Updates on my investment journey - Jun 2020

      Ever since the US Fed announces the unlimited QE on 23 Mar 2020, all US stock indices were slowly recovering from the dip. I also saw similar recovery pattern in STI index, HSI index and KLCI index despite the current economic recessions we are currently facing. It was also a period of self-reflection in my investment journey as I went through many emotional ups and downs.

1) Warrant trading

      Ever since the HSI index started its slow recovery, the speculation game has become much harder to play because of the wild swings involved. I added warrant positions when I thought the index was moving in my desired direction and then I was forced to remove those position when my cut loss rule was triggered. This happened repeatedly as the index was moving sideways for months. As a result, I have lost slightly more than SGD4,000 from 23 Mar 2020 till 14 Jun 2020. Although my warrant trading overall is still in profit, having more than SGD4,000 accumulated loss in the most recent 3 months is not something I can embrace lightly.

      It was then I decided to stick to my new plan instead. I will initiate out-of-the-money call warrant position with longest expiry date when HSI index starts to move up from the most recent dip for 1 to 2 months with no cut loss rules. I decided to do it this way because I feel that stock market currently is simply looking forward to recovery, regardless of weak economy due to the COVID-19 pandemic. I initiated new HSI call warrant position on 12 Jun 2020, 1 day after the US DJIA index dropped 6.9% due to the fear of possible second wave of COVID-19 outbreak in the US and the US fed's latest remark on maintaining the current interest rate as well as the future economy outlook. I feel that the market participants are simply over-reacted.

      Let's hope this time I can guess it right.

2) Stock Investing

      I made some changes in my portfolio with the aim to increase the proportion of growth stock further because I want to speed up the portfolio rate of return which I feel I want be more adventerous in doing it. Relying on dividend return alone is not going to make it fast.

      So, this is what I made up in my mind:

a) Stocks listed in Asian stock market

      I will look for companies that can grow both revenue and net profit YoY consistently. I prefer those with business model that has recurring revenue and align to the current consumer macro-trends and they must pay dividend consistently so that I can get paid while waiting patiently for the share price to grow. The bottomline is, they must have more rooms to grow further.

b) Stocks listed in the US stock market

      Similar to part (a) but with some major differences. I will look for companies specifically in packaged software sector that invest hugely in R&D & sales & marketing in an effort to expand their business and clientele aggresively, even to an extend they choose to make losses YoY. The bottomline is they must have recurring revenue and able to generate rich operating cash flow YoY.

      In view of these changes, I sold off both Mapletree Commercial Trust (N2IU) and Tenaga (5347) and then bought in Opensys (0040), Silverlake Axis (5CP) and Minecast (MIME).

      With not-so-good warrant trading performance in the most recent three months, I decided to just simply hold HSI call warrant until it hits my profit taking level because I feel that stock market will simply recover in the next 2 months irregardless of current economic outlook. I will continue looking forward to increase the size of my growth stock in my portfolio to speed up the rate of return and be more adventurous on doing it.

Reflections on my investment journey in this current bear market

      Recently, many stock markets have went through a series of wild rides. In particular, I have witnessed US stock market triggered circuit breakers for 3 times within 2 weeks in early March 2020. Both COVID-19 global epidemic and the sudden downfall of oil price have surely sparked great fear which sends many stock indices downhill.

      When most of my growth stocks' previous gains got wiped out, I start to feel uncomfortable. After spending some time to think it through, below is the summary of what I did for this month.


1) Re-deployment of capital from growth stocks to Put Warrants
      I decided to sell off all my growth stocks due to two reasons.

      Firstly, it was because the falling share price has defeated the purpose of me to continue holding them. Surely, the share price of growth stocks with solid fundamentals will eventually recover and rise even higher, but I am not so confident if such recovery can be done fast. I can't afford to waste my time to wait for years just for the share price to recover back. I should have slowly take profit in tranches when the growth stocks went above 50% gain before this bear market strikes in.

      Secondly, I needed capital to increase my position in Put Warrants because at that time I felt that the COVID-19 outbreak is getting serious. On top of that, when the OPEC meeting in March 2020 ended in a not so good way, it sends crude oil price downhill sharply, causing massive and fearful selldown in stock market. This means I need to take advantage of that pessimism by adding in more Put Warrant position fast. Since my growth stocks' share price was beaten badly, I might as well redeploy my capital to buy more put warrants.

      I am glad that I made that decision earlier, because as the HSI index falls, my first batch of Put Warrant became profitable. Then I slowly redeployed the capital to buy second and the subsequent third batch of Put Warrants. Although the third batch of Put Warrants are not so profitable, at least I managed to earn more than 100% of these redeployed capital to cover all my previous losses and generate additional cash for reinvestment.
ir

2) Conviction to hold dividend stocks with solid fundamentals
      When the stock market was in crisis, I found many dividend stocks with good fundamentals somewhat become unusually attractive. So I sold off all growth stocks while continue holding good fundamental dividend stocks. Since I sold off all my Put Warrants to lock in profit not long ago, I have slowly bought in more good fundamental dividend stocks with unusually attractive dividend yield.


      This week is quite a confusing week to me because after the Fed announces unlimited Quantative Easing program, all STI, KLCI, HSI and US indices reported gains with full gap up today, despite both the COVID-19 global epidemic is still barely under control and the oil price is still in strong downtrend. I will need to see how these indices behave this week. If stock market overall starts to show optimism by the end of this week, I may need to initiate Call Warrant positions early next week. We shall see.

