Tag: t_roti@lqdAsset

buy small,learn fast: adv@stocks+ETF #Zeng #w1r2

Posted on by tiger40490

The trigger : a stock coach compared properties, gold, mutual fund,, and pointed out a unique advantage of stock as an asset class. I’m even luckier, due to Robinhood.

When buying small, the Impact of missing latest news is proportionally small.

— update

if you want to gradually develop a personal stock-picking “system”, then you need to make a large number of small but real decision, over different times. A few big trades won’t grow your confidence fast enough.

To become an experienced stock investor, you also need to make many informed decisions and learn from that experience.

Q: how much retrospective analysis needed?
A: not about how many hours but how much real traction you gain (not wheel-spinning). You should cut down the review when you notice diminishing return.

Quick learning is an advantage of stock vis-a-vis other investments.

— buy bigger .. When we have some confidence and experience then we can put in bigger trades up to $5k. Even at this level the impact of missing some news is not huge.

After you learn the art and grow in confidence, you may need to bet bigger, or ROTI remains low. But it’s not a harm in itself as explained below

Nevertheless, Low ROTI is no real problem for recreational investing.

— I always favor small trades below $1000, like $500. This way, we don’t need so much due diligence.
My learning comes after I hold the name in my portfolio and I get to monitor it in my portfolio, just as you monitor the stocks of you past employers, the stocks behind the brands you buy. A bitcoin researcher, an economist by profession, bought some coins just to motivate himself to monitor it.

This is a benefit of investing in individual stocks rather than ETF.

— downside of this “buy-small” advantage

  • Low entry barrier means too many small retail investors … herd instinct
  • low ROTI
  • hard to find bargains

— Fractional shares are a great training tool, though there are some limitations.
— Buy without fear if below $50.
— Compared to mutual funds, PE etc, I feel ETF/REIT/Stocks support faster, safer learning curve.
You get to climb the curve faster thanks to the cushioned training outfit.
— mutual funds learning by small trades, as compared to ETF

  • 🙁 annual fee
  • 🙁 no limit order
  • 🙁 you can’t learn by buying one share as in stocks

Both mufu and ETF offer

  1. 🙂 less distraction at work
  2. 🙂 pre-clearance exemption

— email to fellow investor Zeng
Q1: Is there anything harmful in buying very small quantities of a stock?
I don’t know any. I believe lower profit is not a harm in itself. Likewise, keeping money in time deposits is no harm.).

Q2: Is there anything harmful in buying “too many” stocks?
I don’t see any.

Q3: is it ok to buy-n-forget? Many people say “you need to monitor your portfolio once a while and have a plan when to sell”.

  • I think it’s OK. Buffett once said something like ” Our Favorite Holding Period Is Forever“, so I think it’s entirely possible to make a decent profit with buy-n-forget.
  • If I must babysit my positions, it would affect my sleep, my work, my mental energy for workouts, and parenting… all of them bigger than stocks. As busy fathers, we all understand that our total mental energy per day is a limited resource. I don’t think it’s worthwhile to spend my precious mental energy on babysitting my positions.

Q4: is it wiser, healthier to focus on a smaller number of (say 10) stocks or 100+ stocks? You gave a valid argument that since I can only allocate up to 10 minutes, and invest small amounts on each stock, I won’t make big gains.

  • my stock picking is recreational, perhaps with $15-20k risk capital. Am not aiming for big gains[3]. For each stock XYZ, I’m OK with XYZ if over 10 years XYZ temporarily rises above my initial purchase price. “Temporary” so as to give me a chance to exit. Even if I exit with 2.2% return over 3 years, I’m fine.
  • I have learned from experience that more time spent on analysis doesn’t lead to better trades. Sometimes I spend only 3 minutes on an unfamiliar stock, before buying. No major mistake so far. Some of the regrettable stocks were bought after longer due diligence.

[3] If you want big gains, just buy SP500. I do that too, but doing that is too boring and not recreational. (If some investors want to beat SP500, I wish them good luck.)

For my investment to remain recreational, it must not create undue stress. Therefore, diversification helps. Meaningful diversification is not easy, and my 100+ stocks represent a wide spectrum, with superficial diversification. Concentrating on 10 stocks would be even less diversified and more stressful.

