24.0 Trading Gangs

I was in my prepubescent age when I joined a neighborhood gang - five boys and one little pesky girl who could not be shaken off behind by her older brother. The little girl's name was "Diosa" and she was the gang's muse. Though her name belongs to the pantheon, she was our own version of Les Miserables' Cosette. And the boys? Well, we were then all the male version of Cosette, wearing hand-me-down tattered clothes with holes and patches in all the unintended places. But despite this, we were a merry bunch happily singing as we went about accomplishing our mischievous missions. 

Of the five boys, I was the only one who lived on the opposite street where all the other gang members lived. Our leader, the eldest among us, was an out-of-school youth who came from a family of blacksmith. He commanded respect, he being the eldest and therefore the naturally taller, more muscular, and wiser among us. He planned the "hit" and led in its execution. We had slingshots for weapons, our very own eyes for binoculars and our rugged feet for vehicles. The target was either the cornfields and fruit trees across the river or the innocent barrio lasses swimming in the river. Every adventure was exciting and testosterone-driven with a little element of danger. Our leader was smooth while I was a bumbling follower relegated to the task of carrying the loot or acting as lookout. He was a natural and I was not. But I was trying to fit in while attending classes and working on my after-school assignments. That was the 1970's. 

Back to the present, year 2012, I found myself being a member of a "trading gang" without really trying courtesy of an SEC commissioner who fancies herself becoming as the online spymaster of illegal trading activities. In her view, the trading gangs influence or at least try to "influence stock market prices and volumes by buying in unison . . . and the scary part is that some of their analyses are inaccurate which can hurt the issuers." (Reference: Business Mirror). I laughed on her first view that "trading gangs buy in unison" because it is partly true and I laughed even more I was almost in tears that "some of their analyses are inaccurate" because it is uber-true. Now here is the scarier part - anyone with this simple view can become a great spymaster. 

Let me break it down. Every stock trader, member of a trading gang or not, does wish to "influence" the stock market price in his/her favor. This is because every stock trader wants to earn and not lose money. Every stock trader also hopes to buy in unison with the other traders because who would like to buy a dead stock? At one point or another, two or more traders would exactly have the same buy and sell positions of a particular stock. These buy and sell positions would naturally grow in greater volumes depending on how bullish or bearish the market psychology is. It is also true that the so-called  trading gangs confer with each other on their chart analysis and if they do so concur, they will in all probability take positions of the same stock about the same time. Who would like to be left behind? But can they actually trade in unison as suggested by the commissioner? False. The trading gang is a loose organization whose members do not profess loyalty to a gang lord. Most of them do not even see or know each other and any assumption or attempt to buy in unison will crumble because each trader will be subjected to a "prisoners dilemma". 

The trading gangs have their own gurus, masters, and wannabes churning out technical analysis of this and that stock based on chart patterns, candlestick formations, indicators and oscillators, trendlines, among other stuff. I do this myself and the funny thing is that the observation of the SEC commissioner is right - the analyses are, in many, cases inaccurate. The stocks do not move exactly as we published them in the online forum or blog. But of course! The simple reason is that there are other factors not included or captured in the analysis which the good commissioner is better off focusing her sights on - insider trading, false rumors, fomenting the market, etc. - which the trading gangs do not have the advantage of information or the financial muscle and unity in executing such trades.  

I love my trading gang. It reminds me of the neighborhood gang of my childhood past long gone. Actually, it is a multiple of that and so much more. We have two muses, by my own making, whose names do not echo much like that of goddesses but who nonetheless stand among them in beauty and splendor. We fondly call our first muse as KB. She possesses such childlike charm and curiosity, who constantly nags every guru, master, and wannabee for tips and TPs (that is target price for the uninitiated). The second muse, we call her LT because she resembles that ageing star in her younger years - those eyes that can melt a thousand chocolate kisses. But she has been quiet of late. 

Our founder is Superman of Chinese descent and our membership is so diverse. We have chinoys, syanos, bisoys, shaq daytoys, mama sans and of course the OFWs eking out remittances that keep this economy afloat in troubled times and good. During trading, we merrily cheer our favorite stocks and boos known sharks. But when the market is boring, the conversation drifts to any topic other than the stock market and that is where I play the game most. Well, someone has to do the job of being the jester to keep the sanity in check of these trading addicts. This trading gang is just one of many. I am also a member of another trading gang. Hint, its initial is yummy for roasting. This other gang is going to have a Christmas Party soon and I will be going. Perhaps, the organizer may want to invite the good Commissioner so she will have a greater appreciation of how we keep the stock market alive.      

