Platinum Capital Announces Strategic Review

Platinum Capital is a closed end international hedge fund listed on the ASX, which I have invested in for a very long time. In the past, I gained by trading when the fund traded above or below net asset value. But since the pandemic started it seems to have been in a permanent slump. Currently, the share price is 25 cents below the NAV. The underlying performance of the fund has also been relatively poor for a long time. Now, Platinum has announced a strategic review that could include converting to an open ended fund. The latter would allow redemption at NAV. I support this idea. I might even buy more of the fund in anticipation.

P.S. 11:35am

The stock has jumped 7 cents on the news, but there is still 17 cents to go to reach the NAV, so I bought 25k shares in the SMSF.

Futures Trading Disaster

I really messed up with bitcoin futures positions and lost a bunch of money. The triangle didn't work out. I really shouldn't trade futures directionally, I think. They give me anxiety that holding stocks does not. It makes no sense but that is the way it is. So then I trade badly. I closed the positions I had, probably at the bottom of the market for a big loss because I couldn't take it any longer. I still have ETF positions. But I feel so much calmer about those. Crazy. I know that I can't handle this sort of trading holding positions overnight but still I do it. You would think I would have learned this, but somehow I am still optimistic that it will work out.

Elliott Wave Triangle in CME Bitcoin Futures

I'm not big on this sort of technical analysis and especially Elliott Wave but it is amazing how the CME Bitcoin Futures just touched the line drawn connecting the previous two recent lows forming a perfect Elliott Wave triangle:

Hopefully, it will hold with the halving this week...

P.S. 16 April

The low at E was overshot during the US trading session, but this often happens in these formations. As the low of C was not exceeded the triangle is till valid if you believe the theory. Downward pressure is coming from both the general "risk-off" mood in the financial markets and prior to previous halvings there was also weakness before the event and then a bull market following. Also, Anthony Pompliano points out that Americans have to pay their taxes by today. So, they may be selling Bitcoin to get the cash for their taxes. But the price of bitcoin apparently does need to be higher than this post-halving for miners to breakeven.

Switched Remainder of CREF Social Choice to TIAA Real Estate

In January, I switched about half my CREF Social Choice (a 60/40 balanced fund) holding in my US 403b account into TIAA Real Estate. It was a bit early, but now I have switched the remainder. Here is a chart of the monthly returns for the TIAA Real Estate Fund and a twelve month moving average:

I had previously switched into Social Choice during 2022 at the previous peak on this chart.

Sold Berkshire Hathaway

I sold my 100 shares of BRK/B. The last earnings report raised questions about the performance of several major Berkshire businesses. My target asset allocation said I could reduce my exposure to US shares and I wanted to do something else with the money. Yeah, I bought more bitcoin. Munger would have been horrified.

Total profit on Berkshire to date was USD 18k and the internal rate of return was 11.09%.

Yield Curve Trade

 I entered a new yield curve trade - betting on a reduction in the inversion:

This executed by buying a spread that is long two year treasuries futures and short ten year treasuries futures. If we have a repeat of the late 1970s and early 1980s it will lose but inflation was much higher than now then. Last time I tried this in late 2019 to early 2020 I lost about USD 1,500. I was right but too early.

31 March

The trade went badly right from the start and it started making me more and more anxious. I didn't sleep last night and couldn't get to sleep tonight, so I closed the trade. But I still can't sleep yet. So, thought writing this update might help. I would have thought that I had learnt my lesson that I can't cope with overnight futures trades where I could decide to change the trade. It's just not something I can do. I had planned to do some more work on trading in the next few months, but now think I shouldn't do it.

New Trade: Pendal

I bought a position in Pendal (PDL.AX). Yesterday, they announced that they got a takeover offer from Perpetual (PPT.AX) for the equivalent of AUD 6.23 per share. The price isn't a constant as it is about 2/3 in terms of Perpetual shares. The stock was trading around AUD 5.25 after being higher yesterday, but PPT was trading up on yesterday. Analysts say the stock is undervalued and a strong buy after falling a lot in the last year, prior to the bid. So, I didn't see  lot of downside in this. 

In other news, URF.AX is now up to AUD 0.24, 10% above the AUD 0.22 that investors are supposed to eventually receive. I can't sell as my shares are in transit from Interactive Brokers to Commonwealth Securities. They have now left Interactive Brokers, but haven't shown up yet at CommSec...

Next Steps

We have now executed a major part of the financial plans I developed in 2018. We deployed almost all the inherited capital - we still have some Ford bonds, which were intended as a short term investment, we have completed the initial set up of the SMSF and set up accounts for our two children. We have a much more diversified portfolio. So, on the investment front it will now be more business as usual going forward. I explored trading and made a little money but haven't got to the stage of setting up a proper system. This is something I will need to revisit very soon. To decide once and for all if that is a direction I want to take. If I do it, it would be in collaboration with some other people I know. The other major thing we haven't done is estate planning. I wanted to get the SMSF done first. So, we should really look at that seriously soon too.

