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Real trading statement proof: $50,000 to $86,674 – CEO of Tactical Trading Academy

Alvin — Sat, 28 Jan 2012 03:49:46 +0000

Welcome to BigFatPurse Interview show. Today’s guest is BL, he is the CEO of Tactical Trading Academy. He was an ex-banker, and now he has strike-out on his own to teach trading. Find out how he walk the talk.

BL, I understand that you worked in a bank, what made you join the banking industry in the first place?

This is a simple question because I have a business degree, so joining the banking industry is a natural career path. My first job was in asset management.

Is it because of interest or the perceived high pay in this industry?

I did not join because of money. When I started out in my first job, there was nobody to advise me. When I joined the industry 10 years ago, banking was not such a good job. I was actually retrenched. Is it good money? I have friends that told me bankers are overpaid. Honestly, I think the salary of a banker is fair. For every dollar you take back, there is a formula behind it.

You are saying that the remuneration commensurate with the performance you put up. Is there a difference between being a bank trader and a retail trader? Is there any edge that the bank trader has over the retail trader?

I would like to clarify that I am not a bank trader. I was an advisor. When we advised bank customers, we would usually take a longer position and looking at 200-300 pips profit. If I am trading for myself, I could be taking profits at 100 pips or less. This was the main difference. People have the perception that working in the bank would have access to more information, that is totally a myth. When the market do move and customers call us, we do not know what is happening too. We will check on CNBC or the internet to update the customers.

I do understand that banks do employ algorithm trading and with their muscle power, they could scalp better than a retail trader. Do you think this is the current trend?

I have not know of bankers employing algorithm trading. I think this is still not common in Asia. I do know of forex traders who work in the oil companies. These oil companies employ proprietary forex trading teams. How do these traders trade? They would monitor the order flow, and they would know if there is a large number of buyers or sellers at a certain level. They would trade according to the flow. This is how most Asian traders trade.

What time frame do you trade?

I am looking at daily charts and sometimes weekly charts. When started few years ago, I was using four hour charts but I found it was too stressful for me. I think trading must fit your character. I have friends who are very comfortable with 4 hourly charts, going in and out for 50 pips profits. But for me, it would be very stressful because I will be monitoring the market every minute and checking whether I have been stopped out. Now, I am taking longer term position. I feel less stressful and I can do things outside trading.

How long does your trade typically last? Days to a week?

Yes, usually I would hold a position for more than 2 days.

Do you trade other instruments other than forex?

Yes, I trade US stocks. In fact, I am more of an investor when it comes to stocks. Most of my positions are at least 3 months. The reason I chose US stocks is because they are more transparent. I can find a lot of free information in the websites. For US stocks, you can buy one share which is more affordable as compared to Singapore, where you need to buy in multiples of 1,000 shares.

Are you using CFD for trading stocks?

No, as I am using an investment approach for stocks, using CFD would mean I have to take leverage and run the risk of margin call. I may hold stocks for more than one year and hence, CFDs are not suitable in this instance.

Have you traded futures?

Yes. I have tried many instruments such as options and futures. I have to admit I am not successful in most of them. I find it difficult to determine the direction of the indices. I used to trade industrial metals in the London Metals Exchange. The problem is that every 4 pm on a trading day, the supply will be published. Even though you may have all the reasons for copper to go up, but if the published supply indicates there were 3,000 metric tons of copper oversupplied at warehouses all over the world, copper price will drop immediately. If you do not know the industry, you will not know the real supply and demand, and it becomes difficult to trade futures. I cannot take a long position in futures due to the leverage, I would be easily stopped out with a 5% drop in price. As for options, time expiration is my greatest enemy. The way that I think options trading can make money is by selling puts. That means if I think Citigroup is a buy at $20, I do a put on $20. It is still an investment style which means I do not mind buying Citigroup if it falls to $20. If it does not go to $20, I will be happy to collect the premium. I have heard Warren Buffett do this as well in a bull market. It will be difficult to buy stocks cheap and you can collect the premiums.

What made you choose to trade forex in the end?

I found that I could easily make money in forex more than other instruments. This is the frank reason. I am not saying forex is a better instrument. I do think it is more suited to retail investor because contract size for other instruments are huge. If you do not have $20-30k, you can forget about trading Hang Seng or copper futures. If you have $2,000, you can trade forex with mini or micro contract size. Forex has its advantage.

How do you allocate your capital? How much do you set aside for forex trading and how much for stocks investing?

I allocate 70% of my capital to stocks and 30% to forex.

Do you trade spot forex or currency futures?

Spot forex.

I suppose you are using CFD to trade spot forex.

Yes.

Would you disclose how you enter or exit the market for forex trading?

First, I will identify whether it is a trending market or a sideway market. For example, GBP/AUD and USD/SGD are on a long term downtrend. AUD/USD is on a long term uptrend. I will look for opportunities to trade in the direction of these trends. My job is to enter at a conservative level and ride the trend subsequently. Besides identifying trends, I also look at fundamentals. I want a currency that is healthy and there are a few criteria to determine that. The criteria are some of the economic indicators that are impactful to a currency. I do reveal those indicators to my students. I would look for pairings whereby I can buy the strong currency and sell the weak currency.

Do you need to confirm your view on the fundamentals with the direction of the trend?

You can say that but not necessary. A strong currency versus a weak currency, the trend will be very obvious. For example, GBP is weaker while AUD is stronger. Hence, GBP/AUD is a strong downtrend and I see no reason why this trend will change.

When you say it is a downtrend, what time frame are you referring to?

Daily and weekly charts.

Must the daily and weekly charts show the same direction?

Sometimes the daily chart will not show a downtrend which may be due to high volatility. One example will be USD/SGD now. You would not be able to identify USD/SGD as a downtrend on a daily chart. However, it is an obvious downtrend on the weekly chart. Likewise for AUD/USD. Of course, this is not just what I look at.

