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Monday, 16 September 2013

The 3 Ms Part 2 - Money (episode 2 of 2)

The previous episode 1 of 2 on Money Management is about minimizing losses.

This episode 2 is about protecting your profits.

Many retail investors have similar experiences on seeing their beautiful unrealised profits disappearing right before their very eyes during a pullback or market correction. 

If only unrealised losses can disappear as quickly!


Equities and cash

One of the easiest and simplest technique (does not mean easy though) to protecting profits is by taking some money off the table when we are ahead.

This technique has many names. Some call it scale in; scale out; some declare round 1, round 2, round 3; some advocate sell when high and buy later at lower price; some swear by cycle trading/investing; etc. 

If you visit forums like Valuebuddies.com, you may spot quite a few veterans doing it. (You may also notice the "newer" buddies are the ones who are more fervent buy-and-hold forever value "advocates" than the old bird veterans who have gone through a few market cycles)

It's basically similar to Trading Around A Core Position as explained by Jim Cramer.


Equities and bonds

Switching between equities and cash would  be the easiest and most popular.

Some like the Millionaire Teacher would switch between equities and bonds. (Warning! You may want to research the correlation between bonds and equities during the author's time and now. There was no QE distortion then. It's one example of not copying blindly. Jumping to bond funds now would be akin to jumping from the pot into the fire in my view...)


Portfolio Management

Another popular technique if you are into portfolio management would be to re-balance if your equities % share gets "too big" in relation to your other asset classes that are now underweight like precious metals, property, fixed income, cash, and so on. (OK, that's more for more mature retail investors in their 40s and above. Young investors starting out have less options due to smaller portfolio size. Another example of choosing a technique to fit your present context and perspective)


Hedging

Sometimes you don't want to or can't simply switch from equities to cash.

One example is when you are bearish on the market but to sell your cum dividend equity now would to forgo the juicy dividends... So you "hedge" by selling the Simsci futures or STI CFD. It's not a perfect hedge; but at least if the market corrects as you predicted, some of the unrealised profits that disappear ex-dividend in your equity holding can be offset by the "profit" in your short future or CFD hedge.

Another scenario could be you have painstakingly built up a sizable core position in a very illiquid counter. A good example is Vicom (not vested). Some may find it's more cost effective to hedge with CFD or Simsci than trading around a core position in this case.

Hedging does not always have to be with leveraged derivatives. You can do what I've learnt from my mistake:


I was so wrong on Hyflux preference shares 

You can also do hedging with other equities counters. For example, you are bullish on Oil and Gas plays. But what if Brent crude crashes to US$80 and below?

Some may want to add some equities that benefit from lower crude prices as a counter-balance. 

Remember!!! Hedging limits losses; it also limits profits (no free lunch) . 



It's all you - Mind

What I've shown above are merely some of the techniques we can employ if we want to "protect" our unrealised profits. They are merely a tip of the ice-berg. There are many more techniques out there. Have fun exploring! 

To improve, we need motivation.

If we are satisfied with our performance, then there's no motivation. 

There's nothing wrong with that. If it ain't broken; don't change it!

Ah! How I wish I can be in that comfort zone...

Stay tuned for the 3rd and concluding post on the 3 Ms - Mind.





24 comments:

  1. {Researcher James O’Shaunessey looked at a number of investing “systems” and found that they all worked, if you followed them faithfully over time. Value worked the best, but you don’t have to be a value investor to be successful.}

    ReplyDelete
  2. Another words, "If you can't understand who you are, you better not be in the Market"

    ReplyDelete
    Replies
    1. temperament,

      There lies the ring to rule them all - Mind.

      Patience.

      Delete
    2. CW

      My patience improving ;)

      Whole of last week on holiday mood. Ban myself from the markets until the FOMC taper or no taper decision. Just watched Mortal Instrument - City of Bones this afternoon. Very entertaining!

      Oh! You meant part 3? Thursday lah!

      Very strange... Talk about minimising losses lots of interest and challenge.

      Talk about protecting profits colder than north pole?

      I guess I'm the only one weak in this area.

      Delete
    3. Taking profit is never wrong.

      How to argue or debate? :-)

      Delete
    4. CW,

      You pulling my leg ;)

      Not letting our profits run is a big no no too!

      I am now exploring how to protect my profits but yet allow me the possibility to sit tight for that potential 10 bagger.

      I also want to be in a position not to worry about stop-losses too! You think I like taking small losses? Bo bian. Low level kung fu must use low level technique mah :(

      In the past, when trading a core position, I will scale completely out of a core position when super bearish.

      I switch horses like your not winning back the same way we lost strategy.

      Maybe this time I'll kept 10-20% of those core holdings I bought in 2009 no matter what in the next crash?

      Don't pluck the potential 10 bagger seedlings?

      LOL!

      Delete
    5. Have you learned to forget your Bearish Divergence?