Career Update etc.

About a month ago I posted about my career decision-making. So, because I ummed and ahhed, the incoming director found someone else for the leadership position for a year with a view to me doing it after that. On the other hand, she was happy for me to get a teaching reduction when I am in that leadership position.

I talked with HR and my immediate department head about long service leave. He was happy for me to get a reduction in teaching next year but not the course I wanted to drop. Instead, he suggested I drop both courses that are supposed to run in the first half of the year and do another course instead in the second half of the year. This is somewhat appealing as after a few year I get bored of teaching a course even though preparing a new course is a lot of work. So, then I would have a year out of teaching, then teach the new course, and then take on the leadership position while still teaching this course. 

That takes us to the end of 2024 when I will be 60 years old. So, my thinking is to then drop to a 50% position rather than retire outright and teach one course a year. 

On another front, a former student who I am collaborating with on research and maybe on another fintech business venture (at the moment I am on the informal "advisory board") is interested in trying to implement automatic systematic trading with my methods. He already has 2-3 other collaborators on the other (research intensive) business development. These guys are pretty expert in Python etc while I am relatively expert in markets. But he wants me to pay for their time up front for development. So, I really need to make sure I have something profitable before paying for this. So, I am going to do more extensive backtesting of my soybeans model, which is the easier one to backtest using my existing software. Most of the work is in compiling futures data together into a continuous series. I will go back at least to the Great Recession and maybe further. Currently I've tested about 6 years. If that works out (I am skeptical actually) they would then do more testing of other markets once we are trading the first market.

My thinking is to pay for development by being issued shares in return for cash in their (to be founded) company. After that when trading is up and running there would be profit sharing with the management company of which I would also be then a shareholder. One of the team is an accountant who would set all this up. They already have an IP agreement in place.

This actually all seems pretty crazy to me but you won't succeed if you don't try.

Two More New Investments

We're still in the process of reinvesting after the most recent reorganization, which centred on rolling over my Colonial First State superannuation fund into the SMSF. I bought the first "tranche" of a position in Fortescue Metals (FMG.AX) replacing the just closed Treasury Wines position. By the way that position made around AUD 15k in profit with an internal rate of return of around 90%. Fortescue is expected to pay out an enormous franked dividend very soon. The interim dividend was AUD 1.47, which was double that in the previous year. Brokers expect the final dividend to be around AUD 2.50 per share plus franking. This is around a 16% annual yield. The reason the share price isn't higher is that brokers also expect profits to fall in the following years. The thinking is that the iron ore price can't remain this high for long. My thesis is that retail investors will continue to buy the stock to get the dividend and that maybe future profits won't fall as much as expected. In the last 90 days they have increased their forecasts of 2022 profits but the share price is below where it was a the beginning of the year.

The second investment is in Contango Income Generator (CIE.AX). This is a listed investment company (closed end fund). It has been a failure, losing money since inception. Wilson Asset Management got involved, buying up shares and agitating for change. The company switched to a new strategy managed by WCM Investment Management who are based in California. This is a global long-short equity strategy, which supposedly has performed extremely well:

Of course, it is trading below net asset value. It's not that liquid, and so getting a full position will take a little while.

We now have 40 different investments not including cash in various currencies, our house etc. And that's counting the eight paintings at Masterworks as one investment. I still have a couple more investments in mind.

Got Out of Treasury Wine

Was getting bored of Treasury Wine (TWE.AX) so I exited the position. Probably now there will be a takeover announced :) Previous rumours about takeovers didn't eventuate so far.

Stopping Systematic Trading Again...

Of course, bitcoin went straight down after I got in and I have now closed that trade. There was no real basis to that trade. I just went in because Oscar Carboni was getting bullish on bitcoin again. But I have also decided to stop my attempts at systematic trading. I thought I could come up with something which my personality could handle. But it's not the case. I just can't get detached when there is an order out there that may or may not trigger, needs attention to close etc. My anxiety and lack of sleep has been getting worse again this week, despite not actually trading and last night I decided to pull the plug. I still have a soybean calendar spread trade open, which maybe I was most anxious about. But it is actually making money now. I had increased the size of the trade. That was a bad idea. I have now gone back down to two contracts instead of three. These moves should reduce the overall cognitive load. If this still doesn't work, I'll have to close that trade too.

This seems to have happened every time I really get into trading, but each time I think it will be different. Moominmama was concerned when I said I was trading again, saying that I always end up stressed as a result. She was right.

P.S. 9 April

I still had difficulty sleeping, so I closed the soybean calendar spread too. At least that one made some money.

Bitcoin

 I'm finally back into Bitcoin. The position I could get was tiny. Margin requirements are crazy. On IB they are something like twice the actual BTC position. I took a small position on Plus500.

