How much you can earn from $10000 within a century?

Since the market is rather boring at the moment, I thought to share with you something important for long term investment.

If your grandpa left you $10000 80 years ago, how much you would have gained from it now? Well, it all depends on how the money was managed, if not wasted along the way. If it had just been left alone and forgot about, you would still have $10000, no penny less than that nominal value but your buying power would have already lost 90%+ in this less than 100 years period. This is called inflation effect and your money’s true value has been inflated away over time. That’s why it is critically important to not just leave your money alone. Even though you always hear “Cash is King”, it is only a wisdom at certain period of time like now. Over time, cash is dumb!

So let’s say your parents were very smart and invested this $10000 for you for the past 80 years. There are two ways of investing: The first was just for growth. Let’s make it easy. Your $10000 was invested in the S&P 500 index for all these years. By 2018, your wealth from this $10000 would have become $431,397! Wow, congratulation. What a great return, right?!! Before you get too excited, see what comes next! How about the same investment for the same time period but you get a return to $2.5 million? Sounds impossible, right? But that’s what is really possible although not many people are willing to believe and are interested to do so! If you have followed me for a while, this is really nothing that should be surprising to you. The very simple but super powerful wealth building strategy is the dividend reinvestment (DRIP) to benefit from the most efficient and safest money making approach via compounding, the world 8^th wonder per Einstein. See the chart below based on the analysis by the Hartford Funds. No need to say, this is something I’m totally convinced and have already implemented with my own money for years. Sure you can do all the fancy trading, but for me, trading is more of a fun to keep myself with enough sanity and sharpness in mind. For the real wealth building for retirement?  Nothing more than DRIP and my unique cash-rich life insurance. To me, nothing has been more safe and powerful than these two, both of which are relying on the magic compounding effect. Literally, both will generate sufficient retirement income for me and my wife while I’m just sleeping. Not much additional work is needed as long as they are set up appropriately and safely.

 

The mother of bubble

First let me do an "IQ test": Can you tell me which company the following chart refers to? No cheating and honestly tell if you really know.

Just over a week ago, it nearly tripled (260% more precisely) overnight to the moon, trigging a phenomenal FOMO on the day. Then immediately within the next few days, it has given back almost all the gains and down to the earth again. What kind of dramatic saga we have just witnessed. If you still don't know what I'm talking about, it is an early stage biotech company, NextCure (NXTC). It jumped simply because some "good" news from its early clinical trial data and then crashed also due to the data which was found to be not so impressive. It's a typical FOMO: chasing highs first, asking later.

We have seen a similar but in a much smaller scale FOMO moment for BIIB, which I'm actively shorting. Be fair,  BIIB dose have more mature data which they claimed to be good enough for submission. But here is the thing. Following their planned submission early next year, the FDA review time even with a fast track will at least take 6 months and for this first ever drug for Alzheimer, I bet the FDA will ask for a public review with an advisory committee. There are simply so many unknowns in between that may go wrong. While I'm not saying BIIB won't succeed in this historical endeavor and actually I do wish they can for the sake of AZ patients without good treatment as of now, I just don't see it can keep at the current inflated level without cooling down first. So far so good for my short for the short term.

Biotech is the unique sector that has full of bubbly stocks that are flying above the moon for incredibly hyped stock prices. Below are the top ones which are at the nose-bleed overbought status based on the RSI: anything above 60 is usually overbought by this indicator. But we are seeing many beyond 80 and even close to 100. Of course, in a mania type of market with FOMOs everywhere, it may not be so surprising to see the extremely overbought stocks go even further overbought. Indeed there is no law prohibiting anyone chasing stocks regardless of valuation and rationale. As one who has seen many bubbles burst to cause enormous pains for many, I'm just advising caution for anyone who are willing to listen: DON'T CHASE HIGHS NOW!   

PS: if you are interested to know more about my inner cycle, DW Family, email me at: dwmt19@gmail.com

        

A slowly cooked frog?

My friend forwarded me the following chart (the upper one), highlighting the FOMO moment currently is heating up. Today's another jump to an all new high will definitely add a lot more euphoria for sure and further push up the FOMO to all new highs as well. You may think FOMO is usually only reserved for retailed or amateur investors. Well, apparently this is not the case. The chart below is actually about what the professional investors are doing and NAAIM stand for fthe National Association of Active Investment Managers. So the chart is showing money managers' exposure to the market. After a dip in August and October, this index is quickly rising as money managers plow money back into the market for FOMO on a year-end rally. It makes sense as they have to show positive return by end of the year. How can they miss the strong rally going on by just sitting on the sidelines? So they are all in.


