Massacre Scene <殲景>

The week of falling knifes

A Technical Analyst and a Fundamental Analyst are chatting about the markets in the kitchen. Accidentally one of them knocks a kitchen knife off the table landing right in the fundamental analyst’s foot! 

The fundamental analyst yells at the technician, asking him why he didn’t catch the knife? “You know Technicians don’t catch falling knives!” , the technician responded. 

He in turn asks the fundamental analyst why he didn’t move his foot out of the way? The Fundamental analyst responds, “ I didn’t think it could go that low”.

Summary of the week

The market volatility this week is unprecedented and unnerving to many whom had enjoyed close to a decade of relative peace and tranquility. Circuit breakers were triggered at stock exchanges and the fear and greed index registered fear metrics close to the 2008 GFC era. The stock market is a roller coaster ride indeed. It was all fun and chuckles when it is making its slow ascent up. It is when it start crashing down. That is when all the screaming begins. 

Portfolio decisions 

Berkshire B

I intiated a position on Berkshire B at the on start of Monday 09 Mar to attempt to capture the Monday effect as well as the negative momentum after the circuit breakers has been released. Claiming that I have a sizable warchest is a travestry compared to the USD 128B war chest of the Berkshire pair. Although I am generally averse to investing in hard-to-analyze conglomerates in general, Berkshire has a history of documenting the discrete and diversified businesses to average shareholders in its shareholder reports and this is a leap of faith more than anything else. This is a high conviction position sizing due to the below. 

I like the strong operating business like the GEICO insurance arm, BNSF Railways and Clean (and cheaper than industry) energy production alongside with the discrete business arms (Sees candies) that are generating strong operating cash flows. I like the managers whom are not shy of posting their obituary in their annual report to assure everyone of the continuity of their legacy (sharing limelight to the successors) and are rational right to the bitter end (selling newspapers when it is apparent the demise is inevitable). I like the corporate structure of decentralised operations to reduce red tape and layers of redundant middleman managers, and centralised financing structure to optimize cash flow allocation within the operating businesses. I particularly like the contrarian positioning of the Berkshire liquid securities portfolio (airlines, banks, 128B war chest) which is designed to capture alpha once market conditions eventually normalize. 

HK Tracker fund

While others are worrying over capturing falling knifes, I am remorsing about missing the boat. While I was peering through the China index price charts and sucking my thumb, the CSI300 index recovered and never looked back. (*Edit*Before it crashed again and triggered my price alert on Friday the 13) 

Considering the fact that HK tracker fund has HK listed businesses that were directly exposed to China without the downside risks / legalese of the Stock connect scheme, I am reasonably satisfied with the buy decision. China noticably has recovered fron the corona virus despite the short term disruptions to supply chains. Nonetheless, as the global stock markets continue to register record declines, I need to be disciplined in my buy positions in the CN indexes.

War chest

Everyone likes talking about accumulating a war chest to prepare for market crashes. What is little mentioned is that the drawdown of a war chest is usually as quick as the market crash. The speed and the severity of the crash is unexpected and I need to pace myself for the marathon. 

Since I don't have the foresight and financial capacity to accumulate a USD128B war chest, I have opened a CPF Investment account to position myself for  Singapore equities. Compared to margin / leveraged buying, using CPF funds allows me to tap on (float) that cannot be margin called when the brokers are feeling jittery. 

Thoughts about CPF Robo advisers

Considering the fact that correlations of asset classes trends towards 1 in market stress, optimal portfolios / efficient frontiers get distorted as investor utility functions and risk appetite shrinks during market corrections, I will not be utilizing the robo-investors to tap on CPF funds. Robo-investors have the tendency to use past data to optimize volatility adjusted returns by selling assets that fluctuate the most to reduce risk rather than security level analysis of the underlying assets, and generate huge churn. This is not financial advice and merely based on my limited comprehension from the white papers and understanding of the Efficient frontier / CAPM models. 

Conclusion 

Bad times always seem to drag on forever. The recency bias of investors will be exxagarated by negative headlines in a negative feedback loop.To end up with a quote from John Templeton. 

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”