Break From Trading

We are still on our road trip and having a few technical troubles, but I wanted to provide an update of the recent trading.  That said, sometimes you just have to take a break.  Whoa now, I bet you’re thinking…..what do you even do anyway, and why do you need a break?! (I wouldn’t blame Ms. IS for agreeing with this line of thought, but that’s not the kind of break I’m talking about.)  No, I’m talking about a break from making short term swing trades.  The reality is that in the last 8 weeks, the seven closed trades have resulted in the following returns.

KLDX 11.3%

ADM 0%

IRMD 6%

VDSI 6%

1st PAAS 10%

2nd PAAS 6%

MAT 2%

That works out to $2,550 over the last 8 weeks, while risking about $12k at any given time.  (There were also relic positions which were sold for profits and losses during this window but have not been included in this list.  They were longer term investments, not swing trades like I am discussing here.)  That is a great return over 8 weeks.  Do I think I can consistently generate returns like this, week in and week out? No.  I am not even going to suggest that I can make such returns.

What gives me pause, is that none of these trades has lost money.  Even ADM and MAT, my trading of which were abject failures, did not lose money (including transaction fees).  I’m not a good trader, and these outcomes should not have occurred…..or at the very least I should not be able to replicate them.  With this in mind, I have decided it wise not to pursue any additional swing trades over the next week…..while I reflect on what has taken place.  Our investment ideas are constantly changing and evolving.  Some of those changes occur as a result of market conditions and valuations, some as a result of the operational performance of individual companies, some as a result of learning new things.  The important idea here is that our ideas do not, or should not, remain entirely static.

 

How I Came To This Place

Let’s call it Trade Land, and discuss how we got here.  I’ve been investing in the equity markets for a little over two decades at this point…..individual stocks and ETFs for a little over a decade.  My point is that I am neither a complete neophyte, nor an experienced market master.  Two decades, and only one of them active, is a split second in time considering the duration that capital markets.  In short, we have a lot to learn. A whole lot.

Up until a few weeks ago, we made long term investments in companies or passive vehicles that we intended to own for years.  My problem was that for the last couple years, we have been underwhelmed with the valuations and opportunities I saw in the global equity markets.  As a result, the vast majority of our capital has been in cash or a few long term positions.  We were waiting for fat pitches and big opportunities, as I continued to read annual reports and study business models.  Opportunities will come in time, and as a result our allocations remain largely the same today.  Somewhere along the line, I decided I should try to capitalize on a few shorter term swing trades, which I saw a low risk.  We decided I should set aside a small amount of our capital, and see if I could capitalize on such opportunities as they came up.  With that, my swing trading venture was born.

The idea here wasn’t to make money in its own right, but to generate significantly better than money market returns…..with only slightly more risk……all while waiting to put large amounts of capital to work until markets became manic enough to offer up investments that fit our long term criteria.  Well, I suppose you could say that it worked…..which is great…..but we are reflecting now on whether or not we should deviate further from our original thesis.  In eight weeks of trading we generated more in profits that we likely would earn putting one of the portfolios in a money market account for a whole year.  That is huge to me, and means that our original objective has been accomplished.  It also means, that we need to discern whether or not to continue, or potentially expand, the swing trading activity.

This isn’t the first time the idea of trading as a business has come up.  The idea has actually come up several times, and I have always resisted the notion.  A group of friends discussed me starting what I affectionately call a mini hedge fund.  Ms. IS and I decided it wasn’t the right idea, and I declined.  I did seriously consider investing on behalf of a pool when a mentor of mine approached me about running the investments of a closed insurance fund he was thinking about creating.  One of his partners shot down the idea, but the idea of permanent capital did have its appeal.  Long about this point I decided that I still had a lot to learn, and should just keep to investing and trading our own capital.  The question remains however, how actively…….