Truth to tell, we are not really a trading gang. We are just an online forum of small-time online traders who need each other's company. Online trading is lonely and this trading forum is helpful in so many ways. It makes you feel that you are not alone. If indeed we are a trading gang, I will stand proud to be part of it. 

23.0 Chasing Shadows

Once there was a dog which woke up early morning and stood outside his master's house to catch a glimpse of the first sunshine. It was not very much the sunshine itself that beckoned the dog to this daily ritual but the effect that it had on him as the sun cast the shadows of trees. The dog was mesmerized by the shadows  that it barked, jumped and ran circles around any shadow it fancied. But as the sun rose into mid-day, the shadows became shorter and shorter until they were all gone. Tired of all the chasing, the dog would retreat into his master's house to eat. Once re-energized, the dog was all ready for the afternoon show when the shadows reappeared on the opposite side. The dog ran outside the house and watched as the shadows slowly formed as small gray extensions that grew longer as the sun moved further west. Thinking that the shadows would continually grow, the dog was overcome with excitement that it barked, jumped and ran circles more than it did in the morning . But as soon as the night claimed the day, the shadows dissipated into the darkness. Disappointed, the dog retired into his master's house, his energy spent. As he lay down on the mat, the dog was thinking, "Tomorrow will be another day. The shadows will be there and I will be there too to give the chasing."

When I was new in stock trading, I traded like the dog in the story - I was chasing shadows. When I saw prices going up, I would be excited to buy these stocks even at higher prices thinking that these would continue to rise. Of course, they did rise some more making me froth with excitement at the prospect of hitting it big. I would jump off my seat and pump my fist while shouting, "Yes! Yes! Yes!". I was my own cheering squad possibly rivaling the UP Fighting Maroon PEP Squad in energy and spirit. Our helper and my mother-in-law must have thought that I had gone nuts and possibly may still be thinking the same until today.

Even when I saw a 5% or an 8% net gain already, I decided not to sell the stock. "Single digit gain is for beginners.", I would say to myself. What I wanted was double digit gain past 20%. But then all of a sudden the tables turned. The stock price suddenly went downhill catching me off-guard. I snickered at all those "tsupiteros" or day traders who secured their profits early as small-time profiteers. As the body of the green candle got smaller, I summoned all courage and hopes that it would go up again when all the "tsupiteros" had  their fill. But in many cases, it did not. The green candle not only grew smaller, it turned into a red candle that grew longer and longer in the afternoon as bearish mood set in. Many more jumped ship but not me. Like the dog in the story, I chased prices going down and rationalized it as cost averaging. Did this strategy work? Well, yeah it did in a few cases but it did hurt my portfolio in a lot of times more. 

There are two lessons that can be learned from this story. One is to never chase the price - either going up or down. Second is to secure profits early. These two lessons served me well very recently. On October 18, 2012, YEHEY debuted in the stock market by way of introduction and opened at 150% strong over its par value of P1.00 per share. Within 10 minutes, its stock price rose to a mind-boggling intraday high of P4.50 per share. It was a stock on steroids driven by the market in ecstasy. I held my guns silent that day never touching it from its holster already feeling uneasy at how it moved. Seconds later, YEHEY's stock price plummeted like the man who skydived from the edge of space and closed at only P2.70 per share. In the next three days, YEHEY stock went from one red candle to the next and closed at P2.25 at the end of trading on October 23, 2012 lower than its opening price on its maiden day. I could only gasped at how many traders were trapped but I survived because I did not chase the price that day.    

I also learned to become a "tsupitero" by taking profits early. I now understand where these guys are coming from. The old saying, "A bird in the hand is better than two in a bush." now sounds truer and more personal. Very recently, I bought and sold three stocks within a day - GREEN, BLOOM, and COAL that I feel I am becoming like a certified tsupitero. 

Today, like the dog in our story, I still wake up and excitedly wait for the market to open. The excitement is building up every passing minute and explodes as the market opens at exactly half past nine. The difference is that I no longer jump off my seat and pump my fist. I just cheer online with my newlyfound friends. And I wish to add, there is no more chasing shadows for me. And I hope you don't too.   

