I need some balance

While I was living in Cape Town I got into the habit and routine of hiking nearly every weekend.My friends and I would spend spare time during the week looking for hikes and waterfalls to jump from, and weekends hiking to waterfalls to jump from. It was not only a lot of fun, but it got the adrenaline pumping good and proper. It would provide me with a weekly dose of 'man or mouse' moments. Moments in which nothing else existed except for me, the ledge and the water. A split second of being absolutely weightless. Freedom. 

These moments, and the quests that lead up them, were what kept me balanced. Over the last year or so that I've been in Johannesburg I've had very, very few such adventures and I can feel the psychological impact that the lack of adventure is having on me. While I was physically exhausting myself on a regular basis my stress levels were considerably lower. I had an escape. An escape from traffic, from the telephone and most importantly, an escape from the market. A space and time in which none of it existed nor mattered one bit. 

I've learned that the path I have chosen in life, to trade, is an extremely taxing one. There are stresses and pressures that I experience that I can never manage to explain to anyone else. Not even my loved ones get it. People who don't trade simply don't understand. You can try to explain it until the cows come home, but people will never truly understand what it is like being in a constant state of uncertainty. In the market anything is possible at any given moment and being completely wrong is a regular occurrence. Humans, I don't think, are naturally predisposed to exist in such conditions. We're taught our whole lives that one needs to find a job that offers security and surety. This is something that is ingrained in us from a very young age. Trading offers none of that. Everything is in flux all of the time. 

It for that reason that I need to hike again. To clear my head. To get in touch with my primal self again so that I can find balance. Exercise keeps us sane. It is a way for us to cope with the stress and pressure, and a way for us to get rid of the pent up frustration and anxiety. It doesn't matter what type of exercise it is really, but it needs to be physical and it needs to require every last bit of your focus. As traders we need a hobby outside of trading that can completely absorb us, even if it is only for a few hours. We have to allow ourselves to be completely free from the market for a period each week so that when we are participating in the market we can do so with a fresh, clear mind. The only way to survive in this game for an entire lifetime is to find balance. 

I need to go on a hike.

@TraderPetri

Tough times are good times to practice tough skills

I may have mentioned before that there is great value in having a clearly defined set of trading rules. Creating a set of rules that places the probability of success in your favour is a challenge in itself, although once you have designed a system that allows you to consistently make money over time, sticking to that system - or set of rules - is the next challenge. 

Lately the market has been somewhat unkind to me and I've been watching profits that took a long time to make erode away bit by bit over the last two or so months. It's not the end of the world if I think about it, although it's still not a great feeling. I've been tempted to gear a lot more than what my rules allow in order to quickly make back that which I've given away, and I've been tempted to just get out in order to take the intolerable pain of losing away. Luckily I've been through this song and dance before and I know that both of those, essentially irrational, courses of action would lead only to more loses. The challenge I have been facing over the last few weeks is simply to stick to the plan. 

Currently my plan calls for some really advanced hand sitting to take place. I am in position and waiting for the market to give me a signal to either start selling or to start bargain hunting. Neither of these two will happen any time soon though I suspect. None the less, sitting on my hands and doing nothing is proving to be a great challenge. I feel that I need to be active and trading and doing something. My rules are telling me though that I need to be waiting and allowing the market to unfold, to give my trades the time and room they need to play out. I am conflicted with pangs of fear about "what if this is it?", and traces of arrogance around "don't be an idiot, you should be buying". It's a strange and confusing place to be. And this is exactly why rules are so important. 

My focus is to stay disciplined and to stick to my rules. The last time the market pulled back like this I gave in to fear and liquidated literally the day before the recovery and subsequent push to new highs. I allowed my own fear and the constant stream of news-noise to take me out of the market right when my rules told me to wait. 

See, it's easy to stick to the rules when things are going well and every trade is a winner. It is when things are not going so well that the rules become harder to follow. Take a trade, stop out; take a trade, stop out; take a trade, do nothing. It's tough on the soul. I know that I still have a lot to learn, but I think the difference between those traders who make it and those who don't, is that those who make it over the long term are able to stay disciplined enough to stick to their plan through good times and bad.

I know times have been tough recently, but I've seen my rules work in the past and I know that they will work against. All I need to do is to give them a chance to prove that, again. Easier said than done, but this has been on my list of things to improve on for some time and if there ever was a chance to practice this skill, the time is now.

@TraderPetri
25 June 2015

It’s a lonely game this

Many times I have heard and read people saying that trading is a lonely profession. I never really understood it, although I think I am starting to understand it now. Even though there are groups of people who like to chat to each other and share ideas and support each other, at the end of the day it’s each man for himself. Each and every trader in the market are there because they are looking out for their own best interest. When the orders enter the market there are no faces, no loyalties, no thought to whose money you are taking when you win. It is purely each man or woman for themselves. 