Running only our own capital has several advantages.  First and foremost, no angry customers.  No reporting headaches or drama with investors.  Additionally, and most importantly….. I never am forced to make a trade.  Running our own capital, we can sit back and wait for the right opportunities.  No rush, no fuss.  A fund’s investors may not be patient, and most of them want great results quickly….and consistently.  We don’t have those problems, which is why I doubt we’ll ever take on outside capital.  At the same time, we never intend to count on our investments or trading activity in order to produce the income we live on.  For me, that would be crossing a line.  A big red line.  That would change the game, and may encourage making bad trades.  I may feel like I had to make some number of trades in order to make enough income to live on.  No thank you.  Investing and trading are generally fun pursuits, and I don’t want to lose that because of additional pressures.

All of that being said, we are going to reflect on this situation over the next week.  Some time ago I wrote a post about humble investing, and that’s how we always try to be.  Stick to our circle of confidence and never be greedy…..unless of course everyone else is scared stupid.  Our hope is that this time will give us perspective on the situation and which course of action is best.  We will likely expand these activities, but we want to be intentional about it.  So alas, it sounds like we are still working on patience…but hey that’s nothing new :)

Have you come to such a crossroads?  How did you handle it?

 

Weekly Reads

Warren Buffett: An Overlooked Target in Amazon’s Grocery War – CNBC

This article offered an interesting perspective on the margin compression which Amazon may inspire within the food retail establishment.  Beyond Berkshire’s longtime holdings of Walmart (WMT) and Costco (COST), the author questions if Berkshire’s many consumer brands will have reduced pricing power as the retail side of Amazon’s business continues to expand.  It remains to be seen, but it appears to me that private labels have been gaining market share for years within the grocery space.  My largest surprise this week came I the form of Nike beginning to officially sell their merchandise through the Amazon platform.  Unfortunately, I have not found a quality article discussing the arrangement and its potential ramifications……. but this is definitely a deal to watch as the terms become available.

 

Buffett’s Home Capital Lifeline- Bloomberg

Two Buffett articles this week is crazy I know, but the crew at Berkshire have been busy making a substantial loan to Canada’s leading alternative lender.  In some ways I was surprised by this deal, because Home Capital’s decline over the past year has all the hallmarks of the subprime collapse in the US (a la 2007).  For the folks at Berkshire however, it all comes down to risk and reward.  It appears they provided Home Capital a lifeline, in exchange for a solid interest rate of 9% and the ability to buy 38% of Home Capital’s shares at a significant discount.  If they can buy solid assets at a large enough discount, we know they will.  I suppose I am most surprised that Berkshire didn’t use warrants or options in the deal…..instead of actually buying shares directly…….but maybe Home Capital offered better terms in order to get a secondary instead of a larger loan.  As more virtual ink is spilled, the terms of this deal will be better reported.  Buffett and Berkshire’s management have a great history of hitting home runs on these “lender of last resort” type of deals.  It is really hard to argue with results.

 

Next Inverted Yield Curve Could Be Different – Bloomberg

An inverted yield curve (where short duration yields are higher than long duration yields) has a good track record of predicting recessions, or at least it has in recent history.  This article makes the argument that the flattening yield curve may in fact go inverted, but that this time will be different.  I am always skeptical of those magical little words, but we do live in unusual times.  The premise is that the intervention of foreign central banks is altering the bond markets and will cause the inversion (if it occurs), not a negative outlook on the economy.  I don’t dispute that bond purchases by other central banks is pushing down the yields of US bonds, but I think the issue is to the degree.  The balance sheets of all the central banks in the world combined, is only about 5% (or 1/20th) of the size of all of the outstanding sovereign bonds.  They certainly can influence sovereign yields, especially on the very short end of the curve, but I suspect that the rest of the participants actually control the market.  With that in mind, and the fact that it has been over 8 years since the last US recession, and Janet Yellen did just declare that there won’t be another financial crisis in our lifetimes.  Is anyone else out there compelled to hold on to your wallet?!

Disclosure:Long KLDX and VDSI, but may initiate trades in any of these securities at any time.  This post is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional.

14 thoughts on “Break From Trading

  1. Maria

    Thank you so much for the excellent and informative post. I am also in the process of looking into short-term strategies of investing. I am really impressed by the fact that you are offering this content to your readers for free.

