Trading Update: 17 January 2015

True Profits Earned in 2015 to date: -US$12,341.84
All-time maximum profit earned: US$135,976.98
Current drawdown from all-time maximum true profit earned: US$15,617.94
Change from last update: -US$8,582.76
Directional stance: Portfolio is 64.22% bullish.

Quite a week this week. Let's see where we are from where we left off last week, when I said:

Yeesh the numbers are not looking good this week. That's some fierce red numbers staring out at me, and the maximum drawdown I hit intra-week actually exceeded US$14k. I did mention in the previous update that: 

In the more immediate timeframe the markets seem to be taking a breather and we can expect the S&P 500 to resume the rally from hereon, or more probably after more of a pullback has taken place (somewhere in the low 2000s). So we can expect some more short term pain for the portfolio before we get back into business.

So that's exactly the story of the past week, just that the S&P 500 did slightly more than what I expected and decided to take a frolic and detour into the 1990s. 

Although the S&P 500 has since recovered to 2044, the manner of its climb up back to 2044 indicates a worrying possibility that the S&P 500 has, for the intermediate term, topped at 2094, and a downtrend that could head to under 1800 has begun. This has to be monitored carefully seeing that my portfolio is still very bullishly geared. A heavy fall in the markets (which confirms that an intermediate downtrend is in place) and a bullishly tilted portfolio would not make the best of friends. The short term pain I spoke about previously could turn out to be something more and set back profit gains for some time. Caution is called for! Hopefully the market's movements on Monday can reveal more. I am ready to exit and rejig the stance of the portfolio if the market gives signs that call for it.

So, what has happened since? The breather that the S&P 500 is taking is proving to be longer and deeper. The S&P 500 took that frolic and detour into the 1990s and decided to linger a while more, and even toyed with the 1980s. That frolic and detour has caused the portfolio, which was positioned very bullishly at 60+%, to suffer a larger drawdown. The maximum drawdown experienced this week was at the close of markets on Thursday, at US$22.5k.

However ironically the technicals do not seem to warrant that bearish scenario that I highlighted (i.e. a downtrend that could head to under 1800). That scenario is currently off the table and so it is just a matter of seeing where and when this little frolic of S&P500 wants to end. It is very possible that the frolic ended on Thursday at 1988, or it could go on down to about 1950, so we shall see. It's a bit like getting the flu (I've got one since 2015 began (does my health mirror the markets or what?), but I've had no other symptoms since Day 3 of my flu, save for a lingering cough that refuses to go away for good. That's a bit like downlegs in a bull market - they end when they want to end, you just have to wait it out and let them run their course. So downlegs in a bull market = the flu.

I also have 3 points to note of this week:

1) Volatility - It is encouraging to see volatility returning in the market. Volatility is what makes the portfolio earn (and lose) money. It is all about positioning the direction of your sails (i.e. whether bullish/bearish and how bullish/bearish) to fit the wind direction (i.e. market conditions) when you sail.* Right now sailing with 60% bullishness for the past 2 weeks in the downleg has resulted in a US$20+k drawdown. But I'm looking ahead for the bull to resume thereafter and when you are 60+% bullish in a strong uptrend that means a sweet reaping of profits. Let's see!

*disclaimer - I don't, and can't, sail.

2) Reminiscences of 2014 - This correction reminds me of the downleg during the CNY period last year, right on the evening of the CNY eve/day one of CNY the S&P 500 fell about 40 points and I was thinking what a way to start the year of the whatever animal. Like I am right now, I was bullishly positioned but waiting for the bull trend to resume. (Of course it did :)). And like the downleg we are having right now, the correction from peak to trough was about 100+ points on S&P 500. So will history repeat itself?

3) Fear - On Friday night before the US markets opened, the S&P 500 futures actually dived down to about 17 to 20 points during afterhours, hitting the 1970s. On a traders' forum that I frequent, a number of traders admitted that at that moment they had lost faith in the bull and wanted to pull out their positions then, and for some it was faith/intuition/some superstition that "gave them strength" or "helped" them to hold on. Some with nerves of steel actually doubled down on their long positions - they appear to have been proven right for now, based on Friday's rebound. Well if you ask me, from what I am seeing out there, emotions are running high in the markets and there are jitters out there. All signs that a rebound is near and the downleg is about to end. A bull market is sustained by fear and needs to climb a wall of worry.

As Colonel Kilgore said in Apocalypse Now during the thick of the action during the Vietnam War to his disbelieving soldiers (who were so caught up in the horrors of war around them then): "Someday this war's gonna end."