      Delete
    6. CW,

      Nope. Once bitten (2000), twice shy.

      I'm with the market that predicted 7 of the last 3 recessions.

      Ha Ha.

      Come to think of it, not funny :(

      Delete
    7. Thurs morning?
      Thurs afternoon?
      Thurs evening?
      Thurs 2359?

      Patience.

      Delete
  3. Tomorrow is the Day.

    Your Mind will finally determine your trading or long term investing success.

    Especially for long-term investing, many retail investors are so focus on Method and get themselves so addicted to so much analysis.





    ReplyDelete
    Replies
    1. CW,

      So true.

      "Less analysing; more investing" - CW.

      Like Zen saysings, what you say above needs to be appreciated through the journey of experience.

      Without the Mind to steer the "right" Method and Money, most retail investors are like Emerald-eyed fox - knows the strokes of the swordplay well; but no clue to the breathing techniques.

      There's a saying in Chinese that if we learn kung fu without learning "qi", in the end it's just a waste.

      Delete
  4. you think market so stupid? let you cut losses short and let your winning runs?

    like that everybody is rich already!

    ReplyDelete
    Replies
    1. don't be fool by these investors, they let profit run or becomes what bagger they also don't cut losses!

      if you gonna mix trading with investing, god also can't help you!

      Delete
    2. coconut,

      You're a good sounding board as always!

      Some say they are "investors" but they act like traders - your buys and sells betray you.

      Some say they are "traders" but their main funds are in long term assets. "Trading" a small stake is just to mark time.

      Delete
    3. ya, be sure before hand what we wanted to be.

      for investor who wants to trade, they should seperate these 2 funds totally. otherwise definately going to screw up.

      they becomes trade their investment, took their profit and miss the trend or, becomes invest in their trade, usually end up holding on to their losses and not the other way round!

      Delete
  5. I do not know anything about hedging and invest into bonds. All l know about is equities and cash. I wonder if l can survive a very severe bear market.

    ReplyDelete
    Replies
    1. Money Honey,

      I've alluded to it in my previous post on minimising losses.

      A person who has a business or career can earn back whatever he may lost in the markets.

      It can be more devastating to lose the business or career by being distracted by the markets - never mind bull or bear.

      It's people who are not working or doing investing full-time that have greater urgency to make sure they practice Money Management. Bust means must find a job...

      Delete
    2. Money Honey,

      I not sure whether you are gamer; it's easier to use this gaming analogy.

      Like playing Diablo, it's better to max out a few skills than spreading your skills points over many skills.

      Max out your knowledge in equities and cash and you'll have an edge over the next investor.

      Remember, we don't have to out-run the bear, just the next retail investor beside us ;)

      Over time, you'll figure out how to play other asset classes once you have outgrown your "player level"

      P.S. Equities is not just SGX stocks. US stocks? Asian stocks? Benchmarking SIA with HK listed Cathay Pacific for eg?

      Cash is not just SGD. If you ask Malaysian or Indonesian friends working in Singapore, cash has different meaning ;) Singaporean investors are a bit "sheltered".

      Beware the parochial trap!

      Delete
  6. Larry Williams - Trading Rules

    No 9. Your fortune will come from your focus - focus on one market or one technique.

    A jack of all trades will never become a winning tradee. Why? Because a trader must zero in on the markets, paying attention to the details of trading without allowing his emotions to intervene.

    A moment of distraction is costly in this business. Lack of attention may mean you don't take the trade you should, or neglect a trade that leads to great cost.

    Focus, to me, means not only focusing on the task at hand but also narrowing your scope of trading to either one or two markets or to the specific approach of a trading technique.

    Have you ever tried juggling? It's pretty hard to learn to keep three balls in the area at one time. Most people can learn to watch those 'details' after about 3 hours or practice. Add one ball, one more detail to the mess, and few, very few, people can make it as a juggler. It's precisely that difficult to keep your eyes on just one more 'chunk' of data.

    Looks at the great athletes - they focus on one sport. Artists work on one primary business, musicians don't sing country western and Opera and become stars. The better your focus, in whatever you do, the greater your success will become.

    ReplyDelete
    Replies
    1. CW,

      I like the Market Wizards series of books ;)

      All are different; all have their own 8 immortal ways to cross the ocean.

      By the way, you may want to review your Keppel. Not very focus the management leh!

      LOL!

      P.S. Where would Steve Jobs be if he only "focused" on PC?

      Delete
    2. now listen to the old man (CW actually haha)!

      Delete
    3. especially in the field of trading, otherwise absolute no chance of surviving!

      Delete
  7. SMOL and CW,
    Thanks so much for your good advice.

    By the way, one should read about those management heroes at Keppel ---> "Tough Men Bold Visions" especially pages 68 - 71 on Mr Sim Kee Boon.

    url link for the book :- http://www.kepcorp.com/en/content.aspx?sid=59

    ReplyDelete

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