(CHOIVO CAPITAL) Conversation with a top tier trader, and lessons learnt.




Opening
Ever since I started posting on I3, I met quite a few people in real life. Some traders, some investors, some a mix of both, all of which are good people. And sometimes, I manage to meet someone who is truly amazing and teach me a few things.
For the most part, if they are an investor, often time we match up quite well, and I learn certain things, but nothing major. No surprise there. Not because im particularly brilliant or anything, but because we often drink from the same sources. And there is few things you can learn beyond Warren Buffet, Peter Lynch, Phillip Fisher, Charlie Munger, Seth Klarman, Benjamin Graham, Walter Schloss etc.
However, i also met a trader on I3, who is truly a cut above, both in terms of his thinking and his results. And I can’t tell you how hard is it, to meet a trader who has a clear mind and is intellectually honest.
I can honestly say, I think I’ve learnt the most from him, compared to everyone else. Mainly because we think so differently, and have such different experiences, and yet somehow, we can understand each other because we try to be as intellectually honest as much as possible.

Background on the trader
Like me, he is also 26, and like me, we both started from relatively small capital. The difference is that he started trading since 19. And his results is far, I mean far far above mine and anyone else I know.
He started with less than RM20,000 in 2011. And up until 2015, he obtained returns of roughly 30% per annum. In 2015, he started working, and basically put all his earnings in. In 2016, he got returns of 100% and in 2017, he got returns of roughly 500%. In 2018, he is up about 10% plus.
In essence, he turned less than RM70,000 in net capital to almost RM750,000 in 7 years. He did not keep accurate results in terms of fund units. That is CAGR is at least 40% per annum. It’s likely much higher than that as he put in a significant portion of the capital late, and that capital got 200% and 500%.
And to top it all off, he did it with zero margin. There is some luck, but its a lot less. His alpha is clear for me.
We started speaking on whatsapp since last year, and it’s only the last week or so that we manged to sit down and talk properly for a few hours.

The conversation
I thought a lot of how to structure this post, and I think the best way is to do it like a conversation. It is not exactly how the conversation went, I edited heavily for clarity and relevance. As well as adding in some of our whatsapp conversation that I think is relevant.
I try to structure it by topic, and well, I hope it is as useful to me as it was to you. Its not the best formatting, as the conversation was quite wide ranging and we jumped from topic to topic very often.

Jon: All right, tell me roughly how you do you trade? Personally, I’m really curious about your thought process when you trade. I remember in March and April this year, when I was at one point down 25%. I was both fine and wasn’t.

I remember that completely wiped off all my previous return and more. And I wondered, what was I doing? I did things that were logical to me and people whos thought process I respect. And despite studying so much, my paper losses made everything seem like a waste of time. Luckily, I had the mind to trust my process, to hold and continue buying and averaging down.

I’m surer now, but I remember that was the point, I wondered if I should try trading again.

For me, in the end, i decided that i was only going to make money while doing things that are correct statistically over a large sameple size, and  logical to me. Seeing other people make more money than me is perfectly ok. My competition is myself, not others. All i can do is improve my decision making process.

Having said that, it was a low point, I remember asking you then how you did, so how do you do it again?

TTT: Well the principle is relatively simple. I trade companies I like, in terms of fundamentals and valuation, using technical analysis.

I focus a lot on finding sudden and explosive earning, that can last preferably a few quarters, and in terms of valuation, prefer PER of less than 15. This however changes depending one earnings.

I also try and read the sentiment and expectations of the market and act accordingly. This one is probably harder to explain and just require experience.

I have a cut loss of 15% and I use zero margin. Sometimes I go past the cut loss, but not by far.
 
Jon: Ok. The moment you said technical analysis to me, even when we first met, I almost decided not to take you seriously at all. Technical analysis is a waste of time. It’s like trying to predict the weather, its only roughly accurate in very short term, and even then it’s not that accurate either, it only makes sense in retrospect. That is well, pretty damn clear. I can never find anyone who can defend or articulate it in a logical manner.

And it only works in bullish markets, in bear or recession, it’s absolutely useless.
 
TTT: Well, you are right. TA makes absolutely no sense. The price of a stock logically have no relation to the past. Past movements of the stock mean nothing. The future price is based on the fundamental earning change. Having said that, in a rising market TA does work. I mean, I’ve used it very successfully for the last 7 years.
 