Trading Not Going Well

Last three ASX200 trades were stopped out, which is very unusual. The worst in the backtest was two stop outs in a row. Each day the market goes up at the open and puts me into a long position. Then it falls and stops out. Five of the last six trades were losses. I suspect that isn't so unusual. I've done two soybeans trend-following trades and both (long) were losers too. I'm also doing a calendar spread soybean trade which is about a breakeven at this point. On the other hand, we have been doing well in some stocks like Treasury Wine and Domacom.

February SPI Trading Performance

I made AUD 589 trading ASX 200 futures and CFDs in February. I have now compared my trades to the trades the algorithm specifies. If I had traded one whole SPI contract (rather than varying numbers of Plus500 contracts I would have made AUD 770. But the algorithm just daytrading would have made AUD 4,275. Overnight trading as well had a very negative return for the month (AUD -3,125 if you took an overnight trade every time you were up for the day). So, when I started doing overnight trades, it detracted from my performance. I can also calculate the "slippage". I lost an average of AUD 57 per day due to the spread between buy and sell and inaccuracy in getting in and out of trades at exactly the right time. This is actually less than the spread between buy and sell prices on Plus500 of 3 points or AUD 75. After accounting for slippage, the daytrading only algorithm would have gained AUD 3,062.

Trading Update

I've now been trading the ASX200 systematically, mostly on Plus500, for two weeks. I'm only ahead by about AUD 500, but that's not surprising. Actually, it's a good result given the small position size so far, and the potential for drawdowns. I've done more backtesting and improved the algorithm. About half of total returns would come from holding winning positions (during the day) overnight and I haven't done that yet. I also updated my soybean trading model with the last year or so of data and the algorithm I was using would continue to be profitable, so I am adding that. By contrast with the ASX200 model, this is a trend following model that doesn't trade very often. Finally, during the past week I did some trading of Treasury Wine around the high volatility in the stock with the earnings release and broker upgrades and downgrades. This involved far larger fluctuations in value than the systematic trading.

Plus500 Update

I got a statement from the new HSBC account and submitted it to Plus500 and it was approved! So, now I tried to withdraw $1,000. They at least allowed me to submit the request now. However, there was a statement that they will refund the original source of the money.... Which would mean they will send it back to the credit card we used to fund the account, even though that is a joint account. Let's see what happens. 

P.S. 8 February 

The money showed up in the new HSBC account! So we successfully withdrew money from Plus 500.

Finished First Week of Trading

I traded each day according to the rules and had 3 wins and 2 losses and ended up AUD 219 for the week. If that is a typical week then I would need to trade ten times bigger to make a decent "wage" from this. That would be 4 full futures contracts (AUD 670k notional value). But that would expose the account to a possible daily loss of AUD 50k during a market crisis like the March crash last year. I would feel that is just too much for even a AUD 1 million SMSF, though for our full portfolio it is reasonable theoretically. So, we would need to use a constant risk strategy to reduce the risk to AUD 10k every day. That also feels like a big risk in trading if it is a daily thing. So, I doubt we get up to that size of trading any time soon. 

If this is a successful strategy I will likely pursue trying to build an automated system later this year. I previously explored Capitalise, but found they couldn't implement a system like this with variable position size based on risk. So, unless they have improved it'd probably mean learning Python, but that isn't a bad thing...

Why a Constant Risk Trading Strategy Works

A constant risk trading strategy in the day-trading context is where your maximum loss possible is a constant. There are other definitions in trend-following etc contexts where you choose a position size so that the typical or expected daily movement up or down is a constant over time and markets.

Using the first definition, once you choose a stop loss, you compute the loss per contract or share if the stop was triggered and divide the fixed maximum loss figure by that to find out how many contracts or shares to buy. For example, if you are willing to risk $2000 on a trade and a contract will lose $1000 in the worst case, you buy (or sell) two contracts. 

The reason this works is the maximum downside loss is capped but by trading more contracts when possible the upside is increased. This helps create asymmetry. 

This graph shows possible loss on the x-axis and trading results (in backtest) on the y-axis, when trading one SPI contract over the last 13 months:

And this is what happens to the returns when the maximum loss is set at the average $2,300 (yes the stop loss can occasionally be exceeded when the opening price of the day is above the entry stop):

 

This has a lower information ratio (similar to Sharpe ratio but without deducting the risk free rate) than the one contract strategy though. It misses out on really big gains when volatility is high. But if you combine the two and set a minimum maximum loss at $2,300 you get better results than either strategy alone. Below $2,300 potential loss you trade a variable number of contracts and above it one contract only:

This has a higher information ratio than either simple strategy but it does take on a lot more risk at times than the constant risk strategy, which for a small account trading full size futures contracts could mean just not trading when volatility is high.

2nd Day of Trading

Today's trade was a winner, recovering a bit more than half of yesterday's loss. This is going to need a lot more research. Especially around the relationship between volatility and returns. I suspect that it's not worth trading when volatility is low and maybe there is an upside limit to how much volatility to tolerate. Now I have 13 months of data (from Barchart) nicely organized. Just need to merge all the spreadsheets together and test hypotheses.