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Volume I - December 2, 2023Know Thyself

Know ThyselfIt is fitting for me to begin the inaugural My Two Cents with an ancient Greek maxim: Know thyself.In the mid-1990s I was a summer volunteer for a stock broker at CIBC Wood Gundy in Toronto’s financial district. I remember as if it was yesterday my visits to a book store located near a bustling underground food court. I would peruse the business and investing sections for hot new arrivals, reading whatever I could find about the stock market and especially trading. It was there where I purchased Jack Schwager’s Market Wizards and New Market Wizards before both books were elevated into the iconic publications they’re considered today. There are many legendary stories and lessons in both books, and from time to time I re-read them, but one especially sticks out: Schwager writes that, “There are a million ways to make money in markets. The irony is that they are all very difficult to find.”This astute observation is relevant today more than ever. There's so much information available online that it can be overwhelming. The explosion of financial product offerings, data and statistics, and people with opinions – including me, now, I guess – can easily leave an investor or trader flailing in the wind, without a personalized approach to manage his or her money (or have someone manage it for them).To be a successful investor over the long term is to set-up a system with rules that you know, are confident in, and adhere to. If that’s dollar-cost-averaging into index funds, amazing. If it’s trying to exploit merger arbitrage opportunities (see below for a current one), wonderful. In their 1996 Street Smarts: High Probability Short Term Trading Strategies, for example, Laurence A. Connors and Linda Bradford Raschke (who was featured in the New Market Wizards) write how they “Know two traders who do nothing but trade the “anti” pattern from a five-minute S&P chart.” These two traders found a winning niche and stuck with it.Whatever your niche is, become an expert, find a comfort zone and a personal edge. What you shouldn’t do is follow the latest trend or trade – know where you’re putting your money and why, don’t be left holding the bag for others. Know thyself because there’s a million ways to make money and you just have to find one.My Two Cents: on March 13th, Pfizer announced that it would acquire Seagen (SGEN) for $229 per share in cash (the deal is worth $43 billion). In October, the European Commission approved the acquisition. That same month, Pfizer's CEO remarked that, "We are really keen to join forces with Seagen ... We are going to kill cancer." If U.S. anti-trust authorities approve the deal, it's expected to close this month or early 2024. Seagen's stock, however, closed yesterday at $212.72, meaning if the deal goes ahead without a hitch, investors will be able to lock in a ~$16 per share or 7.7% profit. If regulators do not approve the deal, however, SGEN will likely take a huge hit, perhaps down to its pre-acquisition level of around $170. For advanced investors, there could be a favourable risk/reward trade where options are used to capture the difference while purchasing protection in case the stock drops.What's in your wallet?Samuel L. Jackson popularized this saying in a series of commercials for a major credit card company in the early 2000s. Similarly, I’d like to ask you, “What’s in your portfolio?” More specifically, what’s the reason – or reasons – you first put a particular stock, ETF, bond, or other investment in your portfolio?Did you do a deep dive into the company’s financials or did a technical set-up trigger the purchase? Was it because you saw a persuasive segment on CNBC or perhaps people on Twitter – it will always be Twitter to me, sorry – were extolling a certain investment’s virtue?Whatever the case is, you should think about the reason you first put your hard-earned money into an investment. Then, when you’ve compiled your list, go through it critically and ask yourself if the reason(s) are still relevant. Are the company’s financials still strong? Do the technicals show strength or weakness? If you bought what you thought was an undervalued company, is that still the case? If an attractive yield pushed you to purchase a stock, is the current dividend payout still worth holding on?Having high conviction is necessary to be successful long term; without it, whatever enthusiasm drove you to buy something will, like a sugar rush, eventually normalize, opening the door for your money to sit there without a distinct purpose. Often, if we’re losing money on a stock, we’ll just let it sit idle, not wanting to realize the financial loss, forcing us to carry the baggage, but also depriving us of reallocating funds to other, better opportunities.Take a look at your portfolio: do the investments make sense; are they part of a coherent strategy; do they complement each other? There are other questions you can use to critically analyze your portfolio, these are just a few to get you started, but the main point is don’t let your money sit somewhere without an ongoing and discernible reason.After you’re done, reward yourself by watching a Samuel L. Jackson movie, I like The Negotiator.My Two Cents: I'm intrigued by dentalcorp Holdings Ltd. (DNTL), Canada’s largest network of dental practices. The stock is down significantly year to date, but is forming a base around $5.50. One potential growth catalyst over the medium to long term is the federal government's new Canadian Dental Care Plan (CDCP). While program details are not yet public, Ottawa estimates that "9 million uninsured Canadians" will be eligible for the CDCP. Budget 2023 proposed $13 billion over 5 years, starting this fiscal year, and $4.4 billion ongoing to implement the CDCP. If dentalcorp can benefit from this national program, it could provide the company with a new and steady stream of revenue.Finally, Charlie Munger passed away on Tuesday at the age of 99. He was a true legend of the investing world whose legacy - and well-known wit and wisdom characterized by his famous "Mungerisms" - will live on for generations to come.See you next week,Evan

Volume II - December 9, 2023A Stock Market Secret

Sale! Sale! Sale!Everyone loves a good sale. Even if you’re not actually getting good value for your money, as long as you think you are, you’re happy about it.One place where most people don’t like sales - even get scared of them - is the stock market. As prices go up, people are happy (greedy, even) and they giddily buy more. Now, not everyone is like this, but most people are, contributing to long term underperformance for amateur and professional investors. The opposite is less common but true, too: those who patiently wait for stock sales and prudently capture them tend to outperform over the long term (the old buy when there’s blood on the street adage).Helene Meisler, a noted trader, has a pinned Tweet from November 2016 that succinctly captures this dichotomy: “Nothing like price to change sentiment.”People often feel psychologically safe when prices are rising and they’re buying, but is that actually a profitable investing strategy? The most important thing for a successful investor and/or trader is risk management – a topic we’ll cover in-depth in a future volume. A key component of risk management is your entry price. The better your entry price, the more “margin of safety” you have – a phrase popularized by a hard-to-find book by the legendary Seth Klarman.In order to secure a good entry price, you need a stock sale! While there are exceptions and companies you should stay away from regardless of price (e.g., consistently unprofitable/failing companies or value-traps), here’s a secret: as the price of a stock declines, it becomes safer. Everyone was a "genius" buying Facebook (Meta) on the way up in 2020 and especially 2021, but when it cratered and fell below $100 in the fall of 2022, nobody wanted to touch it (it has more than tripled since). What do to? Develop a shopping list: know which companies you want to buy, and why, and when they go up for sale, snatch them up.My Two Cents: It's the season of giving and what's better than a 20% return on your investment?! OK, there's a catch, but still, it's a "guaranteed" return! For those with children and/or grandchildren, opening a Registered Education Savings Plan (RESP) is a great way to save and grow money (tax free) for future education-related expenses. Through the Canada Education Savings Grant, the federal government pays 20% on your annual contribution (to a maximum of $500, and a lifetime limit of $7,200). Actually, if your net family income is less than $106,717, you can qualify for an additional grant. So with a $2,500 annual contribution (per beneficiary), you can earn a 20% return, and an additional five or so per cent on top of that if you park your money in a Guaranteed Investment Certificate (GIC). Granted, the money is not easily accessible and there are certain restrictions on how it can be used, but it can still make for a wonderful long term investment and an even better Christmas gift.I can make $10,000!Flights arriving into Las Vegas are full of optimistic people brimming with excitement of hitting a jackpot or steamrolling the blackjack or poker table. Flights departing from Vegas usually have a more somber tone to them, however.This emotional roller coaster has – and will – remain a part of the investing world, too, especially for those without an informed and grounded plan for their money. Full of excitement at a new opportunity, we often think about how much money we can make on an investment or trade, but it’s 100% the wrong question to ask yourself before committing your money.The better, more prudent question – and almost certainly a more profitable approach over the long term – is how much money can I lose from this trade; what’s my worse case scenario? This is another crucial component of risk management, which we referenced above.This approach may not be as appealing as thinking you're going to make a killing and be able to buy that villa in Greece you’ve always wanted, but it's the better way. There's nothing wrong with establishing an upside goal or target, in fact, you probably should do so – just don't be preoccupied with looking up without having a sense of how far you may fall down.As we discussed in last week’s My Two Cents, begin by asking yourself why you’re making this investment, what's the investment thesis or catalyst for you to put your money where your mouth is. This will help to determine your downside potential. If, for example, you’re buying because of a technical set-up, then make sure you have your stop loss level(s) clearly defined so that if you’re wrong, you can execute your exit strategy.Finally, I’d note that it’s much easier, and psychologically and financially safe, for you to do this before making the trade, because afterwards – especially if things aren’t going according to plan – emotions can take over and you’re approach to landing may get turbulent.My Two Cents: With the steep rise in interest rates, it's a good reminder not to have excess cash sitting in your investment (or chequing) account. While it's prudent to have some cash in your account (especially if you have forced withdrawals such as in a Registered Retirement Income Fund account), you're better off parking idle cash in a money market fund or cashable GIC so it earns a relatively decent return while you await a worthwhile trading or investing idea to present itself.See you next week,Evan

Volume III - December 16, 2023The Most Important Part of Trading and Investing

Risk ManagementI wrote in last week’s My Two Cents that the most important thing for a successful investor and/or trader is risk management.From my experience and perspective, applying a risk management lens is relevant throughout the investment process, but it’s especially critical before a trading or investing decision is executed.This principle, or better yet this approach or mindset to investing, can help to eliminate the possibility of a catastrophic loss, improve the likelihood of reasonable returns in up markets, and cushion the blow in down markets.There are many definitions of risk. The following condensed one is from my old but trusty Canadian Dictionary of Finance and Investment Terms.Risk: measurable possibility of losing or not gaining value. Risk is differentiated from uncertainty, which is not measurable.Here we have two separate but related concepts: risk and uncertainty.Things happen that affect the economy, the stock market, an individual sector, or a specific company that cannot be predicted. There are many example, including: a terrorist attack or unexpected military conflict; declining oil prices; the development of new technologies or services; and, a wide-ranging recall of a best-selling product. These things can and do occur, although there individual timing and impact are uncertain.Risk is different. There are more and less risky investments and we can make such a determination based on available and relevant information. All things being equal, for example, a big five Canadian bank is less risky than a junior gold miner. An upstart pharmaceutical more so than a well-established telecommunications company.Think about a company that has been in existence for many years, that makes a profit more often than not, and that pays a stable and growing dividend. Now contrast this company with one that is relatively new, has never turned an annual profit, and has no history of paying a dividend. Which company’s stock do you think would be a less risky — and therefore likely a better — investment over the long term?Together with risk, there is another important variable: price. That is, what price are you paying for your investment. This is a crucial component and should always be considered before making an investment decision. The price of a stock affects the risk of that investment in your portfolio.Our well-established and profitable company from the example above could actually be a more risky investment than the newer company depending on the price of each. Even the “best” and highly profitable company could be risky if the price you pay for it is too high. Nvidia $500 ask? No thanks, hard pass.Together with price, you also need to take into consideration value. The price and value of something is not the same thing. If you pay $10 for a wonderful meal at a nice Greek restaurant, that’s great value; but, if you pay $1,000 for that same meal, that’s obviously terrible value and should be avoided. It’s the same thing for any purchase, including those of stocks and other investments.What happens when you overpay for a stock? Well, the value you receive for it in return is low and the risk that it loses or does not gain in value is high, or at least higher. Having these types of investments means that your risk management is poor. It also means that the dangers to the downside are likely higher than the potential to the upside.How do you know if a stock price offers good value? It’s an important question: to start, one can look at the chart of a company’s stock to see its performance over a specific timeframe such as one or three-years, for example (this type of approach is referred to as technical analysis, to be discussed in a future My Two Cents volume). On the other hand (or better yet, in combination) one can leverage fundamental analysis to inform their investments and examine key metrics such as price/earnings, price/sales, price/book, and price/cash flow.The key takeaway from this volume is the importance of risk management, that is, the price that you pay for something is giving you good value and margin for error. This of course does not guarantee that you will not lose money (nothing can guarantee that), but it does decrease the possibility of losing or not gaining value.If you understand and apply the concept of risk management, you will have taken an important step in your trading and investing journey.My Two Cents: in Volume I, we discussed the merger arbitrage opportunity with Seagen Inc., which Pfizer proposed to purchase for $229 per share in cash; at that time, SGEN was trading at ~$213. This past Tuesday, PFE received the regulatory go-ahead to close the deal, creating a new oncology division in the process. SGEN's share price jumped that day, trading pennies below the $229 level - creating a nice return for traders/investors in the process.See you next week,Evan

Volume IV - December 23, 2023Making Money Around the World

Making Money Around the WorldI recently returned from a short trip to Motherland Greece.Both in Greece, as well as during longer than desired layovers in Zürich, Switzerland and Copenhagen, Denmark, I witnessed the hustle and bustle of the holiday season, with beautiful Christmas trees and lighted decorations.Whether it was Syntagma Square or the mall-like environment that characterizes today’s major international airports, shopping bags were abound showing the continued – and arguably surprising – strength of the consumer.My trip was a wonderful reminder that there are countless opportunities to make money around the world by investing in international stocks – something I would wager to guess only a small percentage of Canadian investors (if you exclude the American markets) take advantage of.This includes me, who, despite numerous forays in the trading and investing world, I’ve never taken the time to learn, read, and invest in international stocks.As an aside, growing up watching CNBC, I was always curious to see how the Nikkei, FTSE, DAX, and CAC 40 were doing, but my interest never went much further than the interesting acronyms.This is undoubtedly a lost opportunity for me and most investors. Canadian companies represent roughly 2.5% of the global stock market capitalization. Sure, the American markets account for the single largest of any country, which many Canadians are exposed to directly by owning individual companies or indirectly through ETFs/mutual funds or even employer-backed pension funds. However, this still leaves about half of stocks by market capitalization – and opportunities to make money – off the table, which is a tactical and strategic error.FYI: The Global 2000, published by Forbes, uses four metrics (sales, profits, assets and market value) to rank the largest companies in the world.To begin, for those who have self-directed investment accounts, you’ll want to confirm if and how you can invest in foreign stocks, although some companies have what are known as "American Depositary Receipts" listed on major U.S. exchanges. Other factors you’ll want to consider include: the frequency and reliability of regulatory filings – especially for companies listed in developing countries; the daily or weekly volume (liquidity) of a potential investment; exchange rate risk; and, relevant tax implications, if any. Of course, there’s always the ease of investing in an internationally-focused ETF/mutual fund route that one can take.While this may seem like more work than it’s worth, in today’s globalized world, there’s a lot more out there than what’s offered in Canada and the United States.If you already invest in international markets, especially in individual companies, I’d love to learn more from your experience and perspective.My Two Cents: For the older (but still young, of course) readers of My Two Cents, you’ll likely remember Seinfeld’s George Costanza who cracks a "funny" joke at a work meeting and leaves on a high note. I thought of this after observing the performance of both Seagen (SGEN) and dentalcorp Holdings Ltd. (DNTL), which were covered in Volume I. We discussed Pfizer’s approval to purchase SGEN last week, but DNTL has also been ripping higher recently, up 24.4% in the past month. The federal government provided additional details about the Canadian Dental Care Plan recently, and while it’s hard to decipher if DNTL’s stock performance is connected to Health Canada's new social program, I still believe it’s worth keeping an eye out for dentalcorp. Don’t worry, though, My Two Cents will never pull a Costanza and walk away – we'll be here to provide fun, actionable, insights to readers.Welcome Winter: Seasonality in the Stock MarketAs we officially welcomed the three months of winter two days ago, it’s a timely reminder to highlight the seasonality of the stock market and specific sectors. There has been significant research published on this topic (including on the "January effect," that will be covered in a future Volume), which examine economic or business variations because of many factors including vacations and, you guessed it, the Christmas holiday season and the incentives retail stores use to entice consumer spending. The annual publication of the Stock Trader’s Almanac (a must-have, in my humble opinion, for the active trader), which is full of insightful information, has created the "Sector Index Seasonality Strategy Calendar" to highlight the best and worst seasonal periods for roughly three-dozen sectors including utilities, cyclicals, banking, telecoms, and oil.Merry Christmas and see you next week,Evan

