Loss aversion reversion to mean anti pattern

  • Six consecutive days of price deterioration.
  • 16th May to 22nd May 2019
  • No-significant rebounds were observed during this period
  • Company reported expected losses for the forthcoming two quarters
  • There were significant concerns about ability of company to stay solvent
  • Concerns over trade war is a strong negative head wind.

 

Post 2019 US/China Trade War companies for consideration

The following is a list of microchip related companies to consider once the dust settles

  • AVGO – Broadcom
  • NVDA – Nvidia
  • QCOM – Qualcomm
  • INTC – Intel
  • MU – Micron
  • AMD – Advanced micro devises
  • XLNX – Xilinx
  • MCHP – Microchip Technology Inc

The following is a list of Consumer technology companies to consider once the dust settles

  • WB – Weibo
  • BIDU – Baidu
  • TCHEY – Tencent
  • BABA – Alibaba

Insights from Ilya

  • It does not pay to take on risk when the overall macro economic trend is negative.
  • When the yield curve occurs, a recession typically happens within 12-18 months
  • Bonds yield has not returned to its previous highs from its current levels of 3-4.5%
  • Stock still offers the highest rates of returns in the long term horizon
  • Shares of companies that do not produce a necessity tends to spike in late stages of a bull market
  • Portfolio allocation horizon
    • short term portion of portfolio which you will need to access within 1 to 2 years should be placed in medium term bonds
    • mid term portion of portfolio which you will need to access within 3-5 years that will likely experience at least one recession should be place partially in stocks and partially in bonds
    • long term portion of portfolio which you will need to access within 10 years that will likely experience at least a few recessions should be placed fully in stocks

Learnings from the market today

During a trade war situation, negative news about one Chinese company listed NASDAQ or NYSE will cause negative price movement of other Chinese companies

  • 17th May 2019 – Baidu poor earnings (-16% price decline) causes Weibo share price decline (-11% price decline)

Negative news about a negative law suit outcome for a semi conductor causes negative price movement of other semi conductor companies

  • Apple evades legal claims by Qualcomm causes price decline in NVDIA (-4%) and MU (-10.6%)

Key trading mistakes during execution

Mistakes

  1. Do not hold a position against general macro events like (Trade) Wars
    • Lesson learned: impact of loss aversion and reversion to mean is muted when trade war is occurring
  2. Don’t double down on your mistakes
    • Lesson learned: it is cheaper to admit mistake and cut losess
  3. Committing too much to a position leaving not much liquidity for later. This forces freeing up liquidity at a loss when new buying signals surface.
    • Lesson learned: it is cheaper to under allocate portfolio to a position upfront.
  4. Entering too late into a buy signal by more than 48 hours.
    • Lesson learned: it is cheaper to forget about it when you are late
  5. Entering too early into a buy signal.
    • Lesson learned: it is cheaper to figure out the support level before entering into position.
  6. Don’t enter into position when there are no buy signals.
    • Lesson learned: it is cheaper to wait for a wave than to get carried away by the anxiety that there will never be a buy signal again in this lifetime.
  7. Not verifying assumptions
    • Lesson learned: Seek evidences to challenge your own assumptions. Lessons could be learned when you dig deeper into pass records to for deeper insights.

Additional insights

  1. Sudden news about macro economic events (Donald Trump tweeting) does follow a lose aversion and reversion to mean pattern.
  2. Gradual news about macro economic events (US passing tariffs on China and banning Huawei) will have a long term negative impact.
  3. Price of REITs are:
    • relatively insensitive to trade wars
    • hyper sensitive to Federal Reserve (expected) interest rate changes
  4. Only execute loss aversion and reversion to mean trades on positions that exhibit bullish trends both at the individual stock level as well as at the SnP level.

Related references

Insights from dinner with Josh

Grepsr is increasingly being used in the work place by Quid.

Business people that don’t know how to code use Grepsr to pull data.

There is increasing demand for DIFFs to identify thematic trends. Themes are extracted from articles through the use of NLTK.

The proliferation of machine learning libraries and the maturing of the semantic web is democratizing the access to insights.

The legalization of online sports betting has open a fertile ground for this trend towards democratization.

NBA basketball predictive modeling should be done at the players level instead of the team level as the data becomes too lossy.

The odds of sports books at the opening lines is to encourage even bets on both side. The odds of the closing lines is a weighted average of bets (signals) from the crowd.

15th May post effects of 13th May 2019 US/China Trade war on US markets

The following is a list of 19 companies either in the tech sector or with market capitalization above USD20 billion that experienced more than 10% drop in share price on the May, 13th 2019.

Below is the breakdown in terms of price performance on May, 15th 2019.

  • 2 companies (10.5% of sample) not related to trade war
  • 2 companies (10.5% of sample) fully recovered
  • 7 companies (36.8% of sample) at least 50% recovery
  • 10 companies (52.63%) not recovered by at least 50%

Related references

Macro economic analysis on US/China 2018/2019 Trade war

The 196 pages of Chinese goods to be taxed by the US governments are spread across 6 categories. Where US manufacturers cannot find alternative sources of supplies, price increase of end product will be expected. 

Based on what was observed in December. The ability of the US government to sustain the trade war is predicated upon the Feds keeping interest rate low. 

Taxed categories include 

  • agricultural produce 
  • textiles
  • chemical compounds
  • hardware parts
  • mechanical parts
  • electronic parts

The December 2018 US market financial meltdown can be attributed to US government tariffs to reduce demand for foreign material supplies from China coupled with Feds interest rate hike to limit capital needed to boost domestic production.

The trade war seems to serve three purposes:

  • Drive up demand for domestic supplies
  • To keep inflation in check the economy grows (traditionally a role played by Fed Interest Rates)
  • Keep China in check.

Related references

Book Summary: Permission Marketing by Seth Godin

In any industry, the most trusted brand is always the most profitable one

The situation

There are too many companies spending increasing amount of dollars vying for limited attention and money of consumers

The mistake

Companies try to minimize their marketing spend by broadcasting the same marketing materials to as wide an audience as possible.

The right approach

Forget about the majority. Be laser focused on the audience you are targeting to build trust by starting and maintaining a dialogue with your intended audience.

Jay Levinson: An Ad needs to be ran 27 times on the same individual to get the desired impact.

  • An Ad is seen 1 out of 9 times
  • An Ad needs to be seen 3 times to have the desired effect

How to gain trust

  • Be personal
  • Be relevant
  • Be Specific
  • Be anticipated (don’t surprise them by building a regular cadence to your continued dialogue)

Stages of trust

  • Frequency
  • Awareness
  • Familiarity
  • Trust
  • Profitability

Related readings

  • The One to One Future, Peppers and Rogers

Book summary: The essential Drucker

Management: make people capable of working together to respond to change in the environment through:

  • common goals
  • common values
  • the right structure
  • proper training and development

Reasons for failure

  • Not innovating
  • inability to manage innovation

The goal of any business is to create a customer. A business does so by producing generate products and services the community wants in exchange for profits to sustain continued operation.

The goal of marketing is to know understand and know the customer so well the product sells itself

The Purpose of a business is the change it wants to effect in the community

The Mission is what it wants to do to effect the change

The Objectives are key tasks it will execute upon to achieve the mission.

Types of innovation

  • Product innovation
  • Social innovation
  • Management innovation

Waste as little effort as possible on areas of low competence.

First figure out how you learn to figure out how you perform.

Number two person often fails in number one position because top spot requires a decision maker.

Effective people are perpetually working on time management.

The first rule of decision is one does not make a decision unless there is a disagreement.

Determine the right organization size to fit the requirements of the mission.