Friday, March 31, 2006

Are We at a Market Top?

I think the probability that the downphase of the four year cycle is now underway is getting higher. Been looking over various of the usual charts this evening. I was looking for another up wave in the NASDAQ 100 Index. But the NASDAQ Composite and S&P 500 have reached new 5 year highs and it looks hard for them to push higher. The Australian All Ordinaries is at an all time high and a model I have developed is now sending a strong sell signal on that index. There are some countervailing indicators - as always the picture is not totally clear. The US Dollar is looking also very weak on the charts... this is surprising. I thought this wouldn't happen till the Fed stopped raising interest rates. The Australian Dollar has rallied since I bought a few days back.

My portfolio is now net short when taking into account the correlation of the various assets with the general market (beta). In fact for a 1% fall in the market I should see an approximately 0.2% rise in my portfolio, everything else held constant.

This site is cool. LInks to almost 400 personal finance blogs and data on how many visits they have received and how many clicks have been made on each entry. Moomin Valley is included. Which it isn't on


I bought some gold for the first time ever today (in my Roth IRA). This is through the Exchange Traded Fund GLD. Gold broke out of the trading range it was in and headed higher. And looks like going higher still... For several years now, gold has been rising and I put off buying because I held lots of Australian Dollars which traditionally have moved with gold... the link seems a bit broken now though (there was never a really good rationale for it). Also I had shares in a gold-mining firm (CRS.AX) which turned out to be rather a disaster...

I also bought more QQQQ put options in that account and sold Yahoo. So in my Roth there is 5 ounces of gold and around $20,000 of QQQQ shares sold short effectively. This is basically what the Prudent Bear mutual fund (BEARX) consists of.

I did a bunch of trades in my taxable Ameritrade accont too... am rather short...

Wednesday, March 29, 2006

Millionaire Households

Article on millionaire households. Not surprisingly Los Angeles County is #1 as it is the most populous county in the country (10 million people). What is surprising is that New York County (i.e. Manhattan) doesn't show up. Do the New York wealthy pretend to live somewhere else with lower taxes? Hide their wealth well.

Fed Day

Today is the day of the Federal Reserve statement - at 2:15pm - and it will be Ben Bernanke's first... The buzz on Silicon Investor and my own read of the markets is that investors and traders are very wary about what will be in the statement that accompanies the change in interest rates. Last year my Intro Economics class was 2-4pm on Tuesday and Friday and we followed the Fed decision live and its impact on the market. Pity I can't do that this time.... but will definitely be paying close attention at that time. Plan to show my students on Thursday what happened. The Aussie Dollar is up overnight... which is a nice change after I bought more Aussie Dollars. One of my best months ever from an Aussie Dollar perspective, but down in US Dollars... maybe a natural rebound after overselling... or a forecast that US interest rates will rise less? Or a response to the gold price? Maybe a bit of the latter but this morning the US Dollar is down across the board....

Update 5:41pm EST - the market eventually did go in the direction I expected after the Fed announcement. But I made a short bet on GOOG and it went the wrong way... oh well...

Friday, March 24, 2006

International Barriers and Bridges

Yesterday I decided to cancel a trip to speak at a university in the southern US. They told me that as I wasn't a US citizen (but am an H1-B, green card approved but no card yet, have a SSN, and am resident for US tax purposes) they couldn't reimburse my expenses. Instead they would have to pay through my university but I would have to fill out a pile of bureaucracy delving into my tax and visa issues and then set up all kinds of bureaucractic stuff between the universities.... I just wasn't going to put up with this and even though it will cost me $130 in cancellation and change fees on the flight I decided to pull the plug. Was sorry for the guy who invited me as he is an H1-B himself. Just wasn't going to put up with more of this stuff. At a committee meeting at this university today we were presented on the barriers the US is putting in the way of foreign researchers and students and how foreign competition in the university sector is catching up and overtaking the US.... nothing really of news to me on that (unlike some of the Americans at the table...)...