Volume V - December 30, 2023Three Stocks, Three Lessons

Three Stocks, Three LessonsAs we usher in a New Year, it’s tradition for Wall (and Bay) Street strategists to publish their predictions for the next 12 months. For me, though, I want to take this opportunity for some retrospection and to look at three stocks and three lessons learned.The first stock is Arvinas (ARVN), which I initially discovered while researching the regulatory filings of Pfizer. I’ve observed that Pfizer has a history of purchasing companies who they already have a financial stake in and/or a pre-existing pharmaceutical product relationship. This approach to acquisitions was helped by the financial windfall brought upon by the COVID-19 vaccine it jointly developed with BioNTech.In 2021, Pfizer’s investment in Arvinas totaled $706 million (USD). As of December 31, 2022, PFE held a 6.5% equity stake in ARVN, as both companies “entered into a global collaboration … to develop and commercialize … an estrogen receptor protein degrader [that] is a well-known disease driver in most breast cancers.”As I researched Arvinas, I found a promising drug pipeline together with positive research reports (although I take these with a grain of salt). When ARVN’s stock was beaten down in October to the mid-teens, I pounced and bought some shares, initially at $16.91 and as low as $15.20. It fell a little more, which is fine – we’re not looking to buy the bottom tick – and then started rising, almost doubling in less than two months. This left me in a tricky spot: on the one hand, I’d made a rather handsome return, but on the other, the momentum was in my favour, the stock had a history of trading higher, the drug pipeline potential was still there, and the markets as a whole were marching higher.My Two Cents: successful traders/investors are extremely attuned at allowing their winners to keep winning and letting go of their losers – a very easy proposition in theory but painfully challenging in practice.So, what did I do? I sold half of my stake at $30.34, booking a nice profit (nobody has ever gone broke taking profit). The “problem” is the stock is now trading at $41.16. Hindsight, of course, is 20/20; if the stock had traded back to the mid-20s, say, I would have looked like a “genius” taking the profit. Now, however, it’s clear I should have let my winner keep winning.What do you think – how did I handle the trade and how would you have done so?So if my “easy” double makes me look like a market wizard, wait until you read stock story number two…I’ve always been intrigued by cybersecurity stocks, an industry that has no shortage of customers to service given the ever-increasing online threats, hacks, and attacks on key digital infrastructure. I came across an intriguing micro-cap company in this space, Plurilock Security, trading on the TSX Venture Exchange (created partly from the old Vancouver Stock Exchange, VSE, for those for which this means something) under the ticker symbol PLUR. I started building a position in August 2021 when the stock was trading at ~$0.50. It almost immediately shot up, trading as high as ~$0.75 on heavy volume. New and ongoing contracts were being announced by the company on a regular basis and it seemed that its unique authentication system and foray into the AI space would be strong catalysts going forward. Unfortunately – and this is part of trading and investing – things did not turn out this way. Plurilock’s revenues have flat-lined (the company most recently reported a meager 3% year-over-year revenue increase) and it also has a history of secondary offerings to fund operations, diluting the ownership of existing shareholders in the process. The stock now trades at $0.06 (I’m a genius!) and what’s telling for me is that despite the low share price, I haven’t seen any news of company insiders buying shares themselves (a good thing when it occurs, but potential problem when it doesn’t, especially in cases like this one). In fact, I have twice emailed the company’s investor relations representative on this point, but have yet to receive a response – nor am I expecting one at this point. I should have liquidated my position way earlier, and I know this. It’s never too late to sell, and, if things improve, you can always buy back in with a clearer and less emotionally attached mindset. At this point, I’m going to keep the stock on a very short leash, and if there’s no positive catalyst forthcoming, sell the shares that I should have never been holding for so long.The third stock is one of my all-time favourites – not because it’s a winner, per se, but because I have fond memories trading its options back in the late 1990s (and actually using the proceeds to buy a car). I’m talking about Intel (INTC), which has fallen on hard times, but has actually seen a resurgence in its share price – up 90% this year. Back in January and February, after continued disappointing earnings and a slew of negative news, the stock was hammered to ~$25 and pretty much every analyst on the street said to stay away. For me, though, when such opportunities present themselves, it’s usually a strong signal for a contrarian trade, since the stock has likely already had its moment of capitulation, when anyone wanting to sell already has. I nailed this call, but unfortunately, I traded only for a rather insignificant gain, as opposed to holding on for the majority of the move (like I did with ARVN). I had such strong conviction for the trade, especially given the risk/reward profile at $25 per share, yet I didn’t take anywhere near full advantage of the opportunity – a lesson learned (yet again).In closing, I go back to Volume I of My Two Cents and reiterate that my experience has taught me that the key to being a successful trader/investor is to Know Thyself – if you understand this concept, your returns will improve dramatically.Do you have interesting stock stories – good, bad, or ugly – from 2023? I’d love to hear and learn from them.Happy New Year and see you next week,Evan

Volume VI - January 6, 2024'Tis the (Earnings) Season

The January Effect and the January BarometerIn Volume IV of My Two Cents, we discussed seasonality in the stock market and referenced the “January Effect,” which I want to provide a concise overview of, together with the “January Barometer.”The former is a concept that maintains the last trading day of the year, together with the first three to five trading days of January, tend to see an increase in market prices. It presupposes that year-end trading and portfolio management (including, but not limited to, tax loss selling, institutional “window dressing,” the raising of cash holdings before the holidays, etc.) depresses stock prices, for which traders and investors compensate by buying stocks at the beginning of a new calendar year. This phenomenon, however, didn’t hold this year, as both the S&P 500 (-1.8%) and Russell 2000 (-5.2%) are down during the last five trading sessions (the S&P/TSX is unchanged).The January Barometer, on the other hand, was developed in the early 1970s by Yale Hirsch and states: “As the S&P 500 goes in January, so goes the year. The indicator has registered 12 major errors since 1950 for an 83.3% accuracy ratio.” (Source: Stock Trader’s Almanac). In 2023, the S&P 500 rose 6.2% in January; consistent with this theory, the markets also finished the year higher (+24.2%).The first few trading days of this year have overall been to the downside. Could this be an ominous sign for the rest of the year? Perhaps, only time will tell (let’s revisit this point in early February).My Two Cents: I saw the below Tweet exchange and it reminded me of two things, which I thought to share. The first was my reference in last week's Volume to Intel, when I wrote that the stock was "up 90% this year." The second is the importance of looking at any time frame reference with a critical eye and that you examine information (especially when someone is trying to sell you something!) within appropriate comparative/contextual reference points. The below exchange highlights the importance of this approach, as does the INTC example, since despite strong returns in 2023, a 5-year performance check shows a negative return (-4.2%), excluding the company's small dividend yield, but also the negative effects of inflation - which makes the overall return even worse.'Tis the (Earnings) SeasonWith the conclusion of the fourth calendar quarter of 2023 and commencement of Q1 2024, one of my favourite investing – and especially trading – periods is upon us: earnings season.It’s the time of year when publicly traded companies release their quarterly and/or annual financial performance and often provide guidance and commentary that moves their individual stock and depending on the company could move an entire sector or even the market.Stock price volatility abound during earnings season, which is often the lifeblood of traders (always remembering the importance of risk management). You’ll often see wild swings in after-hour and/or pre-market trading depending on the announced results and guidance provided (which are usually discussed in post-release company conference calls).Unless you have a high-risk tolerance or an edge you’ve developed, I’d probably stay away from buying and selling outside of regular trading hours because it’s common that the knee-jerk reaction of traders (including algorithms that scan headlines and depending on key words trade accordingly) is “wrong” and the stock reverses course shortly thereafter.For traders, particularly those well-versed with options, earnings season provides many opportunities, especially short-term contrarian plays. For example, I’ve observed that stocks opening with outsized moves, say 7.5%+ moves in either direction, will have a tendency to snap-back or revert to the mean, even if only briefly after the 9:30am ET open.Let’s discuss a fictitious but common example: ABC Company reports lower than expected revenues and earnings per-share, with the stock immediately selling-off after the close, dropping 9%. In the pre-market the next morning, the stock has ticked up a bit, but still down 8.2% compared to the previous close. By this time, most if not all institutional money that wants to has sold the stock; there may be some retail investors who sell at the open, but usually not in volume that will pressure the stock significantly further. At this point, we have people who will buy the stock to close a short position (making money in the process), as well as others who think the sell-off is overblown and the current stock price actually offers reasonable value at the current level. Carefully executed, there are short-term “dead cat bounce” opportunities for investors (the same is often true if a stock is up a lot, only in reverse).Finally, in terms of earnings season and options trading, I find better value buying and selling options after earnings are released, rather than before, where implied volatility is high and option pricing expensive: if you’re on the wrong side of the trade and/or the stock doesn’t move as much as expected – which happens often – then you’ll be left with losing option position(s). One potential way to counter this is to put on call and/or put spread positions, but again, unless you have a specific edge or strategy, I would proceed with caution. Happy earnings season!Happy New Year and see you next week,Evan

Volume VII - January 13, 2024Tips on Stock Tips

Tips on Stock TipsWhen I started trading and investing in the mid- to late-1990s, the famous tech bubble was beginning to inflate and, in the process, stock tips abounded with everyone predicting the next .com surging stock.I was fortunate to learn early on never to act on – and never to give – a stock tip. It’s a rule that has served me well over the years and the very few times I have transgressed it, I have been reminded why it’s there in the first place.When you act on a tip, you relinquish the decision-making process to a third-party; in other words, you’re not in control of your own money – not a position I want to put myself in.I recall reading in Reminiscences of a Stock Operator, a top five all-time investment book that I still read every few years, the following: “It has always seemed to me the height of damfoolishness to trade on tips. I suppose I am not built the way a tip-taker is. I sometimes think that tip-takers are like drunkards. There are some who can’t resist the craving and always look forward to those jags which they consider indispensable to their happiness.” (p. 202)Since I’ve started My Two Cents, readers have reached out with different stock ideas and suggestions. I welcome them, but unless they fit within my trading/investing framework I don’t act on them.It’s “easy” to buy on a tip, but what happens when things don’t work out? Do you sell immediately; do you buy more; do you sit and wait? What do you do? Many if not most of the time the next steps following the initial buy are unclear – and you have little to no information to guide your decisions.Acting on tips introduces a dangerous element: hope. You hope the tip plays out perfectly so that you can indulge in the financial winnings, but a hope-based investment strategy is a recipe for disaster.One final thought to keep in mind: for every buyer, there’s a seller. This isn’t insightful in itself, but if you break it down a level, the next time you make a trade or investment, ask yourself, am I confident that I know something more or have an edge over the person who is selling? It’s a good litmus test question to ask yourself going forward.My Two Cents: Last year, I wrote about a merger arbitrage opportunity regarding Pfizer’s $43B takeover of Seagan. I’ve been following another potential play in this space, which is a lot more "appealing." Versace, Kate Spade, Michael Kors are some of the leading lifestyle brands impacted by Tapestry’s (TPR) proposed acquisition of Capri Holdings (CPRI). Announced in mid-August, the deal, if it closes, would see holders of CPRI receive $57 per share in cash ($8.5 billion total value). Capri’s shares soared 55.7% to $53.90 when the deal was published, but have drifted down since then, as low as ~$47, closing yesterday at $50.66 or 11.1% lower than the proposed takeout price. There have been some bumps along the way, including the U.S. Federal Trade Commission asking for more information, which has contributed to the stock trading significantly below the $57 level. This past week, however, it was reported that Chinese market regulators approved the deal, providing a temporary lift to Capri’s stock. Similar to what I wrote about the PFE/SGEN combination, there could also be a favourable risk/reward trade with this deal, especially by using options to provide downside protection.Right and Wrong in the Stock MarketIn Volume III, we discussed the significance of risk management, and I wrote: “Nvidia $500 ask? No thanks, hard pass.” Since then, NVDA is up almost $60 or 12%, currently trading at $547.10.This got me thinking about being “right” and “wrong” when making trading and investing decisions. Was I wrong on the stock because it’s gone up significantly since? No, I wasn’t, but with an important qualifier – I wasn’t wrong for me.I go back to Volume I when I highlighted the importance of Knowing Thyself: and, for me, it doesn’t fit my personal style, risk tolerance, or investing philosophy to chase securities at increasingly astronomical levels (despite some analysts having $1,000 price targets on this particular stock).Other traders and investors might have their own approach and strategy to high-flyers like Nvidia, which is great – that’s what helps make a market – but for me I don’t feel confident that I could execute such a strategy over the long-term and at the same time be profitable.More broadly about being “right” or “wrong” in the stock market, you can be disciplined, ensure proper risk management, do your homework, have a strong trading/investing catalyst and still end up losing money. Conversely, you can follow the investment “advice” from a random Tweet and make money. Does that make the person in the former example wrong and the person in the latter one right? Of course not!While “How much money did you make?” is often a question used to judge the success, or lack thereof, of an investment, it’s a short-sighted perspective. Having a process with rules that aligns with your risk tolerance (and, importantly, emotional disposition), will provide you with a significantly higher chance of being profitable over the long term, which is what matters. This might mean you miss out on “opportunities,” like me with Nvidia, but that’s totally fine and indeed part of the process.Here's a quote from the same classic, Reminiscences of a Stock Operator, related to this point: “The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.” (p. 134)See you next week,Evan

