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Monthly Archives: January 2016

The Trader Who Made 6,200% on China Stocks Has Some Advice For Investors

Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers returned more than 6,200 percent last year, has some advice for investors in 2016: Sell your shares now, before it’s too late.
The 45-year-old former worker at a state-owned company, a virtual unknown until last year, has become a star of the Chinese futures market after timely bets on the direction of share prices propelled his Yourong Fund to the top of the country’s performance rankings. He’s carried the winning streak into 2016, returning 35 percent through Jan. 22 after selling stock-index futures just days before the market’s worst-ever start to a year. The Shanghai Composite Index plunged 6.4 percent on Tuesday, bringing losses this year to 22 percent.
Huang, who opened the Yourong Fund in 2014, says China’s benchmark Shanghai Composite Index could drop another 15 percent in the first half as slowing economic growth and a weaker yuan fuel capital outflows. While he’s sticking with bearish futures bets to take advantage of further losses, he says the average Chinese stock investor would be better off shifting into cash.
“I’m not optimistic about this year,” said Huang, a self-taught trader who manages more than 100 million yuan ($15.2 million) in the Yourong Fund and separate client accounts that use similar strategies. “My advice is to hold cash, wait and watch.”

Many of China’s 99 million investors appear to be doing just that. Volumes in the nation’s $5.6 trillion cash equities market slumped to the lowest level in three months last week, while trading of stock-index futures has dropped about 99 percent since June. A bungled government attempt to introduce market circuit breakers in the first week of 2016 deepened investor pessimism after the mechanisms sparked panic instead of restoring calm.
Huang’s ability to profit from the turbulence has made him a standout in China’s hedge-fund industry, which has struggled to cope with price swings that reached the most extreme levels since 1997 last year. More than 700 funds were forced to liquidate prematurely in 2015, and this year’s 18 percent slump in the Shanghai Composite has left many more on the brink of shutting down.
More than 12 percent of Chinese hedge funds have seen their net asset values drop below levels that would force them to liquidate, according to Shenzhen Rongzhi Investment Consultant Co., citing the 5,662 funds that have updated their data so far this year. Most hedge funds in China have such mandatory liquidation clauses.
Nimble Bets
Are China Stocks Repeating the 2008 Bust?
The Yourong Fund was the best performer last year among 310 private Chinese futures funds tracked by Shenzhen Rongzhi. Huang’s closest rival was up just over 1000 percent, while more than a fifth of his peers posted losses, according to Shenzhen Rongzhi, which collects performance figures directly from the financial institutions where funds hold their trading accounts to ensure the data’s authenticity.
To make money last year, Huang had to be nimble. He was bullish for much of the first half, building long positions in stocks and equity-index futures as the Shanghai Composite surged to seven-year highs. After trimming his equity exposure in May, he bet against the market in the second half of June as shares tumbled.
When volatility increased at the end of that month, Huang turned to short-term wagers. A short-term bet on Everbright Securities Co. that he sold the following day, for example, produced an 11 percent return on June 30 as the market posted a brief rally, he said in an interview with Bloomberg News last week from China’s southern Fujian province.
Huang moved in and out of the market over the next two months, making one of his most profitable bets in late August after positioning for losses in stock-index futures before a rout that sent the Shanghai Composite down as much as 25 percent in just two weeks.
“It’s like surfing,” said Huang, who became a full-time investor in 2006 after quitting his job at a state-owned company. “You have to dance on top of the waves.”
Amplifying Returns
Aside from good timing, Huang’s outsized returns were made possible by the built-in leverage of futures. The purchase or sale of a futures contract typically requires an initial deposit, known as margin, that’s just a fraction of the value of the underlying assets. That means even small price changes can lead to big profits — or losses — for holders of the derivatives.
Huang sees China’s stock market coming under pressure this year from both the economic slowdown and a potential surge in the supply of new shares.
Gross domestic product growth fell to 6.9 percent in 2015, the weakest pace since 1990, as an estimated $1 trillion of capital flowed out of the country last year and the yuan posted its biggest annual drop in two decades. Despite six interest rate cuts by China’s central bank, the latest economic indicators for December showed growth is still slowing.
“When you add a lot of cold water into the pot, the firewood we have is for sure not enough,’’ Huang said.
Recovery Signals
With 660 Chinese companies waiting to sell shares via initial public offerings, Huang said the additional supply could divert funds from existing shares. The impact could be even bigger if policy makers follow through on plans for a registration system, which would reduce the government’s ability to control the pace of offerings.
There are signs that Chinese shares are poised for a rally. The Shanghai Composite’s relative strength index was 33 on Friday, near the threshold of 30 that some traders use as a signal of recovery. Li Yuanchao, China’s vice president, said in an interview in Davos last week that the government is willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors.
The government’s intervention has made life more difficult for Huang. He had to pare back his positions last year, particularly in bearish contracts, after authorities cracked down on what they saw as excessive speculation in the stock-index futures market and vowed to go after “malicious” short sellers.
Grateful Investors
Still, none of that seems to have hurt Huang’s knack for calling the markets. Cai Zhongyu, a retired electronics institute worker in Shanghai who’s been following the trade recommendations dispensed by Huang in online chat groups since 2009, said she made a 300 percent return last year “all thanks to him.”
“He always got it right on the market direction,” Cai, 55, said by phone. “You have to admit that.”
Cai was among more than 90 admirers of Huang who traveled to the coastal city of Xiamen to hear him give trading tips and his market forecasts in December. After an extraordinary 2015, his outlook for this year was decidedly more modest.
“I’ll just be following the market and do a few trades as it falls, like ants biting on a bone,” Huang said. “If I get 5 to 6 percent each time and end the year with 50 percent to 60 percent, I’d be happy.”