People will offer advice and try to give you guidance from time to time. I try to do it with people who I think I can help and I have people do it for me when I need it. On both accounts I am grateful for the opportunities. For the most part people trading the market are good people who try to look out for each other, but that doesn’t mean that they are actually able to help each other. Each person is uniquely different and have different tolerances for stress and pressure. I have had the privilege of sitting in a trading room with some of the best traders in South Africa and was able to follow them into and out of trades. Almost every single time that I followed one of the most successful traders I have ever met, I have burned. The irony is that they, almost every time I burned, made money. Not because I burned or because they took my money but simply because they had different tolerances for risk and a different framework for what they believed was possible or probable to happen. They may have traded huge in my perspective at the time, although odds are they were probably trading really small in their own perspective. So when I had taken enough pain and stopped out because I traded too big, they were still happy to sit in the trade and see what happens. My point is that even though there are people out there who are willing to help and guide you, this is a journey you must take by yourself. 

That being said, do not dismiss the lessons that are to be learned from others. More experienced traders can be a tremendous source of knowledge. Applying that knowledge though is up to you. It is said that one must mimic successful people in order to become successful. This much is true, although I think that most traders out there think that this means they should mirror the trades that other seemingly successful traders are taking. That’s a fool’s game. You should mimic successful traders, yes, but not by following them in the market. Look at their routines, learn their mantras. Each one of the absolute best traders that I have met have rock solid ways of doing things. They follow a set process in order to find trades and they have a very clear, and different, way of thinking about trading and the world at large. They have become secure in their routine and their outlook on the world. This is what we should strive for. Not to make money, that comes later. We should strive to become consistent in our approach and in our mind-set. 

This takes introspection and a lot of work on your own feelings of self-worth. Continued belief in your own ability while you are on a losing streak is difficult to maintain. Conversely it is easy to believe that you are great when you are actually just lucky. Keeping your mind-set consistent is our greatest challenge. To be self-assured in the face of adversity and humble when you are on top, that takes knowledge of self. And that pursuit of self-awareness is what makes this journey such a lonely one. You have to accept that you are in this alone and that no-one can help you get to where you want to be, but you.  

@TraderPetri
11 June 2015

You can't always be a winner wena!

The highs and lows of trading. It's often glamorised and very often we are made to believe that once you have a strategy or a mindset that let's you win, the market becomes your own personal money printing machine. The truth is though that it's not. Every so often the market challenges us and forces us to step outside of our comfort zones and learn, or perish. 

Drawdown is a reality that all traders face on a fairly regular basis. I'm sure that everyone reading this knows what drawdown is, although for redundancy I'll explain it anyway. Drawdown is when your account, by a series of bad trades or trades that stopped out, shrinks. Your account stays in drawdown until it is back to the level that it was when the drawdown started. Practically, if your account started at 100k and grew to 120k, clearly you've been doing great. If your account shrinks back down to 110k, then your account is in drawdown and remains in drawdown until it breaches 120k again. 

A simple enough concept really, but the effects of drawdown can be devastating to your mindset. It can strip you of confidence and/or make you make very silly greed or fear based decisions. There is a way to avoid this though. Not drawdown, that is unavoidable, but the impact it has on your mental state. 

The easiest way to deal with drawdown is simply to exit the market completely and take a week or two off. Sure you'll miss some opportunities during that time, but you will have had the chance to clear your head and come back with a fresh set of eyes and no recency bias. Allowing you to 'start again' and fight your way back to the top of your own equity curve. 

Another way would be to simply trade smaller. Trade so small that it hardly matters if you get it right or wrong. Once you've strung together a couple of winners (5 or more), you can start increasing your size again until you are back up to normal size. Again helping you to fight your way back. 

Alternatively you can accept that you cant always win and just keep trading and sticking to your rules. This is probably the hardest thing to do because it places you under higher amounts of stress than the other two options. If you can accept, deep within the core of your being, that losing is OK and that you do not need to know what is going to happen next in order to make money, then you can muster up the courage it takes to waveringly stick to your rules and trust your edge and simply keep trading. This certainly is the fastest way, albeit the most difficult, to get out of the red and back on track with growing your account. 

All of this of course means that you have to track the performance of your account on a daily or trade-to-trade basis. This is handy because it allows you to plot your equity curve on a graph. Trust me here, seeing on a graph that even though you are in drawdown you're still up from where you started can create a tremendous feeling of comfort that helps keep you in a confident and care free mindset. Just the kind of mindset that you need for trading successfully. 

If the market has mistreated you some over the past month or so, chin up! You'll learn something about yourself you never knew and soon be back on a winning streak. 

@TraderPetri
27 May 2015

Take the time to find the setups

Sometimes it feels as if I have run out of trading ideas. Especially when the market has thrown me from pillar to post for a few weeks and has taken some money from me. I then become prone to take trades that ‘look good’ without actually doing the leg work required to properly validate the trade opportunities.