Volume VIII - January 20, 2024Top 5 List of What Not To Do

Top 5 List of What Not To DoLast week's "Tips on Stock Tips" Volume generated some good feedback, so I thought to build on it by developing a Top 5 list of what not to do when investing. I look forward to comments this time around as well.Let's get started:1. Follow the crowd: don't do what everyone else is doing (this is probably good life advice too!). Simply following the herd will eventually likely cause you heartache. The goal should be long term sustainable returns, not one off "wins" that end up costing you over time. If everyone is buying something and you want to join in, be careful that when the music stops, you're not left standing. Likewise, if everyone is selling a certain stock, there may be an opportunity to get something on sale, to get good value. Be different, even a little contrarian, and when making a financial decision know why you're doing it – just because everyone else is is almost never a good idea.2. Buy IPOs: an Initial Public Offering, or IPO, happens when a private company goes public, that is, when a company that is owned by a few people or group of investors decides to sell shares that are then traded on a stock exchange and can be bought and sold by the public. The IPO process is a complex one dominated by investment bankers, although there has been a recent push in the industry to change how companies go public. The timing, price, and other considerations of an IPO are usually opaque – a clear sign that more information is needed before buying an IPO. And don’t get carried away by the performance of an IPO if it goes significantly higher on its first day of trading – it's almost always impossible for the average investor to secure shares at the original IPO price. If you really want to invest in a new public company, wait at least two reporting cycles (six months) to get more information from the company and observe the price action of the stock. Until then, it’s probably best to stay away. (It's not uncommon for companies to post poor earnings immediately after their IPO, like Birkenstock did this week.)3. Listen to analysts: my trading and investing experience makes me wary of following the advice and recommendations of stock analysts. There are some good analysts to be sure, but most of them, especially from the big banks, have an interest in promoting the purchase of stocks. This is why most analysts rarely have sell recommendations on stocks – it's not good for their firm's business. Similar to not following the crowd, don't follow analysts. If you want to use their research as a point of reference, fine, but basing specific investment decisions solely on their advice won't likely work out for you.4. Invest all your money at once: it's a good habit to always have some cash earning interest in a money market fund on hand in your investment account. Maybe a stock you've been following goes "on sale" and you want to purchase it. Maybe an existing account holding you have goes down and you want to add to your position. Maybe the market has a correction and it's a favourable time to put money into stocks for the long term. Whatever the reason, putting all your money to work at once is limiting and exposes you to certain risks like buying at the top of a cycle. Depending on the size of your account, you can scale into (and out of) positions by employing a dollar-cost average approach. In short, it's a best practice to always keep some powder dry.5. Ignore your investments: you should monitor your portfolio, but not necessarily make adjustments if there are no material changes in a company you own or other investments you hold. If the reasons you first made a specific investment remain intact, then there may not be a reason to make changes. If you have new money coming into the account, you may wish to deploy it into your current holdings, or invest in something new. Monitoring doesn’t necessarily mean changing, although you may need to make a few tweaks to re-balance your holdings a few times each year. As a general rule, if you find yourself excessively checking your investments – and especially if they are causing you stress and anxiety – it’s probably a sign that your risk tolerance and time horizon are not aligned with your current investment holdings. Don’t over trade, but also don’t ignore. Monitor your investments and make changes when necessary. The best portfolio for you is the one that is relatively low maintenance and doesn’t cause you to lose sleep.Bonus round: don't ignore fees (direct ones, like brokerage commissions, but also indirect ones like ETF/mutual fund charges) and taxes when trading and investing – both play a big role in long term performance; and, don't over-diversity – there's no "right" number of investments to hold in an account, so just remember that diversification is good, over-diversification is bad.My Two Cents - The Other Side of Merger Arbitrage: We've discussed a couple of merger arbitrage plays in the past: Pfizer’s $43 billion takeover of Seagan, which has now closed, and Tapestry’s proposed acquisition of Capri Holdings, which is still in play. Following the close of trading on Thursday, however, the stock price of Nasdaq-listed iRobot (IRBT) plunged 27% after The Wall Street Journal reported the European Commission intended to block Amazon's acquisition of the Roomba vacuum manufacturer. This is the other side of merger arbitrage-related bets; while risk/reward in these types of special situations can be enticing, proper risk management protocols, including through the prudent use of options, should always be put in place so your money doesn't get sucked away.See you next week,Evan

Volume IX - January 27, 2024How to Buy Stocks at a Discount

How to Buy Stocks at a DiscountI've referenced options trading a number of times, but haven't drilled down into practical strategies - until today. There are dozens of different options strategies, from simple and straightforward to complex and (arguably) unnecessary. I would characterize today's strategy as requiring an intermediate proficiency or understanding of options trading: selling or shorting a (naked) put.This is mostly a short term income generating approach that is implemented on a stock that you want to own - this is an important point. While this strategy allows you to always buy stocks at a discount (compared to the current trading price), there are risks associated with this approach that need to be understood and managed. Before getting into the potential downside of selling a put, here's a real world example to highlight this strategy.Let's say you want to buy Apple (AAPL), but you think the current price is a bit too high. Apple closed yesterday at $192.42, but your target entry price is in the mid-$180s, because that's an area of strong technical support, for example. Let's now go to the March 15, 2024, option chain and look at the $185 puts, trading almost at $3.00. If you sell one contract (each contract represents 100 shares), then your account will be credited $300 (excluding commissions), but now you have the obligation to buy 100 shares of AAPL if your put is exercised, that is, if by March 15th Apple closes at or below $185.What can happen between now and the middle of March?Apple can trade slightly lower (but above $185), remain relatively unchanged, or trade higher. In this case, the put will expire worthless and you keep (gain) the entire $300 premium. Pretty straightforward, but enter risk number one.If AAPL shoots up to $215 between now and March 15th, while your trade is technically profitable and a "success," you've sacrificed a $2,258 gain ($21,500 minus $19,242) for only $300. Not the end of the world, and if you're comfortable with this income approach and never intended to buy the shares at ~$192 in the first place, that's fine - but it's still a risk, or better yet, opportunity cost, to be considered.Risk number two is the bigger concern.If AAPL were to go down significantly, say to $170 in mid-March, then you're on the hook to either close the option trade by buying the put you previously sold (at $170, the value of the put would be ~$15) representing a loss of $1,200; or, alternatively, you would be "put" the 100 shares of Apple at the $185 strike price - despite the shares trading significantly lower (your real cost to purchase would be $182, which is the strike price minus the original premium received).For this reason it's important to reiterate that while this strategy allows you to buy stocks at a discount, it should be used only for stocks that you actually want to own at a specific price lower than the current trading value.Two final points: first, this income generating strategy is best deployed for stocks that are rising or rangebound, not going down, because the stock could continue to fall below your chosen strike price resulting in a loss; and, second, as market volatility, as measured by the VIX, increases, options premiums also increase, which could make change the risk/reward profile of a trade.I bought this book years ago - it's a good resource for those trading, or wanting to trade, options: The Bible of Options Strategies: The Definitive Guide for Practical Trading StrategiesMy Two Cents: A simple yet often overlooked way to improve your trading and investing performance is to keep a journal. Document your market observations; keep a list of interesting stock ideas; track why you bought and/or sold a security; tailor your commentary to either develop or refine your unique approach to trading and investing. It doesn't have to be a complicated or burdensome exercise, but observing or thinking about investing and documenting those thoughts allows you to build a customized bank of information that you can then refer to and leverage. In addition to noting and hopefully learning from your mistakes, a journal can also be used as a way to monitor and control your emotions - one of, if not the biggest, challenge traders and investors (including me) face. Our mobile devices are never too far away from us, so starting a trading and investing journal is easy and convenient and could serve as a practical source to improve your money management.Is Boeing a Buy?Five years ago, former U.S. President Barack Obama sat court side for one of college basketball's most epic rivalries: Duke v. UNC. Playing in that game - but not for very long, it turned out - was superstar prospect Zion Williamson. Thirty-three seconds into the first quarter, Williamson made a routine basketball move and one of his Nike shoes famously fell apart - an obviously embarrassing moment for the sports apparel behemoth. The following trading day, Nike's shares fell nearly 2%, (temporarily) wiping more than $1.1 billion from the company's market capitalization.A similar, yet much more serious, public relations nightmare happened to Capital One Financial (COF) in July 2019 when a hacker accessed 100 million credit card accounts - one of the largest data breaches at that time. For the next month, COF's share price declined almost 15%. It wasn't long, about four months, when COF traded above pre-breach levels (then COVID hit, but that's a different story).Back in 2011, shares of Apple (temporarily) traded significantly lower with successive stories of Steve Jobs' poor health, resignation, and sadly his passing away.It often happens that the stock price of companies suffer when there's a public relations disaster, departure of a key executive, or other "important" yet long term inconsequential - at least to the share price - events that open the door (bad Boeing analogy) to a profitable trade or enticing entry price.Enter Boeing.Shares of Boeing (BA) have been under pressure this year, down 18%, following the shocking - but thankfully not tragic - blown door incident on Alaska Airlines Flight 1282 on January 5th. Things weren't helped by additional incidents and problems with their planes including a mid-air engine malfunctioning that caused one aircraft to make an emergency landing in Miami. Boeing shares closed yesterday at $205.47, 23.2% off its 52-week high. Notwithstanding these near disastrous events, BA bounced (bad analogy, again) at the $200 level on both January 16th and this past Thursday, holding, at least for now, this technical - and psychological - support level. Unless there's more, and significant, bad news, recent events and the cost to fix may already be priced into the stock's current valuation. Challenging Boeing (and Airbus) in aviation manufacturer at scale is almost impossible, as many Canadian investors in Bombardier painfully experienced over many years. Investors may brush aside these mishaps and given a recent report from the International Air Transport Association that projected a record number of people flying this year (4.7 billion), Boeing shares may ascend over the medium- and long term.See you next week,Evan

Volume X - February 3, 2024Buy Strength, Sell Weakness

Buy Strength, Sell WeaknessI had planned to discuss health care stocks in Canada following the Manulife-Loblaw partnership on specialty drugs announced earlier this week, but then I saw Peloton’s share price crumble, once again, and it reminded me of an all-time investing – and especially, trading – rule: buy strength, sell weakness.Ask yourself, how often do you see a profit and take it, but see a loss and keep it? We should of course do the opposite and Peloton Interactive (PTON) is a perfect example why.The once darling pandemic stock, which could do no wrong in 2020 and the beginning of 2021, previously boasted a market capitalization of around $50 billion. Today, from a high of ~$170, the stock sits at a mere $4.24, down almost 98% and worth only $1.5 billion today.Along the way there’s been some bear market rallies, often caused by purported acquisition talks – including from Amazon and Apple – that caused the stock to temporarily spike, but Peloton has been a losing play for almost three years now.Still, how many investors, including retail money, bought dip after dip, only to see the share price tread(mill) lower? Without even running to read their financials, a quick glance at PTON’s chart shows weakness after weakness.The price action reminds me of a quote from Reminiscences of a Stock Operator: “Remember that stocks are never too high for you to begin buying or too low to begin selling.” This is a trade secret that average and below average investors don’t calibrate correctly.Next time you try to be a hero and catch a falling (stock) knife, think about all of those Peloton’s collecting dust and keep things simple: buy strength, sell weakness.My Two Cents: In Volume VI, I wrote about the January Barometer developed by Yale Hirsch which states: “As the S&P 500 goes in January, so goes the year. The indicator has registered 12 major errors since 1950 for an 83.3% accuracy ratio.” After a shaking start to the year, the second half of January finished strong with the S&P 500 eking out a 1.6% overall gain for the month. This may be a good omen for stocks, but with continued geopolitical uncertainties and it being a U.S. presidential election year, both American and Canadian markets could face some headwinds (including no or fewer than expected interest rate cuts, as hinted by Federal Reserve Chair Powell this past week).Passive Income with OptionsLast week’s options strategy discussion of selling a (naked) put generated good feedback, so I thought to highlight another – even easier – strategy to earn income: covered call writing.This is a basic yet effective strategy and involves selling a call option against a stock you buy or already own. You can generate monthly (even weekly, on some securities) income with no financial downside risk on the options trade itself (of course, the stock can fall to zero, but that’s separate and apart from the options trade). There is an important opportunity cost with this strategy, however, but let’s first look at an example and ways to mitigate this risk as well.Say you own 100 shares of the Royal Bank of Canada (RY), currently trading at $131.22. You can sell one of the March 15, 2024, $138 strike price calls for ~$0.60, meaning you will be credited, or collect a premium, of $60 (excluding fees).If by the March expiration date Royal Bank does not close above $138, then the call expires worthless and not only do you keep the $60, but you can also sell another out of the money call for April and each month thereafter. Not to oversimplify things because there are other factors to be considered, but if you did this for 10 months of the year, you could generate $600 annually, which only represents a ~5% return against the current share price.Before continuing, let me outline two important contextual points:1. For Canadian investors, while you can execute this strategy in any investment account, I personally prefer a registered one (or TFSA) since you don’t have to worry about tax reporting/implications.2. This strategy is “easier” for U.S.-listed companies because the implied volatility on options is usually higher south of the border (which means pricing and premiums received will be higher) and also because there’s more liquidity meaning tighter bid-ask spreads compared to Canadian company-listed options.While it takes time and organization, if you were to use this strategy for multiple existing positions in your account, it could be a significant source of passive income.Keep in mind, you want to use covered call writing for rangebound stocks or those trending higher (remember to stay away from weakness). Unless you have a specific niche strategy, I would be cautious using this approach on more volatile stocks (e.g., a biopharmaceutical company that could be acquired at a huge premium to current market prices) or stocks that have the potential for huge daily gains (like Facebook – er, Meta – going up 20% just yesterday).This is where the risk/opportunity cost pitfall potential is: say you own 100 shares of a company trading at $70, then sell a $75 strike call and collect $100 in premium; if during the trade the stock is acquired for $100, you don’t capture that gain since you’re obligated to sell your shares at $75 in exchange for the premium you received. In other words, your upside is capped, which for some traders/investors might not be worth the income received.Having said this, covered call writing is a proven way of generating income and a strategy that many banks and investment companies offer to client through covered call focused exchange-traded funds or ETFs.My Two Cents: Last week, in Volume IX, I asked if Boeing was a buy. This past Wednesday the airplane manufacturer reported solid earnings but did not offer guidance for the rest of the year – an unusual but understandable move under the current circumstances. The stock popped 5.3% on heavy volume (more than twice its daily average) and kept most of the gains Thursday and Friday. The earnings report and commentary from management, coupled with the stock price action, could be a sign that unless there’s more bad news, a short term bottom may be in for Boeing.See you next week,Evan