22.0 Killer Instinct

There is something about Assassin Movies that draw me over to watch them first before other movies. Albeit visceral, Assassin Movies provide me much needed adrenaline rush in the comfort and safety of a movie house sans broken limbs and bones. I love Assassin Movies whether this involves a stealthy ninja, a ruthless hired gun, a former government agent on the loose, or a femme fatale on vengeance path. Why am I talking about Assassin Movies in this post? Because assassins are good at what they do for a living as they possess something that is so lacking in my trading psychology; something that I have been wanting to acquire yet thus far only managed to get hold for a few seconds of trade only to lose it the next. That something is called "Killer Instinct". 

"Killer Instinct" is defined as "an aggressive and ruthless determination to win or attain a goal" (www.dictionary.com). While being aggressive and ruthless may be innate to assassins, the same may not always yield excellent results for stock traders and may even lead to devastating outcome instead. This is not the Killer Instinct that I have been wanting to develop for months now. What I am trying to develop is something better explained by a story (please indulge me at my attempt in writing a fictional assassin character as inspired by the many Assassin Movies I have seen). Here goes.

"He is a hired gun, the best in the business of taking down those who run opposed to the interest of his clients. Though he works with tipsters, forgers, hackers, and other underworld characters, he basically works alone. He does his job cleanly. No questions asked. And once the job is done, he disappears without a trace. Not a word  is heard nor a shadow of him is seen until the next assignment comes. That is why, his clients trust him. 


Every new assignment is treated like a first. He studies every detail of the subject, spending days and nights of stakeouts casing the subject's regular activities, acquaintances, as well as other routines and habits. He patiently waits and stealthily moves with the subject sometimes from a distance and occasionally just a few feet away like when he followed the subject to the comfort room for a pee. On these rare occasions, he does not stare at the subject but only gives him glancing looks like a wind that passes by but hardly noticed. Even during those times when he could have taken down the subject easily, he bided his time. He could have done so but the timing was not right; the exit plans were not yet made. For him, patience is a virtue. He knows judgment day has come only when he has the subject all figured out. He lays down the plan to the smallest detail - the time, the location, the exit plan, and cover up. He rehearses everything in his mind as if it is all too real. 

However, there were times that judgment day did not go as planned and had to be aborted. There was a time when his subject was already standing in front of the hotel exit door with his forehead already right at dead center of his sniper rifle's telescopic sight. But just seconds before he pulled the trigger, three cars screeched to a stop, doors swung open, burly men with pistols drawn stood out and took defensive positions, and the subject whisked off inside the middle sports utility vehicle and in seconds, he was gone. He could still have pulled the trigger and accomplished his task but it was all too risky. Once his position was exposed, a terrible shootout would have happened between him and the bodyguards resulting in several deaths, among them innocent bystanders and pedestrians. These were not part of the plan. That deadly scenario would have cost him his reputation if not his life. Hence, he kept his cool, aborted the operation, and calmly walked away. He, long ago, reconciled with the fact that some days do not always favor the assassin. But those times are few and rare. 

On countless times, the assassin does his assignment swiftly. Like today when judgment falls on his latest subject - a crossover showbiz politician on the verge of getting his party's nomination for presidency. His adorable personality disguises the inner devil who deftly machinates different social classes to achieve his ultimate ambition of someday becoming President. Unknown to many, he is the shadow protector of the largest land-grabbing syndicate in the country hiding behind his pro-poor, human rights charade. He pressures the very government he serves to pay the squatters as condition for them to move out of occupied lands while convincing landowners to sell these lands at bargain prices to the syndicate. Once done, the syndicate then sells these lands to the highest bidder among property developers. The showbiz politician then publicly donates to the largest religious charitable institutions and media foundations to further add to the masquerade. This made him hugely popular among the poor, his showbiz fans, the church, and media organizations. It is perfect crime. Until today.

The assassin was hired three months back to eliminate the showbiz politician by an anonymous client or clients. Three months of surveillance and he has him all figured out. His political party has recently endorsed him as their political candidate for the Presidency. He is set to deliver an acceptance speech in a national convention where movie fans, urban poor, the church, and the media are also in attendance. A week before the convention, the assassin already rented a room in the third floor of an apartelle that sits right across the open grandstand where the showbiz politician is to deliver his speech. In front of his room is a tree which serves as a perfect camouflage. The street is lined with bright streetlights which effectively reduces the spark that comes out of the barrel. Everything is set.

The time has come. The name of the showbiz politician is called and as he walks to the podium he raised his hands waving at the adoring crowd not knowing it is going to be an act of final surrender for him. The assassin hugs his M107.50 Caliber Long Range Sniper Rifle on the floor like a man for priesthood ordained. The assassin takes his aim and sees his target on sight up close in his telescope. As if acknowledging his presence, he sees the the showbiz politician turns towards his direction smiling. He then nods his head. With that symbolic approval of death, the assassin squeezes the trigger without a moment of hesitation. The silver bullet travels 853 miles per second hitting the target on its mark. There is pandemonium everywhere. The assassin stands and packs up his things.  It is another day at the office."