Goodreads: The Subtle Art of Not Giving a Fuck

Every now and then, I will come across an article that gets my heart pumping (that isn't erotic literature), that makes me scream "yes!" silently and pound my fist on the bar in the MRT. This is likely the first time this has occurred in 2015 and "Goodreads" will be a collection of... such good reads I come across. Don't worry, it's not that I have become a philosopher-king overnight. I'm just the thinking man's retail trader.

The article that has the honour of being the first Goodread is The Subtle Art of Not Giving a Fuck by Mark Manson. Let me set out my thoughts below on the article and hopefully your interest is sufficiently piqued to read it.

As we age and advance in life, we start to get a little more comfortable. We also come into possession of more things. We get pay raises. Homes. Kids. Possessions. With more things coming into the picture, we own more but we have more to lose. Some of us may feel that we also lose a certain edge we once had. The feeling that you could drop your things down and leave them behind, with nothing to lose. The feeling that you don't give a fuck about anything. Freedom as a bird.

Mark's article struck a chord in me, and revived that feeling in me. It strikes me that perhaps over time I have grown to be giving a fuck about certain things that I do not need to be giving a fuck about. I want to get some of that back in me. In a healthy way without undoing any progress made in life. You can call it conscious desocialisation.

And here's are my takeaways from his article. 3 points from me.

1. Not giving a fuck is about daring to be different. That's different from aiming to be indifferent to all things. The latter suggests protecting one's emotional state by numbing one's response to stimuli, by disengaging. Is that living? The former involves engaging your passions to do what you feel for. Even if everyone thinks it's quirky or weird or wrong. Which one sounds better to you?

Napoleon Dynamite - Quirky, but happy? Happier than most of us?

Have there been times of late where you have held yourself back from doing something, due to how you think society will view you?

2. We need to find a mission in life. Once we do, the issues that used to bug us, will no longer bug us. Remember the auntie who likes to complain about everything and threaten to write to the ST Forum/CASE/STOMP/hardwarezone just to frighten a vendor into giving a further discount? Remember the bitch in the office who likes to make bitchy remarks about other womens' bags/hair/boyfriend/overseas trips? This is because they have not found anything better to do with their life, and so they occupy their world with such "minuscule" issues. Once you find your mission these people simply disappear from your radar. Or at best, you think of them like a tiny bug pest. You have better things to do. Embarrassment and self-consciousness fade away. Nothing can stop you.

Do you sometimes think that the things you have invested time and effort in are actually quite meaningless?

3. There are only so many things we can care about in life. This is especially so as we get older and our time and energy become limited. So please start to think hard about what are the things worth caring about. Priorities. Pardon my love for football analogies but it's like being a Pirlo, an Alonso or a Gerrard. They get on with age but they can still be very effective footballers because they conserve their energies and focus on doing certain things very well. Every move and step they take is measured and deliberate. There's no need to run around the pitch like a headless chicken if you know how to position yourself to be at the right place at the right time. Time your runs up the pitch. Guide team-mates around you instead of doing all the grunt work. Ration your movements, but make them count. That's what we should be doing as we age too. 

Have there been times where you feel you have too many things to do, and yet when you think about what are the things that are important to you, you realise you have been neglecting those most important things?

Trading Update: 10 January 2015

True Profits Earned in 2015 to date: -US$3,759.08
All-time maximum profit earned: US$135,976.98 (amended on 17 January 2015 - the previous number provided was erroneous)
Current drawdown from all-time maximum true profit earned: US$7035.18
Change from last update: -US$3,759.08
Directional stance: Portfolio is 62.21% bullish.

Yeesh the numbers are not looking good this week. That's some fierce red numbers staring out at me, and the maximum drawdown I hit intra-week actually exceeded US$14k. I did mention in the previous update that: 

In the more immediate timeframe the markets seem to be taking a breather and we can expect the S&P 500 to resume the rally from hereon, or more probably after more of a pullback has taken place (somewhere in the low 2000s). So we can expect some more short term pain for the portfolio before we get back into business.

So that's exactly the story of the past week, just that the S&P 500 did slightly more than what I expected and decided to take a frolic and detour into the 1990s. 

Although the S&P 500 has since recovered to 2044, the manner of its climb up back to 2044 indicates a worrying possibility that the S&P 500 has, for the intermediate term, topped at 2094, and a downtrend that could head to under 1800 has begun. This has to be monitored carefully seeing that my portfolio is still very bullishly geared. A heavy fall in the markets (which confirms that an intermediate downtrend is in place) and a bullishly tilted portfolio would not make the best of friends. The short term pain I spoke about previously could turn out to be something more and set back profit gains for some time. Caution is called for! Hopefully the market's movements on Monday can reveal more. I am ready to exit and rejig the stance of the portfolio if the market gives signs that call for it.