Volume XI - February 10, 2024Higher Stock Market + Lower Stocks = Uncertainty

Higher Stock Market + Lower Stocks = UncertaintyThe benchmark S&P 500 index closed above 5,000 for the first time in history yesterday. While the "stock market" is moving higher, most individual stocks are treading water or moving lower.A handful of stocks - the usual suspects including Apple, Amazon, Microsoft, and Meta - continue to power the market higher. In fact, the so-called Magnificent Seven are responsible for ~60% of the S&P 500’s gain year to date.On the other hand, the majority of large cap stocks aren't participating in the fun; the Russell 2,000, which is an index of small-cap U.S. stocks, is actually down on the year.The breadth of the market, which can be thought about as the percentage of stocks participating in the direction of the overall market, is extremely narrow, which calls into question the health of the stock market moving forward.Having a minority of stocks account for the majority of market gains is not necessarily new. A decade ago, J.P. Morgan published a paper that examined the Russell 3,000 and found that between 1980 and 2014, "The return on the median stock since its inception vs. an investment in the Russell 3000 Index was -54%. Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative."It also showed that about 7% of stocks, the "extreme winners," accounted for almost all of the market gains. Even acknowledging this phenomenon, today's ultra-concentrated extreme winners - 1% of stocks - is concerning and a potential red flag.The Jekyll and Hyde character of the market calls to mind three themes we've previously discussed:1. Volume I - Know Thyself: find a comfort zone and a personal edge, and establish a system with rules that you know, are confident in, and adhere to. Remember, "There are a million ways to make money in markets. The irony is that they are all very difficult to find."2. Volume III - The Most Important Part of Trading and Investing: ensure a risk management lens is applied throughout the investment process, but especially before a trading or investing decision is executed. Remember, you should always consider not how much money you might make on a trade/investment, but how much money can you lose - what's your worst case scenario.3. Volume X - Buy Strength, Sell Weakness: successful long term investors know and leverage this principle. Ride your winners and keep a close eye on your losers, cutting them off if the reason you bought in in the first place is no longer relevant or there's no identifiable catalyst for an upwards movement (hoping doesn't count, that's not an investment strategy).My Two Cents: We've discussed a couple of different options approaches the last few weeks and in an uncertain times such as these, options can be effectively leveraged through different strategies. For example, you can generate income - and cushion downward movement in your holdings - by selling calls against existing positions; and, if volatility spikes and options premium rise, income generating strategies will become even more appealing. You can also purchase puts on the markets (using the SPY option chain for the S&P 500), as a type of insurance to protect your portfolio from a short- or medium term sell-off.Consider Dollar-cost AveragingIf you've accumulated a larger than normal cash holding waiting to buy the inevitable - yet seemingly not forthcoming - market dip, then consider dollar-cost averaging.Let’s look at a simple example to illustrate the point. Say you have $1,000 and have decided to purchase ABC Stock in two equal installments. Setting aside commission costs, if the stock is trading at $10.50 on March 1st and $9.25 on May 1st, then you would purchase 47 shares ($500 / $10.50) the first time and 54 shares ($500 / $9.25) the second round. In total, you would own 101 shares at an average cost of $9.90.One of the advantageous of this approach is that you help avoid, or at least minimize, a high initial entry price, if the investment price declines in the short term.A dollar-cost averaging approach is a prudent way to start or re-start your investment portfolio. It allows you to "dip your toes" in the investment world without risking your entire financial stake at once. If your investments decline, you’ll be able to purchase more shares at a lower price, bringing your average cost down. On the other hand, if the investment rises in value, you’ll purchase fewer shares with the same amount of money, but will have the benefit of having a profit cushion.See you next week,Evan

Volume XII - February 17, 2024From Home Runs to Grand Slams

From Home Runs to Grand SlamsIt’s the Family Day long weekend in Ontario so I’m going to keep today’s My Two Cents short and sweet so that we can all do funner (that’s a technical term) things with our time because, after all, time is much more precious and valuable than money.I received a comment about last week’s Volume (Higher Stock Market + Lower Stocks = Uncertainty), that I thought to share and address.“Let the winners run vs. ultra-concentrated extreme winners is a red flag,” was the comment, which, truth be told, I appreciated receiving and made me think.My response included the following: “It’s not a contradiction. Letting winners ride in an individual portfolio with proper risk management v. the overall market uncertainty are related but distinct issues.”What does this mean - or at least what does it mean to me?The way I look at trading and investing, especially the way I look at my or portfolios I manage, are separate from the TSX Composite, S&P 500 or “the stock market” in general. Unless you have all or almost all of your funds tracking a specific index (or multiple indexes, for example), then what happens in or to your portfolio compared to “the stock market,” could be completely different.There are of course specific days, like Black Monday in 1987, or periods of time, like the 2007-2008 financial crisis or March 2020 when COVID-19 was injected into North America, where pretty much all stocks move in the same direction. Most of the time, though, the stock market and your portfolio diverge. This is why most people, including professional money managers, underperform.Think about a portfolio concentrated in the “Magnificent 7 Stocks,” versus one that had funds primarily invested in the energy or utilities sectors.Letting winners run is a sure-fire way to increase the likelihood of your success. On the flip side, cutting your losses is equally important. One of the reasons for this, which will be covered in a future Volume, is that long term performance is usually influenced by only a small number of portfolio holdings. Said otherwise, hitting one or two home runs in your portfolio will have a disproportionate impact on your performance. This is why it’s critical to let your winners ride.In Volume V, I gave the example of Arvinas (ARVN), a biotechnology company I bought in October in the mid-teens. I sold half of my stake at ~$30, even though I thought there was a likelihood it would continue to trade higher. Then why did I sell? Risk management.Three related tactics of a successful risk management strategy are 1) proper position sizing; 2) having an exit strategy for each trade and/or investment; and, 3) learning how to scale in to and out of positions.Arvinas now trades north of $50 and this past week I again sold half of my stake (a quarter of the original position). Different people will of course have different approaches (remember, Know Thyself), but for me I feel that my approach is responsible from a risk management position, but also consistent with the principle of letting winners ride since I still have a stake in the company.At this point, I’m going to see if my home run can turn into a grand slam, especially since earlier this month the Food and Drug Administration granted Fast Track designation to Arvinas (and Pfizer’s) treatment for patients with metastatic breast cancer. In fact, if the stock dips for non-company specific reasons, I would consider adding to my position – you have to remain flexible, a one-time-buy and one-time-sell approach is too limiting.The wins in your portfolio don’t have to be the ones making splashy headlines and breaking market capitalization records on the daily. Your portfolio and the stock market are not the same thing. Know why you’re putting your money where you are, have a responsible plan for a trade/investment, and when the opportunity presents itself ride those winners, because they will overshadow the middling performance of most investments and provide you with long term success.Happy Family Day and see you next week,Evan

Volume XIII - February 24, 2024Actionable Risk Management Tactics

Actionable Risk Management TacticsIt’s been a wild week in the markets, with (a few) stocks surging following Nvidia’s amazing earnings. With indexes making all-time highs, I thought it timely to revisit the three risk management tactics I briefly referenced in last week’s Volume.This may seem boring and certainly less appealing than individual stocks going up 5, 10, or 20 per cent in a single trading session, but trust me when I write it’s one thing to make money – especially make money on paper – and another thing to keep money.Not wanting to come across as a Debbie Downer, but in an era infused with a certain degree of “irrational exuberance,” its apt to remember the old stock market adage that stock prices take the escalator up and the elevator down.Let’s get to it…1. Proper position sizing: “right sizing” the positions in your portfolio is critical to both managing downside risk and helping you leverage your winners. Position sizing, it should be noted, needs to be monitored on a regular basis – it’s not a one and done approach when you buy a security. Your approach here will depend on your overall investment strategy, timelines, and risk tolerance, among other considerations. If you have a handful of high conviction ideas you might want to have a more concentrated portfolio where the performance of every holding has a strong degree of correlation on your overall performance. There are, for example, a number of actively managed high conviction ETFs where the number of holdings is low – less than 15 or even fewer than 10. On the other hand, you may want to hold dozens of stocks in your portfolio, which obviously affects how each one will be sized. Personally, I’ve always tended to hold a smaller number of stocks, usually between 8 and 16, because I want my winners to actually help build my portfolio. If you do the work and it turns out your way, you should be rewarded for that – and in a portfolio with too many holdings, which is likely over-diversified, I feel you forgo the potential for really big winners. I typically like to keep positions sized between 5-12% of the portfolio while considering risk and volatility. I’m not re-balancing on an overly regular basis, but if a holding has gone down, either because of absolute poor performance, or relative under-performance, then I’ll reassess my reason for entering the position to determine if it’s still valid. If yes, I consider adding to it, if not, I will reallocate the money elsewhere. There is a personal exception I have to this rule and that’s when I want to take an informed flyer on a holding – I’ll purposely position these instances small, say 1-1.5% of the portfolio, to see if a relatively small bet pays off big (on a relative basis), but that's not too frequent an occurrence.2. Scaling in and out positions: this was the third risk management tactic identified last week, but I’m bumping it up because it’s closely connected with position sizing. I wrote then: “You have to remain flexible, a one-time-buy and one-time-sell approach is too limiting.” Context is king, of course, but as I showed with my Arvinas holding, I scale in and out of positions – and I think you should consider this tactic too. For example, if I identify a new stock I want to buy as a 5% portfolio holding, more often than not I won’t trade the entire allocation at once. I want to see how things play out; you think differently – and less emotional – when you want to own a stock versus when you actually do. This is important, at least it is for me. I want to see how the stock behaves compared to why I bought it. Maybe I’m wrong and need to reconsider. Maybe the stock goes down for no discernible reason and I can pick up the shares on sale. I don’t even mind if the stock goes up, because then you already have some downside cushion and getting up to the 5% target will now take less money. Same mentality and approach when selling; if, for example, a stock was bought because of a technical analysis signal, and it reaches your top-range, then I would sell all or part of the investment. This isn’t investment advice, of course, and I’m not advocating for excessive portfolio churn (there are fee and tax implications one must consider), but consider scaling in and out of positions when your original investment thesis has been satisfied and/or is no longer valid – or as valid from a risk/reward and broader portfolio management perspective.3. Have an exit strategy: when you make a trade or investment, there’s a reason(s) that prompted that action – hopefully it’s a well-informed reason based on your investment strategy. In my opinion, and from my experience, you should have an exit strategy for your investments but especially for your trades. It doesn’t mean you’ll ever have to deploy it, but you should think about and prepare for different scenarios and how that would impact your holdings. For example, for a pharmaceutical holding like Arvinas, what happens if that “guaranteed” blockbuster drug doesn’t receive regulatory approval – what do you do? Or a junior gold miner whose initial “discovery” is actually not financially feasible – do you have a plan in place? Granted, there are some core holdings, think about the big banks in the Canadian context, where an exit strategy because of a serious adverse event is unlikely (not that you can’t lose money over time in banks, you can, but if one of the big banks went under, there will probably be more serious societal challenges to deal with than a plunging share price). All investors, even the greatest ones like Warren Buffett (remember his big bet on Big Blue that went terrible), have portfolio losers – that’s not the issue. It’s those big losses that kill portfolio performance that need to be removed from the equation and while there is no guaranteed way to eliminate this possibility, using risk management tactics and having an exit strategy for each security will definitely go a long way.*My Two Cents: Never turn trades into investments – if you bought something with a trade mindset, and it doesn’t go your way, don’t turn that into an “investment.” Here’s an example: you buy a stock because you think its upcoming earnings report will boost the share value. Then, however, the company reports disappointing sales and the stock plummets. Not wanting to take a lose, you decide to keep your shares and turn a trade into an investment – that’s almost always a bad idea. Never mind that the reason you bought in is no longer valid, what’s the catalyst for a move upwards? To say nothing of the opportunity cost of having dead money sit in your account. Now, if you really want to hold the stock, consider selling it so that you can emotionally detach from the position (and the corresponding loss); this will allow you to reassess the situation with a clearer mind and if you want back in, the market is always there – but I’m guessing more often than not you’ll just walk away never to return...See you next week,Evan

Volume XIV - March 2, 2024Two Questions

How to Deal with Market Losses?Most people like to show off their winners. They highlight how much money they made on this trade or that investment. If you scroll through FinTwit, you’d think everyone is making money at a tremendous rate. For example, when the price of Bitcoin was going bonkers, especially at the end of 2020 and into 2021, everyone seemed to be getting rich overnight (to say nothing of all the money made – and subsequently lost – in the various junk tokens). What happens when markets, or individual securities, take a turn for the worse? You often don’t see or hear about that side of the coin, but we all know it’s part of investing and trading.From an investing point of view, if your initial thesis – whatever it may be – that prompted you to allocate a portion of your portfolio to a specific company is still intact, then you have some support there (assuming your thesis is sound to begin with). At the same time, you should never ignore losing positions; there may be both financial and psychological barriers preventing you from acting, but the best approach is to tackle your losers head-on – you’ll feel better and relieved once you do. On a related point, if you’re obsessively checking your portfolio on a tick-by-tick basis, especially when you're losing money, it may be an indication that the risk level in your portfolio doesn’t align with your emotional disposition – consider re-evaluating the breakdown of your holdings.From a trading perspective, losses are inevitable – the sooner you accept this reality, the better your performance will be. On a practical level, there’s a tendency to increase your position sizing when you’re in a slump, thinking (hoping, maybe even praying) that you’ll recoup your losses in one fell swoop. This rarely works and is more often a recipe for disaster. Instead, when things aren’t going your way, step back and reassess why with a clear mindset. Moreover, when you re-enter the markets, trade small, build your confidence, and increase your position sizing accordingly.Think of a basketball player who can’t buy a three-pointer but then sees a couple of lay-ups go in the basket and builds their confidence back. When dealing with market losses, sometimes all you need is a little win to get you going (because not everyone is a Bitcoin billionaire!).My Two Cents: U.S. markets continue to power higher, making new record closes – but what’s happening here in Canada? A 5-year comparison of the S&P 500 (up 83.2%) versus the S&P/TSX (up 32.9%) is instructive. In Volume IV, I wrote about the importance of looking at and investing in international stocks, because clearly if your money – or most of it – is invested only in Canada, you’re limiting, or even hindering, the long term performance of your portfolio. There are broader economic inferences that one can draw from the poor performance of Canada’s main stock market, and despite opportunities in the small-cap space, there are few large bellwether growth stocks powering Canada’s economy. If you look at the top 10 members of the S&P/TSX index by market capitalization, with the exception of Shopify, they are all bank, railway, and oil and gas companies. This poor performance negatively effects all Canadians indirectly through public pension investments (e.g., the Canada Pension Plan Investment Board), employee sponsored plans (e.g., the Ontario Teachers' Pension Plan), and directly though personal investment accounts. As you develop, refine, or implement your investing and/or trading strategy, keep this in mind and don’t limit yourself to Canadian-only listed securities. Finally, from a practical perspective, if you’re looking at investing in an ETF that tracks the S&P 500 (or any foreign index, for that matter), consider securities hedged to the Canadian dollar so you eliminate currency exposure/risk – unless, of course, you know and want to take a position on the currency side of the trade as well.Do you Track Economic Releases?When I started investing, I looked forward to the first Friday of each month because that’s when U.S. “non farm payrolls” employment numbers would be released – right at 8:30am ET. They often moved the markets, creating significant volatility that is the lifeblood of traders.Nowadays, with the exception of key inflation readings the last couple of years, I feel like it’s the rare release that really moves the market. Nevertheless, economic news, including key speeches and testimonies of Federal Reserve officials before Congress, are important and depending on your level of investing and trading, should be tracked accordingly.This is pertinent for those with a macro-economic leaning and those who focus on specific sectors or industries, where particular data points (e.g., new home sales figures; durable goods orders; retail inventories; construction spending, etc.) are especially relevant. Statistics Canada and Yahoo! Finance (among other sites) are good resources with easy to navigate calendars.See you next week,Evan