I am using the above story to describe four psychological traits of an assassin which I believe an independent stock trader must develop to succeed in the stock market. I believe you have figured it all out. Otherwise, you would end up at the other end of the assassin's gun for the stock market is full of it. Have the Killer Instinct or be killed. 

21.0 Stock Trading and Poker

I love Poker not because I am an addicted gambler but because Stock Trading and Poker are pretty much alike. Poker betting terms like "call", "check", "raise", and "fold" are equivalent to stock trading terms as "bid", "hold", "jockey", and "cut loss".  It is so alike that I practice my emotional control and derive some of my trading strategies through the lessons learned from playing it. But that is going ahead of the story.

Once a month, my six friends and I gather to play poker - probably the most intelligent and exciting card game ever invented. Two are lawyers who are partners in their own respective firms, one is a managing director of the shared services arm of the world's leading chocolatier, another is an extraordinary salesman of electric generators who counts the Manila Cathedral, the top 3 banks, and El Nido resorts as clients, the other works for the BIR, and the sixth is the wife of one of the lawyers who is completing her master's degree at the State University. And then there is me - banker, philanthropist, playboy (joke only), turned stock trader. One of these players is a certified poker master who has already won a championship game at a poker club somewhere in the Metro. But that is not me. I am referring to one of the lawyers.

While we are the best of friends, we are all merciless combatants at the poker table. While that may be the case, we all leave and call the night as better friends savouring yet another opportunity at enjoying each other's company and "cutting each other's throat" and, of course, the winnings that come with it. To the losers, there is always the hope of winning in the next encounter and that hope never fades despite the grieving protestations of our better and bitter halves.

One of the “benefits” I learned from playing poker is mind reading which is the ability to detect the strength or weakness of the players' hands through body language, verbal communication, eye movements, facial expressions, as well as betting patterns. In stock trading, it is like having that unique ability to read market sentiments from news about global and domestic economic affairs, corporate disclosures, chart patterns, volume traded, and price action, among others. It is a continuing lesson because serious poker players have the ability to maintain poker faces as well as confound you with bluffs. In the same manner that reading market sentiments can be made difficult when domestic and global events run in opposite directions, and when the market is inundated by rumours and gossips, false information, padded volumes, and price manipulations.

In poker, if you bet more often chances are that you are going to lose. Betting frequency does not determine more positive outcome. What determine positive outcome is the number of outs your hand has versus the number of outs the other guys have. The same can be said in stock trading in even greater magnitude. The more frequent you trade, the more you are going to lose. The reason I say "in even greater magnitude" is because in stock trading you are actually trading with not six or nine individuals, as in the case with Poker, but with thousands or even millions of traders across the world. If you have been watching World Poker Tour (WPT), the players normally do not bet so often even laying down cards that for me have good chances of winning. Now tell me, if this is not the case.

One of the questions often asked is when to buy stocks or raise a position in a particular stock? That is the same question you face in Poker, "When do you call or raise the bet?" In Poker, the answer is the number of outs as above-stated. In stock trading, you buy stocks or raise your position in a particular stock if you have a high probability trade. A high probability trade happens when all your selected indicators confirm each other and there is a positive disclosure about the company. This is regardless of whether the overall market sentiment is up or down. Of course, this is discounting bluffs in poker or hype and dump in trading or the opposite of it.

I learned a valuable lesson from our Poker Master when he said that if you want to win big in Poker knowing what you have is far lesser in importance than knowing what others have. That is very true indeed because you are not playing by yourself but against everybody else in the table. When I was still new in this game, I always committed this mistake of thinking only about my cards and disregarding what my opponents have. He said to me that studying betting behaviours and patterns as the cards are shown on the flop, turn and river will give you indication about what the others have. In stock trading, it will certainly pay dividends if you keenly watch the price action and volumes of bids and ask. If you notice buying or selling pressures always try to learn what is going on from corporate disclosures or from your brokers if you can.

