Tomahawk's Cabin

*Note: Click on the image above to view in full size.

Glacier Sun Rise

*Note: Click on the image above to view in full size.

Sea Side

*Note: Click on the image above to view in full size.

Outright Speculation

Amount of fund available	=	RM 1,000,000.00
Number of contracts purchasable	=
	=	18.35 (round down to 18)
Fund balance	=	RM 1,000,000.00 – (RM 50 x 1090.0 x 18)
	=	RM 19,000.00

Thus 18 contracts will be traded. The fund balance will be used to pay off the margin required to trade in the futures market. The exact mechanism of trading is calculated as follow:

Date	Action	Result	Gain/Loss (RM)
8 Jul Tue	Buy 18 July KLSE CI futures contracts at 1090.0. Pay initial outright margin of RM 4,000*. Futures contract closed at 1090.0.	Initial margin: Gain/Loss:	-4,000.00 0.00
9 Jul Wed	July futures price rises to 1116.0. Hold the position. Value increase = 26 points × RM 50 × 18	Variation gain:	23,400.00
10 Jul Thu	July futures price rises to 1125.0.Hold the position. Value increase = 9 points × RM 50 × 18	Variation gain:	8,100.00
11 Jul Fri	July futures price rises to 1142.0.Hold the position. Value increase = 17 points × RM 50 × 18	Variation gain:	15,300.00
14 Jul Mon	July futures price decreases to 1131.0. Sell the contracts. Value decline = 11 points × RM 50 × 18 Redeem initial outright margin of RM 4,000	Variation loss: Initial margin:	-9,900.00 4,000.00
		Net gain:	36,900.00

*Note the latest initial outright margin announced by Bursa Malaysia Derivatives Clearing Berhad is RM 4,000.00.

After embark upon this business dealing, the following cash position is applicable:

Item	Calculation	RM
Contract cost when purchasing: Initial margin:	18 x RM 50 x 1090.0	981,000.00 4,000.00
Initial cost:		985,000.00
Contract value when selling: Redeemed margin:	18 x RM 50 x 1131.0	1,017,900.00 4,000.00
Final contracts value: Fund balance:		1,021,900.00 15,000.00
Total fund available:		1,036,900.00

After the first trading, we decided to watch the market in order to spot for another great purchasing price. The following table shows the futures prices a few days after the first trading was made:

FKLI Prices for Spot Month Contract 2008

Date	Open Int.	Open	High	Low	Closed
08-Jul 09-Jul 10-Jul 11-Jul 14-Jul 15-Jul 16-Jul 17-Jul	37,053 36,606 36,477 34,840 33,841 34,615 34,133 34,261	1,117.0 1,106.0 1,103.0 1,127.0 1,140.5 1,120.5 1,107.0 1,108.5	1,118.5 1,119.0 1,125.0 1,146.0 1,142.5 1,125.0 1,117.0 1,114.0	1,083.0 1,099.0 1,102.5 1,122.5 1,124.5 1,103.5 1,096.0 1,098.5	1,090.0 1,116.0 1,125.0 1,142.0 1,131.0 1,105.5 1,098.5 1,113.0

The table shows that the price drops to 1105.5 and then 1098.5 on 15 and 16 July 2008 respectively. We estimated that the price will drop even further. However, the market rebounded on 17 July 2008 to 1113.0. Thus we knew we had to react fast enough before we lost our trading opportunity. So, we decided to invest the fund we gained in first trading to the second dealing on 18 July 2008.

Amount of fund available	=	RM 1,036,900.00
Number of contracts purchasable	=
	=	18.93 (round down to 18)
Fund balance	=	RM 1,036,900.00 – (RM 50 x 1095.0 x 18)
	=	RM 51,400.00

Again, the fund balance above will be used to pay off the initial outright margin. The mechanism for the second trading is shown below:

Date	Action	Result	Gain/Loss (RM)
18 Jul Fri	Buy 18 July KLSE CI futures contracts at 1095.0. Pay initial outright margin of RM4,000.Futures contract closed at 1095.0.	Initial margin: Gain/Loss:	-4,000.00 0.00
21 Jul Mon	July futures price rises to 1105.0. Hold the position. Value increase = 10 points × RM50 ×18	Variation gain:	9,000.00
22 Jul Tue	July futures price dips to 1102.5. Hold the position. Value decline = 2.5 points × RM50 × 18	Variation gain:	-2,250.00
23 Jul Wed	July futures price rises to 1142.0. Hold the position. Value increase = 39.5 points × RM50 × 18	Variation gain:	35,550.00
24 Jul Thu	July futures price decreases to 1134.0. Hold the position. Value decline = 8 points × RM50 × 18	Variation loss:	-7,200.00
25 Jul Fri	July futures price remains at 1134.0. Hold the position. Value change = 0 points × RM50 × 18	Variation gain:	0.00
28 Jul Mon	July futures price rises to 1150.5. Hold the position. Value increase = 16.5 points × RM50 × 18	Variation gain:	14,850.00
29 Jul Tue	July futures price decreases to 1145.5. Hold the position. Value decline = 5 points × RM50 × 18	Variation loss:	-4,500.00
30 Jul Wed	July futures prices increases to 1160.5. Sell the contracts. Value increase = 15 points × RM50 × 18 Redeem initial outright margin of RM 4,000.00.	Variation gain: Initial margin:	13,500.00 4,000.00
		Net gain:	58,950.00