Q5: Just what have I learned from so many stock-picking decisions? Here’s a random list of answers, half-ranked by unique/specific value

  • I am learning how to read news, and I learned how much to trust analyst ratings. Now I know there is a validity period, a target price, and a rating in each analysis. I have very limited time and must zero in on the key points.
  • I learned about various zero-commission brokers. Robinhood is a poster boy among them. There are many limitations to the platform. I learned many of those limitations.
  • I learned a lot about how to assess dividend history and dividend safety. I also learned about share buy-backs.
  • I am learning how to group my 100+ stock positions into categories… crucial for the purpose of benchmarking
  • I learned about (sector) concentration risk within my portfolio.
  • I learned about risks in REIT, utility/telecom, pharma, cars, oil majors, energy mid-streams, tourism/airline sector, banking/insurance, mining .. among other sectors.
  • I learned a bit about Russia, India, Canada, Japan, China… Many of these stocks trade OTC .. low liquidity
  • I learned some of the limitations of country-specific ETF or mutual fund. I pick my own stocks for exposure to specific geographies.
  • I learned about withholding tax implications for Canadian (+other) stocks
  • I learned that more time spent on analysis doesn’t lead to better trades, as explained earlier
  • I learned about the risks of fractional shares vs big-quantum stocks (above $200/share), and also market- vs limit-orders
  • I learned about emotions, impulsive trading, over-buying, obsessive trading, distractions from work…
  • [v] I read about legendary investors’ styles including Buffett. They make mistakes too and they seldom can beat SP500.
  • [v] I learned about why the U.S. index beat all regional market indices hands down.
  • I am learning about blue chips vs small caps. Most people seem to favor large caps if they only buy a few names.
  • I learned a bit about leveraged REITs. I think you need to invest in many REITs before you start seeing the differences in leverage.

[v=Note some of the things above can be learned without buying 100+ stocks (thought more trades would speed up learning). I have marked these items with v]

steps@buy`@Rbh #2graphs

Posted on by tiger40490

 

[? = questionable, less reliable metric ]

These instructions/reminders need to be explicit, otherwise in a hurry I will miss the “obvious” hidden meanings.

  • pre-clearance quantity not to be exceeded
  • .. ! .. keep distraction in-check
  • —- due diligence before pre-clear
  • check my existing position .. in profit or at loss? If apparently at loss, then remember Robinhood PnL ignores dividend incomes.
  • check analysts .. (either CNN or tipranks) to avoid buying high.
  • check dividend yield … double-check that dividend has not dried up !
  • .. for a long-term div star, verify on macrotrends
  • check long-term graphs on macrotrends or rbh
  • optionally check 3-month price trend
  • (I need 2 browser tabs beside the tanbinvest and rbh tabs. Consider using multiple laptops.)

— total due diligence tcost before + after preclearance should minimize to 3 minutes if dollar amount < $20

Penny stocks deserve less due diligence, provided you buy one share only. But nowadays I tend to buy more, since the 3D window is too short.

fractional buys deserve less due diligence due to smaller dollar amount

Familiar names (not necessarily blue chips) require less due diligence and could incur lower tcost

 

3episodes@ non-recreational trading

Posted on by tiger40490

[d=non-positive DYOC while holding]
[c=commission, or bid-ask spread was high in terms of percentage of investment amount not notional]
[m=margin account requires daily check, like a crying baby…]
[q=profit too quick and possibly unreal or unsustainable]
[t=time is NOT on my side]

Q1: how many months/years could I possibly hold a position?

— #1) [cdmqt] 1997 commodities for a few months
A1: months
— #2) [cdmqt] Saxo FXO for more than a year
A1: months, up to a year
— [dt] Oanda for a few months since late 2014
More recreational than earlier episodes.

Securities: mostly USD/SGD, but also a bit of gold and oil futures.
A1: 1Y+ for gold, oil. For USD/SGD, perhaps months

— #3) [q] Robinhood
Thank god the pre-clearance helps keep it more recreational.

A1: 1Y+, hopefully longer, as bulk of my assets have positive DYOC, allowing me to buy-n-forget.