Volume XV - March 9, 2024Thoughts on Today's Stock Market

Market Musings…Allow me to write some random but hopefully coherent (if I do my job well) thoughts about today's stock market.First, last weekend my sister sent me an article about Nvidia and asked, “Is this what we should be buying?” I admit it's a stretch, and I'm actually not sure why, but it reminded me of people in the mid to late 2000s buying properties in the United States – sometimes multiple properties – with little or no income (maybe the often told anecdote of getting a stock tip from a taxi driver or barber is more apt here, but hopefully you get the point).Second, a CryptoPunk NFT that previously sold for $2,127 (2017) and $7.6 million (2021), sold for $16.5 million USD worth of Ethereum. I thought the part of the cycle when a JPEG was "worth" millions of dollars was over, but clearly I was wrong. Also, imagine being the person who originally sold it for two thousand dollars probably thinking they got a great deal? Keep this example in mind the next time you complain about selling something too early…Third, a Kobe Bryant game-worn jersey that previously sold for $337,224 (2021), sold at auction this past week for $915,000. Think about it: almost one million dollars – and almost tripling in value in three years – for a sports jersey, even if it's for the late, great Kobe. There are other recent examples of sports cards (a hobby that I’ve rediscovered the last few months) selling for record amounts.Fourth, if you’re still with me, is not just the gains in stocks like Nvidia and crypto like Bitcoin, but the incredible volatility we're seeing: adding and erasing billions and even tens of billions of dollars in market capitalization within minutes or hours; and, in Nvidia’s case, in after-hours trading, which is not normal (nor, would I argue, healthy).Fifth, after all of this “good” news, I’d like to bring to your attention New York Community Bancorp, Inc. (NYCB), which has fallen 67% (not a typo) since January 1st, slashed its dividend by 70%, and desperately received a capital injection of $1 billion from private investors (led, interestingly enough, by Donald Trump's former Treasury Secretary, Steven Mnuchin). NYCB continues to trade lower, like many regional bank stocks, and its case at levels not seen since the mid-1990s. Is this an isolated incident or a canary in a financial coal mine? Time will tell.There are things in today's markets that just seem disjointed to me. A few AI-related stocks are taking broad indexes higher, but are they masking underlying cracks in the economy?Not to cherry pick data points, but on Tuesday Equifax Canada reported Increased financial strain as credit delinquencies continue to rise. In its press release, Equifax notes: “Ontario and BC have been particularly affected, with mortgage delinquency rates soaring by 135.2 per cent and 62.2 per cent respectively compared to Q4 2022, surpassing pre-pandemic levels, [and] the non-bank auto sector, used car bank loans, and unsecured lines of credit also show rising arrears levels, signaling forthcoming challenges.”In a way, the AI craze reminds me of the emergence of “Internet stocks” in the late 1990s, when simply announcing the launching of a website could send your stock soaring after hours and meaningless metrics such as page views – the number of “eyeballs” – was used to value a company.It was a fun and profit-filled time – until it wasn’t. I don’t mean to be dramatic and I’m certainly not calling for or predicting impending doom, but recent developments have me both perplexed and cautious. However, I’ve had enough experience to know that such perplexing – and even contradictory times – can last a while.It wasn’t a coincidence that the headline quote used in Volume I was, “The market can stay irrational longer than you can stay solvent,” from John Maynard Keynes.From a practical portfolio management perspective, this is an ideal time to review your investments and consider points raised in previous My Two Cents. Do you know what you’re holding and, more importantly, why? Do you have an exit strategy for your stocks? Are you using appropriate risk management techniques? Are you leveraging options to protect your gains and/or cushion potential losses?Also, do you have any cash earning interest in a money market fund so if and when stocks fall, you can take advantage of any opportunities? Recall the stock market secret discussed in depth in Volume II: as the price of a stock declines, it becomes safer.What do you think: are these coherent thoughts or should I keep my market musings to myself?!Exciting News for My Two CentsA number of readers have asked me how they can access past Volumes and I’m happy to report that each one is available here.I’m super excited to have my writings all in one place and can’t believe today’s Volume is already number fifteen.Thank you for your support and see you next week,Evan

Volume XVI - March 16, 2024Three Fascinating Trading Books

One of the reasons I launched My Two Cents was to provide readers with a unique and fresh perspective in the world of trading and investing. In keeping with this spirit, today’s Volume looks at three of my all-time favourite trading books. They’re not the most popular, nor will you normally find them in a “Top 10” list of trading books, but they're all well-written, entertaining, educational and, dare I say, inspirational. If you’re looking for a new book to read, you can’t go wrong with any of these ones… let’s begin.Pit Bull: Lessons from Wall Street’s Champion Trader by Martin “Buzzy” Schwartz (HarperBusiness, 1998)Probably my favourite trading book, partly because it was among the first one I read, but mostly because I learned a lot from it and appreciated Schwartz’s candid admissions as a trader – including his insecurities and shortcomings – but also as a husband and father who, despite challenges, persevered and became one of the best traders on the Street.To read Pit Bull is to read a book about trading and Wall Street that doesn’t exist today: the fractional trading; the reliance on old fashioned news reports and classic shows like Wall $treet Week with Louis Rukeyser; the absence of algorithmic and high-frequency trading that can often distort the process of price discovery (among many other differences).It was Schwartz who taught me the ten-day exponential moving average that I used religiously to trade options as a teenager. His own trading experience during Iraq’s invasion of Kuwait, and description of it, is fascinating (and reminds one of a time when geopolitical events mattered to the markets). Pit Bull highlights that trading is and will always be a psychological game: “The most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE,” Schwartz wrote with emphasis – truer trading words have never been spoken.Charlie D: the story of the legendary bond trader by William D. Falloon (John Wiley & Sons, Inc., 1997)When I was young(er), I wanted to be a trader (I still do, actually), and particularly a pit trader. Something about it fascinated me: the competition, the camaraderie, and the high stakes environment spoke to many parts of my personality. Enter Charlie D. The book’s author, Falloon, who never met Charles P. DiFrancesca (he died of cancer at only 39-years old), writes a wonderful story about a loving husband and father, and uber competitive and wildly successful bond trader at the Chicago Board of Trade.Similar to Pit Bull, the story of Charlie D is one that will likely never be replicated, as engineers, software developers, and router switches have replaced trading hand signals and the need to make near instantaneous decisions powered only by one's brain. Charlie D never granted an interview. He never disclosed his trading strategies. But he was a master in the pits, with positions that often matched the largest trading firms and corporations. He was a legend in Chicago and often golfed with Michael Jordan.The following was written in his obituary: Another trader and friend, Thomas Fitzgerald, said, “When people at Merrill Lynch or PaineWebber wanted to know what was going on in the market, they’d say, ‘What’s Refco [a major trading company] doing? What’s Charlie D. doing?’ As an individual trader, he was one the same level as major companies in the world. And he did it with a sense of humor and always with integrity.”Charlie D is both a wonderful trading book and an inspiring story that may leave you wanting to become a pit trader too.F.I.A.S.C.O.: The Inside Story of a Wall Street Trader by Frank Partnoy (Penguin Books, 1999)A professor of law, author of numerous books and articles, F.I.A.S.C.O is Frank Partnoy’s inside look at the world of derivatives trading on Wall Street in the mid-1990s. (As a side note, I’ve heard that Partnoy’s The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals, is itself a fascinating book, although I haven’t read it yet.)F.I.A.S.C.O is different in both tone and tenor compared to Pit Bull and Charlie D, but is nonetheless an entertaining page-turner. Unlike the first two books where there’s a personal, non-trading aspect to it, with family anecdotes and the like, Partnoy shows the ruthless and cutthroat world of Wall Street and the drive to make money at almost any cost. He describes international bond underwriting and the development and marketing of exotic derivative products that often led buyers misinformed but provided big commissions and profits for Morgan Stanley, Partnoy’s former employer.F.I.A.S.C.O details a world of derivative securities that Warren Buffett would eventually refer to as “financial weapons of mass destruction.” If you’re looking for a behind-the-scenes book about Wall Street, this one’s for you.Happy reading and see you next week,Evan

Volume XVII - March 23, 2024Value versus Growth Stocks

A Primer: Bottom-up Approach to InvestingLet's take a step back today and look at a bottom-up way of constructing a portfolio of stocks.The underlying process here is to search and select individual securities. The approach could be informed by different strategies depending on one's investing time horizon and objectives, and risk tolerance - always underpinned by a risk management framework (yes, I know I sound like a broken record talking about the most important part of trading and investing). Actionable examples here include a value-oriented or a growth-oriented approach.On the value-oriented side of the ledger, investors look for companies who are selling at a discount based on one or more metrics, such as price-to-earnings or book value. Be careful, though, that you don't fall into a value trap, where a stock is cheap for a prolonged period of time. I don't remember the specific podcast I heard this on recently, but the guest said something like: "A stock on sale that remains on sale is no sale at all." Look at a five-year chart of AT&T, for example, it's been "cheap" for a long time - but never a good investment.Looking at a growth-oriented approach, stocks here have exceptional revenue and earnings growth, on an absolute basis and/or relative to the broader stock market. (Think Nvidia, here - sigh). While you'll often pay a premium for this growth rate, always keep in mind the old Warren Buffett quote: "Price is what you. Value is what you get." The goal of growth portfolios is to provide investors with capital appreciation; with this objective, however, comes higher turnover (consider fee and tax implications) and more volatility. Growth stocks typically go up more than the broad indexes, but also fall more sharply in down markets. When effectively deployed, the use of options can help to lock-in profits, on one hand, while also cushioning the fall, on the other.For me, I always like to remain flexible, keeping my options open: while you might be predisposed to one approach versus another, if you search long enough there are always opportunities on both the value and growth side of stocks (especially when a "growth" stock temporarily becomes a "value" stock, like NFLX did in spring 2022 or META in the fall of the same year - these opportunities provide huge portfolio return potential).Gold Versus Gold Stocks: Which One Shines Brighter?I originally published this in The Mine Wire - a comprehensive and value-add weekly newsletter covering the mining sector.The spot price of gold has “skyrocketed” the last few weeks. I put skyrocketed in quotations because gold is “only” up ~8% since mid-February. For gold, that’s significant, and puts the precious metal at an all-time (non-inflation adjusted) high. Gold’s performance, however, shines bright compared to large-cap gold stocks, including Newmont (NGT), Barrick (ABX), and Agnico Eagle Mines (AEM). Let’s take a look at gold’s performance, as tracked by Gold Shares (GLD), compared to these three companies in 1, 2, and 5-year increments.