Which currency pair do you trade most of the time?

Like what I said earlier, I trade pairs that have contrasting strengths. I will not trade those currencies with equal strength like EUR/USD. Europe has a lot of problems and US has her own problems as well. At any time, I do not know if the pair is going up or down.

This is really just a relativity game. You cannot say AUD is a strong currency. It is stronger against what? But there is a currency pair that I always like to trade and I am waiting for opportunities. However, I am trading it not for fundamentals, I trade it simply because nobody can beat the market. The pair is USD/JPY. When Bank of Japan intervene in the market and USD/JPY spike up 300 pips, I will enter a short position. Time and again, it is proven no central bank can overcome the market forces. In fact, it is not only Bank of Japan. Recently we have the Swiss National Bank, controlling the EUR/CHF as well. My students and me have entered a short position on this pair as I know that this intervention will not be successful.

So you do look out for news for central bank intervention. Do you look for other news that may impact the forex market?

I do not look at a lot of news. If you worry about event risks, you might as well not trade since there are so many news every day. We just need to pay attention to the influential news such as the non-farm payroll and GDP data. These are the two important news and the rest are just noise. If the news is not able to move the market by 200 pips, I will consider it noise. In fact, non-farm payroll used to be able to do that but not now, as nobody seems interested in US employment market anymore.

You are looking at news that can influence a significant price change because you are trading a longer time frame (in terms of days), which as compared to a scalper or intra-day trader, any news would be important to him. Am I right to say that?

Yes. As I mentioned earlier, due to my character, scalping is out for me although I have friends who are good at scalping. To me, scalping is not a profitable strategy in the long term. A lot of people can disagree. Scalpers take very small profits and if they are not disciplined enough, one huge loss can wipe out last 10 or 20 trades profits. As such, the risk-reward ratio may not be favorable at all.

And a scalper would have to spend more time monitoring the market. You would prefer to set a stop loss and just walk away from the screen and do other things.

Yes.

Can I say that you are using a trend following method as compared to those mean reversion strategies?

Yes, mainly trend following. If it is a sideway market, most of the time the price will revert to the mean.

So you do have different strategies for different conditions – each strategy for trending market and sideway market?

Yes.

Which also mean that if you were to trade a sideway market, you are looking for a currency pair that is equal in strength? As opposed to a trending market whereby a pairing of a strong and weak currency is necessary. In this case, you are looking at EUR/GBP for an instance?

Yes, I would buy at the extreme low for EUR/GBP.

In terms of your investment strategy, how do you select stocks?

First, I will look for companies that have long term rising revenues, earnings and operating cashflow. The operating cashflow must also be higher than the capital expenditure to create a positive free cashflow. In finance, the intrinsic value of a stock is the present value of its free cashflow. This statement would summarize my strategy.

You are using traditional financial valuation models such as the Free Cash Flow model to identify good stocks.

Yes. If you look at it, it is quite close to Warren Buffett’s strategy. If he has done well, I think this is a proven strategy. Of course reading books on Warren Buffett can only offer a glimpse on what he is doing. But we do not know the details or the complete picture of how he picks stocks. I still had to form my own methodology. It did not work well initially and I have to refine my strategy through the years. I used my method and participated in the US stock-picking competition which I managed to rank in the top 1.5%. I have put it up on my website.

Tell me more about the competition.

It is an online competition that is organised by www.zacks.com. The period of assessment is a year and hence, you cannot say one is just lucky.

I understand you typically hold stocks for 3 months or so. Sometimes we know that the fundamentals of the company are good, but its stock price may not be reflective of the true value. How sure are you that the stock price will reach your calculated value in a span of months?

In the past, I would have look for a perfect scenario but most of the time, the stocks would have been priced very high and become expensive. If nothing happens, those stocks will continue to do well. But in today’s world, there are many market risks such as Asian Financial Crisis, credit crisis, and US getting downgraded. All these events can easily push the stocks down 20-30 percent even though there is nothing wrong with the stocks. I overcome this by investing in stocks that have temporary problems. These stocks are already cheap by 20-50 percent. We just need to identify if these problems are temporary or permanent. It would be a good opportunity if it is temporary and I will look for long term support level in the price action to enter a position.

What are some of these temporary problems?

For example, US is cutting budget on defence spending currently and some of the stocks in the defence industry have came down quite a bit. Initially I thought this is a long term problem. But I realised these defence companies do have business overseas and not solely dependent on US. Another sector would be education US government provides a lot of funding for their students and by cutting the budget, many stocks in the education sector have came down.

Basically you are looking at stocks that are undervalued in the short run. Do you still look for positive cashflow in this instance?

Yes, this is still important. I evaluate the fundamentals and at the same time, price must be good.

It is still like a bottom-up approach where you screen the stocks for positive free cash flow, after which you just wait for prices of these stocks to be depressed?

This is half correct. For the instance of the defence industry being affected, I just need to find the most fundamentally strong company in this sector.

In other words, you can go with a top-down approach which you identify the industry and you drill down to the fundamentals to look for free cash flow. Is this a more accurate description of your method?

Not really. It is still considered bottom-up approach. By discovering a group of stocks that tend to be cheap, I would know that this industry is in some trouble. Oil-related stocks are another group where money can be made easily.

Why are oil-related stocks relatively easier to make money?

Oil price is seasonal. Oil price tends to go up at the end of the year due to winter season. In the middle of the year, nobody is paying much attention to oil stocks and that is when you should enter. I still remember some time in July, my friend asked me what stocks I was buying. I told him I was buying US oil stocks. I bought Transocean, which is the world’s largest offshore drilling company. He disagreed with me as he felt that oil price was so low. I replied I bought because precisely oil price was low. Eventually I made a 50% profit.