Speaking of trading exits, there is a scene in the (wonderful) movie Lust, Caution (starring Tony Leung (Chiu Wai, not the other one) and the lovely Tang Wei) where, if my hazy memory permits, Tang Wei lures Tony Leung into a bar that is embedded with assassins tasked to kill him. Tony Leung has some fun with Tang Wei in the bar initially, but when he smells that something is not quite right he drops everything and bolts out of the bar faster than you can say "Tang Wei rocks!"

Look at the man go. Nobody can stop him from getting out. That's how you should exit your trades when you are sure that your prognosis is no longer right. Anyway Tony Leung survived, of course.

Off-topic: I have been down with a flu since the start of 2015. Mrs RetailTrader is not doing so fine herself. Maybe our health is correlated to the markets? ;) A reminder that health is wealth! 

Review of Personal Finances for 2014

Expenses

Below is the breakdown of my expenses for 2014:

• Property (45%)
• Wedding/Wife related expenses (18%)
• Parents (10%)
• Household (applicances, furniture, maintenance) (7%)
• Food (4%)
• Vacation (4%)
• Clothing (3%)
• Tax (3%)
• Insurance (2%)
• Others (5%)

Expenses incurred this year were hefty. It was the first year since i started tracking expenses in 2012 that I incurred a deficit (i.e. expenses exceeding income). I'm happy to say however, this being the year I got married and bought a home with Mrs RetailTrader, that the two largest money bombs (which together with household related expenses added up to 70% of expenses) are not going to be recurring costs, so from an expense perspective I'm definitely looking to trim down on total spending for 2015. Assuming the bulk of these expenses fall away in 2015, I am looking to trim expenses in 2015 by half.

I however expect expenses for food to creep up as I'm no longer staying with parents (for most of us Singaporeans, staying with parents = free food lol!). I expect expenses for vacations to remain constant, and expenses for clothing to hopefully fall as well as some of these costs were wedding related (e.g. making up a wedding suit). Tax unfortunately is projected to increase; insurance should remain the same.

Passive Income and Financial Freedom

Given that 2013 was quite a stellar year for the portfolio, the percentage (and absolute amount) of my total income attributable to passive income fell in 2014 (as compared to 2013). Here's hoping things will pick up. 

I'm a follower of the great plan espoused in Your Money Or Your Life, where your financial journey undergoes the following stages (I'm paraphrasing very liberally so pardon me):

• Stage 1: In debt
• Stage 2: Income exceeds expenses, reducing debt
• Stage 3: Positive net worth, start to generate savings, which in turn generate passive income
• Stage 4: Passive income exceeds expenses - this is where you become "financially free" in that you can save 100% of your salary and can make the decision to "work for fun"
• Stage 5: Passive income exceeds expenses plus savings buffer (i.e. the amount of savings you want to achieve monthly/yearly) - this is where retirement becomes a realistic option.

Most of us in the Singapore personal finance blogosphere are conscientious savers and savvy investors who are in Stage 3. Everyday we build our savings moats, laying them brick by brick, waiting for the day we can hit Stage 4. As there is such a huge gap between Stages 3 and 4, it would be useful to have some parameters to measure progress as one works his way from Stage 3 to Stage 4. The parameter I propose to use is the fraction of one's passive income over his total expenses. Hence, for example, if a person were to generate $50k of passive income in a year, and incur $100k of expenses, that fraction would be 50% and if you think about it, it indicates that he is 50% of the way towards being financially free in Stage 4. I'm at 19% for 2014 although 2014 was a one-off anomaly due to wedding and new home. Just for purposes of comparison, i was at 85% for 2013 (another anomaly though because of the better-than-usual performance of the portfolio - I can't expect to be reliably generating that sort of returns every year). Where are you in your journey today?

My next expenses update (for the month of January 2015) can be found here.

Trading Update: Annual Update for 2014

True Profits Earned in 2014: US$36,943.07
Current drawdown from maximum true profit earned in 2014: US$3,276.10
Change from last week: - US$2767.77
Directional stance: Portfolio is 58.78% bullish.
Annual returns: 10.18%

Looking back

So, the year closes with a "bang" of sorts (pardon the pun but my last memory of last night was watching Big Bang perform during the New Year's Day countdown on TV). The portfolio seemed destined to hit new highs before I hit the bed last night but instead the markets went into a woozy and suddenly I have a drawdown. That's trading for you. But as you can see, the "nice figure" annual return target has been hit and I can say this has been a satisfactory year (from a trading perspective). It would have been nice to hit 40k in absolute figure profit but yeah, greed is good.