Anyway, have assembled a pile of US dollars in my HSBC account and tomorrow will transfer them to Australia. The Australian Dollar has been falling sharply this month. Ostensibly because the Fed is going to raise interest rates much more than the Reserve Bank of Australia will. I have saved $A15,000 so far this month, but am down in US Dollar terms as a result. So at least make lemonade from lemons and try to buy more Aussie Dollars cheap... They will then go to paying down my margin loan in Aus. Last night I sent a fax to my broker in Aus to withdraw $A8000 from two Aussie mutual funds and put that towards margin loan reduction. The Australian All Ords index reached the magical 5000 mark for the first time. My technical analysis model is "flashing" a sell signal. So I have to act. I need to keep some money in those two funds as they are closed to new investors like all good funds eventually are. Large size in mutual funds is detrimental to performance. Good managers call a halt to the inflows at some point.

My mother and brother went to see a potential money manager yesterday. Got the info he sent on fees and performance of managers he outsources to. We know this guy from his previous job with Citibank. Could be good.... need to hear more details from them on what they discussed.

Thursday, March 16, 2006

Daytrading vs. Savings Accounts

Stealthbucks commented that he was curious that so many personal finance bloggers seem really excited about savings accounts from Emigrant Bank, ING, HSBC etc that are offering interest rates in the 4-5% range. don't get me wrong, I recently opened such an account with HSBC. With interest rates higher than they were a few years ago it makes sense to park cash temporarily in such an account. And for those just starting out on the saving and investing journey it makes sense to do this before taking the plunge into more sophisticated investments. Also I have long had a Cash Management Trust account (a Money Market account in American) with Adelaide Bank in Australia (and Macquarie Bank before that).

What is stunning though is comparing my recent day-trading with such a savings account. I have really improved my performance and I hope this keeps up... I am still kind of skeptical. I was always skeptical in the past of people who claimed such high rates of return... It so goes against everything taught in finance theory too... The key is risk control combined with excellent pattern recognition and letting winners run.

Anyway, basically I am taking $10,000 and then using daytrading buying power I can borrow $30,000 extra. If I make 1% in a day's trading as I mentioned in a previous post I have made $400 on the $10,000. Today I made $600. You can't expect to make money every day wins and losses have to average out. But that is a 4% rate of return in one day! if you put the $10,000 in a savings account you get 4% in one year!

Maybe there is something wrong here? Of course this is a reward to skill rather than to capital. If you randomly make daytrades even with stops you will lose money. If you got caught in the huge downdraft in GOOG a couple of weeks back you could have lost $7000 of your $10000 in a few minutes. Even with a stop in place the loss would likely be in the thousands due to the extreme rapidity of the collapse. So you only want to put a fraction of your total capital on the line and keep packing profits back into other investments (as well as spending and taxes). This is the risk control strategy of most professional traders. I first read the ideas in Teresa Lo's writing.

Wednesday, March 15, 2006


Looks like I just went over $A400,000 in net worth... Three hundred thousand US Dollars remains elusive though due to the weakness in the Aussie Dollar. Did some GOOG daytrading again today - made money but could have done a lot better by just holding onto my position from the beginning of the day to the end. The stock soared when a judge released a fairly favorable opinion on the case between DoJ and Google. I sold into that spike and then did a couple of bad trades before buying into the final upswing of the day and selling 70 of my 100 shares at the close. Using daytrading buying power that allows additional intraday borrowing is on the one hand dangerous on the other hand it imposes discipline to close overly large positions by the end of the day.

Also am almost finished Mark Tier's book "Becoming Rich". Don't be put off by the title and somewhat self-helpy style. It really is an excellent book on developing an investing/trading philosophy. Of coruse there are some contradictions here and there in some of the things he said. The key messages are a delineation of the the main components of master investors' systems - primarily Buffett and Soros are discussed and finding where you have an edge in investing and focus on that just as the masters do. In my strategy I don't any more try to pick what I call "industrial stocks" for long term investment. I can see what is a lousy firm to invest in but don't know what is neccesarily the best opportunity. I focus instead on:

1. Picking good managers for long-term investment

2. Using my knowledge of macroeconomics etc. to try to time the market

3. Use my knowledge of time series analysis, pattern recognition etc. to do short-term trading.

Some people are good at real estate, some in the stock market etc. There isn't anything you have to invest in, despite what people commonly say. If you can't see where you have an edge then focus on finding good managers and advisers. Easterling's book which I completed reading mainly drives home the point that you need a very long term horizon for passive index style investing to work for you. If you are in your 20s and don't want to retire till 60 at least you will probably do fine (but could do better). Dollar cost averaging will help you. Rebalancing and bond strategies the book discusses will help more. But if your time horizon is 10-20 years you may need something more radical given the probable secular bear market that we are in....