I can go on and on but I will stop with this last lesson – “Learn to cut your losses”. When I was new in both Poker and Stock Trading, I played and traded with a stubborn determination not to fold or cut my losses even when it was already apparent that the tide was going against my favour. My pride in not admitting I was wrong had the better part of me. I kept telling myself that the right card would show up in the river or that the price trend would soon reverse. But it did not . . . until it was too late. Cutting losses is a bitter pill to shallow but this will save you a lot of trouble down the road. It is foolhardy to consider paper losses as just only on paper. Believe me, a paper loss is as real as it can get.

Now, here is a bonus lesson from the game of Poker, “Poker takes a day to learn but a lifetime to master.” Let those who have ears hear this, “Stock Trading takes a day to learn but a lifetime to master as well.” Do not be a fool to think you can beat the market all the time. The market is like the enigmatic Monalisa, “many men have fallen on her doorstep.” However, please do not let this dampen your appetite but let this serve as a guiding lesson to dampen your losses instead. Now, onwards my fellow stock traders and poker players to the greatest inventions ever created by man –Stock Trading and Poker.

  

20.0 Mind Games

If you want to be successful in the stock market, you have to be really good at mind games where 1) understanding and riding market sentiments correctly and 2) having the ability to make tough and decisive actions account for probably more than half of your success or failure. The other half or lesser percentage is accounted for by your technical skills, be it in fundamental analysis or chart reading. A small percentage is given to luck. After more than a year of active trading, I arrived at this surprising conclusion. Surprising because market sentiment and trader psychology were not given prominence as topics of interest in the certification program I enrolled in (See Blog Post No. 8, "Back to School") more than a year ago. While this may have come a bit belated, it still is never too late to be useful for me in  my next trades and for any neophyte trader who cares to profit and prosper in this profession. 

 

In my previous trades, I basically relied on technical analysis in screening stocks. I tried coming out with different stock selection methodology for uptrends, downtrends, sideways, reversals and pullbacks but the result is always inconsistent (See Blog Post No. 18, "Staying Alive") . Sometimes I won and sometimes I lost and lost badly I did in not a few occasions. So what gives?

My misplaced belief that technical analysis is the only tool to having winning trades is what gives. I totally disregarded general and specific market sentiments here and abroad and doggedly bought stocks that my stock selection methodology screened out for me even when the market was down. When the market is bullish my stock selection methodology is validated and I have a winning trade. But when the market is bearish I end up having a bad trade and am left  questioning my methodology.

Realizing this, do I now throw technical analysis out of the window? The answer is no. My technical analysis is not wrong but market sentiment tells me that the timing is off. This is the one missing ingredient all these months. If I have to make an analogy, it is like figuring out correctly that the girl you were eyeing on also had hots for you but  things fell apart because you asked her out at the time she had dysmenorrhea.  Not being able to understand market sentiment will make you lose money and disregarding it totally will make you lose your head. Wrong timing, even when the analysis is right, equals bad trade.

Now, how do bad trade become worse? The answer is bad trader psychology. Because I was not prepared to accept trading mistakes, I stubbornly held on to these stocks even when they continued to go down. Cutting losses was not in my vocabulary arguing these were just paper losses.  I simply watched my portfolio as they lost market value instead of taking decisive action to stop the bleeding. I always told myself things will be better but every passing day it did not. Those days were filled with great anxiety and it certainly hurt my pride.  

But why did I not do anything at all? That is because in my mind there is a little angel and a cute little devil playing games. The little angel is telling me to cut losses and move on but the cute little devil is telling me to hold on and just enjoy the pain. As was the case, the cute little devil almost always won. But this is no longer now; I learned my lesson well. I say not anymore, never. 

19.0 The Third Wheel

If business, as they say, is war then rightly so the stock market is its daily battlefield where the bulls, the bears, and the bullshits meet. I have been in this market for more than a year now to recognize that apart from the bulls and the bears who are continually locked in battle, there is a third wheel that influences and manipulates market sentiment and trader psychology for its own devious purposes. This third wheel, who I call with a less than flattering name as the "bullshits", ultimately wants to control price. 

Like the TV Program bearing the same title, the third wheel is a seductive master or, to make it more gender neutral, a master seducer who plays her/his part very well. He/she can be beguiling and enthralling one time, and a doomsayer and scare monger the next whenever it suits his/her self-serving designs. Regardless of the direction he/she wants the market to take, expect it to be a rough and deadly ride at the end for that is when the third wheel dumps the bull's shit on the unsuspecting. Hence, the name. 

