Silicon Valley Bank

Chart 1: Silicon Valley Bank chart (created using trading view)

Recently, the failure of Silicon Valley Bank (SVB) made headlines, with 209 billion in assets. However, this is still relative smaller (especially after factoring inflation over the years) compared to Washington Mutual's collapse in 2008 with 434 billion in assets. SVB's specialization in tech and start-up sectors made it less diversified than other banks, leading to its inability to cope with higher-than-expected interest rates, which resulted in a need to raise 2.25 billion to improve its balance sheet. This led to a downward spiral, and start-up clients withdrew deposits, causing a bank run with 42 billion in withdrawals. To prevent a systemic panic, the Federal Reserve (Fed) devised a plan to backstop depositors, creating a new Bank Term Funding Program. The market reacted positively, with strong rallies in the Dow Jones and cryptocurrency prices.

It's important to note that Singapore banks, like DBS, UOB, and OCBC, have diversified lending to real estate, business, agriculture, and construction etc, making it unlikely for the contagion effect from SVB's collapse to spread to Singapore, for now. The Fed's plan has prevented other institutions from collapsing, leading to positive market reactions. However, future interest rate hikes and inflation rates must be considered to prevent systemic panic. Robust measures must be in place, and it's vital to monitor market data and inflation rates.

A Glance at US Indices

 A glance at US indices as of 9th Mar 2023 

Chart 1 : DJIA 

Chart 2 : QQQ Nasdaq

Chart 3 : SPY (S&P500)

* chart created using trading view

The Road Less Traveled: Navigating the World of Microcap Investing

Microcap stocks, generally taken as companies with a market capitalization of $50 million to $300 million, can provide significant investment opportunities for those willing to do their research. In this blog post, we'll explore an investment philosophy centered around identifying high-growth, small-cap companies with strong business models, experienced management teams, and significant growth potential.

The investment approach emphasizes focusing on the company, not the stock price. Strong fundamentals are more important than the current stock price. It also emphasizes finding companies with a sustainable competitive advantage, such as a strong brand, unique technology, or high switching costs. Additionally, investors should look for companies that have the potential to grow significantly due to their ability to target a large and growing market.

Investing in experienced management teams is critical to the success of a microcap company. A long-term view is recommended since microcap stocks can be volatile.

Microcap investing can offer several advantages for investors, including potential for high returns, diversification benefits, less competition, and more information available.

However, investors should also be aware of the potential risks and pitfalls of microcap investing, including high risk, lack of liquidity, limited analyst coverage, and higher volatility associated with these stocks. As with any investment, it's important to do your research and be prepared for potential risks.

How would Jesse Livermore trade in 2023

Jesse Livermore was a famous trader who lived in the early 20th century and made a fortune in the stock market. While it is impossible to know for certain how he would trade in 2023 if he were alive, we can make some educated guesses based on his trading principles and the current market conditions.

* Follow the trend: Jesse Livermore believed that the trend is your friend and that it is essential to follow it. He would likely look for stocks or assets that are trending upward and trade with the trend.

* Stay disciplined: Livermore was known for his discipline and adherence to his trading plan. He would likely set strict rules for entry and exit points and stick to them regardless of emotions or external factors.

* Focus on risk management: Livermore understood the importance of risk management and would likely prioritize it in his trading strategy. He would likely use stop-loss orders to limit his losses and avoid overexposure to any one asset.

* Keep an eye on market sentiment: Livermore was a master at reading market sentiment and would likely pay close attention to it in 2023. He would look for signs of market euphoria or panic and adjust his trading strategy accordingly.

* Utilize technology: Livermore was a pioneer in using technology to improve his trading, and he would likely embrace the latest tools and platforms available in 2023. He may use machine learning and artificial intelligence algorithms to identify trading opportunities and make more informed decisions.

In summary, if Jesse Livermore were alive in 2023, he would likely continue to follow his timeless trading principles of trend following, discipline, risk management, market sentiment analysis, and technology utilization.

US Market Sentiment - Week of 27th Feb 2023

 

chart created using trading view

source: cnn business

source: cnn business

The Art of Averaging Up

Investing in the stock market can be an excellent way to grow your wealth over time, but it comes with a certain level of risk. One of the strategies that investors use to mitigate that risk and maximize their returns is called "averaging up", when applied correctly, with experience. In this article, we will explain what averaging up is, how it works, and its advantages and disadvantages.

What is Averaging Up?

Averaging up is a trading strategy in which an investor buys additional shares of a stock they already own, but at a higher price. This is done when the investor believes the stock's price will continue to rise. The idea is that if you already own a stock that is performing well, then buying more of it at a higher price will increase your overall return when you eventually sell it.

