New Blog

So things are changing... dreams are growing... new blog is at https://herenya.co.za/blog/
Check. It. Out!

Is there any value left in this market?

So things and times change; and so do the winners and losers on the stock market. Those stocks who were stellar performers a few years ago do not always stay stellar performers as macro economic circumstances change in favour of other companies, and thus these other companies take the performers of old's place at the top of the ranks. 

I did a very (and I mean very) basic search on the Google finance stock screener (link to it here) and it returned a list of stocks that matched my criteria. Basically I was looking for companies that had EPS growth in excess of 5% over the past 5 and 10 years, an ROE ratio of over 15, a DY higher than 2 and is up over the past 52 weeks. Actually, this is a fairly good set of criteria in my opinion as it isolates companies that are currently, and have been for a decade, growing.

The list of stocks is as follows:

So in they go into my trading universe and the deeper dive into their fundamentals commences. If there is anything I learned from SMBU it's that we have to use technology to our advantage. In other words, stock screeners are the bomb and we need to use them.

Lot's of homework to do on my new list of stocks that I kinda think I might like once I understand them better. 

Things change pretty quick

Well, I don't really know what to say... things change fast. One minute you have a diamond in your hand, then next minute you drop it and it disappears. That however is a metaphor for a situation I don't really want to get into. Life tests our ability to stay resilient, I think. Every time we overcome a challenge, we are presented with a bigger one. This is the nature of life and we need to learn to be ok with it. The bigger the challenges become, the more progress we make in our personal growth. So in a sense we should be grateful that we have these challenges to start off with.

Does the Dow Theory say we can worry yet?

A few months ago I posted about the Dow Theory and how according to it at the time there was not yet anything to worry about. A link to that post can be found HERE. 

In there I looked at the S&P500 and the Russell 2000 and whether they were breaking to new lows roughly at the same time. Well I've still been looking at them and since then, the picture has changed somewhat.

Again based on daily closing prices, the first index to break the lows (which incidentally is no longer the most recent significant low as I am still using the same lows of October 2014) was the Russell 2000.

7 Days ago the Russell 2000 took out the October 2014 lows.

And roughly at the same time (i.e. today), the S&P500 also broke to a new low... temporarily at least.

S&P500 pierced below the lows of October 2014 but managed to close above the level.

Looking closer we see that the lows have not been broken yet, well, not entirely anyway.

Could it perhaps be the hammer of destiny?

Well, ok then. So what now? I think we wait for the weekly candle to close on Friday and we look again once the weekly candles are formed and use those to tell us if this is the making of the greatest hammer formation I have ever seen, or, according to Dow Theory, is the beginning of the end of our 7 year bull market.

5 life lessons from the gym locker room

I've recently started going back to gym and today for the first time in, well, probably 20 years, I made use of the shower facilities at the gym. Not that I have not been at the gym for 20 years, but I have not used the gym locker room and showers for, well okay maybe not 20 years, but definitely more than 10. I have tended to avoid this penis parade for most of my life so far for a few, what are in my opinion, very good reasons. 

Firstly, well, I mean dude, nobody wants to see your junk. Put it away, use a towel, wear underpants, do something. Just get that shit under control and out of my sight please. Secondly, why is everyone looking at me funny because I haven't freed willy? Leave me alone man, I'm not here to make friends or to 'hang out'. Is this some sort of cult that I am refusing to be a part of, or just 'man stuff' that I don't understand? Who cares? Fuck off. It's mine and I'm not comfortable with you looking at it.

Anyway, all that awkwardness out the way, there are some valuable lessons I learned this morning. I am seeing them as lessons in manliness, and I now share them with you:

1. Walk around with your shit all hanging out because that's what men do.
2. Use the word 'oak', or 'oke' a lot. For example: "Okes just leave their bags all over the place boet."
3. Make small talk with people you don't know. Okes love talking to weird naked strangers while they're rubbing cream all on their junk. 
4. Talk about how loose and/or stupid woman are. This is an important one I would imagine, because statements like "chicks are hornier than us oke" and "they can get dick at any time boet, you gotta be careful", or "Sandton chicks are daft oke, they grew up too rich, you must just fuck them and leave them, use them for what they're good for", are met with enthusiastic nodding and varying grunts of general agreement.
5. Tell people how expensive your holiday is going to be. Don't, and I mean DO NOT mention an actual figure of what your holiday is going to cost. In fact, if someone asks you outright, avoid answering this question by any means. Although, you must tell the other okes that is it going to be fantastic and very expensive.

I imagine that as time goes by I will probably learn many more valuable lessons. So as and when I learn them I will keep you updated. For now though, stick to these 5 rules and I think you will survive.

Day in the life of a trader

A little while ago I had the privilege of presenting a JSE Power Hour. To be honest, this was one of the most humbling experiences I have had in my life so far. I am very grateful to have had the opportunity to share some of my journey with people whom it may be able to inspire. 