After the second trading as shown, the latest cash position is as follow:

Item	Calculation	RM
Contract cost when purchasing: Initial margin:	18 x RM 50 x 1095.0	985,500.00 4,000.00
Initial cost:		989,500.00
Contract value when selling: Redeemed margin:	18 x RM 50 x 1160.5	1,044,450.00 4,000.00
Final contracts value: Fund balance:		1,048,450.00 47,400.00
Total fund available:		1,095,850.00

Conclusion

After the speculation, we have successfully turned RM 1,000,000.00 to RM 1,095,850.00. It was a net gain of RM 95,850.00. We have produced 9.59% return for our speculation within two weeks. This is rather an astounding achievement for short-term speculation.

However, we also encountered various risks in this trading. Even though we were able to purchase at market bottom, we could not close out our position at the highest price possible. For example, we should sell at 1142.0 but only managed to do so at 1131.0. But this is something very difficult to practice in the real market because the trend of the market is unlikely to appear exactly as predicted.

Moreover, it is sometimes hard whether to remain patience or to act quickly in the market. This is due to patience may sometimes result in observing a market decline. On the other hand if we acted too fast, the real advance in the market may not fully materialize yet. Thus, this can be said as a matter of market timing and correct judgment. Besides, it is important for us to be confident with our analysis and stick with one principle rather than hopping to other so-called techniques if the market moves against us.

Finally, a good speculator will not follow the crowd blindly. We need to focus on our reasoning and make decisions base on appropriate analysis rather than following broker’s tips, friend’s recommendation or insider’s information.

Recommendations

Besides speculation, other methods such as hedging and arbitraging may also be very profitable if they are practiced with fine scrutiny. In fact, arbitraging is the riskless way to make profit in the futures market as arbitrageurs are taking advantage of the anomalies or mispricing of the futures prices in relation to the fair values of the instruments.

Moreover, other analysis style such as fundamental analysis should not be ignored because this type of analysis may be more accurate and reasonable. Key factors like industrial life cycle, business cycle and the interest rate should be taken into account when analyzing the performance of the market. In the sense of short-term speculation, the stance of monetary policy and the supply of money in the market should also be aware of in order to thoroughly examine the outlook of the market.

Sun Rise and Set in Hong Kong

*Note: Mouse-over your cursor on the image above and click to hide/display label.

Fish

*Note: Mouse-over your cursor on the image above.

Stick Men Fight

Animator vs. Animation 2

Animator vs. Animation

The Warren Buffett Way

Even though you have all heard this a million times, and it has been proven over and over, many of you will not heed this advice and will lose a lot of money in the long run for a shot at the big bucks.

Warren Buffett, Benjamin Graham, Bill Miller, and Peter Lynch are arguably the best investors of all time. The following will be the strategies for EVERY single investor who wishes to reduce risk and maximize return:

1.) Understand how the company makes money. If you can’t verbally explain to someone how they make money, you certainly shouldn’t own stock in that company.

2.) If you understand how the company works, and you wish to purchase stock in it, imagine this scenario: As soon as you purchase the stock, the stock market closes for 5 years. This means that you will not be able to sell the stock for 5 years. If you are still comfortable with the purchase, then it is a good investment. If not, don’t buy it.

3.) It is always a good thing when management owns a significant portion of the company’s outstanding shares. This doesn’t mean that a company whose management does not own a significant portion of the outstanding shares is a bad choice, though.

4.) The company should get a return on equity of over 15%. This is a Warren Buffett staple. A company that cannot generate 15% returns on their equity is not a very good company. There are exceptions to this, however. Growth companies who are still trying to make it off the ground generally don’t have this high ROE and oftentimes they have negative ROE. Successful investing in growth companies is not impossible, but it requires a bit more luck.

5.) If a company has been beaten down for a reason that is NOT related to their performance, such as analyst downgrades, a buy opportunity is created. Warren Buffett has a famous quote that goes: “Buy when there is blood in the streets.” Learn it, live it.

6.) It is a fact that the stock price of a company fluctuates up and down faster than the actual performance of the company. This means that the VAST majority of stocks at their 52-week high are actually overvalued. This also means that the VAST majority of stocks below their 52-week low are very undervalued. All the best investors would rather buy stock in a company near its 52-week low than near its 52-week high.

7.) Choose stocks with high cash and little debt. Hard times aren’t quite so hard when you have lots of cash on hand.

8.) If you are a growth investor, Peter Lynch suggests that you buy stocks with a P/E ratio less than the estimated growth rate. This results in a PEG of less than 1. Of course this uses analyst estimates, so it’s never a sure thing.

Along these same lines, it is also important to note that the companies which Warren and company must invest in are large, well followed (especially after he buys) companies. This puts them in the spotlight and raises the demand for stock in the company. Always true to form, the law of supply and demand forces the price up when the demand goes up and supply remains the same (for arguments sake, the supply would actually be less now that Warren bought a significant amount, which he has no choice but doing).

Investors should use a blend of value and growth in their investment decisions and never to invest in companies that are in the spotlight.

Aptera

*Note: Click on the image above to view in full size.

High Alpine Landscape

*Note: Click on the image above to view in full size.