 
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Posted by on January 26, 2016 in Uncategorized

 

While Many Panicked, Japanese Day Trader Made $34 Million

While a lot of investors were hitting the panic button Monday, a Japanese day trader who’d made a big bet against the market timed the bottom almost perfectly and narrated a play-by-play of the trade to his 40,000 Twitter followers. He claims to have walked away with $34 million.
As financial markets got crazy this week, many people turned cautious. Some were paralyzed. Not the 36-year-old day trader known by the Internet handle CIS.
“I do my best work when other people are panicking,” he said in an interview Tuesday, about an hour after winding up the biggest trade of a long career betting on stocks. He asked that his real name not be used because he’s worried about robbery or extortion. To support his claims, he shared online brokerage statements showing his trades second by second.
CIS had been shorting futures on the Nikkei 225 Stock Average since mid-August, wagering it would fall. By the market close on Monday, a paper profit of $13 million was staring him in the face. He kept building the position. When he cashed out late that night, a collapse in New York had caused his profit to double.
Instead of celebrating, he kept trading. He started betting the market had bottomed. When he finally took his winnings off the table on Tuesday, he tweeted, “That’s the end of my epic rebound trade.” His profit, he said, had almost tripled.
“It was a perfect trade,” said Naoki Murakami, who follows CIS on Twitter and whose markets blog has made him a minor celebrity in his own right.
Trash Talking
Last year, when he was the subject of a profile in Bloomberg Markets magazine, CIS said that in a decade of day trading, mostly from a spare bedroom in a rented apartment, he had amassed a fortune of about $150 million. At the time, he shared tax returns and brokerage statements to back up his claims. One document showed he had traded $14 billion worth of Japanese equities in 2013 — about half of 1 percent of all the share transactions done by individuals on the Tokyo Stock Exchange that year.
CIS became a cult figure among Japan’s tight-knit community of day traders by trash talking on Internet message boards early in his career. He’s notorious for lines like “Not even Goldman Sachs can beat me in a trade.” Last year he opened a Twitter account, on which he talks about video games and, regularly, his trading. It’s impossible to say how many of his followers are also day traders, and how many of those buy and sell in his wake. Those who do, of course, are quite possibly helping him make money.
Playing Poker
During the interview Tuesday at a Tokyo coffee shop, where he had agreed to talk before continuing on to a poker game with buddies, he explained his recent trades step by step. Dressed in a plain gray T-shirt with a flannel shirt tied around his waist, he was monitoring a brokerage account on his iPad and had a $1,600 burgundy under one arm, a 2003 Domaine de la Romanee-Conti. (It wasn’t a celebratory bottle, he said; he drinks a lot of good wine.)
“Of course I’m happy about today, but you win some and you lose a lot, too,” he said, explaining the Greek financial crisis had cost him about $6 million.
CIS said he has no idea whether or not China is going to drag down the global economy. He doesn’t even care. When he trades, he tracks volumes and price moves to follow the momentum. For him the basic rule is: “Buy stocks that are being bought, and sell stocks that are being sold.”
Latest Trade