I came to sense the existence of the Third Wheel a year ago when a shell company was rumored to be bought out by another who was planning to go into the gaming industry. When the Exchange inquired into it, both parties flatly denied such rumors. But even with such denials the rumor continued, fanned mostly by people who knew better than the rest. The result? A mind boggling increase in the stock price by 1,887% in less than a month's time. But as soon as other traders jumped into the fray hoping to catch windfall gains as price pierced through the roof, boom! the third wheel dropped the bomb and the price to this day is back near the level to where it started. The ploy worked - the bulls became greedier going up and the bears scurried in fear going down like puppet toys being masterminded by its bullshit master.  


This scenario would be repeated several times over and just did so very recently. An agri-based company had a very successful IPO at P7.50 per share. In only nine days of trading, its closing price jumped more than three times from P7.70 to P23.95 and there were speculations it could hit in the vicinity of  P50.00 in a few more days. Having had my lessons learned last year, alarm bells were ringing in my ears. Although I was tempted to join in the fray, I held my guns silent. Everywhere else, it created a lot of excitement and adrenaline rush at a time when global and domestic sentiments were down and sorrowful. It was like the only stock being traded that defied all the odds; the only man left standing in a street littered with blood. 


I monitored its trading every day and noticed a wide disparity between the volumes of the bid and ask prices - bids were thick in millions while asks were thinly spread in hundreds and tens. Somebody was jockeying it up - a term I learned only recently when I joined in an online social network of this profession. The bullshit jockey did his/her job quite well in padding a false demand. But then history repeats itself and cold blooded murder took place on the two days that followed as the price of the stock nosedived by 59.0%. Again, there is blood in the streets. You could only guess who benefited from it the most and who scratched their heads in clueless frustration.

I am writing about the Third Wheel to caution my fellow traders who, like me, are new in this stock trading business to tread very carefully and not to fall into the trap. There are dark shadows everywhere and their motives ill. A Third Wheel is easily spotted to be in the works when the stock price suddenly moves sharply without any accompanying disclosure to support such trading behavior. How else could that be explained when the IPO price has supposedly discounted the company's foreseeable future cashflows? Novice as we are, we know for a fact that perhaps somebody got ahead of information we are not privileged to obtain as is always the case. 


How must we then better respond to these machinations? We only have two options  - to stay clear of trouble by playing possum (not participate) or beat the Third Wheel in its own game by always getting ahead of him in the curve (contain your greed and jump ship before he unloads that filthy dung). I was actually happy for those independent traders who did earn money when that particular stock went up but mourn for those who fell wasted. Well, there is always something to be learned at every turn and we can only hope not to become willing victims again.   


To the Bullshits, not a single glass would I raise. We will someday beat you in your own game as others have already done. To the Bulls and the Bears who trade honestly in this market, I stand in ovation as we perpetually dance to the excitement and buzz of this trade. We are the true wheels of this market and not the Third Wheel.


   

18.0 Staying Alive

As I am writing this, the temperature outside the house has already gone past 36 degrees centigrade for the past several days. It is indeed hot, really hot, that my six-month old daughter does not anymore wear the usual sweater and pajama clothing even though the airconditioning is running at 19 degrees. Before summer took over, the airconditioning inside the room normally ran between 21 - 22 degrees and my daughter would be soundly sleeping, fully clothed from head to toe. This is no longer the case and staying alive in this oppressive summer heat is already a concern as I suffer from headaches and colds from sheer heat exhaustion. 

There is one other thing that is giving me headaches these days - the stock market. Ever since that fateful day of August 5, 2011 when world stock markets crashed (see previous blog "The Year of Trading Dangerously"), my trading objective has been reduced to staying alive. This means not losing more than 15% of my investment capital in these turbulent times. My original objective of earning 60% ROI annually has to take a backseat. I have to pull myself back on the ground given the reality of the world that we are living in today no longer operates in the same parameters as before. 

In order to stay alive, I started carefully analysing chart patterns and technical indicators on when stock prices move up and down and when trends reverse.  When I started applying my so-called stock-selection methodology, I soon found out that the new methodology does not produce consistent results. I was beginning to question the usefulness of technical analysis and at the same time I was beginning to doubt my technical skills as losing trades piled up one after another.      


In the month of September 2011, my accumulated losses racked up to a high of 11.4% of capital before settling down to 9.2% . In October, this went up to as high as 13.7% before going down to 7.7%. Then I started recovering my losses slowly in November going from 6.1% to 4.8%. But in December, I made trading mistakes as the market went sideways and my losses went up again from 5.3% at the beginning of the month to 9.0% at the end of month. It was frustrating to see my portfolio being sucked back into the mud. My mood was not celebratory in the season of hope. But hope did come in January 2012. With the announcement by the government to fasttrack several Public-Private Partnership Projects (PPP), the PSEi went wild up. I was ecstatic as I cut my losses from a high of 9.7% at the beginning of the month to only 1.8% at the end of the month. Then on February 8, 2012, my portfolio turned in a 0.06% profit for the first time since I started stock trading full time as a profession. It was a career-best high to date - paltry yet symbolic.