Jon: That must be quite difficult. How do you use something illogical in a logical manner? Hahahaha. I mean, it works until it does not, and when it does not you get murdered, as we can see very clearly in March to May. The sheer amounts of complaints OTB got is insane. It’s very clear that most was probably at least 30 plus percent down. How do you make sure you do not get your balls chopped off during the downturn?
 
TTT: Hahaha. Well, I have a cut loss, which I stick quite closely to, and I only trade during times when sentiment is good.
 
Jon: Well, how do you determine when sentiment is good. During the 2008, they were 3 times on the way down, when one could think that sentiment is improving. Using your cut loss at 15%. Assuming your follow it very very strictly, and cut exactly at 15%, and that you are able to do it, and the price does not blow past your cut loss. You are still looking at a loss of roughly 40%. After the third jump.

How could you possibly find it within yourself to buy again when it was at the very bottom?
 
TTT: Well, like I said I have a cut loss, and I only trade when sentiment is clearly positive.
 
Jon: So I’m guessing when sentiment is bad, you hold cash? How many percent did you hold around March to May?
 
TTT: Well they range, but most of that time, I held 85% cash.
 
Jon: Well, if you were to study the percentage of cash to index movements. People tend to hold maximum cash when the prices were absolute lows, and minimum cash when prices were absolute highs. That is clearly the opposite of what people needed to do. And historically and statistically, those who held the least cash, and put the most to use during those times, are those that made the biggest money. How do you make sure you make the big money?

During the big drop in March to May, I remember telling you prices were too cheap, and for example Liihen was 2.2, LionInd was like 0.6 ish in July, or many more. You were asking me if you should buy last week when Liihen was like RM3, or Lionind was like RM1.1. Clearly the timing is completely off.
One of the most expensive things in investing is comfort. Selling stocks in a bull market is very uncomfortable. And so is buying stocks in a market that is nose diving.
However, these are the right things to do. And it's always in retrospect that one really realizes that.
There is always natural inclination to want to wait till the future clears up a little, for current uncertainties to resolve.There's a certain comfort that comes from the consensus of many others.
However, a cheery consensus and a large number of other intelligent people making the same investment choices as you almost mathematically insures that you'll do the wrong thing at the wrong time because prices now reflect at consensus.
Low risk, high uncertainty situations are the friends of a buyer of long term values.
 
TTT: Well, you are right. Having said that, in hindsight it was the right move, but a crisis might have very well happened, and I may turn out to be right.

Having said that, my strategy means I need to be ok with not making the big money, in exchange for making the easy money, the ones based on momentum or sentiment.
 
Jon: Ok, that is interesting way to look at it. Do you use cut loss? I mean you know my perspective on it. I think it’s completely stupid and illogical.

Cut loss is like having a real estate agent coming to your house and saying “There is an offer for your house of RM600,000”. And you reply saying “I’m not interested, but if someone ever offers RM500,000, please sell it, and the lower they offer the harder you should try to sell”.
 
TTT: You are right. But you are investing. I’m not, I’m trading.

Jon: Your gambling and speculating you mean? I know it sounds dirty, but i dont mean it that way. I do
enjoy poker, and I do gambler in those scenarios, or in Dota Games or elections, ahahahaha.

You are gambling or speculating intelligently?
 
TTT: Yeap, I am gambling, and when gambling, cut loss is key.
 
Jon: In 2015, in the US, a lot of investors put cut loss, and during the flash crash, they literally saw their cut loss blown past and their stock being sold at incredibly stupid prices. And in literally less than half an hour later, they saw their sold stock rise far above the cut loss price.

This was also what happened in the 1990’s flash crash, when portfolio insurance was the hype.

How do you make sure this does not happen?
 
TTT: Well, my cut loss is usually a lot less than most, in addition, most of the times, I don’t actually put the cut loss in my trading software. Having said that, my capital is still small, so I’m fairly certain I can still make it.
 
Jon: That’s a little sloppy. Hahahaha
 
TTT: Yeah.
 
Jon: Let’s talk through your biggest trades, HengYuan and JHM. I think they cover most of your trading style. What was your sizing?
 