In order to avoid this, I need to remind myself that I need to take the time to find the right setups. There are a few factors that need to be combined just right in order for a trade to be deemed a ‘high probability’ trade and therefore finding the right ones takes time, patience and effort. The last 4 or so weeks have been rather tough for me. Other than a big win on an Aspen short, the majority of my other trades I’ve either stopped out of or are currently running against me. This puts me in a precarious position and in danger of making irrational decisions. The sure fire way of me to avoid costly mistakes is to bury myself in the process of relooking at the entire universe of shares that I am trading in. This does not mean that I need to only relook my share universe after a bit of losing streak. It should be relooked every single month, at least. It does however take me, mostly, out of the market for a period. Allowing my mind to reset itself and also allowing me to find those trades that really count. 

So starting with looking at each industry, I need to look at the monthly and daily charts to see if there are any major trends that are changing. This is followed by looking into each industry to find the best and worst performing shares in each sector. This allows me to have a list of potential longs and shorts. 

Once I have a list of shares that I want to be long and a list of shares that I want to be short, I can start looking reading up on them. This is the boring part, but probably the most important. I need to read the last few years’ worth of SENS articles and get a firm grip on how the company makes money. I also need to compare some of the key ratios against those that I deem to be in line with what I require from a share to be able to go long or short it. Some shares will fall off the list and some will stay. 

What I am then left with is a list of shares that I am comfortable to long and short, depending on what the overall index is doing. This whole process is sort of ongoing, although I think that taking a day or two ‘off’ to spend the time digging through the market can only be helpful to my mind-set and bottom line at this point of the game.

Happy trading!

@TraderPetri
13 May 2015

Caps on interest rates and the impact on Transaction Capital

The impact that the interest rate caps proposed by the SARB will have on micro-lenders is something that I don't want to speculate on. I do however want to understand the impact that the proposed cap on interest rates will have on Transaction Capital, seeing as much of their income is generated via financing taxis (SA Taxi). Now there are a few differences between financing assets (like taxis) and unsecured lending. Firstly, in the case of Transaction Capital's SA Taxi, they are doing asset backed lending. Which means that they have an asset to repossess if all goes wrong. Secondly, they are granting what is classified as Developmental Credit. This is because they are essentially financing small businesses and not just cars/taxis. Each taxi they finance belongs to an entrepreneur and is operated as income generating assets which is why they fall into the Developmental Credit criteria. Now if we look at how the proposed regulations impact this type of credit and subsequently how this impacts Transaction Capital, we see the following: 

• SA Taxi can loan currently at a max interest rate of 32.65% (although their pricing ranges between 18% and 26% to average 24.6% yield). The proposed regulations in fact increases the cap on interest rates on Developmental Credit to 32.78%. Which means that if they wanted Transaction Capital could in fact charge a higher interest rate on their taxi finance deals. In other words the new regulations will have no impact at all on their EBITDA (seeing as they are well within their max limitations already - and the cap is being increased). So if they wanted to be greedy, they could probably squeeze a bit more margin out of it. 
• In terms of initiation fees, the current max for Developmental Credit is R2500, and the new proposed max is R2600. Again, higher and again in Transaction Capital's favour. But as they only originate about 6700 to 7000 new credit agreements each year, impact on EBITDA will be low. 
• As for monthly service fees, the new regulations increase this from R50 to R60 for Developmental Credit. So with 24 500 accounts, the impact on EBITDA will also be rather negligible. The key is here that the nature of the credit is to stimulate economic growth and social upliftment, and not get consumers spending. In other words, this is 'good debt' that is used to start and run small businesses. 

Bottom line is, the proposed regulations by the SARB will do no harm whatsoever to the earnings capabilities of Transaction Capital. Worthy of note also is that a while ago Transaction Capital sold Bayport. Did management see the train coming and got off the tracks in advance?

We must not forget that Transaction Capital also has MBD within it's stable. MBD does debt collection both as principal and as agent. Which means that they both buy debtors books in their own capacity and collect on the debt, and they collect debt on behalf of other institutions. This is a tricky business to understand, but from what I understand various 'unsecured lenders' NEED them to collect on their debt. I say need, simply because Transaction Capital is the biggest player in the field (in SA) and is often the only one that has enough cash to buy or collect on these bad debt books. Now there was a recent ruling about garnishing orders in the courts that could have one worry about the impact this will have on debt collectors. Here economies of scale again work in Transaction Capital's favour. Less that 1% of MBD's total monthly collections come from this EAO collecting mechanism as MBD rather makes use of the good old fashioned call centre method. Once again, this will have a negligible impact on EBTIDA, as Transaction Capital is largely unaffected by the recent court ruling. 

So when I look at this whole situation and the recent developments, I see a company that is well positioned to succeed while others might start to feel the pinch of court rulings and proposed new regulations. It appears to me that the management team foresaw much. I guess this makes me a bigger bull than ever.

Find a research report (to which this adds) here.