Turning my losses around and earning a profit for the first time gave me a false sense of invincibility. I aggressively bought three speculative stocks - CPG, CLOUD, and AAI in February. Then disaster struck as the prices of the three stocks nosedived. Believing that the dip was only temporary, I stubbornly held on to these securities even as they all lost value every single day thereafter. It hurt my pride and I was tossed in confusion. When I finally decided to sell them off, my losses were 7.14%, 16.93%, and 40.33% for CPG, CLOUD, and AAI respectively bringing back my losses to as high as 10.51% in March before cutting it down to 8.9%. For a moment I lost all confidence in trading  that I did not trade for days. It was the same feeling as being involved in a car collision for the first time.


Then April came making summer really hot for all to care. But as hot as the summer is, so is the stock market which began breaking the ceiling again. Hope turned into ecstasy as 9 out 12 stocks turned green cutting losses from a high of 9.31% to a low of 4.29%. Thinking that the stock market would continue breaking higher grounds I decided not to realize any profits and allowed my stocks to continue running. But the market sharks sensed blood and made a killing turning my portfolio to lose value again. As the market closed today, April 30, 2012, my portfolio loss stands at 6.7%. 

It has been almost eight months now since August 2011 and my portfolio has yet to rise above the zero line. Even if it has yet to achieve that, I am grateful that I was able to steer clear from real trouble. I have heard of investment funds worth billions running dry in the US and if that is any benchmark then I possibly have to congratulate myself for staying alive. The lessons learned from losing and not losing enough to be out of this market are more valuable than what I have learned in school, from the books, or websites combined. And for this, I can say that I have already won half the battle. As one of the great optimists around, I have to say this, "You ain't seen nothing yet. I have stayed alive all these chaotic months and I will start kicking soon."

17.0 The Pacman versus the Taxman: Rethinking Taxation

One headline-grabbing but otherwise alarming piece of news courtesy of the Taxman is the recent arraignment of the Pacman for contempt due to his failure to submit tax documents relating to his assets and income. Headline-grabbing because Pacman is a national treasure and one of the biggest individual taxpayers of this country and alarming because what they have done to the Pacman they can very well do unto you and me for as long as you and me are earning money.

The tax suit can only be fittingly described as scandalous and unconscionable, one that qualifies only as being more immoral than the crime it purports to foil. With the Taxman's desperate creativity, it can surely find legal basis for its action but that legal basis stands on loose moral grounds. Here is why.

The Pacman was born in this country dirt poor to parents struggling to survive every hungry day. Despite all the hardships, he boxed his way out of poverty and getting all the physical punishments in return while doing odd jobs in between that formed the early foundations of the Pacman's legendary status. With Divine Providence or not, Pacman fought to survive and survive he did plus a lot more than anybody in this country had ever done before. When he was poor and struggling, not a shadow of government support was ever extended to him because he was then an insignificant nobody, unworthy of any attention that the government and his Taxman now so lavishly but unduly giving him these days. But now, the Taxman suddenly sounds like a long lost relative who salivates after the Pacman's riches.

Pacman's story echoes on the multitude of individuals in this country who managed to survive and became successful despite the absence of government assistance or lack thereof when it was most needed. The same is true with start-up businesses that do not enjoy any government-sponsored perks and privileges such as those in ecozones but were otherwise taken advantage of and made doing business difficult by government factotums down to the Barangay level. But when they become big and successful, expect the Taxman to bully them for the government's much "undeserved" share of the income pie.

The point dear Brutus is that government does not have any moral basis to grab part of your hard-earned income and claim it as its own. Income taxes (and VAT) are despicably loathsome form of government extortion and must be disemboweled from its system of raising revenues.

It is fairly understandable to worry about how government would be able to continue financing and sustaining its various economic and social agenda if income taxes and VAT were abolished. With income taxes and VAT accounting for about 30% to 40% of government revenue, the loss from the abolition of income taxes and VAT will certainly render government ineffective if not irrelevant. Of course, this is not the objective. The objective is to make taxation equitable and voluntary. Is this possible? Let us rethink taxation.

