Trading with Focus – Playing with Teddy Bears
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Nowadays my Facebook feed has degenerated from ‘cool friends living their best lives’ to a series of Dad jokes being shared unironically, and new mums trying to out-mum each other.
Online news is rubbish, what with their Idiocracy-mandate of lowest common denominator, so, I scroll through Reddit for my daily edgy/funny online content.
In amongst the usual fights about whether the sequels of Star Wars are better than the prequels, or some photos of animals being cute (r/aww or r/illegallysmolcats) I found this great guide on one of the more useful threads, r/coolguides, where they share cool guides.
Now, you might be forgiven for thinking I am a little negative about the stockmarket at the moment, which is a weird thing for you to think about. But sure, from time to time I worry more about protecting the base than stealing more home runs.
I would think that this period of unbridled optimism is more akin to a free run, than a home run, and we are seeing companies trade on multiples as high as 66,000x revenue and various daily rocket ships being manipulated to trap the unsophisticated investor, but that’s none of my business…
So, when I look at the market I always worry that it may crash – always, of course it could! But I can’t live my life like that. If you want a bad set-up for a crash, you should have been at the coal face when the entire global economic model was at risk of imminent collapse and the US government were arguing about whether to just let it fail and see what happens. That was scary.
But it didn’t. We are a fairly resilient lot, us humans. We come up with solutions…eventually.
If I was a ‘perma-bear’, or someone who constantly believes the markets are on the edge of a precipice, I would be buying seeds, chickens, guns and canned goods, and looking for a reliable clean water source in a defendable position. But that would be found under r/oddlyspecific.
The r/coolguides thread is primarily pictorial guides on things such as how to do a push-up properly, or which vitamins are in which foods and what they do. In this case the cool guide in question was what to do in case of a bear attack.
Now I am about as likely to find myself in some sort of Man vs Bear situation as I am to increase my kale intake because it’s high in whatever, but this one rhymed so I immediately committed it to memory in case I one day find myself wherever bears exist.
“If a Bear is brown, lie down. If a Bear is black, fight back!”
So, it turns out Reddit has a lot to offer, make sure to check it out because it’s a competitor to the robot Zuckerburg (but scroll by ‘popular’, at least to start). But even this seemingly unrelated cool rhyming guide only works if the sun is up, and if the bear in question identifies with its colour and behaves accordingly.
In the stockmarket, it’s smarter longterm to be bear-ish, or bear-aware, than it is to be a full-blown bear.
That’s because full-time bears fall victim to their own fears and then prey on the fear of the market to get clicks or media coverage, and in my opinion have cost people more money than any other investment commentary.
Scaring pensioners after a sell-off is sure to get you a few media bites, but it’s irresponsible and just bad advice.
Now on the opposite end of the scale, we have the ‘perma-bulls’ and if you really want to be scared, go check out r/ASX_Bets. This and the Facebook stock-tip sites are where these 450,000 first time ASX investors (with a total time in the market of about 6 months) are doing their ‘due diligence’ on a stock.
Last week I tried to defend the weak, but now, in a standard moral backflip, I say go there, see what it is that is pumping up the market and position yourself correctly. Which is probably to either do the opposite, or stop following the stocks they follow.
They now insult sellers by calling them ‘paper hands’ and make homophobic references to anyone with a slightly negative view. But, they’ve made me a lot of money recently, and I know my capital gains tax dollars will end up back in their hands when they blow it all in the market, so I don’t feel the least amount of shame… they have to learn somehow!
There used to be a few sayings about bears in the market. “Bears don’t own shares” was one, but these days you can go one further and open a CFD account or borrow stock for shorting. I’ve never lost more money in as short a period of time as I did with CFDs and they are so risky that their adverts now look like cigarette packets.
Shorting can be a pain in the backside to arrange, and in a physical sense it has to be stock specific, so I’ve recently been punting around with the listed short index ETFs.
BBOZ and BBUS are a couple of ETF exposures to the downside of the market brought to you by the good people at BetaShares. They are also geared, so any movements are significantly enhanced, meaning they are higher risk than the average bear.
I use them for short term gambling, like taking a short term view of an overbought market. But, (for the brave and smart and educated) they could also potentially be used for a general short term hedge in a falling market if you don’t wish to sell some of your bluechips.
However, if you are like me, and poorly timed the next downleg back at the end of April (that never came) you will need to take into account the costs associated with holding them for the long term, as there is a fee that is built into the return. Luckily our low, low brokerage rate meant I could average in over the last five months with small parcels and not get eaten in transaction costs.
Back when the market crapped out from its highs to its recent lows, the 40% sell-off in the broader Australian market returned 150% to the BBOZ holders, but although the recent rally has not yet recovered all of the highs, the BBOZ price is all the way back to the where it was when the markets were at a high. So there is some time-related loss for a longer term holder to take into account.
So the geared short ETFs are one way of playing a sell-off, but will only give you exposure to the ‘market’ which is mainly bigger, bluer companies. What about all that spec rubbish that you are loaded up with?
The biggest question you have to ask yourself is how much loss can you take? The headline act of this particular bullmarket stint, Mr B. Chip, obviously wasn’t worth $1.4 billion just yet and has halved in the space of a week, so that might be a decent guide for what can happen when the heat comes out of a speculative stock.
Are they ‘potentially’ ‘worth’ more? Sure, maybe, but also, not yet, not by a long shot.
They would have to sell a lot of chips, and they only just released the first draft on silicon, and it looked a lot like a Raspberry Pi computer that some kid can make at home. They aren’t ‘worth’ any more than someone is prepared to pay for them until they are hitting revenue and profit numbers that justify a valuation of that enormity.
Second question, what is pumping the price on these things? I doubt highly that the money being printed by the US government is directly influencing your speculative share prices on the ASX. Many of the companies that have been re-rated were in the business of doing whatever they were doing long before Covid hit. So why have they gone ballistic?
Well, the truth is probably somewhere between superannuation withdrawals, kids with time on their hands, Reddit and Facebook chatrooms and the professionals that recognise that there is no better way to take money from the inexperienced than at the speculative end of the stockmarket.
Also, have a think about the psychology when a sell-off occurs (or go to the Facebook tip sheets for a quick education). Stage one – disbelief – hold the line, this will bounce. Stage 2 – anger – who’s selling?! Stage 3 – I can’t sell these now, I’m down too much. Stage 4 – I’ll never buy shares again.
The new retail speculator numbers have grown by over 400,000 in the last six months, and some of these guys only had a few grand to start as they were able to access their super. A loss of a couple of grand for the long-term trader is something to shrug off, but I remember when a couple of grand was all the money in the world.
So when you see a sell-off in a speculative stock with a high retail base that is trading on ridiculous multiples of its original value without any real value-add to their company, be cautious. The ‘smart’ money is likely already out and ‘retail’ gets panicky.
They certainly won’t re-enter lower, as they have no more money to re-enter with!
So, this could be a black bear, where you should fight back, or it could be a brown bear, where you should lay down, but I don’t care if it’s only Yogi-Bear; bears have teeth and claws.
Just don’t let it take all your honey!
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This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.