Averaging Up vs. Averaging Down

Averaging up is the opposite of averaging down, which involves buying more shares as a stock falls in price. The idea behind averaging down is that if you buy more shares at a lower price, then your average cost per share will decrease, making it easier to eventually turn a profit. However, it's worth noting that averaging down can be riskier than averaging up because there's no guarantee that the stock will eventually recover.

Advantages of Averaging Up

One of the biggest advantages of averaging up is that it allows investors to capitalize on an already successful investment which imply that the view or investment thesis is correct. If you've already made money on a company's stock and believe that it will continue to perform well, then buying more shares at a higher price can be a smart move. It can also help to reduce the overall risk of your portfolio by focusing your investments in companies that are already performing well.

Disadvantages of Averaging Up

While averaging up can be a smart strategy, there are some risks and downsides to consider. One of the biggest risks is that the stock may not continue to rise as you expect, especially when one is not watchful. If the stock's price starts to fall after you've made your additional purchase, then you could end up losing money if your eyes is not on the ball.

Another potential disadvantage of averaging up is that it can increase the concentration risk in your portfolio. If you invest too heavily in one company, then you're more vulnerable to any negative news or events that could impact that company's stock price.

Finally, averaging up can be psychologically challenging for some investors. Buying more shares at a higher price can feel counterintuitive, especially if you're used to buying low and selling high. However, it's important to remember that investing is all about the long-term perspective, and that short-term fluctuations in price are just part of the game.

Conclusion

Averaging up is a trading strategy that can help investors maximize their returns and reduce the overall risk of their portfolio. By buying additional shares of a stock at a higher price, investors can capitalize on already successful investments and potentially increase their overall return. However, there are some risks and downsides to consider, and it's important to weigh the potential benefits and drawbacks before implementing this strategy in your portfolio. It's important to conduct thorough research on the stocks you're considering, and to have a clear understanding of the market conditions and trends that could affect their price in the future.

Ultimately, there is no one-size-fits-all approach to investing, and what works for one investor may not work for another. Averaging up can be a useful strategy in certain circumstances, but it's not without its risks. 

note:  As with any investment strategy, it's important to be aware of your own risk tolerance, investment goals, and overall financial situation before making any decisions.

The Wyckoff Method

The Wyckoff method, also known as the Wyckoff trading method, is a technical analysis approach that aims to identify trends and anticipate potential price movements in financial markets, particularly in stocks and commodities. The method is based on the work of Richard Wyckoff, a prominent trader and market analyst in the early 20th century.

The Wyckoff method is grounded on the principle that the market is driven by supply and demand, and that the behavior of market participants, as reflected in price and volume data, can reveal their underlying intentions and sentiment. Therefore, by analyzing the patterns and signals in price and volume charts, traders can gain insights into the market's dynamics and make informed decisions about buying, selling, or holding positions.

image source: wikipedia

The Wyckoff method involves several key concepts and techniques, including:

* Accumulation and distribution: Wyckoff believed that markets move in cycles of accumulation (when smart money buys assets at a discount) and distribution (when they sell at a profit). By identifying these phases and their characteristics, traders can anticipate reversals and trends.

* Price and volume analysis: Wyckoff emphasized the importance of analyzing the relationship between price and volume, as they reflect the actions of buyers and sellers. For example, high volume and low price fluctuations may indicate selling pressure, while low volume and high price fluctuations may signal buying interest.

* Chart reading and analysis: The Wyckoff method relies on the interpretation of chart patterns and signals, such as trendlines, support and resistance levels, price bars, and indicators. These tools help traders identify key levels and trends, as well as potential entry and exit points.

* Stop-loss and risk management: The Wyckoff method stresses the importance of risk management and minimizing losses. Traders are advised to use stop-loss orders and to adjust their positions based on market conditions and developments.

Overall, the Wyckoff method offers a systematic and disciplined approach to trading, which can enhance the accuracy and consistency of decision-making. However, it requires knowledge, skill, and experience to apply effectively, and may not guarantee success in all market conditions.

The Black Swan

In an earlier posts, "First Thing First: Risk Taking in Financial Markets - A Balancing Act", I shared Nassim Taleb's perspectives on taking of risk, here am pleased to talk about his famous work "Black Swan" 

The term "Black Swan" was popularized by Nassim Nicholas Taleb in his 2007 book titled "The Black Swan: The Impact of the Highly Improbable". Taleb's work introduced the idea that black swan events are unpredictable and rare events with catastrophic consequences.