Of course we have seen similar FOMOs before, two major ones back in late Apr and late Jul, three months apart. Each time, also after grinding highs for weeks, the reckoning moment came eventually and months of the gains virtually evaporated within a couple of weeks. This is typically how a FOMO will end up and when the day comes, it is typically very fast and seemingly out of blue from no where. During the FOMO time, people usually think they are smart enough to get out at the exact top but hardly anyone can do that consistently. The vast majority will have to endure enormous pains as the result, then changing their mood from euphoria to depression. Then the same process starts again and again and again!! That's why for hundreds of years, the market has changed tremendously but the human psycho has never really changed in any way.


I thought to add a S&P chart for this year to highlight the last two FOMO time period what the market was doing (the yellow cycles for both charts). And I shared this for a couple of WeChat groups last evening. A friend immediately spotted something interesting and he added a few lines to my S&P chart. What it looks like now? Yes, a frog and he even gave an extremely interesting and vivid decipher of the chart: 温水煮青蛙！How brilliant it is!! Yes, the flog feels really great initially with the slowly warming up water until it is heated so much that without knowing it, the frog faints and then dies.


So we are in Nov now, also about 3 months from the last FOMO. Will we see the frog going through the slow dying moment again? We will see probably very soon!😏😄😎

What Buffett is telling us?

Not sure how many people noticed the news that the value investment master, Warren Buffett, is seeking to increase his ownership for Bank of America to 10% of the company. I don’t see any major market reaction to this news but I think Buffett is sending an important note to us, which is likely related to what the FED is doing at the moment. If you still don’t know yet, the Fed is effectively doing another round of QE, although Powell denied publically to be doing so. Since the last Fed meeting in Jul, Fed has not only stopped shrinking its balance sheet, it has started to actively buy Treasury again every month, which is in essence of a QE with a slight but important twist. In the past few years of QEs, Fed was buying long term Treasury bonds. But this round, they are buying short term Treasury only. What they are doing is effectively artificially steepening the yield curve, which has inverted recently and triggered a great concern of a recession that may be coming. It may be a clever move by the Fed this time to manually depressing the short term yield by buying short term bonds so that to widen the yield curve. That’s really what we are seeing right now and the market seems quite happy with a reducing chance of an immediate recession. This kind of manipulation is quite beneficial to the banks as they typically borrow money with short term interests and lend out for higher interests for longer term. This is how they make money. As smart as Buffett is, he is certainly knowing this too well and he wants to take the full advantage of this new QE. That’s why he wants to boost his ownership for BoA, a smart move. So I think the banking sector should generally be a good place to put some money in the next year or two as long as the Fed is continuing this type of QE.     

 

There's one thing I'm not sure about is how long lasting the effect will be with this QE manipulation by the Fed. The whole world right now is just like a heroin addict. When he has got too much and used to a large dose, the symptom rebounding effect will be enormous when the dose is cut a bit. That’s what happened late last year after the Fed had shrunk its balance sheet for two years. The problem for addicts is, after a cut back for some time, even a resumption in the large doses may not be enough to quickly end those problems (symptoms). Usually they need more and more doses to curb their addictive symptoms. Unfortunately after more than a decade long of dumping of the cheap money (heroin) to the market that has become so addicted to it, our financial system has become more and more weak and feeble. It is still OK with some increasing amount of heroin dumped to it again. The question is how long the effect can truly last and what will be the ultimate consequence from it! I don't think it will be pretty at all and probably very ugly when the final reckoning day comes. Of course this is a topic we will talk a lot more in the future as by no means it is anything imminent. But the longer the can is kicked down the road, the worse the consequence will be. Enjoy what you can get for now but it will be really wise to be also prudently prepared for the worst to come. It is not if, but just when the final reckoning day will come. The Fed's new QE has probably pushed it further down the road by 1-2 more years but heroin addiction will pay the price eventually regardless what is done! 