Credit Scores

Good article by David Bach on credit scores. I don't like a lot of what this guy writes, particularly on housing, but seems there is a lot of sense in this article. Some of the people playing the credit card arbitrage game should read this and learn more. I fell into some of these traps without knowing. Am not planning on buying a house till 2009-10 at the earliest so hopefully can clean things up by then. Hopefully my balance sheet will be taken into account too!

PS: A whole new credit scoring system was announced today by the three major agencies.

Sunday, March 12, 2006

Trade Analysis

Most people probably don't analyse their investment performance as much as I do. My motives are to find what works and see whether I can viably some day be self-employed as a trader-investor. Over time my investments have made money and beaten the relevant indices while my trading has lost me money. The question is: Am I improving? and: Which kind of trades are profitable for me?

Using the spreadsheets that I set up for the Schedule D of my tax returns in the last two years I computed the rate of return on each trade held for less than a year - just gain or loss divided by cost of investment. Overall I found that there was a negative correlation between period held and rate of return! Looking at just day trades they on average returned 0.78%. Those this year have averaged 1% and there is a correlation of 0.33 between date of trade and rate of return. So I am profitable and learning on day trades.

I am usually trading about $30000 or 10% of my net worth on each day trade. A 1% rate of return is $300 per day or $75000 a year which is my current salary. So if I can maintain that over time (this sample is just 42 day trades), it would be a viable occupation.

Longer trades lost money. However, when I excluded the worst two trades that happened last year, the return was a little greater than 1%. The correlation with date was zero. So I am not learning there... but if I can exclude these worst disasters by setting some kind of wide stop on trades I should be able to make money on that too.

I also separated out option trades. These also lost money. But excluding the three worst where the option expired worthless they earned close to 2%. Key here also seems to hold for a short period, though probably more than a day. I have never day traded an option.

If you are an active trader have you tried analysing your trades? It's one good use to put the Schedule D to!

Saturday, March 11, 2006


Some posters on NetWorthIQ have criticized my use of margin or said: "well it's not for me - good luck". Leverage through margin loans, options etc. as well as funds that have built in leverage is both dangerous and useful. It needs to be used judiciously. In today's markets I don't think you want to buy stocks for the long-term on margin. That worked in the 1980s and 90s but expected rates of return are just not good enough now. But when the market is in rally mode as it was from late 2002 to 2004 or 2005 depending on the index some leverage can add to returns. In Australia the standard model is to set the loan so the interest equals the dividend earned and then you are basically looking for capital appreciation and in Aus. surplus tax credits from the dividends (unfortunately the US still has double taxation of dividends instead). Margin also allows you to short either to hedge your long holdings or to speculate which should be done cautiously. At the moment I am using little and fluctuating margin depending on what trades I am doing. Soros' model was to invest one's net worth in longer term investments and then borrow a little against it to trade which is roughly what I am doing at the moment.

However, if the market should crash I would then have a lot of reserve firepower to buy stocks cheap... that is something to think about. You don't have to use a margin facility just because you have it.

What I certainly will do then is move most of my mutual funds and retirement funds from the bond dominated diversified funds they are currently in to a fund called CFS Geared Share Fund which is a leveraged stock fund. Rydex provides somewhat similar products in the US. The difference is the CFS fund is actively managed and Rydex is an index product.

Friday, March 10, 2006

Bullish Percentage

Yeah, I am getting bashed in the markets, giving up profits I made earlier this and last month, though as only a fraction of my net worth is in trading and most is in fairly conservative at the moment long-term investments the overall damage is not too severe.