This is the problem with most retail investors, who do not really understand the concept of buying low and selling high. When the price is low, they are not interested because they think that the stock is dead. When the stock price starts to move up, breaking 1-year high or 2-year high, they will get interested and begin to buy stocks. And when prices came down, they sold when they cannot take the pain anymore. They do not realise they are actually buying high and selling low.

Yes. You will need temporary impact to the stock price in order to buy low. Otherwise, good stocks are usually expensive.

Do you buy more stocks after a stock market crash?

Yes but you will have to wait for a long time for such opportunities. I prefer to look for problems in sector rather than the entire stock market.

Where are your sources of information?

There is no short cut in making money. You have to read constantly in the internet and subscribe to magazines like Fortune to keep yourself updated. Only when you know what is happening, you will then be able to make judgement and decisions. You cannot make a good decision when your information is not comprehensive. You need to be smarter than most people to make money.

How much time do you spend trading and researching for investment opportunities?

By looking at your blog, I think we have a common interest and that is having a passion for the financial markets. Constantly I am thinking how to make money. The moment I wake up, the first thing is wonder did Dow Jones went up the previous night. I do not spend a lot of time on forex. I just look at the daily and weekly charts to identify the support and resistance levels. I will know if the day is good for entry. If not, I will just pass and look at it the next day. I will use the time to research on US stocks. There are so many stocks out there and it is not possible I have gone through most of them. I would usually pick 1 stock out of 20 that I researched. If I have to pick 20 stocks for my portfolio, I would need to look at 400 stocks.

Do you make use of stock screeners to help you shorten the process?

I used stock screeners in the past but I found them not comprehensive enough. Moreover, the data that are provided may not be accurate.

Like what you said, there is no shortcut in making money. You have to put in the extra work to make sure your trading or investment is sound.

Yes.

I understand you provide training for aspiring traders. How do you go about imparting your trading skills to a newbie?

I teach both forex trading and stocks investing courses. I do one-to-one coaching sessions. For forex, I will teach them how to find strong and weak currencies, how to identify trend, which indicators I use to find a good entry level. I also provide MT4 templates for their charts. These MT4 are for back-testing purposes. For example, you can test trading AUD/USD with MACD signals for the past two years, starting with $50,000 capital, how much would you end up with. I use this to quantify and prove to anyone that indicators cannot be used blindly. MACD cannot be used for all currency pairs, RSI is not a very useful indicator and stochastic is only good for some currency pairs.

For stocks, it would be largely about accounting knowledge. This knowledge is necessary to pick good stocks according to the criteria I need them to find. I do provide a spreadsheet as a tool to calculate the intrinsic value of a stock.

In addition, I provide trade signals for my forex students as well as my positions in US stocks. You can take a look at my website where I provide all the statements. I always tell my students that learning how to trade is equivalent to learning how to drive. Passing the theory exams do not suggest that you know how to drive a car. You need practical lessons and trade signals are to guide students to trade in the live market. I apply my own teaching in my trading and I will explain to them why I get into those positions. I coach them to drive on the ‘main road’. Even though I encouraged my students to trade after the coaching sessions, I found that many of them procrastinate and not update their trades to me. Likewise for stocks course, I wanted them to identify 1 stock based on my criteria and only a handful of students would get back to me, and these are the people that benefited the most. They are the ones that made full use of me as a coach.

Are you concerned that your students may just follow your trade signals and not apply the rules on their own?

Of course there are some students that are lazy. There is nothing I can change. I can only encourage them to enter trades on their own.

It is only those that are genuinely interested to learn the way to trade would benefit most from the course. It is not for those who are only interested in getting rich quick.

I will never promise people you will get rich quick using my method. If you want to make money fast, you would be taking very high leverage which translate to a higher chance of getting a margin call. You run the risk of losing your capital. My method cannot get you rich but can provide another source of income for you. Of course if you do well you can make more money.

How long is the duration of your course? You mentioned there is a phase 1 that is theory-based, and a phase 2 that is hands-on.

Speed of coaching depends on the student’s foundation. Those who have experience in trading forex or investing in stocks, I can teach them everything in one coaching session. For someone who has zero knowledge, I would typically need 3 to 4 sessions with 1.5 hours each. Subsequently, they would receive the updates of my trades for the next 6 months.

How do you charge your lessons? Do you charge by sessions or is it one price for the course regardless of the number of sessions?

I am charging by course. $300 for forex course and $450 for stocks course.

Do you eventually want to help your students discover their own trading strategies and your courses are just to help them get started and familiar with trading mechanics and psychology?

That is not my objective. I know my method works. This is the question I have been asking myself. I read many books and I find that 90% of what they teach are junk. If you want to find your own method, you have to spend time, effort and money to experiment. The learning curve will be longer. My profit and loss statements are there. You can take a look if you are not convinced. When people teach trading or write trading books, my question is where is the statement? How can you prove that your method works and I can follow? When they claimed they became millionaires through trading, can they show me the bank account? Do they make money through trading courses or do they make money through trading? These are the questions that I will ask. To reduce the doubts, I post my statements, I post my trade signals and I am very transparent. If I still cannot convince people with these, I do not know what else can be a better proof.

Many times I find that people are willing to pay $3,000 to $5,000 for courses with charismatic educators saying you can make $20,000 in one week. This is not realistic but somehow people believe them. Many of my students are actually graduates from these courses. They told me that sometimes the methods are not clear and they are not sure if they can make money. Their educators do not provide trade signals. After the 4-day course, you are out on your own. Just like learning to drive in theory and there is no one to hand-hold you. This is the problem in this education industry.

If you pay $5,000 for the course, you would need to make $5,000 just to break even. How many people can make $5,000 if you are a new trader? My course is just $300 and it is not difficult to make that back.

A student asked me yesterday if anyone taught me how to trade. I said no and if someone had taught me, I would have shorten my learning curve. I learned by paying school fees to the market. Only by learning about myself, through trial and error, and feeling the pain of losses that I eventually making money now. I think it took me 10 years to create my strategies.