I’m even doubtful about myself

Oh, boy, the bullish mood these days is enormous and hard to beat, so much so that I even doubt about myself on my bearish view questioning about the sustainability of this euphoric move. I have encountered many times in my investing life, when the market was persistently either depressing or euphoric and I was persistently wrong for days or even weeks to the point that I was even questioning myself “Are you nuts to be so stubborn to be against the crowd?” But my past experience has taught me that nearly every time I would be among the last ones to laugh in the end. The most recent two times with either extremes were the last Dec when the market was persistently depressed and I also got the same feeling that it seems the world would really come to the end with no hope in sight of any meaningful recovery. That was the time I made a bold call for a 20% upside for S&P (see here). Then in Apr this year when the market was persistently bullish to the point that it seemed nothing could stop it from making new highs again and again. And that was also the time I got the feeling that it didn’t look like anything could bring down the market. But I kept myself up and even wrote a blog " How long can you beat the same drum?" on Apr 22. Of course the market kept going up for one more week to reach its peak at that time at 2945 (a point close to my last year end call of 3000 for this year). Then all the sudden the music stopped playing and the market crashed down to 2750 within a couple of weeks.

So I will stick to my bearish view for now when I also starts to get the same feeling of a seemingly unbreakable uptrend. I don’t mind to get a few more eggs on my face because I know when the turning comes, it can be really brutal for FOMOs! Besides, the eggs have provided me more energy for continuing my bearish call.😉😏😅 
Joking aside, it doesn’t mean I cannot benefit from this market move. While I’m bearish overall for the market, I’m actually quite bullish on a few sectors that have been beaten down so badly in the past few months that I have seen their sign of bottoming. So I talked about a few value stocks to my DW Family and fortunately they seem all behavior quite well these days. The general bullish market are certainly helping them but I think even in a downtrend, the beaten down value stocks should also perform relatively well due to the rotational move of the investor’s money that must find somewhere to go. In addition, there are also some greatly overbought stocks that cannot go up any further even with the very strong market. Betting against them could also make some money regardless what the overall market is doing. Within the DW Family, we did a quick short on MRK, which was fortunate enough to yield a quick 80% gain within days. BIIB is another one looking like to falter soon. Then you all know how badly these days for the precious metals. As I said, I’m shorting gold stocks and fortunately enough it is still going in the direction I’m looking for. By the way, we are probably seeing the next shoe drop for gold/silver and the correction is probably very near its end but just still not yet there. We may see gold down towards 1400 to 1420 range before this correction is over.


PS: if you are interested in my DW Family, send me email here.   

The power of “insider” trading

Don’t get me wrong and I’m fully aware that it is illegal to do real insider trading. So never never try this if you know some actual insider information and act on it for your gains. I have known personally some colleagues over years who were convicted and put in jail for insider trading. It is just not worth it to take this kind of risk. So let’s be very clear about this first!Nevertheless, we may get fairly good “insider information” without actually knowing what it is. Sounds odd, isn’t? Well, I have written this before. Basically, by watching what the real insiders are doing with their own money for their own company stocks, especially with respect to buying stocks, we may get a good leading indicator something positive may be coming for the company and for the stock accordingly. Of course there is no guarantee for sure, especially regarding the time duration when the positive insider positives will be reflected in the stock price. But at least we know those knowing the business insider and out feel good about their stocks and are willing to buy even though outsiders are actively selling. This kind of insider buying, if in enormous amount, could sometimes mean explosive jump for the stock. I have a real example just happened this week.

If you don’t know what happened yet for the biotech giant, Biogen (BIIB), there is the backstory. It faltered sharply a few months ago when it disclosed that their leading candidate for Alzheimer’s disease, aducanumab, had failed the predefined futility analysis. Since this was one of the major hopes for the company from the street that supported its hyped stock prices, it got instant haircut by over 20%. Well, it turned out this is not the end of this story. To everyone’s surprise, the company announced last week that it will submit the NDA application for seeking an approval for the drug that was once already having the death sentence. The stock immediately jumped 20% following the news. Apparently the company has been doing a lot of working by reanalyzing the data and discussing with the FDA and finally they concluded that the result is still good for submission. Considering the FDA was consulted all along during this process, apparently it means the FDA also values the study result, which is a good sign for the drug’s fate. Of course it does not mean any guarantee that it will get the approval as the FDA may still reject after a more thorough review. I bet likely this review will require an Advisory Committee Meeting.