==== txCost, NRY: 2 underrated advantages .. provide a significant margin of safety. When other investors experience losses or liquidity issues, I am often spared. Most people underestimate these advantages. Instead they focus on the overrated DRIP.

With commission costs and zero-div stocks, the entry-price/timing decision is more risky, more error-prone, more intimidating, less fun. I often become paralyzed by the due diligence. The dividend payout is a huge psychological and economic cushion against NAV drop or regrettable entry-price.

Similarly, rEstate investment without rental yield is more risky.

— small transaction costs (one-time or periodic) do add up .. Some investors (like Kun.H) seem to dismiss these costs esp. commissions, in their pursuit of 中长线 strategic trends. In contrast, My MOETF “system” and HFT systems rely heavily on the commission advantage. Some HFTs even earn a rebate from exchange for providing liquidity.

Upfront commission and expense ratio are the two best-known transaction costs. Other small transaction costs:

  • FX exchange costs
  • fund transfer costs between institutions.
  • taxes

## fraction@big-quantum stocks: drawbacks

Posted on by tiger40490

When I buy IBM, CVX or OMC, I use small fractional orders of 0.1 share each, and build up my position. It felt fairly convenient, at least for liquid names, but really? Let’s list the drawbacks of this approach

— drawback: defeats fire-n-forget .. Relying on limit orders (not these fractional market orders), I have a new habit of building my order book to buy at multiple price levels. This way, I can set up a series of entry-points and go to sleep.

As such, it’s a form of fire-n-forget. Without this, I’m forced to watch the market (not really for liquidation purpose) to acquire the stock.

— drawback: slow fill .. Fractional orders may take a while to execute, perhaps due to technical issues including liquidity. I think the order is not sent to exchange, but sent to some special liquidity pool.

I experienced this “slow execution” with Asia time-zone stocks like WNS and many pink sheet illiquid stocks.

div^capital_gain: which do you bet on@@

Posted on by tiger40490

Between dividend and capital gain, which *one* is your primary focus financially? Which one do you bet on? Choose one please.

— Betting on dependable dividend income for retirement .. is betting on the “business” to generate free cash flow.
After we pay $40 for a XOM share, we hope to receive around $2 payout every year, without worrying about the short-term fluctuations in XOM price, assuming we don’t need to sell.

— Betting on capital gain is betting on supply/demand, betting on sentiment, betting on collective human reaction to news.

In this bet, inherent profitability of the business (heart@valInv) is perceived like weather or another source of news.

For example, when Twitter banned Trump, investor sentiment turned negative but some reactions were positive. Energy news impact energy stocks in complex ways, due to investor reaction.

— buy-n-forget .. is harder for tech stocks.
Tech stocks, China stocks, financial stocks generate paltry dividend. So I am forced to monitor the sentiment and hope to escape before any crash.
— buy-n-hold .. is the default for dividend investors. During the long holding period, we hope to be lucky with DYOC.
— Market timing .. is much less important for dividend investors. They kinda watch for entry points. They don’t watch for exit points, except for reallocation/re-balancing.

Buying too high …. is kinda tolerable for dividend investors, as long as DYOC is well-maintained. This depends primarily on dividend cut/raise decisions by the business.

impulsive trading ] recreational investing #w1r3

Posted on by tiger40490

https://zerodha.com/varsity/chapter/impulsive-trading-possible-causes-and-cures/ is concise. “It’s important to remember that you must carefully monitor market conditions, and apply a trading method when it is likely to produce a profit. If a high probability setup doesn’t present itself, it is vital to stand aside.”

Affected asset classes: FX, but mostly stocks/ETF

— tcost for recreational investing .. Managing impulsive trading may have a non-trivial tcost. As recreational investors we need to accept the tcost. To a recreational investor, runaway tcost can be equal-to or bigger-than $cost as a concern. (As my confidence grow, financial risk-taking will grow.) For small orders, I need to strike a balance between two tendencies

  • ($cost) emotional, irrational, impulsive trading. This could also create tcost like distraction, lost sleep iFF the position becomes sizable.
  • (tcost) over-think, over-analyze, but no purchase in the end.