If someone is interested in attending your course, how does he/she go about it?

First, they need to transfer the course fees to my paypal account: metal.commodity@tradingeducationprogram.org. I will contact the person when I receive the payment alert from paypal.

Alternatively, they can always visit your website, tradingeducationprogram.org, for more details as well as the instructions to sign up for the courses.

Yes.

Thank you BL for your time and valuable sharing.

You are welcome.

PS: Do you like the interview? You can read more in my book, “Secrets of Singapore Trading Gurus“. Use “bfp15″ to get 15% discount.

Bruce Lee – “It’s not the daily increase but daily decrease. Hack away at the unessential.”

Alvin — Tue, 17 Jan 2012 23:17:18 +0000

Are we having too much clutter at home? Are we adding more material things into our life but not necessary needing them? Are we spending our time aimlessly watching TV or surfing the internet?

We have limited time and one life. We must learn to stop wasting our time and money on unnecessary things. Discard them and you will have more time and money.

Bruce Lee said it is analogous to sculpting a statue. Instead of adding decoration to a piece of rock, a sculptor chisel away the unwanted parts to reveal the beauty of a statue.

Decrease something daily. Hack away at the unessential.

3 ways to live better

Alvin — Sun, 15 Jan 2012 00:28:11 +0000

Live life with more courage

We have a lot of fear in our lives. Although fear has kept our ancestors alive (avoiding dangerous creatures), it has limit our potential too. Thanks to great men who had abolished fear that we are able to advance to what we are today. Thank you Thomas Edison for having the courage to fail 1000 times to discover the light bulb.

I went to Outward Bound Singapore (OBS) in my teens and there was a phrase on the building that we can see while we push off the canoes from the shore – “You cannot discover new oceans if you do not have the courage to lose sight of the shore.”

We can live in our “safe” world and not try new things. We can choose to live in our comfort zone. But I found many of such people turned dispirited after a while. Men would not be happy if there is a mismatch in what they envisage their life to be, and the life that they are actually living. If you have a dream of doing something, go ahead and do it! Identify what are the things that are holding back and you will find most of them are just excuses that you refuse to overcome.

We only have one life, live it according to how you want it to be.

Stick to what you believe

As you pursue what you want in life, there would be a lot of naysayers to discourage you. Many people, even your family and close friends may disagree with you, you have to stick to what you believe. Do not be swayed by comments. You can be wrong, but stick to your belief until you are proven wrong. It is more convincing to be proven wrong than imagining that you could be wrong and let the fear hold you back. Being wrong can actually bring you closer to success. Most regrets in life is on something that you have not done, and less likely on something that you did wrong.

If Edison had believed the naysayers, we would not have light bulbs now.

Do not be concerned about what people think of you

Many times, we say things because what others like to hear, and not because we meant it. We are constantly and subconsciously being concerned about others’ impression of ourselves. Bruce Lee said the hardest thing to do is “honestly expressing ourselves”. It is very tiring to always have to put up a pretense and manage impressions, but we do it anyway. Shakespeare said, “All the world’s a stage, and all the men and women merely players”.

Do you want to act for life?

Inspired by Jon

Peter Lynch’s Rule of Thumb in Investing

Alvin — Tue, 10 Jan 2012 22:57:17 +0000

I found this on Wikipedia and it is worth archiving:

Market cap

Market capitalization less than $5 billion – Lynch generally avoids large, well-known companies in favor of small-cap stocks that still contain significant upside potential. Most fund managers define small-caps as companies with market capitalizations under $1 billion. Institutional investors often use market one investment criterion, requiring, for example, that a company have a market capitalization of $100 million or more to qualify as an investment. Analysts look at market capitalization in relation to book value for an indication of how investors value a company’s future prospects.

PEG ratio < 1.2

PEG ratio below 1.2 – The PEG ratio is a valuation metric that compares a company’s price-earnings ratio with its projected growth rate. Small, high-growth stocks generally trade at higher PEGs compared to the big-caps. If the PEG ratio is around 1, the company is considered fairly valued. A PEG ratio that is much higher than 1 indicates an overvalued company, and a PEG below 1 indicates an undervalued company. While the PEG ratio can effectively provide insight in certain evaluations, it is limited by its overriding focus on earnings growth. Revenue growth, cash flow, dividends, debt, and numerous other factors are also critical in determining value. Additionally, while PEG is useful for smaller companies it may be misleading for big-caps, since sustained growth is less important to their total returns. PEG is most useful when supplementing a thorough discounted cash flow analysis or relative valuation.

Earnings growth 15–30%

Five-year earnings growth between 15% and 30% per year – In investments, earnings growth refers to the annual rate of growth of earnings, or the amount of profit a company produces during a specific period, usually defined as a quarter (three calendar months) or year. Earnings typically refer to after-tax net income.. When the dividend payout ratio is same, the dividend growth rate is equal to the earnings growth rate. Earnings growth rate is a key value that is needed when the DCF model, or the Gordon’s model as used for stock valuation. Companies that exceed a 30 percent earnings growth rate are confronted with two fundamental problems: (1) sustaining a high growth-rate over the long term is extremely difficult; and (2) stocks growing that rapidly are usually already being actively covered by Wall Street analysts, and Lynch prefers less well-known names and avoiding competition.