The term "Black Swan" has its roots in a long-standing belief that all swans are white. In ancient times, it was commonly believed that the color white represented purity and perfection, and thus, all swans were assumed to be white. However, in 1697, Dutch explorers discovered black swans in Australia, shattering the long-standing belief that all swans were white.

Taleb used the metaphor of the black swan to illustrate the idea of a highly improbable event with a massive impact. According to Taleb, black swan events are rare, unpredictable, and have a significant impact on individuals, societies, and economies. These events are often ignored or downplayed by experts and decision-makers because they fall outside the realm of normal expectations and are difficult to predict.

Taleb's work suggests that traditional methods of risk management are insufficient in dealing with black swan events. He argues that instead of trying to predict or prevent such events, individuals and organizations should focus on building resilience and antifragility. By doing so, they can be better prepared to deal with the unexpected and to thrive in the face of uncertainty.

Since the publication of Taleb's book, the term "Black Swan" has become a widely used metaphor in many fields, including finance, economics, politics, and technology. The idea of a black swan event has become synonymous with the concept of an unpredictable and rare event that has a significant impact on individuals and societies.

In conclusion, Nassim Taleb's work introduced the term "Black Swan" as a metaphor for a highly improbable event with a massive impact. The term has become widely used in many fields and has prompted a rethinking of traditional methods of risk management. By embracing the concept of antifragility, individuals and organizations can become better prepared to deal with the unexpected and to thrive in the face of uncertainty.

Deep Value Investing - Michael Burry (Scion Capital)

Michael Burry, a well-known investor and founder of Scion Asset Management, became a household name after his successful bet against the US housing market prior to the 2008 financial crisis. He was portrayed by Christian Bale in the movie "The Big Short," which chronicled his story and those of other investors who foresaw the impending subprime mortgage crisis.

Burry's investment philosophy is rooted in the principles of value investing. He believes in finding undervalued companies that the market has overlooked or mispriced. He looks for companies with strong fundamentals and potential for long-term growth. Burry is known to conduct extensive research, including poring over financial statements, analyzing industry trends, and keeping an eye on macroeconomic factors that could impact a company's future prospects.

One of Burry's most famous investment strategies is the "deep value" approach, which involves investing in companies that are significantly undervalued. These companies often have negative market sentiment, low price-to-earnings ratios, and are ignored by institutional investors. Burry looks for companies with strong balance sheets, low debt, and positive cash flow. He also prefers companies with strong competitive advantages, such as high barriers to entry, unique intellectual property, or strong brand recognition.

Another key tenet of Burry's investment philosophy is a focus on risk management. He believes in taking calculated risks, but also in minimizing downside risk. Burry is known for his aversion to leverage and his insistence on a margin of safety in all of his investments. He is willing to hold cash or take short positions when he believes that the market is overvalued or that a particular industry or company is headed for trouble.

Burry's investment philosophy has been highly successful over the years, and he has been consistently recognized as one of the top investors in the world. His ability to spot undervalued companies and his willingness to take contrarian positions have helped him achieve outstanding returns for his investors.

In summary, Michael Burry's investment philosophy is rooted in value investing, with a focus on finding undervalued companies with strong fundamentals and potential for long-term growth. He is known for his deep value approach, risk management, and willingness to take contrarian positions. These principles have helped him achieve success as an investor, and they continue to guide his investment decisions today.

Buffet Shift Focus To Apple in Tech Portfolio

In January 2023, Warren Buffett's Berkshire Hathaway sold a significant portion of its stake in Taiwan Semiconductor Manufacturing Co. (TSMC), which is one of Apple's most important suppliers for chips used in its products. 

This move by Buffett was viewed as a shift in his investment strategy, as he has been a longtime investor in TSMC and has previously praised the company's leadership and innovation. While the exact reasons for the sell-off are not clear, it is believed that Apple's decision to invest heavily in its own chip-making capabilities, as well as concerns over the global chip shortage and rising chip prices, may have played a role in the decision. Apple's recent move to produce its own 5G modem chips in-house starting in 2023 may have also contributed to the decision. 

This move by Buffett also reflects the dynamic nature of the tech industry and the constant evolution of supply chains and partnerships, as companies like Apple seek to reduce their reliance on outside suppliers and take more control over key components. Overall, Buffett's sell-off of TSMC shares serves as a reminder of the importance of constantly reassessing investment strategies and staying aware of market trends and disruptions.

The Importance of Mindset / Psychology in Investment and Trading

 A Review of the Book / Work by Mark Douglas

Early in my investing and trading journey, I was fortunate to come to learn, along with proper risk management, one of the most important thing is actually a trader's pyschology and mindset, unbeknown to him - has a huge influence on the outcome of his trading overall outcome.