I have received some feedback that in the video of the presentation on YouTube, the slides are not synchronised with the speech. So if you would like to listen to the presentation while going through the slides, you are welcome to listen to the video below while flipping through the presentation. 

The presentation can be downloaded by clicking on the link below:

Day in the life of trader presentation

And the video can be found here:

Sometimes

Sometimes life gives you something so great that you sit wondering how on earth you could have deserved it. Sometimes it takes from you something that has become the cornerstone of your purpose in an instant. Sometimes you can slowly see that coming. Sometimes you can do nothing about it and choose to bury your head in the sand in an attempt to avoid the inevitable. Sometimes the inevitable is not inevitable. Sometimes things work out better than you expected. Sometimes things work out differently to what you wanted and that turns out to be better than what you were hoping for. Sometimes you have to choose to do what is difficult and uncomfortable in order to get a shot at something that may or may not work. Sometimes it's worth it. Sometimes you need to walk through hell with a brave smile on your face. Sometimes you must choose uncertainty over absolutes. Sometimes it's easy to do that. Sometimes it's not. Sometimes doing things that are out of your character and against your nature is the only way in which you can grow. Sometimes you have to force yourself to grow. Sometimes you have to make incredible sacrifices without knowing if they will ever be made for you in return. Sometimes you just have to take that chance. Sometimes things are worth risking everything for. Sometimes you have to accept that you are not in control. Sometimes you have to give life the space it needs to unfold at its own pace.

So what about U.S. interest rates?

There is no shortage of people speculating about what is going to happen with regard to the U.S. interest rate hike situation so I figure I may as well through my 2c into the pond as well.

The way I see it is that the Fed had said that they are looking at two major factors before they can increase interest rates. These are (paraphrased of course);

1. a reasonable expectation that inflation will reach 2% within 12 months

2. full employment in the economy

So addressing these:

1. Now ok, we know that inflation in the U.S is rather stubbornly low, although we have been seeing it creep up the page a little. Lot's of mixed data coming out in terms of PPI and CPI and so on, although it does seem that the current near zero interest rates is and has been allowing consumers to spend like there is no tomorrow. I am no expert on this but I think that if nothing changes, within 12 months we could see 2% inflation in the U.S.

2. We've seen that Non-Farm Payrolls came out much lower than what was expected for the month of August. We also saw that Unemployment Claims came in lower than expected for the month of August. So what this is telling me is that fewer jobs are being created, but at the same time less people are unemployed. Sure you will never be able to get completely 100% rid of unemployment, but what it looks like is that the U.S. economy is approaching full employment.

So taking these two factors into account, I would say that we are likely to see a 0.25% increase in interest rates when the Fed makes their announcement later this month.

That's my 2c.

@TraderPetri 

Dow Theory says nothing to worry about ... yet

I've been very worried about the market at large and that what we are seeing is perhaps the beginning of another 2008 type scenario. I wasn't around when the last crash happened, well I was around, I just wasn't involved in the markets (I bought my first share in 2009 - if only I never sold it...). Anyway, I've been looking at the charts and freaking out about the news like most people I suppose and started to really get worried about the world markets at large, thinking that they are about to come crashing down at any second.

This may still be lingering in the back of my mind, although I have found some comfort that we do not yet have confirmation of the end - according to Dow Theory - yet.

One of the rules of Dow Theory is that there needs to be confirmation of new highs or lows on two various indices before one can comfortable say that a new trend is forming. These two indices were once the Dow Industrial Average and the Dow Railroads Average. Times change though and in modern times a more accurate measure of the U.S. markets would be to use the S&P500 and the Russell 2000. Now the basic idea here is for both of these indices to break to new lows roughly at the same time before we can confirm that the overall market trend (primary trend) is changing.

Looking at the S&P500, we can see that the last major low has not been taken out yet.

The most recent major low is indicated by the red line and until that line is broken by price, we cannot say that a major new low has been formed.

When looking at the Russell 2000, we can also see that no major new low has been formed yet.

The most recent major low is indicated by the red line and until that line is broken by price, we cannot say that a major new low has been formed.

So based on the concept of confirmation as stated in Dow Theory and adapted to our more modern market, we cannot say that the Primary Trend has changed yet.

This does little to soothe the nerves, although it does add some perspective. Only one those lows are taken out on both indices at roughly the same time can we confirm that the general market is moving from Bull to Bear mode.

*Note the the red lines (for confirmation) are based on daily closing prices and not on intraday spikes.

Cool stuff going on!

Well, I feel that I should share a little about the cool things that are happening in my life. It's important to remain grateful for the lives we have and the people and things in it.