My first serious speculation on Hang Seng Index with SGX put warrant

      Finance industry is a special place where you can make money out of other people's misfortune and fear consistently. It is something that other industries cannot do on consistent basis. Am I unethical in taking profit from other people's misfortune? Yes, definitely. But I am not against any laws or regulations. In fact, I am just a small market participant and there are traders out there who are much smarter and richer than me making such profit as well. Also, for long term investors they have been waiting to buy high quality companies' shares at fallen prices and many China A shares and HKSE listed shares falled into that category. Isn't this being the same mindset of profiting from other people's misfortune as well?

      When the Wuhan virus news recently breakout in mid December, I had a sudden realization that I should take a serious approach to speculate the downward movement of Hang Seng Index to earn some money along the way and to hedge my portfolio. So I decided to start with SGX put warrants with HSI Futures as its underlying. Its time to strike while the iron is hot.

      Below are my further considerations before I decided to take a bet on downward movement of Hang Seng Index.

1) Bad news on sustained and prolonged basis
My view is that for Hang Seng index to fall downward for sustained period, there must be a main driving force that drives massive stock sell-off and it must last for a while. I believe that the driving force is the emotional fear within the hearts of most market participants because fear is a strong emotion that has been ingrained in our survivial genes since ancient times, be it the fear of loss or the fear of missing out. For that fear to sustain or spread further, a series of bad news is required.

Recently, scientists had confirmed that the Wuhan virus had 80% genetic makeup similarity as that of SARS and both viruses belonged to the same coronavirus family. I believe this information alone will incite certain degree of fear to general public in mainland China and Hong Kong because of SARS outbreak happened decades ago. To make the fear worst, there is currently no cure or vaccine available for the Wuhan virus.

In addition, when the Wuhan virus outbreak is gaining more attention worldwide it was about 1 week away from Chinese new year where huge human traffic flow is expected. I take the liberty to interpret this that the number of infected cases and death cases will only get worse during and after the Chinese new year. Some Chinese believed if the new year begins in a bad way, it is an omen of bad luck all the way till the end of the year. Indeed, the number of infected cases and death cases reported are consistently rising and Hong Kong recently announced emergency outbreak due to this.

2) Technical analysis - downward momentum

Since I intend to hold my put warrant position for days or longer, I used MACD indicator on Hang Seng index daily chart to confirm the index downward movement momentum. When the Wuhan virus news are getting more attention, the index falls from the recent peak. Subsequently, the MACD (12, 26) blue line crossed below the signal red line and the gap between those lines are widening, as indicated by the red histogram increasing downwards. From here, MACD seems to indicate strong sell signal and strong index downward movement momentum.

      However, speculation does comes with risks and so I entered speculative position with small capital. Below are some the risks I can think of.

1) Positive and quick vaccine development progress

Although there is no vacine currently available for Wuhan virus, scientists worldwide are collaborating to develop and test the prototype vaccine. In fact, scientists in Chinese mainland had successfully sequenced and mapped out the virus' entire genome sequence, thereby shortened the time to get the vacine ready to the mass public. 

2) Severity of the Wuhan virus

Althought the virus is spreading faster than SARS, the mortality rate is ~ 2-3%, much lower compared to SARS of ~ 10%. Also, as of now the total deaths reported are all came from mainland China and most of them are in their old age with health issues. A number of successful recovery cases have also been reported. As the custom securities and checks are further tightened in countries worldwide, there is a chance that the viral spread could be effectively contained.

      I entered put warrant position with HSI futures as underlying at SGD 0.066 on 22nd Dec 2019. It turns out the HSI index agreed with my speculation logic and at the time of this writing, my gain is about 160%. A whopping 160% paper gain in just 9 days is something I can't imagine. However, as warrants and HSI are both volatile, my gains could be wiped out if I am being too greedy. To prevent massive losses to my capital due to unforseen circumstances, I can only speculate with small capital. I will exit position if at least one of the following conditions are met:

1) Put warrant is near expiry

When the warrant is 1 week before expiry, there will be no trading allowed for that warrant. If HSI goes against me during that week, I will be screwed. So, I will liquidate my position if the expiry date is very near to the 1 week period prior to expiry.

2) MACD line crosses above signal line

If the MACD line crosses above the signal line, it means the HSI index upward movement momentum begins. No reason to hold my position when the index is expected to move upwards with strength.

      Let the force of the universe guide me along the way in my speculative journey.

***Latest Update***

      I liquidated my put warrant position at SGD 0.137 on 04 Feb 2020 even though the MACD line has yet to cross the signal line. This is because the green candle stick on that day was having a gap higher than previous day's candle stick. This indicated that the market participants had optimistic view on that day even though the Wuhan virus infection rate and death rate reported are still increasing. Also, currently I am having a full time job and when I saw my paper gain fall from 160% profit to about 100% profit in just 2 trading days, I was distracted while performing my day-to-day tasks. To ease my mind, I decided I need to pull the trigger to sell the warrant to lock in that 100% gain.

      Of course, no one can predict the future and in this case I was lucky my view was correct. 1 day later, the HSI started with another higher gap and had already breached the purple support line. In addition, the MACD histogram showed a decrease in downward movement momentum strength, indicated the existence of the upward movement momentum strength. Both happened when Wuhan virus infection rate and death rate reported are still increasing.