Debt ratio < 35%

Debt-to-Equity (D/E) ratio below 35 percent – If a companies debt levels are excessive, it often proves extremely difficult for managers to raise sufficient cash to finance continued expansion. Without expansion into new markets, corporate growth eventually slows down. Companies with lower debt often have better prospects for future expansion. Additionally, in the event of an economic slowdown, these firms should be in better shape to weather any storms. Regarding debt-equity ratios, Lynch cites 0.33 (25% debt compared to 75% equity) as normal for a corporation. Additionally, he believes a debt-equity ratio of 4 reflects a weak balance sheet.^[8] Buffett echoed Lynch’s avoidance of companies that have significant debt. He argued that debt is “the weak link that snaps you.” A good business “will produce quite satisfactory economic results with no aid from leverage” while a company with significant debt will be vulnerable during economic slowdowns.^[5]

Institutional ownership 5–65%

Institutional ownership ranging between 5% and 65% – Institutional investors are organizations that trade large volumes of securities. Percentage institutional ownership is the percentage of outstanding shares that are owned by mutual funds, pension plans and other institutional investors. Most well-known stocks have at least 40 percent institutional ownership. Typically, upwards of 70 percent of the daily trading on the New York Stock Exchange is on behalf of institutional investors. Peter Lynch uses the degree of institutional ownership to gauge market interest. His contention is that stocks with a relatively small level of institutional sponsorship offer the best return potential. When ‘Wall Street’ analysts identify a stock and institutional money begins flowing in, price growth can be dramatic.

Dividend yields

When yields on long-term government bonds exceed the dividend yield (annual percentage of return earned by an investor on a common or preferred stock) on the S&P 500 Index by 6 percent or more, Lynch recommends selling stocks and purchasing bonds. He recommends this as a type of value-contrarian-safety strategy, claiming that when this situation occurs investors should enjoy the “risk-free” investment of bonds, they are either yielding exceptionally well or the stock market is over-valued. Either way bonds make more sense than stocks at that time. This is the only exception to Lynch’s assertion that stocks are always better investments compared to bonds.^[9] (See Fed model)

Cyclical stocks

For cyclical stocks it is recommended to purchase when the P/E ratio is low, and sell them when the P/E ratio is high (i.e. when earnings are peaking). Cyclical stocks tend to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles and paper.

Cyclicals can be a rewarding investments if purchased at their bottom price, so it helps to seek opportunity in depressed stocks, rather than analyzing potential reasons why a cyclical will take losses. When cyclical stocks are crushed by a weak economy and it appears things could not possibly worsen, cyclicals usually hit their bottom.

Lynch goes on to explain the PE ratios for cyclicals, advising the time to buy is when their PE hits a historic high, because ‘Wall Street’ has caught on to cyclicals and often begins discounting them before the overall market tops-out (i.e., ends a period of rising prices and is expected to stay on a plateau or decline). When a cyclical stock is at a low PE ratio, alongside record-high profits that have grown for several years, the market is anticipating a downturn. When a cyclical reaches a high PE on very low earnings, the price may be ready for an upturn because earnings will be at or near their nadir.

Secrets of Singapore Trading Gurus vs Secrets of Highly Profitable Traders

Alvin — Sun, 08 Jan 2012 00:28:39 +0000

People who frequent the bookstores would know that besides my book, “Secrets of Singapore Trading Gurus”, there is a similar book, “Secrets of Highly Profitable Traders” by Chin Yong Sak. Before these two books, there were no books on the interviews with Singapore traders. Probably that was the gap that Yong Sak saw. You can read about the genesis of “Secrets of Singapore Trading Gurus”.

While I was on this project, Eileen learned from the boss of Rank Books that an author was also interviewing traders in Singapore and would publish a book too. We went ahead and happened to publish around the same time. I had bought a copy of Yong Sak’s book and I enjoyed reading it. There were actually more differences than I thought and I would like to present to you. Of course, there are also pros and cons to each book.

Different traders were interviewed

“Secrets of Singapore Trading Gurus” featured 8 traders while “Secrets of Highly Profitable Traders” had 5 traders. We do have 3 common traders – Binni Ong, Keane Lee and Nicholas Tan. Other than that, my book covered 5 other traders – Yeo Keong Hee, Clarence Chee, Tom Yuen, Patrick Lee and Dave Foo. Yong Sak interviewed Colin Seow and Jason Yee which I did not.

Secrets of Highly Profitable Traders – Illutrative charts and discussion on strategies

What I like about Yong Sak’s book is that it has pictures of the trading charts to illustrate the traders’ strategies. He went deeper to discuss about one strategy from each trader, which gives the reader a clearer idea on their methods. Unlike my book which is more of a Q & A format, he compartmentalized and categorized the content. It read as though the trader has written the passages to the reader directly.

Secrets of Singapore Trading Gurus – Q&A format and video interviews

I prefer to present the content in verbatim as much as possible to keep the messages of the traders intact. I want to minimize the loss of integrity and originality through editing. In addition of the text, you are able to view the video recordings of the interviews. By watching and listening to the traders, you can sense the body language and energy where words would not be able to describe. As you can see, I want to provide ‘real image’ as much as possible.

If you are torn between the choice, I would like to say both books present rather different perspectives and you can confidently buy both books and pick up different lessons from them.

There is free delivery to Singapore address currently – buy and get 15% off (discount code: bfp15)

If you want to find out more about the book – “Secrets of Singapore Trading Gurus”

PS: I do not see Yong Sak as a competitor. I see him as someone with a common interest and I am happy that we can both provide the public with a greater knowledge about the trading scene and education in Singapore.

Liar’s Poker by Michael Lewis

Alvin — Wed, 04 Jan 2012 13:48:05 +0000

Liar’s Poker is a book about Michael Lewis’s (author of the book) experience working in the once prestigious Salomon Brothers investment bank. He gave an insight into the internal workings, tension and ugly side of the firm. I shall pick out the useful and amusing things from the book.

Interview for an investment banker job

I found the description of the interview interesting. I do not know if this is true. “Investment bankers had a technique known as the stress interview. If you were invited to Lehman’s New York offices, your first interview might begin with the interviewer asking you to open the window. You were on the forty-third floor overlooking Wall Street. The window was sealed shut.”