I started writing for www.JustOneLap.com recently, which is an amazing experience as I get to share the ups and downs of this trading game with people and also get some of the things that I hardly have anyone to talk to about off my chest.

I will also start doing some charts for a website that provides trade ideas to people on a subscription basis fairly soon. I don't want to give away any details here yet, but the concept of the site/service is very cool and I am super excited to get started!

It feels like opportunities are coming my way and I am really starting to fulfill my destiny. Well ok, there is a long, long road ahead, but it really is starting to feel like I am making progress. Sometimes it can be a little scary and overwhelming also, but all in all things are really going very well.

Reminding myself of the truth

I've been thinking about and analysing the trades that I've done over the past few months and have managed to come to a conclusion - of sorts - about what has been going wrong. I think the main problem has been that I have allowed myself to take views. In other words; I've allowed myself to project my expectations of what I believed the market 'should' do onto the market. When there is enough fundamental data to base an expectation on and you are a long term equity investor, then sure, it makes sense to do this. But if you are a shorter term trader, as essentially I am, these types of expectations can really be very dangerous. Having an expectation about what some certain point in the future will look or feel like almost always leads to disappointment. Over the longer term rationality will prevail, but in the shorter term sentiment and momentum rules the day. I have to remember that it is not my job to predict the market, but merely to follow it and to take the opportunities that it makes available to me.

In order to do this I need to create the right mindset that will allow me to flow in and out of the market without bias or fear. The best way to do this is once again stick a bunch of sticky notes to my screen that constantly remind me of Mark Douglas' 5 Fundamental Truths of Trading. So written in barely legible crab scribble, I will be stcking the following truths to the bottom of my screen:

1. Anything can happen.

The world, and the market, is completely and totally random and cannot be predicted. If you can fundamentally accept that anything is possible at any given point, there is no logical way that you can hold any expectations about what 'should' happen. And therefore forming a bias or a view is irrational. Anything is possible and it is your job to react to the changing environment.

2. You don't need to know what is going to happen next in order to make money.

Self explanatory I think. If you just follow the market the opportunities to make money will present themselves. Anything is possible remember.

3. There is a random distribution of wins and losses for any set of variables that define an edge.

An 'edge' is what your rules gives you. A setup for a trade... a set of variables that indicate to you that an opportunity exists. No strategy works all the time and no system will get every trade right. The more you trade the more probable that 100 losing trades in a row becomes. Likewise the more probable that 100 winning trades in a row becomes. None the less, the distribution between winning setups and losing setups are mostly random and unpredictable.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

Seeing as nothing can be predicted with certainty and that anything is possible, all we can do as traders is to put the probability of success in our favour. Our edge gives us this, but we must remember that just because it is probable, doesn't mean that it must happen.

5. Every moment in the market is unique.

Every single day countless people interact with each other all acting on what they are interpreting about the markets behavior. Just because a chart pattern repeated itself  few times does not mean that it will repeat itself again. It is impossible for anything to ever truly be repeated exactly like it was before. For that to happen each and every person interacting with the market will have to do exactly what they did before in exactly the same sequence. Even if one person is not at their desk, or is in a different mindset, that pattern that you are banking on repeating will not be exactly as it was before. In fact, it may not work at all. Every moment is entirely unique and different and remember, anything is possible. 

Accepting these 5 Fundamental Truths of Trading sounds a lot easier than it is, although I believe that they are vitally important to anyone's success as a trader. They need to be engrained in your mind and always be at the forefront if your thoughts. This will leave no room for expectations to creep in and make your life difficult. If you haven't read Trading In The Zone yet, do yourself a favour and read it. 

Happy trading.

@TraderPetri

4 August 2015

Back to the drawing board

I’ve been tracking my performance for some time now and have recently completed another full year cycle of recording statistics about my trading. I am sure by now most readers are aware that I have been having a bit of tough time in the market over the past 3 or so months, so I don’t need to elaborate on exactly how rough it’s been seeing as you already know.

None the less, I have spotted a few trends in my trading performance over the past year that I intend on either stamping out, or improving upon. I have been making use of a volatility and probability based strategy that allowed me to get some great runs out of stocks like Telkom, Capitec and PSG. During times of market turmoil however, my strategy suffers. What I can now see by making use of the historical data I have, is that during the times that the market is trending higher my strategy tends to outperform rather well. However, during times that the market is moving sideways or coming down, my strategy takes strain, and often in excess of the market.

The idea is for the strategy to accumulate good quality stocks during tough times, which works very well. Although I think it will work considerably better as a long term equity strategy and not as a short term derivative strategy. Granted that during the ‘trending up’ times the strategy works well.

