This peaked in 2015 with elections in January 2015 and then in July a referendum saw voters reject the European Union proposed bailout leading to new elections in September 2015. Yet two years later Greece is pretty much never spoken of? The debt had not magically disappeared, rather it is being 'managed'. The struggle remains real for ordinary Greeks and no doubt the politicians continue to do whatever politicians do.
The point is the word is full of one crisis or another and the media will always make the crisis seem way bigger then it often is. If it bleeds it leads is the old newspaper adage and a financial crisis in an EU economy is always going to lead with plenty hysteria thrown in for good measure.The truth is the Greek debt crisis never really mattered to the rest of the world and I did a JSE Power Hour on this in June 2012.
Now don't get me wrong, we will have another global financial crisis - of that I am certain. But what will trigger it and when it will happen I have no idea. So as long-term investors and short-term traders we ignore all the hype and fear mongering. We focus on what we know and can control. For investors that means buying quality at prices we like. For traders - trade the price and ignore the noise.
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The #ALSI gives us a free lesson in stop hunting pic.twitter.com/EkqvebhUkV
— Trader1137 (@Trader1137) August 30, 2017
As a trader your stop loss is your most important decision as it protects your capital from destruction. Sure it is hard emotionally cutting losing trades, but that's a lot harder then going bust - so every good trader is ruthless with their stop losses.
But where to place it is hard.
Point is - don't be obvious when placing a stop loss. Don't make it too tight or place it where everybody else would place their stops. Other traders will go stop loss hunting and will shake you out. If you find yourself being stopped out only for the trade to reverse and go in your initial direction - widen your stops. That said careful your stop loss isn't so wide that your system starts to lose money.
Yes stop losses are hard. Hard emotionally as we're losing money and even harder to know where to place them. But without a stop loss process as part of every trading system you will go bust. So spend the time working on your stop loss placement within your trading system.
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Recently I have been getting a ton of scam phone calls around trading and investing that follow two themes.
The first is offering me some training and software that will make me a fortune, usually 40% in six months! It won't. If it was so awesome why's this person stuck in a call center cold calling me?
The second is offering to get me on the ground floor on some stock (such as Space-X, Uber or the like) or alternatively they've got a hot tip for me. If it all so hot, why are they cold calling me? Surely people would be queuing up to buy?
These are scams, disconnect the call and if you can block the number and warn your friends. Certainly do not start sending money offshore to some random voice on the phone regardless who they say they are. Nor pay top money for software and training when much is free or cheap on the internet.
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I did a Bitcoin (code: BTC) podcast in March and nobody cared . Another in June and interest was still modest. Now it booming and everybody wants in?
What is Bitcoin? It is not a currency, it is if anything a commodity. It pays no dividends and can buy things but remember sea shells have been used to buy things in the past.
For those wanting to buy Bitcoin, Magda Wierzycka )CEO of Sygnia) recommends using Luno locally (albeit it internal so only market within SA and hence price not always reflective of other exchange prices). Or use an offshore exchange (using your annual R10million offshore allowance) via Kraken or Xapo.
Here's a trick, there is no central exchange for Bitcoin, so what's the price? Also no regulator and we have seen exchanges crash, be hacked and go bust. So this is fairly wild west out there.
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JSE – The JSE is a registered trademark of the JSE Limited.
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I got an email about how a long-term investor had a 15% trailing stop loss on their share and asked it this was the right stop loss level. The question was moot as the writer seems confused as to whether they were a trader or an investor.
The easiest measure is how long you plan to hold a position. If less than three years than you are a trader as SARS says holding less than three years is income and hence taxed at your marginal rate. So derivative or not short-term under three years is trading.
But there is another issue which is technical vs. fundamental. Traders generally use charts as price action trumps all else and plays out in the short term regardless of valuations. Long-term investors use fundamentals as they will play out over the long term. So a long-term investor would have a stop loss but it would be fundamental based, not price based.
Lastly, you can be both. Certainly I am both short-term trader and a long-term investor. Importantly use separate accounts, even if with the same broker.
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On Tuesday the Top40 was trading at the high for 2017 (and again on Wednesday) and when I tweeted the fact the replies were mostly about how the market is wrong. Look at unemployment, Guptas, recession, down grades etc. they all shouted. None of the is wrong, but is it relevant?
Firstly we've had a three year +/-30% correction in time. But as importantly the market is not the local economy with listed companies earning a lot beyond our boarders and mostly the better stocks in the index as loser are tossed out. Lastly and perhaps most importantly the market looks head 12-18 months. With rates coming down, Zuma out in the new year and his preferred choice struggling 2018 looks way better for South Africa than many a recent year.
So if we're looking to the seed half of 2018 then the future s brighter, and sure this may be relative, but brighter surely means higher for the market?
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Last week I spoke about the price war in ETFs. But do fees still matter?
For the passive market fees are surely at point where they almost don't matter. Sure they can go lower but we're talking most local ETFs now nicely below a 0.5% TER ratio while the offshore are slightly above 0.5%. Don't get me wrong, every 0.1% makes a difference, but on R100k that's R100. Not nothing but not the difference between retiring or not.
I still look at VOO with a TER of 0.04%, but we're never going to get that low (they're a mutual company and owned by the fund holders and have massive scale we'll never see in South Africa).
Admin fees, once a silent killer have also disappeared at some brokers where a simple ETF or tax-free account has zero admin fees.
Transaction fees are still a bug bear at some places with minimums that mean you need to trade some R18k-R30k per hit to get the effective rate.
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With the new issue of ETFs from Satrix and Sygnia taking over the DB x-trackers (to be branded Itrax) we're seeing some price wars forming. Very good news for consumers, but some buts.
My strategy will be where I buy an ETF that now has a cheaper alternative I will start buying the cheaper immediately. Switching will take longer.
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We've seen two small stock listing recently that were trying to attach themselves onto the hype of a hot sector. Gold Brands in the quick service restaurant (QSR) space and Pembury in education. Both have failed and both teach us an important lesson in the new stars that are worth investing in.
It is about quality, it always is. Sure a raging bull market will lift all stocks as we saw way back in 2005-8 listing boom. But in a more subdued market, a more skeptical market, quality matters. Cash matters, brands matter, management matters. It all really matters. It is not enough to just be in the right space.
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The problem with buy and hold is not the math, which proves it works.
The problem is with the evidence, which proves investors can't do it.— Bob Brinker (@BobBrinker) June 27, 2017
A recent question asked about some investing ideas and concluded with the comment that "I'm looking at long-term say 5 years.". Wow. For me five years is short term while long-term is decades (yes with a 's' at the end).
I am not falling into the trap of saying things are faster these days with always on smart phones with taxis at our beck an call and online derivative trading. But the tweet below highlights that while we know long-term buy and hold works excellently, especially with ETFs, the average investor finds it hard. Stats continually show that average holding periods for stocks has been rapidly reducing. On the NYSE it is now months whereas it used to be years and years.
I'm not sure if it's fear, impatience, indecision or just a greed to be rich quickly. But wealth creation takes time and sure it is no fun when over the last three years most local portfolios have returned nothing, only beating money under the bed.
What I do know is that thinking of a few years as long-term is bad.
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When I ask people this question I generally get a surprised look as if it is a stupid question and the answer is generally CFDs. The follow up question is always - why do you trade them? Here the answers get garbled because there is seldom a good reason.
We need to be strategic about what we trade. There are differences between; shares, indices and FX. Different funding, risks, costs, spreads and more. We need to understand what they are and trade those that best suits trading in general and our trading specifically.
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