Date: 2020-01-13
Investment commentary
Throughout 2019, I felt as if I maintained strong short bias, especially on the active side. This is probably because managing shorts were more stressful than managing longs. Only recently when I compiled the data, I realized that 2019’s most significant gains were attributable to some special situation longs, then to shorts, and then to some passive longs which I have increased. So apparently, no real short bias there. Or was there, given that the sizes might have been little too stretched? Not sure. Well, furthermore, even though on the net basis shorts contributed positively to the portfolio return, most major individual losses were from the shorts. I am getting better at managing shorts, but I still suck at options. I find the use of options very difficult; this is disappointing and little stress-inducing, even. I basically missed out on directly benefitting from the rising equity indices, and I might have just gotten lucky in some of my special situation longs too, so I shall call 2019 a humbling year, despite good returns. The craziness seen in the market near the end of November and December overwhelmed me so much that I covered some of my key shorts (luckily). There was one person who strongly encouraged me to take this action, and I am so grateful for his advice and am glad that I left my ears open.
In 2020, as far as investment goes, I only have some short-term plans, and I don’t know what to do in the medium term.
I find this market extremely frustrating. There seems to be so many days, weeks, and months, where something completely predictable or of the past is not priced in. For instance, when some destructive news comes out of Iran or Saudi Arabia, I can safely argue that the market didn’t see it coming, but the reactions are so muted and short-lived that it makes me wonder whether some tail risks were ever priced in at all. This view, that market is in denial, is reinforced by my other thesis that algorithmic trades are more reactionary than human trades to the news flow; if these news flows were to be priced in, volatility I believe should have hiked much higher. Well, perhaps price actions in oil have just been muted due to pessimistic long-term view on the demand side. This too is a confusing bit, as I am long energy, even as I share the sentiment with the long-term oil bears. There has been lots of self-contradiction in recent months, and I am coming to terms with it.
It is perhaps liquidity versus everything else. It is as if the Fed has added asset inflation (as oppose to consumer price inflation) via POMO as an additional mandate on top of another relatively-recently (in grand scheme of things) added one which is ‘full employment.’ This appears to be a meaningful twist; more so than what I had originally thought. What has happened in Japan since the BOJ directly intervened in its domestic financial markets is a good historical reference, although the Fed’s actions’ implication is little different in some aspects and also more far-reaching. Also given that the BOJ's actions' implications hinged on the Japanese assets' relative value vis-a-vis the rest, the analysis of the Fed's case shouldn't be simplistic.
For now, copper is my favorite. There is a good chance fiscal stimulus from the developed countries’ governments can spark a secular rally in this commodity. Gold remains as a very attractive asset too, although caution against sharp corrections should be taken. I struggled a lot to figure out how I would best express my view on gold, and this is silly because the first time I researched on this in depth was in 2011 and I still struggle. I like tactical trading around US oil and gas, because this seems to provide an opportunity for a trade with asymmetric risk profile: if there is a melt-up in equities, this trade can do fine; if any additional-serious troubles from the Middle East jeopardize the equity performances, US oil and gas may turn out to be a good hedge. Some companies with monopoly or unshaken oligopoly status (whichever sector they may be in) also seem okay, as the business environments seem increasingly more favorable for them. Also, as previously mentioned, I think algorithmic traders fail to price in short term future effectively, so I view this as an arbitrage opportunity for macro investors. So far I have had numerous trades that would only be profitable in inefficient markets, and they have been working out well, so I will continue this. Despite the high stress level, I plan to continue monitoring and carrying out some idiosyncratic shorts in coming years, as I believe they remain as a key source of alpha. I will just need to be reasonable and disciplined in two aspects: sizing and loss-cut levels. When the sizing is appropriately done, it is extra important to focus on the percentage-based loss-cut rather than setting the maximum amount of loss, so I do that.
I find the following mental training very helpful for my investments. I try to keep good records of what has happened via journal writing and portfolio record keeping. Then when I consider some trades, I go back in time and ask my-past-self what sort of thoughts and considerations would have encouraged me to take better positions back then. Sometimes, I really cannot see myself taking the most suitable positions, which is disappointing. However, in some other occasions, I see my-past-self managing to make very profitable (of loss avoiding) trades for whatever reason via whichever processes. The focus of this mental exercise is on the methodology rather than on the outcome, so I find this constructive. I just need to squeeze some essence out of it. I don’t seem to feel much pain when I look at my losses in the retrospective manners, so this tendency helps.