With one exception (AEM over the last year), we see that GLD outperforms each stock in each time-frame. Even examining short-term returns, GLD beats each stock over the last three months. It’s a stark showing and begs the question: if a historic increase in underlying gold prices cannot be leveraged by the world’s largest gold companies to benefit their shareholders, is there a point to invest in large-cap gold stocks? One may respond that these percentages don’t account for dividend payments, but on average the yield for each company is slightly less than three per cent and hardly compensates investors for the significant under-performance.Should investors who want exposure to gold companies explore small- and mid-cap gold stocks instead? While they present a different risk-reward profile compared to established firms in the sector, small- and mid-cap stocks also offer the possibility of significant upside if new mines are discovered and/or yields are better than expected; as well, there’s always potential upside through merger and acquisition activities. Regardless of approach, the key takeaway is the price of gold and the performance of gold stocks don’t always shine equally bright.See you next week,Evan

Volume XVIII - March 30, 2024The Importance of High Conviction Trading

The Importance of High Conviction TradingDaniel Kahneman, winner of the Nobel Prize in Economics (2002), passed away on Wednesday at the age of 90. Professor Kahneman's trailblazing work on decision making, including the bestselling book, Thinking, Fast and Slow, is both insightful and relevant for many different industries - including trading and investing.I remember reading Thinking, Fast and Slow, on the subway pre-COVID, and often spending the day contemplating what I had read. For me, it's such an informative book that it brings to mind the quote attributed to Aristotle: "The more you know, the more you know you don't know."Professor Kahneman's passing also reminded me about the importance to know and understand loss aversion when investing and especially when trading.The work of Kahneman, together with Amos Tversky, showed that "the response to losses is stronger than the response to corresponding gains" (p. 283). In other words, the joy of making $1,000 is not as high as the sorrow of losing $1,000 is low.Kahneman writes: "You can measure the extent of your aversion to losses by asking yourself a question: What is the smallest gain that I need to balance an equal chance to lose $100? For many people the answer is about $200, twice as much as the loss. The "loss aversion ratio" has been estimated in several experiments and is usually in the range of 1.5 to 2.5" (p. 284).This is a crucial consideration and should be a driving motivation to make only high conviction trades (and investing decisions more broadly).In the very first Volume of My Two Cents, I wrote: "Having high conviction is necessary to be successful long term; without it, whatever enthusiasm drove you to buy something will, like a sugar rush, eventually normalize, opening the door for your money to sit there without a distinct purpose."Warren Buffett has described this approach as waiting for the "fat pitch," basically situations that offer an extremely favourable risk/reward proposition. In such scenarios, you will either not, or only marginally, be loss averse since your particular trading or investing decision is highly in your favour.One of the ongoing challenges - and pitfalls - for traders, including yours truly, is the "need" to constantly be doing something. I think this has always been the case but especially heightened in the age of social media where we are constantly being stimulated and in turn look for an outlet to take action or "make a move."When you're constantly swinging at pitch and after pitch, to continue the baseball analogy as a new MLB season gets underway, your batting average will suffer, perhaps not in the short term, but definitely over an extended period of time.Which brings us back to the need to have high conviction before allocating your money. Asking yourself before you make a trade whether you truly have a strong conviction will help to filter out mediocre ideas, especially when you get an itch to "do something."From a practical perspective, where interest rates have somewhat normalized and money market returns are respectable, you can earn a decent risk-free return while waiting for that heater down the middle of the plate to build your portfolio. The key operationalization point here is that when these pitches are thrown, you need to be aggressive within your risk management framework so that you can actually benefit from them.So the next time you're ready to swing, think, fast and slow.Happy Easter, to those who celebrate, and see you next week,Evan

Volume XIX - April 6, 2024How and When to Trade the News

How and When to Trade the NewsI learned very early on in my investing and trading journey about the buy the rumor, sell the news phenomenon.I was initially perplexed why specific stocks oftentimes traded lower after “good news.”The situation usually unfolds as follows: a stock is bid up in anticipation of a positive development (e.g., better than expected earnings and/or guidance; a new product launch – think Apple or Tesla; merger and acquisition activity; etc.).The upbeat momentum, which sometimes takes on a life of its own, reaches its climax when the development is announced or confirmed – then investors and traders sell. The reason is there’s little or no juice left to squeeze after the announcement because it was already priced into the stock.Having confirmed the good news, there’s no more good news to be had; in this case, be careful not be a bag holder while others looking to book profits sell you their shares.This relates well with an article I recently read, “Front-Page News: The Effect of News Positioning on Financial Markets,” authored by Anastassia Fedyk in The Journal of Finance.Professor Fedyk, who was a portfolio manager at Goldman Sachs, examines how the categorization and subsequent placement of news on the Bloomberg terminal effects stock prices. The Bloomberg terminal, which is both the most popular and iconic news and financial data provider to professional investors and institutional firms, classifies news as “primary important” and “secondary important.”The former always has prime front-page positioning on the terminal – up to 40 minutes, according to the author – while the latter are sometimes on the front page, depending on the day’s news flow, but most often are not.There are a number of interesting tidbits in the article, but this is Prof. Fedyk’s general conclusion: “Overall, the information in front-page articles is fully incorporated into prices within an hour of publication. The response to non-front-page information of similar importance eventually converges but takes more than two days to be fully reflected in prices.”One takeaway from the article is that most investors, and probably all independent investors, should not try to trade “breaking news,” because the risk/reward proposition is unfavourable. If your rapid assessment of a breaking story, especially its finer points, is off even by a little, there’s a likelihood you will overreact and end up on the wrong side of the trade. If most of the move from a “primary important” story is captured within the first 10- to 60-minutes, unless you have a defined system or trading edge, you’re just rolling the dice, which is never a good idea.A second takeaway is that there are many opportunities every single day to identify important yet mostly ignored news – where a positive or negative development hasn’t been fully priced into the price of a stock, meaning there’s still money to be made. Fedyk writes: “In modern informational environments, where investors face millions of news articles per day, even widely available public information may not be immediately and efficiently priced.” This is especially true when significant national (e.g., a general election) and/or international (e.g., a natural disaster or terrorist attack) news and events take place and crowd out what would otherwise be significant financial news for the markets or an individual company.From a practical and implementable perspective, which I always try to focus on at My Two Cents, you need a system in place to organize and catalogue information, which you can then analyze to determine if a stock has room to run – or further downside ahead – based on a news development. One way to operationalize this is to select a specific sector or a particular group of stocks to follow, so that you can develop a sense of price activity, volume levels, and trading patterns for your selected securities.Another important consideration is where you source your information since most independent investors (and even some professional ones) do not have access to a Bloomberg terminal. There are many different online platforms available (e.g., Koyfin); your brokerage firm should also be leveraged as a source of information since many of them publish daily research reports and company-specific updates.If you’re trying to trade the news, you’re probably not setting yourself up for success; however, as Prof. Fedyk demonstrates in her research, for dedicated traders who take the time to examine news beyond the headlines, opportunities to earn excess returns do exist.See you next week,Evan

Volume XX - April 13, 2024Is Your Stock Shopping List Ready?

Have a Plan to Handle Market VolatilityApril has started off on a weak note for leading U.S. indexes. Hotter-than-expected inflation readings south of the border and continued uncertainty about the trajectory of interest rates (some, including former Treasury Secretary Lawrence Summers, have argued the next move of the Federal Reserve will be to raise, not lower, the federal funds rate), have infused caution amongst investors and traders as to the short- and medium-term outlook for the markets.Gold -- a traditional hedge against inflation -- continues to climb higher although large-cap producers such as Barrick Gold Corporation (ABX) are still lagging: ABX, for example, has had a strong month, but is up only marginally year-to-date (3.4%) and actually down (7.9%) over the past twelve months. Having said this, if the price of bullion holds its gains and/or trends higher, money managers may turn their attention to gold stocks and their may be significant upside for the group. While gold stocks may be under-performing, individuals can't seem to get enough of the physical metal: 1 oz. gold bars sold at Costco can't be kept in stock because of their popularity. It was reported this week that Costco is generating $200 million a month in revenue from the sale of the bars. Finally, on a related point, silver has also caught a bid lately; while it's often overlooked for its shinier precious metal cousin, there could be a trade opportunity with iShares Silver Trust (SLV).On top of inflation and interest rate concerns, gold prices coming to life, there's also increased geopolitical uncertainty, which could cause commodity market volatility, as well as further destabilize international trade. Related to this, one of the things that stood out during my market screening yesterday was the huge move up (16%) in the VIX (the Chicago Board Options Exchange's Volatility Index, commonly called the "VIX" for its ticker symbol, measures expected volatility in the S&P 500; it's also known as the "fear index" and during significant sell-offs -- think March 2020 -- spikes to align with the panic of traders).What to do if there's further volatility in the stock market?In Volume II I wrote: "As the price of a stock declines, it becomes safer. Everyone was a "genius" buying Facebook (Meta) on the way up in 2020 and especially 2021, but when it cratered and fell below $100 in the fall of 2022, nobody wanted to touch it (it has more than tripled since). What do to? Develop a shopping list: know which companies you want to buy, and why, and when they go up for sale, snatch them up."This is a good time to develop a stock shopping list.Is there a company that you've wanted to add more of in your portfolio? A security that you've always wanted to be in your portfolio but have found it "too expensive"? An entry point based on technical analysis that you'd like to trade a stock?One (non-recommendation example) is Amazon (AMZN). A 5-year stock chart shows significant support around the $150-level, which would represent a decline of ~20% from current levels ($186). The risk/reward profile at the entry point is a lot more enticing than buying the stock at around all-time highs now.Whatever your preferred approach, when markets are at a possible inflection point, it's prudent to prepare yourself -- and your portfolio -- for different scenarios. For example, on the flip side, this might be a good time to sell a stock that has stagnated with no discernible catalyst for further upside or trim a holding that has run up.Doing your research, having a plan, and developing a shopping list will serve you well during any market mayhem; it will avoid panic and emotionally driven decisions, which are almost always the wrong ones when trading and investing.See you next week,Evan

Volume XXI - April 27, 2024If Canada was a Stock Would you Buy It?

One of my goals when I started My Two Cents was to never skip a Saturday newsletter, a streak that lasted five months. Nevertheless, I'm back this week with a banger Volume, like the old Maclean's Double Issue. #IYKYKIf you enjoy today's read, share it with a friend - let's get started!Would you Buy the Stock of "Canada"?This is the question that came to mind when I heard the federal government's proposal to raise the capital gains tax.One of the federal communication lines — parroted by the mainstream media — is that the increase will only affect 0.13% of Canadians. When I first saw this reference, I immediately thought of the classic 1954 book "How to Lie with Statistics" (and also the "juking the stats" reference from the unrivaled The Wire television series #IYKYK).Setting aside methodological mental gymnastics, the number that really stuck out for me was $54 billion. This is the amount of money the federal government will pay, for just one year, to service the debt. It’s an obscenely high figure that does nothing to help Canadian families and businesses. It’s also more than the federal government invests in health care or national defence.A "Canadian Income Survey" published by Statistics Canada just yesterday noted the following: "The median after-tax income of Canadian families and unattached individuals was $70,500 in 2022, a decrease from $73,000 in 2021 (-3.4%), adjusted for inflation." The decline in income of Canadians together with current federal spending trends is a toxic combination.Canada has a productivity problem — this is not news. What is news (sort of) is the federal government continually creating disincentives to entrepreneurship. Canada has an enormous — and growing — debt problem, which, combined with languishing productivity, begs the question: if Canada was a stock, would you buy it?If the answer is no, where does one go from here?As we’ve previously discussed, looking for investing opportunities around the world — not just in the United States — is one way to diversify your portfolio, as well as uncover emerging and growing companies that can enhance your returns. As helpful background, country specific ETFs can be found here (in USD).But let’s return to where we started: capital gains taxes.While acknowledging this is only a partial or limited solution, it's important to know and leverage the various registered account types available to Canadians. For example, those looking to buy their first home should take advantage of both a Registered Retirement Savings Plan (RRSP) and First Home Savings Account (including the increased RRSP withdrawal limit, from $35,000 to $60,000, for first time home buyers).There’s also Tax-Free Savings Accounts which all investors should utilize and maximize (the current cumulative lifetime contribution limit is 95,000), as opposed to having money only in a non-registered investment account.Additionally, from an operational perspective, it’s important to keep tax implications in mind when buying, and especially selling, securities. The upcoming capital gain tax change, which takes effect on June 25, 2024, could provide you with a reason to re-examine your portfolio for stocks that have gone down significantly for tax loss selling purposes. While this is one practical step, like correctly calibrating your registered versus non-registered investment accounts, the benefits of these suggestions are admittedly limited and unfortunately not likely to improve for Canadians in the short- to medium-term.Trading Options in Earnings SeasonIn Volume VI, I wrote the following about trading options during earnings season (and highlighted the point with a fictional example):For traders, particularly those well-versed with options, earnings season provides many opportunities, especially short-term contrarian plays. For example, I’ve observed that stocks opening with outsized moves, say 7.5%+ moves in either direction, will have a tendency to snap-back or revert to the mean, even if only briefly after the 9:30am ET open.This scenario played out to perfection Thursday morning with shares of Facebook (Meta Platforms, sorry). The company reported disappointing earnings and the stock immediately sold off in after-hours trading; it opened the next morning down $72.10 or 14.6%. While this huge move, together with the corresponding loss of market capitalization (as well as personal wealth destruction for Facebook's founder), received all the media headlines, the only money to be made trading META on Thursday was to the upside. The stock made its intra-day low ($414.50) within the first 60-seconds of trading and finished $26.88 or 6.5% higher from that level.In January I also wrote: "By this time [during after-hours trading], most if not all institutional money that wants to has sold the stock; there may be some retail investors who sell at the open, but usually not in volume that will pressure the stock significantly further." This is exactly what happened to META and purchasing short-dated call options after the open (as I did) was a highly successful and profitable trade.The opposite (stocks gaping-up and then trading lower during the day) is also a regular occurrence but from my experience not as powerful. Just yesterday, for example, Google (Alphabet, sorry) opened significantly higher but traded lower during the day. Its open and high for the day were almost identical ($174.37 / $174.71) and it closed down almost $3 from those levels. In other words, without a previous position, there was no money to be made trading GOOGL to the upside.Next time you observe earnings-related outsized moves after-hours, look to see the intra-day move of the stock the following trading session, it might just surprise you.Reverse Stock Splits: A Flashing Red FlagIn Volume V, I wrote about my investment in Plurilock Security (PLUR), which wasn't go well. I confessed: "At this point, I’m going to keep the stock on a very short leash, and if there’s no positive catalyst forthcoming, sell the shares that I should have never been holding for so long." Seeing no material news coming from the company, I closed my position in early February - it was a necessary and easy decision.The week before last, Plurilock announced the dreaded reverse stock split (or "share consolidation" as it was eloquently described in its press release). Every 10 shares held would be exchanged for 1 new share, with the stock price increasing ten-fold to compensate; for PLUR, it meant a three-cent stock became a thirty-cent stock.While a reverse stock split (just like a regular 2:1 or 3:1 stock split) has no direct impact on a company's value, the former is a red flag and usually forced upon a company (e.g., to meet stock exchange listing requirements), while the latter welcomed and often bid-up by investors and traders.I remember more than a decade ago the storied Citigroup had to institute a 1:10 reverse split to get its shares trading at a respectable level since the once dominant banking conglomerate had become a penny stock.The bottom line is in almost all cases reverse stock splits signals a major red flag for investors.See you next week,Evan

Volume XXII - May 4, 2024Stock Talk

It’s the Easter long weekend and I have more pressing matters than My Two Cents … like getting the lamb ready for the barbeque!In late December I wrote “Three Stocks, Three Lessons” about Arvinas (ARVN), Plurilock (PLUR), and Intel (INTC).I provided an update on PLUR last week and INTC is still struggling, providing another weak forecast during its recent earnings call. The long ago darling of technology stocks is down 35% year to date; on the other hand, however, the thirty-dollar range has been a key technical level and INTC may prove a profitable investment for those with a long term time horizon (it might also be a good risk/reward candidate to sell puts, which will generate some income and allow you to purchase the stock below current levels – refer to Volume IX, “How to Buy Stocks at a Discount,” for more information).Then there’s ARVN, a big winner for me the last six or so months that has come down quite a bit after almost tripling from November to February. I’m very happy with how I’ve managed this holding: originally purchasing it in the mid-teens, selling some at $30, and then selling some more at $50. As I’ve written before, learning how to scale in to and out of positions is critical for superior long term results.Discussing Arvinas back in February, I wrote: “In fact, if the stock dips for non-company specific reasons, I would consider adding to my position – you have to remain flexible, a one-time-buy and one-time-sell approach is too limiting.” While I’m not there yet, if the stock price action stabilizes, I’ll look to add more to my existing position.Speaking of stabilizing, what about Boeing (BA)? In January, when BA was hovering at ~$200 a share, I asked if the company’s stock was a buy. I also wrote, “Unless there's more, and significant, bad news, recent events and the cost to fix them may already be priced into the stock's current valuation.” Unfortunately, the bad news has not slowed and is reflected in the share price ($179.79 as of yesterday’s close). On Monday, the company announced it had raised $10 billion through a bond sale, with the shares ascending higher (they got done to below $160). While Boeing’s restructuring – and associated cash burn – is an ongoing challenge, Boeing the company, which was founded more than 100 years ago, will continue to build planes. If we’re not almost there, a time will come when the risk/reward profile for investors will be favourable. It’s when stocks are not loved that often provides long term holders with advantageous entry prices; more so than Intel (there’s materially fewer competitors in the airline industry), Boeing is a stock worth watching.In February, I wrote a Volume titled, “Buy Strength, Sell Weakness,” so how exactly does Intel and Boeing fit with this approach? The short answer, right now, is that they don’t; however, there will be an inflection point where the weakness ends and the long term value of both companies will be reflected in their respective share price. The “sell weakness” example provided in the February Volume was Peloton Interactive (PTON). Unlike INTC and BA, there’s a plausible scenario where PTON doesn’t exist – or doesn’t exist in its current form – in five or even fewer years. In fact, in the past month PTON is down another 10%. While buy strength, sell weakness is a very useful strategy (especially for trading, as opposed to investing), there’s also a level of judgment that is required when allocating – and reallocating – portfolio dollars.Χριστός Ανέστη and see you next week,Evan

Volume XXIII - May 11, 2024Is Warren Buffett Coming to Canada?