“Another stress-inducing trick was the silent treatment. You’d walk into the interview chamber. The man in the chair would say nothing. You’d say hello. He’d stare. You’d say that you’d come for a job interview. He’d stare some more. You’d made a stupid joke. He’d stare and shake his head. You were on tenterhooks. Then he’d pick up a newspaper (or, worse, your resume) and begin to read. He was testing your ability to take control of a meeting.”

Trading bonds and taking an eighth of it

He described how the Salomon trader would earn commissions through the sale of bonds. The trader will probably offer $50 million worth of IBM bonds to pension fund X through the Salomon salesman. He will take an eighth of a percentage point or $62,500 in this case. Thereafter he will convince insurance company Y through another salesman that the bonds are worth more than $50 million and this may not be true. The trader will buy back the bonds from X and resell it to Y at a higher price, and pocket another eighth of a percentage point in quick succession.

The rise of the mortgage department

Salomon Brothers was the first to form a mortgage security department in 1978. This was probably the genesis of our securitization of our mortgage loans and eventually escalate into the crisis in 2008. The fastest group of borrowers were the homeowners and “the volume of outstanding mortgages loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world.”

Securitization of mortgage loans

“Mortgages were not tradable pieces of paper… No trader and investor wanted to poke around suburbs to find out whether the homeowner to whom he had just lent money was creditworthy. For the home mortgage to become a bond, it had to be depersonalized.”

“At the very least, a mortgage had to be pooled with other mortgages of other homeowners. Traders and investors would trust statistics and buy into a pool of several thousand mortgage loans made by a savings and loan, of which, by law of probability, only a small fraction should default.”

“Thus standardized, the pieces of paper could be sold to an American pension fund, to a Tokyo trust company, to a Swiss bank, to a tax-evading Greek shipping tycoon living in a yacht in the harbor of Monte Carlo, to anyone with money to invest. Thus standardized, the pieces of paper could be traded.”

Frenzy selling of mortgage loans

When the Fed increased interest rates in 1979, the saving and loans industry was on the verge of collapse. A tax break was passed whereby the thrifts were able to enjoy if they sell their loans. Salomon Brothers, the only firm on Wall Street to have a mortgage department, was the sole buyer of cheap loans. Naturally, it monopolized the mortgage market.

“… you did not have time to check every last property in a package of loans. Buying whole loans (that is what the traders called home loans, to distinguish them from mortgage bonds) was an act of faith, …”

Government-backed

Freddie Mac and Fannie Mae were created during this period and offered to “transform most home mortgages into government-backed bonds.” “Once they were stamped, however, nobody cared about the quality of the loans. Defaulting homeowners became the government’s problem.”

Brain drain and rise in competition

As Salomon refused to reward the mortgage traders enough to make them stay, many of the traders left for other Wall Street banks, bringing along their knowledge, skills, experience and lists of clients. This allowed other banks to catch up on the mortgage trading business and challenge Salomon’s monopoly. The spread has narrowed and profitability began to decrease.

Creation of the Collaterized Mortgage Obligations (CMOs)

“It was invented in June 1983, not not until 1986 did it dominate the mortgage market.”

“To create a CMO, one gathered hundreds of millions of dollars of ordinary mortgage bonds – Ginnie Maes, Fannie Maes, and Freddie Macs. These bonds were placed in a trust. The trust paid a rate of interest to its owners. The owners had certificates to prove their ownership. These certificates were CMOs. The certficates, however, were not all the same. Take a typical three-hundred-million-dollar CMO. It would be divided into three tranches, or slices of a hundred million dollars each. Investors in each tranche received interest payments. But the owners of the first tranche received all principal repayments from all three hundred million dollars of mortgage bonds held in trust. Not until the first tranche holders were entirely paid off did second tranche investors receive any prepayments. Not until both first and second tranche investors had been entirely paid off did the holder of a third tranche certificate receive prepayments.”

Complicated CMOs

“…seemingly limitless number of ways to slice and dice home mortgages. They created CMOs with five tranches and CMOs with ten tranches. They split a pool of home mortgages into a pool of interest payments and a pool of principal payments, then sold the rights to the cash flows from each pool (known as IOs and POs, after interest only and principal only) as separate investments. The homeowner didn’t know it, but his interest payments might be destined for a French speculator, and his principal repayments to an insurance company in Milwaukee. In perhaps the strangest alchemy, Wall Street shuffled the IOs and POs around and glued them back together to create home mortgages that could never exist in the real world. Thus the 11 percent interest payment from condominium dwellers in California could be glued to the principal repayments from homeowners in a Louisiana ghetto, and voila, a new kind of bond, a New Age Creole, was born.”

Unethical business practice

Salomon was said to dump shares of a collapsing company to clients. “There was a phenomenon known at Salomon as a priority. A priority was a huge number of bonds or stocks that had to be sold, either because selling them would make us rich or because not selling them would make us poor. When Texaco teetered on the brink of bankruptcy, for example, Salmon Brothers owned about one hundred million dollars’ worth of bonds in the company. There was a real danger that these bonds would become worthless. Unless sold to customers, they could cost Salomon a great deal of money. Sold to customers, of course, they would cost the customers a great deal of money. That, it was decided, was the best thing to do.”

Investing lies

“He [Alexander] wanted to know why the dollar was plunging… I told Alexander that several Arabs had sold massive holdings of gold, for which they received dollars. They were selling those dollars for marks and thereby driving the dollar lower.”

“I spent much of my working life investing logical lies like this. Most of the time when markets move, no one has any idea why. A man who can tell a good story can make a good living as a broker. It was the job of people like me to make up reasons, to spin a plausible yarn. And it’s amazing what people will believe. Heavy selling out of the Middle East was an old standby. Since no one ever had any clue what the Arabs were doing with their money or why, no story involving Arabs could ever be refuted.”

Create warrants to transfer risks

“Risk, I had learned, was a commodity in itself. Risk could be canned and sold like tomatoes.”