The latest trade began on Aug. 12, when CIS noticed a shift in equity markets he hadn’t seen for a while. Shares in the major indexes were struggling to recover from sell-offs. He started shorting Nikkei futures: 200 contracts the first day and another 1,300 over the following week and a half.
The stakes were enormous. With 1,500 contracts at a notional value of about $160,000 each, his bet against the Nikkei was about $240 million. For every 100 yen move in the index, he stood to make or lose $1.25 million.
The market was mostly flat over the next few days; CIS bided his time playing video games. On Friday Aug. 21, the Nikkei dipped. Then on Monday, the index plunged the most in two years, and the futures fell more than 1,000 points to 18,410. By the close at 3 p.m. in Tokyo, his profit stood at about $13 million.
Feedback Loop
This is the point where most traders would take their money off the table and call it a year. Not CIS.
“I’m adding to my position,” he wrote on Twitter. “Then I’m going to go for a walk and prayer.”
He sold 100 more futures contracts. Two hours later, he sold another 100. His bet against the Nikkei had risen to about $275 million. He would lose $1.4 million for every 100-yen increase in the index.
His logic for hanging on to the trade until the U.S. open, at 10:30 p.m. Tokyo time, was this: Panic would grip American investors returning from a weekend after they saw the scope of Asian selling, including Shanghai’s 8.5 percent plunge. That would trigger selling, which, in a feedback loop, would pull Nikkei 225 futures down violently amid the thin volume of late-night trading.
“I figured there would be a lot of fear around the U.S. open and that’s what I was aiming for,” he said.
On cue, the Dow Jones Industrial Average fell more than 6 percent in early trading. Nikkei futures tumbled again, dipping 1,250 yen below the 3 p.m. closing level. CIS, home in his pajamas, finally cashed out his short position. His profit had hit $27 million.
“Too Delicious”
There was still more money to be made from the panic though. Some investors that night were willing to pay a hefty premium for options that protected against the Nikkei crashing below 10,500. That would be a collapse of almost 40 percent. In CIS’s view, these investors were looking to buy insurance against a near impossibility.
He was happy to take the other side of that trade. The contracts were worth another $250,000 to him. He made the first deal within 10 seconds of what would prove to be the market’s bottom at 10:34 p.m.
“Too delicious,” he tweeted.
About an hour later, as he became more confident in a rebound, he started buying Nikkei futures. Now the play was the opposite of the short bet he’d started the day with. By 1 o’clock Tuesday morning, he’d accumulated 970 contracts, a $145 million wager that the market would start to climb.
He made one more trade before bed: a few more option contracts sold to straggling panickers. Those were worth $6,250. By now, at 1:40 a.m., he was a rich man stooping to pick up pennies.
He dashed off a last tweet at 2 a.m. “What a day. Still holding on to all my buys,” he wrote. “Time to sleep.”
The Rebound Trade
CIS returned to Twitter five hours later. Nikkei futures opened at about 18,000 and slowly recovered. Early that afternoon, he closed out his long position.
At the coffee shop later that day, CIS was pretty nonchalant for man who had made tens of millions of dollars in less than 24 hours. For him, it was just one trade out of thousands he would make this year.
“When a trade goes right I feel like bragging a little, but I don’t get on Twitter to talk about it if I lose,” he said with a laugh.