— other speed humps and speed bumps

  • hump: One way to mitigate this infatuation is side-by-side comparative analysis.
  • Bump: Limiting the concentration risk and aggregate exposure is another control measure. Infatuated investors like to “play big” and win big.
  • .. At Robinhood, the risk  capital on each stock tend to be small.
  • hump: Also, listen to friends, family and advisors, including Kun.hu.
  • Bump: A cool-down period has proven helpful in my experience. Pre-clearance is the most effective antidote for impulsive trading. However, compliance breach threatens my job security and represents the most grave danger, worse than trading loss
  • hump: fractional investing is another antidote . Instead of “stand aside”, I can commit $5 to $20.
  • hump: Incremental build-up reduces the pressure, stress of due diligence.
  • .. one extremely form of incremental build-up invests up to USD 20 in an unfamiliar stock, just to monitor it.
  • .. YES I should learn to embrace small positions on a stock after a 5min pre-trade effort (pre-clear, documentation..). Even though roti is low, this stand-aside is suitable for recreational investing.

signs@gambler: big bets@stocks

Posted on by tiger40490

Speculation/speculator is another word for “gambler”

Get-rich-quick mentality

— timing the (stock) market, as YLZ mentioned.
— reacting to news and sentiment of “retail hot money”
[[ irrational exuberance ]] and my RTS business analyst — “always recovers after down turn”
— short holding period. Day-trading is an extreme example. I like buy-n-hold to collect dividend
— infatuation, esp. in the property market
— gold investors are often gamblers, partly because 1) negative current-income 2) large positions 3) horrible bid/ask spread
In contrast, my colleague Gavin is a buy-n-hold gold investor.

— retail FX and commodity investors are often gamblers, trading news without understanding the fundamentals
I used USD/SGD FX trading for personal currency hedge in mid 2010’s, at a leverage of 1.0. That’s less speculative.

I feel bitcoin is a classic speculative asset.

— keep mortgage unpaid .. One of the most common j4 is to invest in stocks. Basically borrowing bank money to play stocks.
The most experienced stock investor I know, Kun.H, actually paid off his mortgage early !

— Huge enterprises betting big

  • eg: China Aviation Oil
  • eg: Nick Leeson
  • eg: national governments taking a stake in big banks? Not derivatives

— over-sized bets, like one of my young UChicago classmates (probably a rich kid). Many of these kids bet big on FX
I felt bad about my small bets in stocks and mutual funds, but it could be a good thing ! 

The lesser of two evils — I would rather tolerate poor ROTI, rather than betting big amounts.

If you want to build big positions, I feel U.S. ETF is safer.

One of the biggest price to pay is peace of mind…

recreational investing #w1r3

Posted on by tiger40490

limit order (rather than fractional) is part of tCost optimization.

My stock investing can be characterized as recreational_investing. Biggest risks are 1) sleep]peace, focus@work 2) mkt risk.

I feel the tension between two forces
* self-hate due to low $ROTI, low commitment amount… tolerable for recreational investing
* if I bet bigger, I hit high tcost (due diligence + babysit) and much higher market risk.

The most promising solution is bigger buy-n-forget, buy-n-hold for bigger dividend. I can also stick to recreational investing, and keep my portfolio NAV below $20k.

— ROTI .. as a metric is critical. The time must be time well-spent, in terms of

  • (Most of the benefits are related to retirement.)
  • brain stimulation (anti-aging), highest in stock-picking, lowest in mufu picking [1]
  • learning, self-growth, self-discovery
  • meaningful interaction with real people not automated programs [1]
  • pnl .. is usually below $3k, but can become 10k
  • joy.. I think many retirees use stock investing as a pastime. It’s their own money, not wasted on unhealthy activities.

Some retirees use recreational investing to fend off inflation, and build a small legacy for a grandchild. Could be as small as $5k, but it gives meaning to the effort. Meaning can be important to an otherwise meaning-lite recreation.

In contrast to roti, the ROI metric is less critical for a recreation [1].

— [1] discussions: single stocks far exceed funds
I have found far more online discussions of single stocks than funds.

In my chats with friends, fund investing is a shallower topic than stock-picking.