In lieu of income taxes and VAT, the government must levy only Final Production Taxes and Final Consumption Taxes. Final Production Tax means that those manufacturers producing intermediate outputs shall not be levied a tax and only manufacturers that produce the final output that are not further processed, transformed, or converted into another output shall be taxed whether such final output is used for industrial, commercial, or personal consumption. The rationale for this is that if we look at one assembly line composed of different processes that is owned by the same entity, only the final output is taxed. Now, if these different processes are owned by different entities the same principle must be applied for these different entities though operating separately are actually part of one assembly line. As for the Final Consumption Tax this means that you will not be paying a tax for something that you will be using to further process, transform, or convert into goods. Only those that will be consumed without further processing shall be taxed.

Now how will these compensate for the loss in income taxes and VAT? And how will this be equitable and voluntary? The second question is easy. It is equitable and voluntary because you simply produce and consume those goods and services that you are willing and capable of paying for. If you do not want to pay the tax, you simply do otherwise. Easy right? Not only that. The bonus is that this will result to the efficient allocation of resources  as households and individuals shall have better control of their income as well as their future.

The second question is difficult but certainly doable. Firstly, we have to determine an input-output matrix and then determine which of these final output shall be levied higher tax rates. The same with Final Consumption Tax. We have to determine which of the final goods and services shall be levied higher tax rates. Theoretically, if the demand for and supply of final goods and services are not sensitive to higher prices, then these goods and services shall be levied higher consumption and production tax rates. Then there is the multiplier effect arising from higher personal disposable income as well as lower production cost coming into the picture (see previous blogpost). If we do the math right, we shall be having a better economy and well-being in this country as well as a stock market that will be soaring higher than ever. But of course, first thing first. The government and its people have to have the political will to make this happen.

16.0 The Velocity Solution

When the economy stalls, political leaders and policymakers normally resort to either more government spending or interest rate reduction to jumpstart the economy. These are tired and testy policy instruments used over the centuries. I have previously argued that government spending is a false cure and I wish to add that interest rate reduction is only a welcome development to those who have access to credit and favors only the rich and the middle class but not the multitude of people who are stuck in the mud. Are we left with no other choice? Actually, there is. But this is something people in the government will oppose to vigorously and for good reason. I call this the Velocity Solution.

To those introduced to basic Macroeconomics, Nominal Income (NI or GDP) is a product of the total amount of money in circulation and the velocity of money for all transactions. Simply put, how much money we all have and how fast it changes hands determine total income. Both, of course, are affected by taxes such as income tax and value-added tax. Personal income tax reduces personal disposable income and corporate income tax reduces retained earnings that would have been available for reinvestment. Value-added tax (VAT), on the other hand, increases the price of the final output in an alarming rate as various inputs that add value to produce the final output is being levied a tax. VAT is the most onerous evil ever created that adds burden to the cost of production every step of the way before food, clothing, and shelter are avaible to be eaten, worn, and lived in, respectively.

Now consider this, if income and value-added taxes were abolished, working people would have more money to buy goods and services at cheaper prices; businesses would be encouraged to reinvest more since they would have more retained earnings, the cost of inputs to production cheaper and the market wealthier. This creates more employment which in turn increases the number of people with more money. This will multiply GNP a hundred times more than what the government spending has advertised to achieve.

If the government is indeed sincere in jumpstarting the economy all it must do is to abolish all forms of income taxes and VAT. This will have an immediate and widespread effect. Private Consumption and Investment will go up in leaps and bounds and without possibly any accompanying inflation. Surely, Government Consumption will be reduced but who cares Care Bears? The greater multiplier effect of private consumption and investment will more than compensate for whatever loss there will be in government expenditure.

The problem with government spending is that it is non-inclusive, the trickle-down effect is painstakingly slow and without need for overemphasis, it is historically pockmarked with corruption as many and as frequent as the potholes on the roads and bridges that the government builds. In contrast, the abolition of all income taxes and VAT is all inclusive, has immediate effect, trickles down, up, and sideways, and it will eliminate at least that part of corruption in the collection of income taxes and VAT.


I understand, however, that this proposal will meet vigorous opposition from the government and its taxman because for one abolishing income taxes and VAT will greatly reduce the amount available for corruption and the power that comes from having a lot of money without really working hard for it.


P.S. If you agree on abolition of income taxes and VAT, please feel free to share this around until the sound is so loud it will reverberate in the ears of our politicians and policymakers and wake them up in their sleep that they can do nothing to resist its eventual demise.