But whether or not it will get an approval is not the point of my discussion here today. What is truly amazing to me is how the real insiders have already sent a very clear signal weeks before that something major and positive may be coming. Weeks ago I got the notification from my sources that there was a huge insider buying for BIIB and the amount for this one was really impressive. We are not talking about a million or something but nearly 30 times more by one important insider, a board member. Though not as much but the CEO was also buying big in million dollars. Here are the two major insiders who were buying the stock like crazy. While no one like me and anyone else outside the company would know what was really going on, it was really a very strong sign that some major development was ongoing for the company that may be great for the stock that was on sales. It turns out this is indeed the case. So next time pay attention to such kind of insider buying. Most often than not, it is positive for the stocks in the weeks or months ahead. This will be one type of information, the legal “insider information”, I will be sharing with my DW Family when I see it or know it. As a matter of fact, I just shared one stock with the major insider buying in the similar scale.

Shorts got burned

I’m seeing this note on the wall everywhere today!

Today is the jobs report day and the market responded to the super strong jobs report with a roaring rally. Regardless you like or not, if you are at least reasonable, you have to agree that the US economy is really strong with a very healthy and strong employment market. Of course Trump’s haters have laughably argued that the strong US economy is due to Obama’s economic policies. In reality, anyone with a sane mind has to agree that it is due to Trump’s very business-friendly economic policies and deregulations with the historical tax-cut. I digress a bit.

No need to say, such a strong rebound and rally in the past two weeks or so is certainly a pain for anyone betting in the wrong direction in general. Since I’m often telegraphing publically about my view of the market, I cannot hide that I’m totally wrong till now about the overall market direction for the past two weeks. No need to sugarcoating! But does that mean those with a wrong betting must get burned? Not at all if you ask me and here is why.

I think the trading master Soros once said “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” I think this is exactly the key every trader should learn and understand. No one can be always right, not even Buffett (the value investing master) or Soros (the trading master). So no need to feel bad if you are wrong, which is just part of investing and trading. The critically important for every one of us to learn is how to control our risk so that if we are wrong, we won’t lose much but if we are right we can win bigger. That’s really the key to differentiate between winners and losers, not the winning/losing rate. This is the principle I’m trying to follow to avoid being truly burned when I’m wrong. There are few more specific advices I can share based on my experience:

• Don’t ever use margin, which can truly kill you. I personally never use margin to trade regardless how much I’m convinced for a trade! It’s just not worth it for the potentially fatal risk involved.
• Never short anything naked, i.e. directly short stocks or sell call options without hedging. This is in essence using margin with unlimited risk that can potentially fatal. I personally always use hedging to short or use put options to bet for the short side. This way, my total downside risk is always predefined and I know upfront how much max I can lose if I’m wrong. As long as it is within my acceptable limit, there won’t be an excruciating burning moment for me even if I’m completely wrong.
• Bet small, especially for short term speculation, and try to go with a high reward/risk ratio for each trade. This is the key in order to be able to win bigger but lose small. For example, I was shorting IWM (Russell 2000) for this week with the weekly puts. Given the very short duration, my position size is quite small relatively speaking as I was prepared to lose all while betting for a quick double. Well I got it wrong and indeed has lost all. But my loss has been more than enough compensated by another short betting (see below).
• Try to diversify if possible. Even in this roaring bullish market, not everything is bullish. We are still seeing many cracks, especially among those that have been chased up fiercely already. A couple of weeks ago, I told my friends that I started to short NKE after it moonshot following a very strong earnings report. See what has happened for it. After it topped around $97, it has declined all the way down to slightly below $90 as of today. Since I’m using a longer term bearish call spread, my bet is relatively big as the risk reward is something like 3:1 in my favor. It has been a luckily great short in the past two weeks. After such a fast decline, some sort of bouncing is very likely. So I’ve adjusted my short spread to make it more neutral. But I think we will get another chance to short it again if it indeed shoot up with a dead cat bounce. In addition, I’m also holding some puts for MRK and VZ and I think they will turn out to be great shorts as well, given the overall market has been in such an overbought condition and the TA for the two are quite bearish.

No one likes being wrong but it is unavoidable in trading. However, you don’t need to  be burned when wrong! As long as you can manage your risk appropriately, you don’t need to be the burning victim even when you bet on the wrong side. Hope this helps!