TTT: Well ok. For JHM and Hengyuan, when I started that round my capital was about 150k-200k. For those, I really sailing, I had up to 75% in one stock some times. Yeah it was damn risky, these days I usually put 15-20% max, but back then I was damn aggressive.

So for the JHM, basically I rode it up during that 3 to 4 quarters where earnings exploded. I traded by selling the tops and buying the bottoms, usually ill make like 5% to 10% each round. I got out of the position at some point when it became too high. It was then Hengyuan came up.

For Hengyuan, I saw Icon8888 article, and OTB made his recommendation in the subscription. I bought around RM7-9, close to 75% position, and I traded the tops and bottoms. I dropped the position by about 20% at RM11 to Rm12. Another half at RM14 to RM15, and sold all by RM17.

 
 
Jon: OK, I’m not too familiar with the JHM movements or story, but im more familiar with Hengyuan, in any event, its more exciting anyway.

The main thing that I want to ask, is how do you maximize your return? You sold 20% at RM11 or RM12, didn’t you feel any regret when it went up to RM14 to RM15, and When you sold some at RM14 to RM15, didn’t you feel regret or stupid when it went up to RM17? And same thing when it got to RM21?

I mean you see the stupid comments on the forums, where they keep saying should have held longer or I should cut loss, where the right or wrong decision wholly depends on the outcome and not the though process.

How can one even make logical decisions in that scenario or with that way or thinking?
 
TTT: Well, for me. I am very clear that I am gambling and speculating. So for me, it’s like a bonus each time I sell at a higher price, and I don’t aim to make every dollar, but the safer ones.

I know it’s not worth that fundamentally, so I try to sell in batches to optimize abit the return, but once I sell, I don’t regret or look back. Though tbf, I did rebuy at RM7 to RM6 and resold when KYY fired, but I generally waited.

I mean I did get tempted at RM13, but I didn't buy in the end.
 
Jon: That really interesting to me. One thing I noticed is that, you seem to have a very clear understanding of what you’re doing. You don’t mix between investing and speculating. Most speculators tend to think they are investors, and bad speculation, turns into investment in the long term.

Having said that, didn’t you lose a bit in MYEG, when you bought at the second limit down, and didn’t manage to sell when it dropped the next day. But you manage to sell during the rebound. Why did you keep for the rebound instead of just selling.
 
TTT: Well, I was away from my computer, it dropped too fast, and by the time I was back, it was far past the 15%. It wasn’t that big of a position, only about 15% but still kind of sucked. I just decided to wait it out based on a gut feeling.
 
Jon: Haha, it’s really hard to differentiate the luck and the alpha, I mean in Muda you almost got chopped, you bought early and sold literally the day before the result that gave the limit down.
 
TTT: Yeah I guess. For that I sold as I felt expectations was too high before the results. The result was correct ish, but forex whacked. So before, I needed to take into account unknown factors in my returns.
 
Jon: One of the things I found interesting, is how you didn’t use margin. I mean, most traders use margin, and like the stockraider argument, it only cost 5%, given you CAGR of probably higher than 40%, why didn’t you take it?
 
TTT: Well, I prefer learning from other people’s mistake. And listening to people speak about crisis in hong kong etc, its clear that margin is the problem. If I had margin when I started, I think I would have lost a lot of money due to calls.
 
Jon: What is the risk for you? For me it’s the ability for someone else to sell your stock, at precisely the moment I don’t want to, that is a huge risk for me.
 
TTT: Yeap exactly that. Also, it can be really tempting to sailing in stocks when it’s really cheap on margin, but in recession, it can drop from RM7 to RM2. You think its cheap, you sailing, and it drops to RM1 and wipe out your capital. Just too dangerous.
 
Jon: One thing im curious about is this. One of my motto's in life is, "If you dont attempt to manipulate others, you cannot be manipulated"

Put in the context of relationships. Guys who complain about being used by a girl for free drinks, lunch dinner etc. Are often guys who are trying to manipulate a girl into a relationship with him via those things instead of just being honest and straightforward. And because of this, she is able to manipulate him into giving her those things via the mere possibility of sex. Because she never had to say "yes" or "no", but just maybe.