Knowing this allows me to be able to switch between strategies during different types of market conditions. Therefore I intend to refine my strategy over the next few weeks in order to be more adaptable to different market conditions. I need to trade more conservatively when the market is moving sideways and I need to be more willing to short when the market is moving lower, and I need to stick to what has been working during times that the market moves higher. I know that switching between these different trading styles is within my ability, I just need to formalise a set of rules for me to follow when the appropriate times come, as well as a way of identifying the changing market conditions in order for me to be able to recognise when I need to switch between styles.

This gives me a lot of homework to do over the next few weeks. It may sound tedious and like hard work, but trading for a living is tedious and hard work. Therefore I am more than willing to put in the time refining and back-testing strategies every year. My goal is to constantly improve my trading and this is to me a logical way to take stock of where I am and what I need to do in order to improve.

The most valuable lesson I have learned over the last few months is that trading is about survival. Yes, sticking to your rules is of the utmost importance and is the only way in which you can ensure that you are protecting your capital when times are tough, but every now and then we need to re-evaluate our rules to make sure they are still relevant. The market is always evolving and we must evolve with it if we hope to survive.

Some homework for you as well; go and look at each of your trades over the last year and try figure out how you could have done better, regardless of the outcome that trade had. It may make you feel a little stupid every now and then (as it surely does to me), but I assure that you will spot some sort of pattern of mistakes that you make and that fixing those mistakes is easier than you think.

@TraderPetri

22 July 2015

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.

Sure it's a megaphone... but how does it work?

Two charts, two targets...

In the first one the megaphone is measured from where the price touches the upper end of the megaphone for the last time, by drawing a line straight down to the bottom of the megaphone.

The the second one the megaphone is measured from where the price touches the lower end of the megaphone for the last time, by drawing a line straight up to the top of the megaphone.

So the question is... which one is right?

Learning to understanding my emotions

Many people tend to think that one needs to remove all emotion from trading. From my experience, this is not possible. There are some very old and primal instincts that we are ingrained with that can be challenging to overcome. Removing those primal instincts – and I’m talking about Fear and Greed here – is perhaps possible, but probably not plausible. Therefore I think that learning to control emotion will not only be a lot easier, but will also not turn you into the robot that never smiles and just can’t seem to embrace the concept of dancing.

So to avoid turning into an emotionless void, while also trying to avoid making silly trading mistakes due to bad decisions made under the influence of irrational emotions, I need to teach myself to control my emotions in such a way that it is not to the detriment of my overall mental wellbeing and also to the advantage of my trading.

It may sound a little crazy, but this is a real issue. The argument that you had with your spouse or parent or child can and will influence the way in which you make decisions. The frustration you experience in traffic will overflow and accumulate with the frustration you feel because of that trade that is going against you. The impact that our everyday emotions have on our ability to make rational decisions, and thus good trading decisions, cannot be ignored.

From what I have read and understood, there are a few things one can do in order to achieve emotional control. The four A’s of emotional control, if you will. I don’t think they go in any particular order as the circumstances around the constant stream of decisions that need to be made and the emotional framework in which they need to be made are constantly changing. I do however think that the last one will always be to Act.
The basic idea is that there are 4 steps:

The first step is to Acknowledge the emotion. “I am feeling angry because I didn’t take my stop loss”, or “I am feeling confident because I banked a big winning trade”. There are a variety of them and each has a different effect of you. You need to first understand what emotion you are feeling and most importantly, what is causing it. This should help you deal with the cause of your emotions and bring you back to a rational state in order to make a good decision.

Then you could Anticipate the affects that various possible outcomes of a potential decision would have on your emotional state. “If I took this next trade and I lost my entire month’s gains if it didn’t work out, I would be very angry with myself and feel rather crushed and hopeless”, or “If I take this next trade and it also turns to gold, I will feel extremely confident and feel like nothing can ever go wrong”. This should help you deal with the effects of emotions before they are able to influence your decision making. This way you are creating a road map of your emotions and it should be easier for you to acknowledge them when they crop up.

You then need to Accept these various outcomes and try to understand how these new emotions can influence your decision making. “I am on a hot winning streak and I am feeling supremely confident”, or “I just banked a huge loss and I am feeling very scared of the market”. Again the purpose here is to bring you back to a state of rationality. By accepting the emotion you are feeling, you are taking the power away from it.

The last step would be to Act in a rational manner. You now understand your emotion, what has caused it, what could influence it and how it could change. You also accept the potential impact that this emotion could have on you. Knowing all these things should allow you to sit back and see the bigger picture, if you will, and allow you to make a decision independent of emotional influence.

I have to say here that I am no expert at this and that this concept is rather new to me too. It is something that I will be working on in the months and years to come because I believe that it can be incredibly helpful in all aspects of decision making. The purpose is not to remove emotion, but rather to understand it and counteract it if it is proving detrimental to your own best interest. Seeing as trading is essentially just that, making decisions that are in your own best interest, I believe that mastering this should be one of my highest priorities.

@TraderPetri
28 April 2015