I did not manage to hit the heights of 2013 (20% returns) or the great year that began this journey, 2011 (27.6% returns). If you think about it and just stare at the charts for S&P 500 in 2013 and 2014, 2013 and 2014 are very similar. Generally part of a steady bull run with some dips along the way, which are opportunities to make more money, distributed at points during each year. I look at my trading records (and look at them again) and can't quite explain why performance was twice as good in 2013. In fact, there were quite a few times in 2013 where I allowed greed/loss aversion tendencies to get the better of me and traded "wrongly" and this caused the directional stance of my portfolio to be veered a little dangerously in one direction (where the risk of large losses grows, i.e. not ideal! Danger, Will Robinson!), yet it was from positions like this that, when the market direction turned eventually, I was able to reap in copious amounts of profits. In 2014 I was more disciplined and stuck to the rules largely (except for the weeks where I first began this blog), and yet "still like that". Could it be that the parameters I've set as to how bullish and bearish I allow the portfolio to become are somewhat more conservative? Am I "outgrowing" the safety nets I built for myself in the initial years? Could it be that it is time to open up the floodgates a little, and be amenable to risking a larger drawdown in the hope of larger returns, in order to take things on to the next level? Again, pardon the football analogy but is it time to give my players more freedom to express themselves rather than being obsessed with marking, constantly staying in position and tight defence? Is it time to be Liverpool rather than Chelsea? ;)

I have no answers at this point and probably will need to pore through my trading records again to see if there is anything else I can glean from the past.

Above is a chart depicting my trading capital since June 2011 to date. Naturally, the trading capital does not quite correspond to trading performance because it is contingent on other factors, such as (but not limited to) my salary/bonuses and expenses. The dip in 2014 which "interrupted" the steady progress over the years can be proudly attributed to my acquisition of Mrs RetailTrader and our matrimonial home :)

Looking forward

As I alluded to above, it is time for me to relook the strategy to see if it can be tweaked to increase the profits. If 2010 saw version 1.0 of the methodology being implemented, and 2011 version 2.0, and 2012 version 2.5, and 2013 version 2.7, it's time to take the methodology to the next level - version 3.0. What I mean by this is to continue to refine the "rules" for which the portfolio is managed, i.e. its bullish and bearish limitations, and parameters for maximum tolerated drawdown. Of course I don't believe in absolutisms and false dilemmas, any changes I make will be evolutionary and nuanced, I'm not expecting to make any 180 degree wholesale changes. Tweaking will be the name of the game for 2015.

S&P 500 looks set to continue the bull run (there is not enough complacency in the markets as yet) and the current indications (which can change in an instant so please do not rely on anything I say here on market direction for your own trading purposes! These updates are intended more to share my thoughts on my trading process than to provide any sort of advice) are that the markets can go all the way to the high 2100s to 2500s before topping. So I say we enjoy the ride up and when the bear market is confirmed, the portfolio will need to switch to "bearish" mode. Based on past data the portfolio tends to perform better with volatility, which will be present in large amounts in a bear environment so I am actually looking forward to the next bear. As I told a friend my age yesterday, the upcoming bear could be the opportunity for people of my generation (who did not have much capital to "cash in" on the financial crisis of 2009) to really grow our pot for retirement (go big or go home!). Of course, step by step. It could be that this bull market (which is really a relentless one, as it is a reaction to the crazy fierce bear of 2008-2009) could go all the way to 2016 so let's be patient, bank the bull market coin first, continue to save and accumulate capital for our trading "warchest" and take things step by step (and remember to enjoy life on the way).

It's difficult to set targets for 2015 because ultimately you cannot control when the bear market wants to begin but hopefully I can at least hit 10% returns again for next year. And never forget rule number 1. Beyond that I hope to recapture the performances of 2013 and 2011.

In the more immediate timeframe the markets seem to be taking a breather and we can expect the S&P 500 to resume the rally from hereon, or more probably after more of a pullback has taken place (somewhere in the low 2000s). So we can expect some more short term pain for the portfolio before we get back into business. As we only have one more trading day in the US before the weekend, my next regular trading update will be on 10 Jan 2015 instead of 3 Jan 2015.

Cheers and here's hoping for a good 2015! I wish each reader health, happiness and wealth!