Is Warren Buffett Coming to Canada?The annual Berkshire Hathaway shareholder meeting was held earlier this month in Omaha, Nebraska. The three-day spectacle brings tens of thousands of investors from around the world to the Cornhusker state. During his commentary to shareholders, CEO Warren Buffett alluded to the fact that Berkshire is potentially looking to deploy some of its more than $165 billion (~$225 billion CAD) cash on hand into an investment in Canada. "We do not feel uncomfortable in any shape or form putting our money into Canada ... in fact, we’re actually looking at one thing now," said Buffett.According to its first quarter report, Berkshire -- through a subsidiary of Berkshire Hathaway Energy Company -- already owns a "regulated electricity transmission-only business in Alberta, Canada." Could Buffett's Canadian investment idea be within the same sector? If you remove the big banks (which present regulatory challenges, among others), there are not that many large companies in Canada that would be worth Berkshire's investment dollars. Perhaps a resource or railway company (or maybe even fertilizer stock Nutrien, the old Potash).It will be fascinating to watch what happens; and, for those inclined to speculate, if a Buffett investment in Canada is eventually disclosed, in addition to the underlying security, call option values are likely to soar for the lucky company.The TSX Composite Made an All-time High: Does Anyone Care?With relatively little fanfare, Canada's benchmark stock exchange notched a new all-time closing high on Thursday. Despite this "accomplishment," the S&P/TSX Composite Index is up a meager 36% over the past five years (in comparison, the S&P 500 is up 83%).The adjusted market capitalization of the S&P/TSX is roughly $3.54 trillion dollars. I recognize the following is a bit of a crude comparison (it doesn't factor in dividend payouts, for example), but hear me out. If the five year performance of Canada's main stock exchange was similar to its American equivalent, today's market capitalization would be ~$4.76 trillion dollars. In other words, there would be one trillion dollars more in the accounts of Canadian (and some international) investors, both large financial institutions but also, importantly, individuals. This is almost an incomprehensible amount of money; think about both the direct and indirect benefit this would have on the economy, investor and consumer confidence, retirement savings, corporate growth and entrepreneurship (and the list goes on...). Even if it was a fraction of the approximately $1.2 trillion difference, it would still equal hundreds of billions of dollars of more wealth in Canada; this is a massive opportunity loss that few commentators talk about.Two weeks ago I asked, "If Canada was a Stock Would you Buy It?" and despite the extraordinary Warren Buffett looking at one potential investment in Canada, by and large our economy, stock exchange, and business climate/outlook does not paint a positive picture.So sure, the TSX composite made a new all-time high, but with the huge amount of money that Canadians have foregone because of lackluster long term results, we really shouldn't care or celebrate too much.See you next week,Evan

Volume XXIV - May 18, 2024I (Irresponsibly?) Doubled My Money In 18-Minutes

One Up On Wall Street by Peter LynchWhile I have not read this book, I recently saw a quote from this classic and it reminded me of a stock I own in a number of portfolios.The quote: "I'm accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I've owned something."The stock: VitalHub Corporation (TSX:VHI).Below is a description of the company from its May 9 financial results release, which showed strong revenue growth and a healthy cash balance (representing roughly 10% of its current market capitalization):"VitalHub is a leading software company dedicated to empowering Health and Human Services providers. Our clients include hospitals, regional health authorities, mental health and addictions services providers for children and adults, long-term care facilities, home health agencies, correctional services, and community and social services providers."I first bought VHI in the second half of 2020 at $2.60, picking up additional shares along the way, almost always at or below three dollars. If you look at a chart of VitalHub, for almost three full years (late 2020 to late 2023), the stock did next to nothing, trading within a tight range.However, after another solid earnings report last November, and a slew of other positive news, investors finally caught on and the stock broke out and has not looked back. VHI closed yesterday at $7.02, just slightly below its 52-week high ($7.13).The company kept reporting strong financials and as I have previously written (see Volume II), my investment thesis remained intact and I was confident that sooner or later this would serve as a positive catalyst for a significant upward movement in the stock.Sometimes things work out as planned and in this case the example of VitalHub aligns with exactness to Peter Lynch's description of just "hanging around" before making money.I (Irresponsibly?) Doubled My Money In 18-MinutesFrom a great investment to a great (and, admittedly, lucky) trade...This past week we witnessed the return of the meme stock craze, with shares of GameStop and AMC fluctuating wildly, resembling human behavoiur more commonly found in a makeshift basement casino.Into this mania, yours truly decided to enter the fray. On Tuesday morning, as AMC traded more than 100% higher in the pre-market, and implied volatility on options values soared to astronomically levels, I purchased 10 AMC 05/17/24 5.00 PUTS for $0.27 when the stock was trading just above $10, and closed the position 18-minutes later for $0.64.The impetus for the trade was mostly based on muscle memory and experience, although there was also a not insignificant amount of luck involved.While it may not seem like it at first glance, I of course employed the cardinal rule of both investing and trading: risk management.As I've referenced before, we should begin any allocation of funding not with how much money we can make, but instead how much can we lose / what is the worst case scenario.From my perspective, there was a strong risk/reward profile. Among other things, it was only Tuesday morning, meaning there were still four full trading sessions left before the options expired -- an eternity given the trading volatility, which included numerous halts, of AMC. Moreover, given expensive options pricing, even with a move higher, the puts would retain some trading value, owing to the possibility that the stock may come crashing down (which it did, closing at $4.40 yesterday -- although remarkably still up 25% for the week).An important side note here: whenever you see off-the-charts implied volatility, options pricing eventually become disjointed, when you see a stock crashing and the price of puts for the underlying security (which, in theory, should increase as the stock descends), also crashing -- a rare phenomenon but one that you need to consider if trading such events. This actually happened the following day, on Wednesday: at 11:36am, AMC was trading at $5.45, down $1.40 or 20.4%; at the same time, the $5.00 PUT was trading at $0.55, down $0.01 or 1.8%.Back to the trade: the overall value of the trade was quite small, so the potential downside was controlled and limited. Given the implied volatility, the likelihood of the $5.00 PUT retaining some value was high, so I discounted a 100% loss. I knew, however, if there was a sharp, sudden decrease in AMC's share price, the value of the puts would momentarily spike, and I could capture the difference, which ended up happening (some parts skill, some parts luck).I would characterize the trade as measured but also uncommon (at least for me), and while some may argue it was irresponsible, the overall trading profile -- and the reasoning behind it -- was in fact grounded within a risk management framework.See you next week,Evan

Volume XXV - June 1, 2024Buying Individual Stocks: Good or Bad?

Only Professionals Should Buy Individual Stocks, Right?One of my go-to investment-related podcasts is "Masters in Business" by Barry Ritholtz. I find his long form interviews quite informative and listened to a lot of them during the peak of the COVID-19 pandemic when walking alone outside was one of the most exciting things you could do.There's also a quick hit podcast that Ritholtz hosts called "At the Money" that usually runs ten-to-twelve minutes long. I recently listened to an episode, "Should You Be A Stock Picker?" where the guest (Larry Swedroe, Head of Financial and Economic Research at Buckingham Strategic Wealth) argued, among other things, that the "Typical retail investor is actually dumb or naïve and they get exploited by institutional investors." Swedroe cites "lottery stocks" like penny or bankrupt stocks that attract the money of retail investors; if this is one's strategy then Swedroe is correct because it's a surefire way to eventually eliminate the value of your portfolio.I don't doubt that there's something to his thesis: most individual investors lose money over the long term and/or under-perform the major market averages. Most investors will be doing themselves a financial favour if they buy low-cost index fund(s) on a regular basis.Regardless of what the evidence shows, however, there will always be people who manage their own money, buy and sell individual securities. It's not easy, but if you're dedicated and disciplined, there's certainly a lot of financial information and economic data available online today which, while not leveling the playing field between retail and institutional investors, the knowledge gap has definitely decreased from where it was twenty or even ten years ago.Following the podcast, I read Andrew Coyne's article in the Globe and Mail, "Eighteen years and $46-billion later, the CPP admits it could have earned more just by buying index funds," where he details the abysmal performance of the Canada Pension Plan Investment Board.The CPP had net assets of $632.3 billion as at March 31, 2024. The Board's long term annualized under-performance should concern all Canadians and be a topic of discussion in Parliament, which the Investment Board is accountable to, despite operating at arm's length from government. Setting aside the poor results, which is no easy task, what's perhaps more troubling is the money wasted (er, spent) running the fund. From Coyne:"The fund’s staffing levels, consequently, exploded: from roughly 150 employees in 2006 to more than 2,100 today. So did its costs, particularly the fees paid to external investment managers: from $36-million in 2006 to $3.5-billion in 2024, a near hundredfold increase. Over all, combining management fees, operating expenses and transaction costs, the fund’s expenses now exceed $5.5-billion annually – more than $46-billion in total since 2006."Despite billions of dollars being spent (wasted?) to recruit and retain high quality people and the best external investment managers and supporting them with the best technological capabilities, it leads me to wonder who the "dumb or naïve" folks really are...While managing hundreds of billions of dollars is nowhere near the same thing as managing an individual portfolio, my key takeaway is this: if you Know Thyself (yes, I'm a broken record on this point), have a specific and value-add trading and/or investing plan or thesis, and employ rigorous risk management principles, you may not become the next Warren Buffett, but you might just do better than some so-called experts... recall my favourite quote from author Jack Schwager: "There are a million ways to make money in markets. The irony is that they are all very difficult to find."Paying Less, Keeping More: Fees and CommissionsWhether it's trying to book a flight (especially a domestic one) or looking to secure a new mobile phone contract, Canadians have relatively few choices and those they have are among the priciest in the world.While it doesn't usually get much media attention, fees and commissions among so-called discount (or online) brokerages in Canada are seemingly stuck in the dot-com bubble era. I personally find options pricing egregious, where there's often a per-contract fee as if there's any material difference or cost to the brokerage firm between a client trading 1 or 10 option contracts online. Like all financial service offerings in Canada, the big banks dominant the space and for many of them, there's often little attention paid to their discount brokerage operations (I know, I used to work for one).This past week, however, I did something I haven't done in more than 15-years: I opened a new investment account.Fees and commissions are often ignored and sometimes thinking about the difference between $4.99/trade or $9.99/trade could seem unimportant. The reality, though, is that even small differences of fees add up over time and have a major impact on your portfolio's returns.Regardless if it's a mutual fund management expense ratio, stock trading commissions, or the invisible fee spread on currency exchanges, minimizing your transaction costs is an often overlooked tactic to keeping more of your money and thus improving your long term returns.Your current brokerage should offer you an annual account or performance report that you can download. In it, your account changes and total fees paid should be listed. Carefully examine the latter and compare what you're paying with what other banks or financial institutions are offering because the time it takes opening a new account online could start paying immediate dividends.See you next week,Evan