"Trading in the Zone" by Mark Douglas is a book that focuses on the psychology of trading and how to develop the right mindset to succeed in the market. It aims to help traders master the market with confidence, discipline, and a winning attitude.

Douglas emphasizes that a winning mindset is the factor that distinguishes successful traders from others. He explains that fear-based thinking is a common problem among traders and that traders need to overcome this ingrained mental habit that costs them money. By looking beyond random outcomes, understanding the true realities of risk, and being comfortable with the probabilities of market movement that govern all market speculation, traders can be successful in the long run.

According to Douglas, a great trader is comparable to a world-class athlete. Both have honed their skills, reflexes, instincts, and wills to a fine edge, and both have reached the point where a winning performance is an automatic, utterly unconscious process - that's when they are operating in the zone. The book explores how traders can achieve this state of mind.

"Trading in the Zone" also discusses the differences between fundamental and technical analysis and explains how fundamental analysis was the dominant trading strategy in the late 1970s. The book debunks the myths of the market one by one, teaching traders to look beyond these myths and focus on the realities of the market.

The book, first published in Apr 2000, has been well-received in the trading community and is considered a classic in trading psychology. It is recommended for anyone who is interested in developing a successful trading mindset.

Overall, "Trading in the Zone" by Mark Douglas is a comprehensive guide to the psychological aspect of trading. It teaches traders how to develop the right mindset and overcome the mental barriers that often hold them back. By doing so, traders can achieve a winning attitude, master the market with confidence and discipline, and ultimately become successful traders. 

First Thing First: Risk Taking in Financial Markets - A Balancing Act

When it comes to investing in financial instruments and assets, the concept of risk is always at the forefront of our minds. Whether it's stocks, bonds, real estate, or other investments, we're constantly trying to balance the potential for reward against the possibility of loss. But what is the general consensus on how to approach risk in the financial markets? 

The Traditional View on Risk Management

Traditionally, the investment community has taken a risk management approach to investing. This involves using a variety of tools and techniques to minimize the potential for loss and maximize returns. For example, portfolio diversification, which involves spreading investments across a variety of asset classes and industries, is a common way to reduce risk. Similarly, investment managers will often use financial derivatives, such as options and futures, to hedge against potential losses.

While these risk management techniques can be effective, they are not without their limitations. For one thing, it's impossible to eliminate risk entirely. No matter how well-diversified your portfolio is, or how many derivatives you use to hedge against losses, there's always the possibility of something unexpected happening. Moreover, the very act of trying to minimize risk can have unintended consequences. For example, a portfolio that is heavily diversified across many different asset classes may miss out on the returns of a hot market.

Embracing Risk: Nassim Taleb's Perspective

Nassim Taleb, a well-known philosopher, statistician, and economist, takes a different approach to risk in the financial markets. Rather than trying to minimize risk, Taleb argues that we should embrace it and try to understand it. In his book, "The Black Swan," Taleb argues that traditional models of risk management are based on the false assumption that the future will be like the past, and that they fail to take into account the impact of rare and unpredictable events.

Taleb's perspective on risk is that it is an essential part of life and that we should embrace it instead of trying to avoid it. He argues that taking calculated risks is necessary for growth and progress, both at an individual and societal level. According to Taleb, avoiding risk entirely is impossible, and even low-risk strategies can have disastrous consequences if they are not properly understood.

Balancing Risk and Reward

So where does this leave us when it comes to investing in the financial markets? The truth is, there's no one-size-fits-all answer. Each individual has their own unique risk tolerance and investment goals, and what works for one person may not work for another. However, by understanding both the traditional view on risk management and Nassim Taleb's perspective on embracing risk, we can develop a more nuanced understanding of how to balance risk and reward in our investments.

At the end of the day, investing in the financial markets is always going to involve some degree of risk. But by taking a balanced approach that considers both traditional risk management techniques and the idea of embracing risk, we can make informed decisions that help us achieve our investment goals.

The Investment Edge: Strategies, Mindset, and Tools for Success

Hello and welcome to The Investment Edge!

This is a space where I share my personal experiences, insights, and opinions on investing and trading in the stock market and other investment opportunities. I'm passionate about investing and trading, and love to share what I've learned along the way about different methods, strategies, and mindsets.

On this blog, you'll find authentic and honest stories about my successes, failures, and everything in between. I believe that investing and trading are journeys that require patience, discipline, and a willingness to learn. My goal is to help you navigate these journeys by sharing my own experiences and insights, and providing you with the tools and resources you need to make informed investment and trading decisions.

So, whether you're a seasoned investor/trader or just starting out, come along on this adventure with me and let's gain the investment edge together!