Saturday, November 10, 2012

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My Second Quarter Trading (Q2FY12-13) and Some Lessons from It

I had a dramatic stock trading cum investing experience in the last quarter (Q2Fy12-13). I haven’t traded in more stocks than in Q1 but ended up with more sale transactions and the buy-above-high-and-sell-for-stop-loss trades, that pushed me down in the first month itself. Those trades costed 1300 in losses and more than 300 in nsdl charges (each sale transaction has a fixed nsdl charge, so it is better to sell all in one go when trading low quantities). In between there was annual maintenance charge for Sharekhan. Not sure how that is deducted. Lets assume it is approximately 400. Nevermind, all these fixed charges don't scale if the capital is scaled.

Looking at the transaction report till date (its hard to separate q2 alone now, I haven’t hired an accountant :) ), my gains before fixed costs stand at 3093.48. Apart from the above mentioned fixed charges, some money went somewhere. Those could be more fixed charges which would be insignificant as capital grows to higher levels in the coming quarters. So I didn’t yet check them out. May be these all eventually make the case for hiring an accountant. Let us see.

Note: Recently a friend pointed out the low value of capital in my trading. Well, once upon a time, I traded what could be considered a lot of capital by my friends at work. I thought about starting where I stopped, but the more I thought, the more I realized that once you take a break from trading, you should not start with the same capital that you paused at. You need to get back on track by following systematic investment plan and scale capital as profits grow. Note that in all Ponzi schemes it is the early birds that gain the most. But that doesn't mean if you start now you are going to be the bottom of the pyramid. When you can't tell if it is the end or the middle, you should take on a systematic scaling plan. Scale your exposure based on your recurring tolerance of loss as well as increasing profits. The recurring tolerance of loss is suited for jobbers who get steady income which is not a privilege of full time traders. However for any trader, the systematic scaling strategy (getting back to business) is to increase exposure only when profit increases, step by step. This ensures in case you were starting at the top of the bull market, you don't get caught by a bloody surprise. Blood baths don't happen all the time in the market but when they do - there's no need to talk about it (2008 showed what it was).

Meanwhile, the real profit based on incoming and outgoing flow of cash, is lesser than the larger figure above. It stood at 1239 for the combined quarters or till date. Discounting net gain of last quarter 989, it is about 250. I wish I could show better. But there are no ways to cook books here. Atleast I showed bigger figure in the previous paragraph. Of course that’s one way to cook. I don’t have stakeholders or shareholders here, that’s why I comfortably share this third paragraph. However one should note that this is small profit because of fixed costs. As the capital scales, the larger profit (3093) is scalable and at one point is the real profit (as the fixed costs become insignificant).

Average capital for the quarter was 50k, 150% up from last quarter :). The capital infusion rate per quarter remains the same as per my systematic investment plan. It is going to experience some dramatic jumps in the future as per my unsystematic investment plans but it won't immediately go into stocks. Or may be not as I rethinking about unsystematic plans to convert into systematic. Also percentage-wise Q2 net gain doesn’t make much of a story. Also I haven’t bothered to separate the stocks traded in this quarter, so no relative comparison table. Those are the not the important things anyway, so lets move on to important stuff.

The Distribution of Gains

There is no better way to evaluate a stock trader than plotting the distribution of his/her gains vs. their frequency. I have plotted below my distribution graph for the two quarters combined.

There were lots of losses around 250. That’s the black body of the last quarter experience. As July progressed, the bull market that started with the second bottom of June continued into the second quarter. From my earlier experiences, I felt the urge to increase the exposure as the market continued the uptrend. Only the scaling strategy was wrong. There was still more to learn about trading and the markets (broader and inner). It wasn’t too many trades, just few. But I wasn’t clear about my strategy yet.