Another interesting indicator I follow is the Bullish Percentage. This one is for the NASDAQ 100 index. It tracks what percentage of the point and figure charts of the stocks in the index in the question currently yield bullish recommendations. It is read in a contrarian fashion. When most charts look bullish according to the P&F methodology the market is overbought and will fall. This shows that P&F is mostly not a very useful methodology except used very carefully and differently, for example, in this way...

Another investment book arrived yesterday from Amazon. This one is by Mark Tier. Glanced through - a little "self helpy" but pretty useful I think. More later on this when I have read it. First need to read more of Easterling which I have started.

Thursday, March 09, 2006

McClellan Summation

Just was checking out the McClellan Oscillator and Summation as I do most days. One of the most powerful tools for medium term trades of the indices and determining overall direction in the markets. At the moment the oscillator is getting pretty extreme to the downside showing a short-term bottom in the market is near. Did several trades today, ending with my Ameritrade account more to the long-side. Only one short now. I don't post all my trades here by any means. Just a few to explain my thinking on investing and trading.

I am expecting the markets to rally here till the end of the month. Based on the McOscillator and other technical indicators and looking at a lot of different securities and Elliott Wave Theory. My short term trading is mostly on technicals and the macro picture. A few news stories about individual stocks (like GOOG). But I won't trade if I don't see a good technical set-up as well as the story.

Wednesday, March 08, 2006

Unexpected Returns

Received the copy of Unexpected Returns by Ed Easterling I ordered from Amazon and started reading. The book looks at longer term cycles in the stock market and the justification for hedge fund type investing instead of buy and hold. Buy and hold works in the long bull markets such as from 1982 to 2000 in the US, but maybe we are now in a protracted sideways bear period as occurred in the 1960s and 1970s and buy and hold could provide dividends and interest but little long term capital appreciation.

Monday, March 06, 2006


Just bought some shares of "Infrastructure Yield Securities" (IYS.AX). This is listed on the Australian Stock Exchange but is actually a complicated real estate investment. I originally bought some in the IPO in 2000 but had to sell in 2002. They have certain tax advantages. But what is interesting now is that there is an offer to roll up the fund with a final distribution greater than what I just paid. And there should be a scheduled distribution still for this month. Seems an interesting trade. There never was great interest in these securities. Deutsche Bank never managed to issue all of them despite the very high after tax yields they offered. This would qualify for my "core investments" I discussed recently if I didn't think the scheme was soon to be closed. So I am considering this a trade. For my NetWorthIQ pages I am listing this as a stock as that is how it is listed on the exchange.


So why the names Moomin Valley and moominoid? The moomins are characters in the books (and other spin-offs) created by the Finnish (but Swedish speaking) author Tove Jansson. They live an idyllic life of leisure and adventure in Moomin Valley. They don't care too much about material things but like a comfortable life. They don't care what other people think about them. They don't appear to do any productive work. They are very open-minded and caring about other creatures they encounter. I seem to have a lot in common with a couple of the characters and I guess my dream is to live a life as happy as that of the moomins.... So the aim of getting rich is not for material benefits but in order to live a life more like that of the moomins :)

Sunday, March 05, 2006

Berkshire Hathaway

I am reading Warren Buffett's annual letter and for a change I like what I see. I also checked the chart of Berkshire stock and maybe now is the time to buy. Both I and my Mom have been Berkshire shareholders but we both sold. I needed the money during my 2002 financial crisis and my Mom sold all her shareholdings in individual stocks after my father died.

Berkshire is the kind of stock that I am beginning to collect for a core portfolio, the aim of which is quality assets which shouldn't fluctuate too much with the stock market and can be held indefinitely for tax effective income and long-term capital gains and don't need to be traded in and out of with market conditions. Another recent buy was Clime Capital in Australia (CAM.AX). The manager of that firm - whom I met and actually applied for a job with - is a Buffett worshipper. It is basically a closed end fund and he is doing well so far with his portfolio but the stock price is far below NTA. The price has gone up since I bought. Other assets in this class I own are:

Loftus Capital (LCP.AX) - current strategy is to be a micro size down under version of AMG
Platinum Capital (PMC.AX) - effectively a listed global long-short hedge fund
Everest Brown Babcock (EBB.AX) - a security that includes a 30% share of a manager of funds of hedge funds and a share in such a portfolio of hedge funds
Challenger Infrastructure Fund (CIFCA.AX) - invests in infrastructure including gas pipelines, broadcast towers, and now bidding on a ports deal all in the UK.

