- regime change occurs on the average every 3 months and the model gets outdated.
- early signs of outdated model includes consistent non-commit signals
- initial changes to trading parameters will tend to yield poor initial outcomes.
- Good outcomes will require time to play itself out
- Buying on the MACD bullish reversal tends to be too late in a volatile market. Potential gains from the reversal would have most likely played out by then
- Drastically reducing number of outstanding positions leads to inefficiency of capital deploy as capital is left idling around with a bullish trend plays itself out
- Explore buying when negative MACD trend slows down.
Key take aways:
- Commodities fall slowly and recovers fast
- utilize trend following
- Equities fall fast and recovers slowly
- utilize mean reversion strategies
- Anything that can be tested should be tested
- Be wary of
- future leaks
- Key weakness of my profile Yang Wood Day Master profile
- easily confused when provided with too much conflicting social signals
- slow in decision making process
- recommendations: avoid unnecessary conversations and stick to simple system that works
- Do not enter into positions until SPY MACD bullish crossover occurs.
- Practice “Let’s not talk about trading”
- When people ask how you pay for your expenses, just reply money from parents.
- When people send messages about trading related stuff just don’t reply
- Too many inputs from unqualified personnels creates confusion in the mind leads to bad decision
- Arguments is a time sink, creates a lot of unnecessary stress, drains will power, emotional and mental strengths. This leads to poor decision making when it matters
- Wasting time explaining the obvious to people does not lead to me having more money in my pocket whereas giving people wrong info leads to bad relationships later on.
- Set positions and forget
- Do not waste time debating about news on social networks. It leads to hurt feels amongst friends and relatives.
- No point reading news as bulk of the macro signals are already reflected in the prices of index by SPY. It does not generate profit.
- Don’t attempt to derive satisfaction and self-worth from trading profits. If you feel good now you will probably feel like shit later when profits start diving
- Do not talk about profits made during trades, makes others who did not make that money feel bad about themselves.
- Do not talk about losses made during trades, provides others the opportunity to make you feel even worse with their useless feedbacks.
2020 Corona virus sell offs
May 2019 US China trade war sell off
Dec 2018 US China trade war sell off
2003 Sars sell offs
2001 September 11 World trade center collapse
2008 Financial crisis
News sources utilized
- Motley Fools
Buy rumors and sell on news
- rumors are not official news but signals that a news might be coming soon
- continuous upwards movement of share price for few days means news might be announced soon
- once news is out share price will adjust based on actual numbers
Buy on over reaction to bad news and sell on recovery
- There is usually overreaction
- The AI Economy, Roger Bootler
- To Be a Machine, Mark O’Connell
- Irrational Exuberance, Shiller, Robert J.
- Life 3.0: Being Human in the Age of Artificial Intelligence, Max Tegmark
- Mind Children The Future of Robot, Hans Moravec
- The Singularity Is Near, Ray Kurzweil
- 1984, George Orwell
- no matter how much research you done regarding a stock you don’t have a contract what the future price should be
- with high yield bond there is a contract for a certain price in a future, if you are correct about the calculation, you will be correct about your yield
- bargain price: liquidation price 75cents on the dollar buy at 20 cents
- when you are not a big established investment firm like Lehmen brothers, you have no franchise to protect. You are free to go the unconventional route for potential outsized returns
- great ideas are born bad. Its easy to make your way to a great idea from crazy outrageous ones than cautious and sensible ones. Investment bankers by default filter out the crazy outrageous ones.
- Contrarian thinkers need to train themselves to see things via unconventional routes
- ways to structure a bond
- give money back sooner
- give higher interest rates
- give more stock
- give stocks cheap
- It is easier for corporation to pay interest which is tax deductible than dividends which are not
- Bonds offer process
- first tier high rollers offer liquidity get to buy at cheaper price and exit earlier
- second tier payers, with franchise to protect, who want to avoid stigma of being junk bond buyers will come in later at more expensive price and exit later.
- Successful leverage buyout scenario: after buy out use cashflow from business to pay off the junk bonds thus deleverage the business
- Mutual fund arbitrage: compare value of underlying portfolio and stock price
- If you are right about a company being undervalued and it is willing to put itself up for sale, there will be buyers
- Poison pill: defense mechanism against corporate take overs. When would be acquirers crosses threshold of ownership, existing shareholders are given extravagant rights rights making it less desirable as take over target
- Michael Milken:
- perception versus reality, see what the world could not.