— risk capital i.e. money you can afford to lose. See blogpost on risk capital
— Pool size: perhaps 10->20-100k, depending on your family brbr, mtg/college and other obligations, dependable income, retirement time-frame,
— asset classes:

  • stocks; reputable funds; REIT fine but rEstate is not recreation 🙂
  • FX, gold, oil

risk rating: high-risk assets are welcome due to the small exposure.

[21]y I feel no urge 2sell #buy-n-forget

Posted on by tiger40490

k_babysit4exit

I do check my purchased stocks, perhaps too often, but luckily without the urge to sell.

I shared with a colleague and fellow investor (Gary) who once mentioned his/her day-trading tendency.

  • Somehow I am lucky to feel no temptation to sell my stocks, perhaps because 1) the number of shares is usually very low (recreational) .
  • In a declining market, I am lucky to be resistant (not “immune”) to panic, trying to get rid of “toxic” asset.
  • Another reason — 2) I spent 5-30 minutes analyzing each stock + pre-clearance, so I don’t want to waste my time by selling soon.
  • Then the dividend factor comes into play — I can hold long term because I believe in the dividend safety of my stock picks.

“Does it make sense to you?” I asked. My colleague nodded. I kinda trust his/her reaction because now I think the temptation is real and widespread. I recall my temptations in 3episodes@ non-recreational trading

Note selling would also require pre-clearance.

MOETF [def] #downturn

Posted on by tiger40490

MOETF == MyOwnETF i.e. my own portfolio of U.S. stocks

Due to tcost, I don’t bother to compute the percentage weight, biggest gainer/losers, sector weighting,,,

— ETF .. is the main benchmark and competitor to MOETF.
ETF seems to be popular among mt cohort. I guess up to 10% of my peers have an ETF-only (or ETF-mostly) portfolio. In my defense of stock-picking, here are my first j4:

  • convictions .. I have a view about hundreds of stocks or specific sectors. ETF doesn’t let me act on my views.
    • Similarly, commission charges also prevent me from acting on my views, so am lucky to have the commission-free platforms.
  • percentage .. I can, and often do, increase (buy) or decrease (sell, rare) the percentage weight of each name
  • stocks: learn fast, though the learning is possibly superficial. In index investing, there’s no active learning, no knowledge I can gain and share with my family and friends. When my hand-picked bets work well, I feel the “kick”. This is a kinda positive feedback
  • stock picking is classic recreational investing, where (unrealized) PnL is sometimes not the #1 ROTI
  • constituents .. I can see the constituent names more easily. With ETF it’s harder so I won’t bother to find the answer.
  • .. flipside: distraction. See buy-n-forget→ sleep]peace, focus@work

me: “Look at my portfolio return!”
them: “But my SPY has even better return”

I accept that. However, in defense of MOETF I will raise my finger and point at other financial advantages, beyond that return:

  • MOETF has better dividend yield than most indices. I can handpick stocks with high CDY (above 9%). No such CDY in any ETF.
  • xjl crunch in a downturn … if and when I need to liquidate some, I could choose which stock to liquidate, as some are more profitable, or more distressed, or with more potential. Impossible with ETF.  In contrast, between 5 ETFs, I’m less likely to find one “above water”. See also my blogpost on bluechips are more dependable.

— drawbacks… tcost is the key drawback and part of most items below. However, as recreational investing, roti is measured by an unconventional yardstick.

  • dividend monitoring is too complicated
  • some names have a very high unit price, so I must use fractional share.. market order only
  • pre-clearance exempted for real ETF

Employer may say “Are you too busy trading on the sideline”? My defense:

  1. my trading activity is mostly during U.S. hours
  2. small trades, quick due diligence
  3. many decisions and analyses (even the money) were from family members. However, my browsing history in office is recorded, possibly not investigated. Better search at home.
  4. Some pre-clearances didn’t lead to actual transactions

— Matt of OC was the first to suggest the strategy to buy entire stock market. According to him, over a longer horizon (like 10Y?) the overall market always go up. I think it’s true in U.S. market, not true in the China or Japan or European stock markets. When I asked further, I think he said at least buy the entire U.S. stock market.