All these except PMC.AX are trading below NTA.

Another thing that all these businesses have in common is that the managers have significant stakes in the shares. This is of course true of Berkshire too. Berkshire is likely undervalued relative to the assets it holds.

The TIAA Real Estate Fund might also fall into this class. At least I am thinking of it in that way.

All of them only constitute about 14% of net worth at the moment.

I am looking to add more of these type of investments in any upcoming market downturn.

Saturday, March 04, 2006

Income and Expenditure

The table shows my income, expenditure, and saving for February. "Other income" includes salary and this month, for example, my expected IRS refund. Retirement "other income" are the contributions to my 403(b). I also contributed $4000 to my new Roth IRA which is a transfer from current savings to retirement savings and so isn't counted under retirement income which are pre-tax contributions. Investment income for current assets is broken down into the core investment earnings - realised and unrealised capital gains, dividends, and net interest etc - and foreign currency movements. The final total saving figure should equal the change in my net worth.

The key thing is my savings rate is around 75% from total income this month. This really is the trick to building net worth fast. Of course, there have been months when total income is negative, so this isn't neccessarily a very typical figure, but certainly not unusual.

Unlike some bloggers out there I don't work hard at avoiding spending. I am single and live in a cheap area. My rent is only $600 in the nicest building in my downtown. I don't own a car. I am naturally pretty frugal I think. Things I focus on more are trying to increase investment income and maximizing tax efficiency.

I probably don't really NEED to save much aside from those 403(b) contributions in my particular circumstances. My dream is though to get to independently wealthy status earlier than I otherwise would.

Friday, March 03, 2006

Alpha and Beta

Just updating my spreadsheets ready for March which includes reporting on performance etc. I keep track of the two best known parameters in modern portfolio theory - alpha and beta. The chart shows my alpha and beta estimated over the 36 months preceding each data point. So March 2006's data point is based on a regression from April 2003 to March 2006 on monthly data. The regression compares my portfolio performance to my MSCI World Index benchmark. Alpha is reported as the annual risk adjusted rate of return by which I exceed the benchmark index.

The interesting thing about this is that recently my alpha has been very positive - i.e. adjusted for risk I easily beat the market. The other interesting thing is that alpha is rising over time. This is a beautiful example of a learning curve :)

Another Wild and Wooly Day

In trade in Google stock. I was long and added shares before the big run up and then was short when it started to fall. Couple of missteps since and ended the day short 50 shares and my Ameritrade account up $1600 or so. This chart is from the Ameritrade Streamer:

Thursday, March 02, 2006

February Investment Performance

Calculated my investment return in February: a measly 0.24%. But the MSCI World Index (Gross including before tax reinvested dividends - which is the benchmark I measure myself against) was down 0.11%. So I beat the index (not unusual...). My performance was mainly affected negatively by the fall in the Australian Dollar over the month. In Aussie Dollar terms I was up 2.14%. The biggest positive contributer was trading in Google. The net result of everything else was a slight negative (before foreign currency adjustment).

Wednesday, March 01, 2006

A Very Different Day

Today the stockmarket has been very volatile and in particular GOOG and the rest of the internet sector. I went into the day short GOOG and shorted more. Initially the stock went against me. But then it just collapsed - amazing to see. The CFO said something negative about growth. I didn't get the full down move. I bought to cover more than $10 from the bottom. Since then I have been doing a rapid succession of long and short trades and am up thousands of dollars on the day. Most daytrading days are not like this. This is very unusual! If I had been long it would have been disastrous - even with a stop in place it might take a while to fill while the stock was falling dollars per minute...

Most of my other positions are down so I am up about $2000 on my Ameritrade account at this point in the day...

It's the end of the month and in the next few days I will work out my accounts and investment performance for February. More on that then. Looks like I am now $24,000 towards this year's net worth goal.