My gains in the first quarter were dominated and predominantly determined by one stock - Varun Industries. The strategy there was bottom fishing. You can only bottom fish before the bottom happens. Once market went into uptrend, the opportunities are gone. Then I went onto new high stocks. You just can’t shift so fast between strategies. It needs skill. Skill to identify the really strong ones from those that are just moving up because of the broader market winds. The rest of the quarter revolved around changing my strategy dramatically from bottom fishing to the best strategy I followed till date (I did that in 2007 too) and finding the best ways to filter the stocks to trade for the chosen strategy.

In between I got introduced to reading books by Nassim Nicholas Taleb, the hero of randomness. His books Fooled by Randomness and The Black Swan, are very intellectually entertaining. When I say they are amazing, you can bet on their face value. There are no coincidences in life. Its all random. Random doesn’t mean chaos. Random because it is beyond our capacity to predetermine the entire sequence of outcomes. Well, the world is the way it is. We try to think we understand it, but we don’t. It is what it is. It may be multidimensional and non-orderly world. But we try to map it onto one dimension and make it simple and try to find order. These books have given me the perspective I needed for a long time.

I had eventually switched from bottom fishing strategy to pyramiding strategy. Stopped watching stocks that are going down to hell and started watching stocks that are going up to heaven. I found the statistical justification for the latter and practical justification for the former. Now my strategy has become more robust. I also understood the reality of non-linear gains. Earlier I perceived the market to have randomness of Gaussian distribution, but my perception now switched to randomness of Mandelbrotian distribution which is more realistic for the today’s world. However I could see that on a lower scale, like intra-day trading, one could still distribute one’s gains to Gaussian distribution with positive mean. However if you remember what I have written in last quarter report, I wasn’t trying just to get a shifted Gaussian distribution but rather a Mandelbrotian distribution which has most significant gains on the extreme right and all insignificant ones scattered anywhere around the center. Well, actually its not exactly that distribution but a one sided version of it (+ve sided). Of course, I am open for further evolution of my strategies and distributions as time passes. But only for evolution, not for change. Change is like a circle - merry-go-round, evolution is like a spiral, each time you make a round you arrive at a new level.

The distribution, however doesn’t look as good, having booked single largest loss from a stock so far. It was 675 in Varun. I had to end it up with a loss because I just couldn’t know its upper limit on profit. Its more likely to continue downtrend. But things got better by the end of the quarter by following the new strategy and buying into Shasunphar and Bergepaints and few insignificant others. The gains have merely shifted from one stock to another. As we are already in the middle of the 3rd quarter (sorry for the delay in getting Q2 report out), I could tell that those gains too are merely shifting from Shasunphar to other stocks. I am out of Bergepaint though with a little gain. This way, I would be booking losses most of the time, so hopefully I might not have to file these in my ITR again, unless losses are too large and I want to take the benefit of offsetting them against future gains.

On MC Tracker

This is how my portfolio looks on moneycontrol tracker as on the first trading day of this quarter. My greatest profit was in one stock that had also gained most in %. In between you would notice Atul with 15% which is a side effect of trying a short term trading strategy on 52 week high stocks. I will write about the details of strategies later. I got a bit of surge to scale up the position in Bergepaints too early before it proved its hold-worthyness. That was a classic mistake, though it wasn't costly. However I am now seriously continuing with my strategy. I still see the effects of broader market winds on the elasticity of trends in individual stocks and sector rotations and all kinds of strange things that keep happening randomly in the stock market. Random because I don’t have the capacity (nor tried) to determine its order. The overall gain looks too positive because unlike the first picture from Sharekhan, it doesn’t show the closed trades.

From here on my performance wouldn’t be based on net gains as they are very much influenced by the continuation of the trending stocks which in turn are influenced by the sector or broader market winds. Hence my goal is to focus on getting the distribution right without getting let down by the rare and significant negative events. After a pair of rare and significant positive & negative (in any order) events happen, then you can see the true score.

This quarter I have taken some very good lessons. I have to correct some of the last quarter ones as well. But I feel too lazy for that now. I will continue that in the next post that will come soon.

Update from Q3 (time travel): Things are looking better in Q3. Also I discovered some new effects of my systematic pyramiding strategy that I myself hadn't expected.

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