While girls who complain about guys who just sleep with her, while keeping her on a string in terms of the possibility of a relationship. Well, they were trying to manipulate the guy into a relationship by sleeping with him. And him knowing this, is able to manipulate her into sex, with just the possibility of relation. Because he never had to say "yes" or "no".

Likewise, in trading. The only way you can lose money trading sentiment etc, is by trying to make money trading sentiment. The only way you can lose money in a bubble is by trying to make money via a bubble.
How do you make sure you are not the one being played by others while trying to play the other person?
 
TTT: Well, i try to be less greedy. And to be honest, its always worked for me.
 
Jon: Why not be the least greedy and not do it at all? Hahahaha


TTT: Hahahahaha
 
Jon: Do you have any plans to do investing? I mean we spoke a lot on this on whatsapp, one of the pick you were talking about for medium term investment is Layhong. Prices have dropped a bit lately, and you actually knew it would drop, at one point, it was actually more than 10% positive for you. Why didn’t you trade.
 
TTT: Well this one is a medium term investment, so im not to trading it.
 
And that is it. We spoke a lot more on a couple more topics, but that would be too wide, random and long a piece. Having said that, he has one of the sharpest and clearest mind in I3 for me. A real rarity.

How does one trade for income, invest for the future, and be able to buy more when a recession comes?
While I was in Johor, I also met another investor. He is able primarily a trader, but has a significant investment tendencies and ability.
He too has a fairly decent return and a fair decently sized portfolio (triple mine probably). I asked him, why do you feel such an urge to trade when you know investing for absolute return is the best way and your capital is more than enough.

He said, “Well, I have three children, most of my salary goes to feeding them family and keeping a roof over their heads and a car, so any additional income and growth in capital needs to come from my investment/ trading portfolio.”

According to him, he has a main cash portfolio, and a margin account backed by FD. One of his main concern is that how does he make money from trading without risking too much capital, and how does he be able to have the cash to invest during a crisis, when he can save so little?
We discussed for a while, taking into account the methods of my top trader friend and this is the solution we came up with.

Portfolio management for a trader/investor.
  1. Open two portfolio. The first is pure cash only, and the other is a margin trading account. I would suggest portioning it 80% in the cash investment account, and 20% in the margin account.
     
  2. For the cash account, you will only buy long term investments, that you are absolutely sure of its intrinsic value, no gambling, trading, sentiment reading at all, pure absolute value long term investing. Any selling or buying needs to be based on fundamentals and discount to intrinsic value. You only sell when fundamentals change, or if it went up too much.
     
  3. For the trading account, you will trade stocks based on sentiment news etc. The key thing you need to know is, one, you are trading rubbish companies like HUAAN etc. Or you do not really understand the company.

    You are gambling. The key thing here to make sure you don’t get confused, is to not mix your cash and gambling picks. Stock you buy for investment, you cannot trade with. Stock you buy for trading you cannot buy for investment.

    You have a very clear cut loss, which needs to be based on the leverage used.

    Assuming your use FD backed margin accounts, If maximum 3 times leverage is used, a 5% drop means you need to sell everything. 2 times, mean you need to sell out all at 10% drop. Just one time leverage, you need to cut at 15%. No exceptions.

     
  4. In times when sentiment is bad, you will not trade at all. And if your cash investment portfolio drops by at least 30%, you will only then move it to margin. And you will margin up to 50% of your capital maximum. And you will only leverage up very slowly at 2-3% per week. And only if you are very very sure.

    If you feel sentiment consolidating in the recession (do note can consolidate and drop a few times), you can trade, but must adhere very very closely to cut loss.

    You are gambling, don’t ever forget that. If needed, you should consider moving it all to the investment portfolio, if the former drops by more than 50%.

    As you will be holding your investment portfolio all the way down, and buy as you go. You must make sure you are very very very very clear about your companies what they are worth. The economics and the valuation.

    And if you’re actually correct, chances are it won’t drop more than 50%. If you were to leverage up to 30% once your portfolio is down 30%, chances of you ever getting margin called is very close to zero. You may want to lower it to 25 to 20% to be more safe.

    You cannot make a mistake in valuation, economic characteristics, or margin of safety. Because you are holding and buying more all the way down.

    If you are wrong, they won’t be a rebound.
 

Conclusion
I hope this was as useful to you, as my conversation and discussions with these people were. Good luck.

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