 
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Posted by on January 26, 2016 in Uncategorized

 

Peter Lynch: Making Money by Investing in “Fast Growers”

“The investor of today does not profit from yesterday’s growth.” Warren Buffett

Most of us have relatives who like to fashion themselves as ‘stock-gurus’, with their stories revolving around how they ‘could have been’ millionaires now, if only they had held their nerves. The stock that comes up frequently in these conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of Infosys in the IPO (that went undersubscribed in 1993), 51,200 shares (adjusted for bonus issues) worth sum of Rs. 5,46,30,000 would be in your kitty.

Infy has given CAGR returns of whopping 48.2% to investors during last 22 years. Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at 5 crores and 46 lakhs today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?

A Fast Grower is a small yet aggressive & nimble firm, which grows roughly at 20-25% a year. This is an investment category which can give investors a return of 10 to as much as 200 times the investment made by them. No doubt, it remains a favourite of Peter Lynch!

In 1950s, the Utility & Power Sector were the fast growers with twice the growth rates to that of the US GDP. As people got more power-hungry gadgets for themselves, the power bills ran through the roof & the power sector surged with booming demand. Post the Oil Shock in 70’s, cost of power generation became high with power tariffs going up; people learnt to conserve electricity. Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar decline was observed in the Steel Sector & Railroads. First, it was the Automobile Sector, and then the Steel, followed by Chemicals & Power Utility & now the IT Sector is showing signs of slowing down. Every time, people thought, rally in the fast growers of the age would never end, but it did end, with people losing money as well as their jobs. Those who thought differently like Walter Chrysler (founder of Chrysler Corporation), who took a pay cut and left the railroads to build new cars in the turn of the last century, became the next millionaires.

Three phases involved in their life cycles, are:

1. The Start-Up Phase: Majority of the companies either burn up all the cash or run out of ideas by the end of this phase. Maximum casualties have been observed here, making it one of the riskiest phases. However, maximum returns can be made from them, if one enters near the end of this phase.

2. Rapid Expansion Phase: The Company’s core proposition has worked now, with the strategy being replicated by expansion of product/service portfolio or consumer touch points.

3. Mature Phase: Growth slows down, either due to high debt or low cash, owing to the massive expansion witnessed in early stage. Fall in demand or legal restrictions might also contribute to faltering growth.

The trick is to track, which phase the organization is in, at the moment. If the firm is in late start-up phase with possibility of moving to rapid expansion phase, buy the stock when it is still cheap. Once firm’s earnings start falling with its products witnessing poor demand, it’s time to bid goodbye to the stock.

The key parameters involved in Peter Lynch’s ‘two minute drill’ are:

1. P/E Ratio: avoid stocks with excessively high P/E

2. Debt/Equity Ratio: should be low

3. Net Cash per Share: should be high

4. Dividend & Payout Ratio: should be adequate

5. Inventory levels: lower the better

Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.

Checks specific to Fast Growers:

1. The star product forms a majority of the company’s business.

2. Company’s success in more than one places to prove that expansion will work.

3. Still opportunity for penetration.

4. Stock is selling at its P/E ratio or near the growth rate.

5. Expansion is speeding up Or stable

One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.

A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.

1.The quarterly sales decline for existing stores.

2. New stores opening, though results are disappointing: weakening demand, over supply.

3. High level of attrition at the top level.

4. Company pitching heavily to institutional investors talking about what Peter Lynch calls ‘diversification’.

5. Stock trading at a P/E of 30 or more, when most optimistic estimates of earning growth are lower than 15-20%, thus, unable to justify the high price.

Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!

If you feel its difficult for you to identify Fast Growers stocks at early stage, you can subscribe to our Hidden Gems and Value Picks subscription services. We put best of our efforts to identify companies having potential to give exponential returns in medium to long term. Its our mission to ensure that you reap the best returns on your investment, our objective is not only to grow your investments at a healthy rate but also to protect your capital during market downturns.

 
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Posted by on January 9, 2016 in stock market

 

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