- Vision is Strength.
- capital is abundant, vision is scarce.
- excess capital is not strength but opportunity for weakness
- capital put in the hands of someone with vision will result in drastically different results.
- return of the owner manager as opposed to the corporate manager
- by-pass the China wall principle where companies try to isolate the deal making and arbitrage departments
- knows many industry in depth
- way of thinking
- There is a strategy behind everything. Everything fits. Thinking this way taught me to compete in many things, not only take over but chess and arbitrage
- Empiricism says knowledge is based on observation and experience, not feelings
- Studying 20th century philosophy trains your mind for takeovers
- Chain thinking: just like chess, in any transaction, think of every single possible move and counter move
- always consider what might be the worst case scenario and then protect your downside while increasing your control
- a civilization starts to decline when a large part of its population stops working
- Icahn/Kingsley theory: focus the market’s attention on the disparity in values and someone will buy you out
- Take over strategy potential outcome after indicating it as a take over target
- acquisition of shares by original suitor
- hostile challenger
- white knight who will come and free up the locked up value
- Prefer stocks with limited downside exposure, gravitate towards out of favor stocks that had already been discounted by the market
- When analyzing a company, earnings does not always present a clear picture. Depreciation is paper losses. Cashflow presents a better picture. Key components to analyze
- return on equity
- committed the mistake of just focusing on financial engineering to reduce cost, think about how to grow the business
- Did not realize after fully taking over a company that the revenue side of the business is usually circumscribed to external factors not under direct management control
- Take over strategy potential outcome after indicating it as a take over target
- On negotiations
- everything has to be negotiated
- threaten, continuously threaten by painting a very dire picture. This helps frame the alternative which you demand as something very very reasonable
- wear down your opponent
- answer a question with a question
- always push the deal as far as it can without blowing up
- wait until a company is so stretched in need of a deal before buying on the most favorable terms
- On goal setting
- have no fixed goals
- see all the possibilities
- Princeton liberal arts eduction:
- exposure to eclectic mix of human knowledge teaching a student how to think, explore and question rather than prepare them for a specific career
- the best thinkers will rise to the top of their chosen careers precisely because they have not limited themselves to narrow courses of study
- Michael Milken:
- between perception and reality there is a gap
- herd instincts: investors are constrained by appearance. A manager of a respectable financial institution will shun “fallen angels” so as to avoid appearing imprudent to his colleagues
- forces wishing to keep a large company afloat are far greater than those that wish to see it perish
- credit rating systems are flawed. It focuses on the past instead of the future. Ignore large fortune 500 companies in favor of ones with no credit standings to find a good deal.
- The market which may be quick to digest earnings data was grossly inefficient in valuing everything.
- Lessons from Solomon brother traders
- I don’t pat myself in the back, because the next sensation is a sharp kick lower down
- those who say don’t know, those who know don’t say
- Despite the valuable lessons history can offer us, its shown that man does not learn any of these valuable lessons.
- Benjamin Graham: The more elaborate the mathematics, the more uncertain and speculative the outcome. Avoid substituting experience with theory.
- Key historic events:
- 1933 Glass Steagall act: separation of investment banking and retail banking
- July 1944 Bretton wood systems: World currencies agree to a fix exchange rate against the USD, USD agree to fix exchange rate with Gold.
- 1971 Collapse of the Bretton Wood systems: US, faced with increasing pressure to maintain the USD gold exchange rates as its foreign reserves were depleted by a extended Vietnam war, went off the gold standard to prevent a run.
- 6th October 1979 The Volcker Act : money supply will be fixed, interest rates would float
- 12th Nov 1999: repeal of the Glass Steagall act: banks can now take use consumer deposits for investment purposes.
Types of borrowers
- Hedge borrowers – cashflow can pay both debt and interest
- Speculative borrowers – cashflow can pay only interest. Needs to regularly refinance to repay debt
- Ponzi borrowers – believes future appreciation can finance both debt and interest
Crash happened when too high a percentage of borrowers in the system are Ponzi borrowers.