“My client wanted to take a big risk by wagering a large sum of money on German bonds rising. He was therefore the “buyer” of risk. Alexander and I created a security, called a warrant of a call option, which was a means of transferring risk from one party to another. In buying our warrant, risk-averse investors from around the world (meaning most investors) would be, in effect, selling us risk… The difference between what we paid cautious investors for the risk and what we sold it to my customer for would be our profits. We estimated these would come to about seven hundred thousand dollars.”

Investment strategy – Seek secondary and tertiary effects

There was one useful strategy described in the book. A trader named Alexander whom Michael Lewis followed.

“… in the event of a major dislocation, such as a stock market crash, a natural disaster, the breakdown of OPEC’s production agreements, he would look away from the initial focus of investor interest and seek secondary and tertiary effects.”

“Remember Chernobyl? When news broke that the Soviet nuclear reactor had exploded, Alexander called. Only minutes before, confirmation of the disasater had blipped across our Quotron machines, yet Alexander had already bought the equivalent of two supertankers of crude oil. The focus of investor attention was on the New York Stock Exchange, he said. In particular it was on any company involved in nuclear power. The stocks of those companies were plummeting. Never mind that, he said. He had just purchased on behalf of his clients, oil futures. Instantly in his mind less supply of nuclear power equaled more demand for oil, and he was right.”

After he made a killing in oil, he shifted his attention to potatoes.

“Buy potatoes,” he said. “Gotta hop.” Then he hung up.”

“Of course. A cloud of fallout would threaten European food and water supplies, including the potato crop, placing a premium on uncontaminated American substitutes.”

One more example, what if Tokyo had a major earthquake? What are the secondary effects?

“…what Alexander would do is put money into Japan on the assumption that since everyone was trying to get out, there must be some bargains. He would buy precisely those securities in Japan that appeared the least desirable to others. First, the stocks of Japanese insurance companies. The world would probably assume that ordinary insurance companies had a great deal of exposure, when in fact, the risk resides mainly with Western insurers and with a special Japanese earthquake insurance company that’s been socking away premiums for decades. The shares of ordinary insurers would be cheap.”

“Then Alexander would buy a couple of hundred million dollars’ worth of Japanese government bonds. With the economy in temporary disrepair, the government would lower interest rates to encourage rebuilding and simply order the banks to lend at those rates. Japanese banks would comply as usual with their government’s request. Lower interest rates would mean higher bond prices.”

“Also, the short-term panic could well be overshadowed by the long-term repatriation of Japanese capital. Japanese companies have massive sums invested in Europe and America. Eventually they would withdraw those investments, turn inward, lick their wounds, repair their factories, and bolster their stock. What would that mean?”

“…to Alexander, it would suggest buying yen.”

Free delivery to your address – buy the book.

Investment & Trading Report Card – Dec 11 and Year 2011

Alvin — Sun, 01 Jan 2012 02:48:46 +0000

2011 has been a tough year to trade, especially for trend following strategies. Post August 2011, the market has been volatile with no clear indication of direction. Only Dow Jones closed the year on a slightly positive note while the rest of the European and Asian indices were negative.

Equity Markets

+4.49% (Dow Jones Industrial Average)
-1.12% (S&P 500)
-3.21% (NASDAQ)
-7.34% (FTSE 100)
-15.61% (DAX)
-18.68% (NIKKEI 225)
-18.22% (STI)
-19.00% (CAC 40)
-21.34% (Hang Seng)

The funny thing is that most of the problems are with Europe and US, but Asian markets received the greatest beating. Again, the market showed its irrationality.

Commodities

+10.14% (Gold ETF)
-10.14% (Silver ETF)

Trading Results for Dec 11:

Open trades:
Celgene – Bought $63.22 , now $67.59 (+6.9%)

Closed trades:
Olympus – Bought 740.4, sold 1,224.3 (+65.4%)
Devon Energy – Sold $65.53, bought $64.65 (+1.3%)
Hang Seng Index – Sold 18970, bought 19058 (-0.5%)
Rangold – Bought $108.50, sold $103.59 (-4.5%)
Bank of China – Sold $2.74, bought $2.89 (-5.5%)
Agile Property – Sold $6.15, bought $6.61 (-7.5%)
MAKO Surgical – Bought $30.26, sold $27.95 (-7.6%)
Capitaland – Bought $2.60, sold $2.40 (-7.7%)

Investment Results for Dec 11:

Dollar Cost Averaging:
STI ETF – Ave price $2.9773, now $2.74 (-8.0%)

Performance for 2011

The volatility and difficult market in 2011 is something that I have not experienced in my past 3 years of involvement in the stock market. 2008 was a clear down trending market. 2009 was an up trending market. 2010 was not too bad for the bulls too. The first half of 2011 was rocked by Japan’s Earthquake and market remained pretty flat. August 2011 was a panic month as stock markets dropped consecutively for days. To preserve capital, I have decided to cash in all my long positions in my investment portfolio and stay cash. I always believe in staying alive to fight another day. And with the whipsawed market post-August, I suffered many small losses which bled my account. These have led to a draw down in my capital by 21.2%. Of course, there is some pain in losing money. But I am definitely financially well as these are money that I have set aside to invest and trade. Through the process, I learned about my emotions and reactions to the market and money. Going forward, I will continue to get involved in the market and learn more about myself. If you ask me what is the most important lesson that I learned from the markets in 2011, it will be that I need to understand myself better (in relation to the markets), and develop a strategy or approach that suit my personality.

Top 10 Favorites of BigFatPurse 2011

Alvin — Tue, 27 Dec 2011 23:22:18 +0000

Here is the list of 10 BigFatPurse posts most viewed in 2011! Thank you for the support and I wish you a great 2012 ahead!