    Reply
    1. Income Surfer Post author

      I’m glad you enjoyed the post Maria, but be careful with short term trading. It has worked ok for us, but we are very careful and greatly limit our capital exposure. It can be a great way to lose large sums of capital however. Have a great week
      -Bryan

      Reply
      1. Maria

        I am careful, indeed. Actually, I am so careful that it gets boring. Currently, I am only trading options on dividend stocks. But I have a holiday coming up and I am going to use it to get into short-term trades.
        Since my first message I went through some blog posts, and you really are a good writer, thanks again.

        Reply
  2. Walter Fabisiak

    After reading your post on swing trading PAAS, I took a look at its chart and bought 100 shares at $16.25. So far the trade looks like its working. I plan to use the upper Bollinger band as a signal to exit.

    Reply
    1. Income Surfer Post author

      I’m glad you enjoyed the post Walter, but be careful. The miners are very volatile and it is very possible a downtrend is reestablishing itself. Short term trading of stocks can be a great way to lose money. I wish you luck and hope you’re having a great week
      -Bryan

      Reply
  3. Amber tree

    Almost 2 years back, I as in a similar situation: I wanted to see what “trading” could bring me. I did not want to risk my portfolio. I did create a playmoney portfolio to experiment with what you would call “swing trades”. Out of that grew also the interest for options. That portfolio now has outgrown my play portfolio. I sell puts, worst case, I end up with stocks I do not mind to own at a price I am ok with.

    Reply
    1. Income Surfer Post author

      Thanks for sharing your experience AT. It appears to be a good way to generate a little extra return….provided I am patient and wait for situations i am comfortable with. I also find covered calls and cash covered puts to be appealing for the reasons you mentioned. I’m not to the point where I know enough to employ them, but eventually. Seems like a great way to take advantage of extreme emotions in the market, and worse case you buy a stock you want anyway…..or sell one that you feel is way overvalued. Win-win. I hope you’re having a great week. Happy hunting
      -Bryan

      Reply
  4. Jay

    Thanks for another intriguing update Bryan! Appreciate the context on your trading history and experience. It sounds like you’re doing things the right way and the prudent way. Thanks as well for sharing the Home capital article. I’m curious to learn more about the deal structure and how he was being greedy when others were fearful!
    Jay recently posted…Canadian Breakout Stock Picks – How to Find Them!My Profile

    Reply
    1. Income Surfer Post author

      I’m glad you enjoyed it Jay. Yeah, Buffett sure knows how to cut a deal. Home Capital was over a barrel. They were insolvent and would have had to declare bankruptcy if not for a 1 year bridge loan, at over 20% interest, from one of the Canadian pension funds. I imagine Buffett really liked the assets….but I’m sure the story will evolve over time.

      Hope you’re having a great weekend
      -Bryan

      Reply
  5. Graham @ Reverse The Crush

    Thanks for sharing your trading results, Bryan!
    $2550 over an 8 week period with 12k is a fantastic return. Also, having experienced day trading myself, I know how rare these type of trading runs can be. I think it’s the perfect opportunity for you to reflect on your trades and investment style while you’re up. I think it’s important to take breaks from trading so that you don’t get too high or too low. Thanks for sharing. Enjoy the rest of your trip!
    Graham @ Reverse The Crush recently posted…Blog Report for April & May 2017My Profile

    Reply
    1. Income Surfer Post author

      I’m glad you enjoyed the post Graham. Yep, that’s exactly what we are going for. Reflect a little and decide the scale at which to proceed. We’ll see what the future holds. I hope you’re having a great weekend.
      -Bryan

      Reply
    1. Income Surfer Post author

      Thanks for taking the time to read and comment Sloth. Yeah, that’s not a bad strategy at all. I’m not all that experienced at using options, but I’m learning. Unfortunately, volatility is so low that in the equity market right now that you don’t get much premium by selling options. Fortunately that also means they cost less to buy.

      It looks like we have recommended several of the same books. I see you had Dhandho Investor on your list as well. Great book, and definitely an under the radar pick. Make sure you check out The Outsiders: Eight Unconventional CEOs…. It’s an outstanding book. I hope you’re having a great weekend
      -Bryan

      Reply

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