10 things I learned about life in 2011

Alvin — Sun, 25 Dec 2011 03:07:35 +0000

We have come to the final week of 2011 and I have 10 things to share about life:

1) I have everything I need

Looking at the things I have, I can conclude that I have everything that I need. Humans do not need a lot of things to survive. To survive is not difficult for most of us. We can eat simply, live simply and use what we have. Do we really need the latest iPhone? Do we really need a big house? These are wants. We have got what we needed but we are not satisfied and we want to progress in the social ladder to fulfill our wants. Do not get me wrong, I am not saying that we should not have wants. But we cannot focus on the lack – what I want but I have not get it yet. Instead, we should focus on what we have – I have everything I need. The latter mentality will let you live life with more courage because you have eradicated the fear of loss. When we focus on what we don’t have, we feel small and unaccomplished. When you know you have everything, you are more willing to give and the funny thing is, you will actually get more in return…

2) Focus on creating value

Most of us started out doing things for the benefit of ourselves. Many of us still are. This is mainly because we have fear of loss. We tend to think in a zero-sum world whereby we will lose if we give. The fact is there is always a ‘return’ when you give. The spirit of Christmas is to give and share the joy of love. When you pass a gift to another person, even if the party do not reciprocate, you are likely to end up with another gift from someone else. Besides the tangible presents, the relationship between the giver and receiver intangibly improves. Hence, the action of giving has a multiplying effect. We should treat every day as christmas and focus on others instead of ourselves. Focus on delivering good service and products to clients; show love and concern to your family and friends; go the extra mile for people; donate to the less fortunate; etc. The society will only be a better place when we think for others.

3) Provide an opportunity for others to give by accepting

Besides giving, we need to accept the kind gestures from others. Maybe it is peculiar to Chinese, I always see my parents and grandparents refuse to accept gifts because they do not want to appear greedy or feel indebted to the giver. They would spend minutes pushing the gifts to and fro. We are actually denying the chance for the person to give when we refuse to accept the gift or help. The process of giving stops. Put yourself in the shoes of the giver and the person rejected your gift. How would you feel?

4) Not about getting rich

As mentioned above, you will actually get more in return as you give more value to others. As such, you would probably end up with great wealth. This is the beauty of nature. Because you have exhibit the ability to care for others and now you are entrusted with the responsibility to command the wealth and do good for society. Wealth must be held by ethical and socially responsible people if not a lot of harm will be created. It is not about getting rich for the sake of yourself and your future generation. But when you believe that you are a good person and can do good for society, you should take up the responsibility to control wealth.

5) Investing is to help society allocate resources to the right areas

After trading and investing for the past few years, I have been asking myself what is the fundamental meaning of investing? If we can only be rewarded for the value we create, what value does investing provide? The closest I can think of is that investing is about channeling money to the right areas that needs development. Think of a blank piece of land – Money has to be paid for construction to develop the land. Think of a mining company – if there is a supply shortage in certain mineral, money will be channeled to the mining companies to expand the production and feed the society with sufficient supply. And if you have expected this shortage and invested in the mining companies, you would have been rewarded by the rising share price because you have helped the society identify the need and have already put in resources to develop it.

6) Focus on becoming a better person

Only when you become a better person, your actions will change and the world around you will change. If you want to increase your income, you cannot remain the same you. What kind of person do you need to be to take up a higher appointment? – Do you need to be more responsible? Do you need to be a confident speaker? What kind of person do you need to be as an entrepreneur? – Do you need to be decisive? Do you need to be driven? Answering these questions will help you understand what it takes to be where you want to be. But knowing is the first step, exercising the new behaviour would be the challenging part. You will only be given the job when you are able to exhibit the required behaviour.

7) Help people get rewarded through their efforts

As the saying goes, “give a man a fish, he eats for a day. Teach him to fish and he can eat for a lifetime.” Have you ever encountered yourself refusing to delegate the work because your staff is not experienced enough to complete an important piece of work? The path of least resistance would be to do it yourself but not delegating is not being good to your staff. The greatest thing a leader can do is to help your staff accomplish the task and get them the necessary reward and recognition. This is much tougher than doing it yourself as more time and effort have to be put into it. But by doing so, you have already brought up the ability of your staff and this is a higher form of giving – teaching them how to fish.

8 ) Be present

I am a culprit for not being present most of the time. I find that in general, Singaporeans are very occupied and always have things in their minds. Just observe people walking briskly along the street and look at their faces when they are boarding trains. Majority seemed to be having their own bubbles and oblivious to the surroundings. I find myself drifting into this mode even when I am with family and friends. This is unhealthy as you cannot devote attention to building close relationships with people, especially those that you care about. Learning to focus on the present will definitely improve your life by reducing the stress (brooding over unfinished work), allowing you to enjoy the company and build strong relationships.

9) Cherish while they are here

This year, the Tanjong Pagar Railway Station was shut down and relocated to Woodlands. The news stirred the emotions of Singaporeans. Many people went to visit the station and took pictures. Some even took the train to Malaysia to experience the ride from the old station for the very last time. Why do we only cherish people or things when they are about to go? I would think this is the emotion of fear of loss. Have we spent enough time with our elder parents while they are still alive? Or do we always put more emphasis on work?

10) Go ahead to do things

More often than not, we regret for things that we have not done and not things that we have done wrongly. This links back to the previous point that we cherish people when they are about to go. Simply because we know that we have not spent enough time with the people that we care about, we dedicate all the remaining time to them in their dying days. And when we do not even have this opportunity, we will feel remorseful for our lack of actions. This applies in other areas of our life. There are many things we want to do in life. But we often put them off because of work or other excuses. These activities that you did not do will come back and haunt you someday. So go ahead and do them while you can!

Some of the points are rather heavy but the purpose of this post is to encourage us to think about our lives. I do not proclaim as an expert as I am still learning about life as much as others. I just want to share my experience and my thoughts about it. I wish you a joyful Christmas where you enjoy the company of family and friends, and great food!