Volume XXVI - June 8, 2024Thoughts on GameStop

What Can We Learn From the GameStop Situation?I was planning to write about a few different stocks, some of which I've discussed previously, and one new security I've recently added to my portfolio, but this Roaring Kitty / GameStop (GME) situation ... intrigue ... fiasco ... got me thinking.Before my stream of consciousness commences, I hope - and kind of am predicting - that Michael Lewis, one of the greatest modern-day financial storytellers, researches and reveals to the world the full story behind GameStop's stock history the last few years. If and until this happens, much of what's being said, written, and Tweeted is speculation; this is an operative word, so let's start with it.On Thursday, GME soared 47.5% to close at $46.55 on extraordinary heavy volume (200+ million shares traded). To put this in perspective, on the very same day, June 6th, the entire S&P/TSX Composite Index traded "only" 198 million shares.Then, after the market close, Keith Gill (Roaring Kitty, also known as DeepF**kingValue on Reddit), scheduled a YouTube live stream for Friday at noon Eastern, which further sent GME higher than a SpaceX Starship rocket.GameStop traded north of $60 and there was rampant speculation on FinTwit and elsewhere that Roaring Kitty's live stream would send the stock to the moon. Based on his publicly disclosed positions in GME, which include owning the stock and call options expiring in two weeks, it was a "guarantee" that Gill would become a (paper) billionaire the following morning.I was actually hoping (hoping is the wrong word; as I've written before, "a hope-based investment strategy is a recipe for disaster"), that the stock would open at $60 or even higher so I could purchase some 0DTE (zero days to expiration) puts, convinced that the stock would sell off during the day, even if only briefly, opening an opportunity for a quick trade, similar to how I doubled my money in 18-minutes on an AMC trade (another meme stock) described in Volume XXIV.Unfortunately, in a surprise move, GameStop released its quarterly earnings early (always a questionable development), showing declining revenue, and also announcing "an additional 75 million shares on top of the 45 million share sale it had announced in May that raised more than $900 million." Around 6:30am, when the earnings were released, the stock immediately dropped from the mid-50s to less than $40. I was disappointed to see GME not trade higher in the pre-market and despite a few minutes of strength at the beginning of the regular trading session, the stock was crushed, down almost 40% to close at $28.22 for the day. What I thought was setting up to be a rewarding trade did not materialize...When trading options, one always needs to remember - and implement - that money can be made regardless of price direction. Most of the time we think about making money when a stock goes up, but for traders, price volatility is paramount. It's easy to get fixated on a stock that "has to" go down or up from a certain level, but we should keep an open mind and execute trades accordingly: would you rather "be right" or make money?GameStop's surprise earnings release completed changed the trajectory - and mood - of countless GME speculators, beginning of course with Roaring Kitty, who instead of becoming a paper billionaire, lost a cool quarter of a billion dollars in a matter of hours. From euphoria - always a dangerous word to use in the context of financial markets - to panic and devastation as option positions expired worthless and people buying shares on Thursday hoping for a quick flip received a rude awakening. You never actually make (or lose) money until you close your position. This fact is applicable to investors but of crucial importance to traders. Things can change so fast, especially when you're dealing with stocks being halted (manipulate?) seemingly every other minute, that the market showing you a paper profit can quickly turn into a portfolio millstone.Another thing that the GME situation reminded me of is the importance of hedging your bets. Hedging is a risk management tactic that investors should deploy, when and as required, but traders should implement with regularity. It's not often talked about - it's much more appealing to buy a massive block of shares, then sell them significantly higher for a nice clean profit and brag about it on Twitter - but it's nonetheless critical to both protecting profits and avoiding, or at least helping to avoid, destructive portfolio losses.Think about the GME speculator who purchased the 75 or 100 dollar call strikes, going to bed Thursday night thinking they're going to make a killing at 9:30:01 AM but waking up to realize their position is worthless.Roaring Kitty allegedly turning $53,000 into a several hundred million portfolio (hopefully Mr. Lewis tells us one day if this was actually the case...) is the exception that proves the rule. Even other traders who have turned a relatively small sum into massive winnings (many of whom are covered in the Market Wizards series of books by Jack D. Schwager, another excellent author), haven't done so using primarily one colossal concentrated bet on a single security.Yes, being aggressive - especially for traders - is generally a positive trait. Yes, riding your winners is important (I wrote about "From Home Runs to Grand Slams" in Volume XII). But this has to be done with prudence and risk management, otherwise just when you think you have trading figured out, you end up making another tuition installment to Mr. Market.See you next week,Evan

Volume XXVII - June 15, 2024Stock Talk: Part II

I thought to build on the original "Stock Talk," Volume XXII; maybe this will lead to a regular, standing item entry for My Two Cents - what do you think?Let's start with a discussion about dentalcorp Holdings Ltd. (DNTL), which was profiled in the very first Volume published in early December. At that time, I wrote: "The stock is down significantly year to date, but is forming a base around $5.50. One potential growth catalyst over the medium to long term is the federal government's new Canadian Dental Care Plan (CDCP)." Since then, the stock is up roughly 45%, closing yesterday at $7.97, nearly a 52-week high. A few years ago it was trading in the mid-teens, so there's precedent for the stock to trade higher. Last month, dentalcorp published a Viewpoint regarding the CDCP and while it acknowledges challenges with the program's roll-out, it also highlights some initiatives the company is implementing to "facilitate easy access to essential oral healthcare for Canadians seeking CDCP providers." From a technical analysis perspective, if the stock can break above the $8-10 range, it will have a clear path higher to ~$15.What's happening with silver? Two months ago, in Volume XX, I wrote: "Finally, on a related point, silver has also caught a bid lately; while it's often overlooked for its shinier precious metal cousin, there could be a trade opportunity with iShares Silver Trust (SLV)." At that time, SLV was trading around $25; it's up to $27, or 8% higher, which is a sizable move for silver (it was trading more than $29 late last month). Year to date SLV and its gold counterpart, GLD, were tracking rather closely, until May when SLV decoupled and traded significantly higher in comparison. It feels like silver may be overextended at these prices, at least on a short term basis; in any event, it will be interesting to watch how stock market volatility impacts precious metal trading the rest of the year.Is the Toronto-Dominion Bank a buy? TD's stock hit a roadblock when money-laundering probes were announced by the U.S. Department of Justice. Now there's also a class-action lawsuit which alleges "TD Bank misrepresented anti-money-laundering deficiencies, causing a stock drop." According to Jefferies Financial Group, the bank may be facing fines as high as four billion American dollars. TD is down 13% year to date; and, for those who are interested, its current dividend yield is 5.5%, which may seem attractive but the return is comparable to some current GIC rates. Sooner or later this issue will be resolved and it's likely that sooner rather than later any financial costs will be priced into the stock, if it's not already fully priced in. If it drifts lower, I'm going to look to open a position, either through stock ownership or purchasing long dated (January 2026) call options.When mergers and acquisitions go awry... At the beginning of the year I wrote about a massive merger in the global luxury goods industry: "Versace, Kate Spade, Michael Kors are some of the leading lifestyle brands impacted by Tapestry’s (TPR) proposed acquisition of Capri Holdings (CPRI). Announced in mid-August, the deal, if it closes, would see holders of CPRI receive $57 per share in cash ($8.5 billion total value)." Almost a year after the deal was originally announced which sent Capri's shares soaring (up 60% in one trading session), the deal still hasn't closed and CPRI is floundering, now trading at $31.70, lower than when the deal was announced. In late April, Capri issued a statement in response to the U.S. Federal Trade Commission’s (FTC) challenge to its proposed acquisition by Tapestry. At this point, it seems unlikely the takeover will materialize, which the market saw coming since CPRI was trading below its proposed takeover price for many months before the FTC expressed concern. On the other hand, if the deal were somehow to close (speculation, but perhaps a new American administration will direct officials to re-examine the transaction?), Capri will have another round of a soaring share price.See you next week,Evan

Volume XXVIII - June 22, 2024Opening a New Trading Position

I’ve written about various stock option strategies in the past and today I want to revisit one of them - selling calls against a stock position - regarding a trade I put on yesterday.Did you know the Monster Beverage Corporation (MNST) is one of the best performing stocks over the last two decades? Well, it is, but there's also another company in the same sector, Celsius Holdings (CELH), that has had a meteoric rise of its own the past five years: up 4,743%.That number, while wildly impressive, would have been significantly higher if I was writing this Volume last month, when it was trading at $95, as opposed to its current level of ~$62.Some recent data points have shown that the phenomenal growth rate Celsius has experienced might be slowly and that its major distribution partner, PepsiCo, has reduced inventory of the energy drink.This has caused the stock to get crushed, down more than 33% the last month. I've been monitoring the stock for a while and following its recent free-fall, decided to open a new trading position.I bought 100 shares of CELH yesterday at $61.33. I simultaneously sold 1 August 16 65 strike call for $5.25. Excluding fees and commissions the net cost of the trade was $5,608 ($6,133 minus the credit of $525 from selling the call).Between now and the middle of August when the option expires there are three scenarios that can play out - let's explore them.The first is that the stock continues its decline, which is definitely a possibility. The reason, I should say, that I targeted the $60 level is that its previously been a level of resistance/support, so there's some technical importance to it. Let's say it goes to $50, which is another area of support, I'd be down roughly $600 or 11%; at that point, I could write (sell) another call option against the position to generate income and further reduce my cost basis.The second scenario is that CELH hovers around its current level, maybe going up a little - let's say on August 16 it closes at $62 for illustrative purposes. At that time, the call option will expire worthless (I get to keep the entire $525 premium collected), and I'll also be up a couple of dollars on the underlying stock. If I were to sell the 100 shares, I'd make a total profit of $592 ($67 plus $525) or more than 10% in less than two months.The third, most profitable scenario, is that the stock of Celsius rises to $70 or more by mid-August (let's say $75). What happens in this case? My stock position will be up handsomely, but I'll actually lose money on the call option side. I like deploying this trading strategy when opportunities arise, but one "risk" is that your profit potential is capped. In this scenario, the total profit would be $892 ($1,367 on the stock sale minus $475 - the difference between buying/closing the call position for $1,000 and the initial credit received of $525 when I sold/opened the trade).In this case, I would be better off without the call option portion, but I'm fine with sacrificing some profit, $475 in this example, for the initial credit and margin of safety selling the option provides. There's always two sides of the trading coin, sometimes more, so there are considerations that need to be accounted for when putting on such a trade. At the end of the day, though, securing a 16% positive return in eight weeks is a proposition I'll take all day; as I've written before, nobody has ever gone broke taking profit.I'll circle back to this trade in the weeks ahead to see how it plays out...See you next week,Evan

Volume XXIX - June 29, 2024Closing Last Week's "New" Trading Position

Last week’s Volume detailed a new trade.I opened that position on Friday, June 21st, and I closed it two trading days later, on Tuesday, June 25th.Here’s why (and how).As I wrote last week, the position was opened because I’ve been following Celsius Holdings (CELH) for a while and felt that the massive decline (from ~$96 to ~$60) had mostly run its course, at least on a temporary basis.I didn’t think my purchase price of $61.33 was the bottom tick, of course, but felt that the $60 level provided good support and together with the premium received from the August 16 65 strike call offered a good risk/reward proposition.On Monday the stock traded – and closed – below $60. My experience told me to close the position on that date.The next day, it traded significantly lower, not surprisingly, and on heavy volume.Once I observed the early minutes of trading I closed the position, which I should have done the day before.I sold the 100 shares at exactly $57 for a loss of $447.06; and, I simultaneously bought to close the call option at $3.25 for a gain of $183.58 (one of the benefits of covered call writing and why I generally like this strategy). All told, including fees and commissions, I lost $263.48 or slightly less than five per cent.I could have held on until the August expiration but here are a few reasons why I didn’t (and one reason why I maybe should have).Let’s start with the latter.Often short term (and, depending on the context, long term) bottoms are put in on heavy volume. People capitulate and sell a holding – sometimes regardless of price – creating a bottom. Celsius traded 9.7 million shares on Tuesday, almost double its daily average.The stock traded higher on both Wednesday and Thursday (but lower yesterday) so maybe a short term bottom is in – time will tell.On the other hand, CELH traded multiple 9 million plus days in the middle of June when the stock was dropping and it only proved to be a temporary reprieve from further selling.For me, though, the trade was constructed within a pre-determined risk management framework that was violated so the position needed to be closed.When you’re wrong, or likely wrong, especially on a trade, you need to cut your losses short, which is what I did.As I wrote in Volume XIII, you should never turn trades into investments, that’s almost always a losing proposition.Another reason I closed the position is because I didn’t want to start devoting time and energy managing it (e.g., moving down the option chain as the price declines). There’s an emotional cost and, importantly, a financial opportunity cost to managing losing positions.Your money is tied up, not being productive, and there may be other, better ideas that arise (if my experience has taught me anything, there are always opportunities to make money in the stock market).This doesn’t mean that at the first site of trouble you close your position, especially if you have high conviction for a position.But in this scenario, I felt the trade was ill timed and I was better off moving on and recalibrating. Maybe I’ll put the trade back on, I’m not opposed to doing that. If I do, however, I’ll be doing it with a clear mindset, not coloured or negatively anchored by a bad entry price and a losing position.A major leaguer who fails 70% of the time he goes to bat is considered an all-star. A WNBA player who misses 60% of her three-point attempts is considered elite. Failing isn’t bad – but you need to manage (and learn more) failures, and that’s why I took the lose on my Celsius trade and moved on.Happy Canada Day and see you next week,Evan

Volume XXX - July 13, 2024One of My Favourite Trade Setups

Trust Your (Trading) GutThis is actually a thing, believe me. If you don't, read this New York Times article. For all of the super computers and complex investing and trading algorithms that dominate daily market activity, sometimes it's basic human intuition that is the best indicator.I'm not advocating for a full trading and/or investing strategy based on gut reactions - that, like a “hope-based” approach I've written about before - is a recipe for long term disaster. However, for experienced market participants, there are select times when you know you're absolutely onto to something, like you can tell the future.Maybe it's a specific stock that you watch and have a good understanding of its price patterns. Maybe the market is telling you something based on how it's trading. Whatever the context that triggers an actionable gut reaction, I'm convinced there's a sixth sense to the markets (and would love to hear your thoughts and specific stories). For me, foregoing some of these gut reactions has left me with more than a few regrets over the years. Here's the latest.I was doing some research recently and came across a dollar-stock called FibroGen (FGEN). I didn't do a deep dive into the company, but read it has some potentially promising treatments in its pipeline, including in Phase III clinical development. I added the ticker to one of my watchlists. The week before last it dropped below 70-cents and I immediately thought it offered an attractive risk/reward trading opportunity. It wasn't tied to a sector development or company-specific news, it was just a gut feeling I got from observing its price action.And what did I do about it? Nothing!To absolutely no surprise, the stock skyrocketed more than 50% higher in just a few trading days. A nice little trade I should have executed but didn't. Why? Because I didn't follow my gut feeling despite years of experience telling me this was a good trade.One of My Favourite Trade SetupsStocks that are significantly overbought or oversold and likely to revert to the mean - even if only on a short term basis - are one of my favourite trading setups. I'll share one example from the last week to illustrate this point.This past Tuesday, July 9th, I purchased Tesla puts expiring in November (200 strike option) following a massive run up in Tesla shares since the end of April. From trading at ~$140 to breaking above $250, I thought the move - even if it had more room to run - was likely due for a short term pullback.As a side note, two of the technical indicators I like to lean on for these sorts of trades are Bollinger Bands (named after famed trader John Bollinger) and the Relative Strength Index, referred to as the RSI. I like to keep my technical analysis simple, understandable, and actionable.Looking at Tesla, I thought the stock would have a down day or two, but wasn't sure on the exact timing so wanted to provide myself with some buffer (remember rule number one: risk management) by buying longer dated options (i.e., expiring in four months). I put the trade on in the morning, but the stock kept trading higher throughout the day. On Wednesday, however, when the NASDAQ was up more than 1% and Tesla was up only fractionally, I felt confident that the pullback was imminent. On a strong day for the broader averages, Tesla, as one of the leading mega-cap stocks, should have been up significantly; the fact that it wasn't told me that there were few buyers left at these prices, at least for the time being.Note, this trade was not predicated on what Tesla's value is - or what it should be - or even where it will be six weeks or months from now - for my purposes, I didn't care about these considerations.The next day, when there was a market sell off - the NASDAQ closed down almost 2% - Tesla was down big, ~$22 or more than 8%. While the put options I purchased saw a massive gain, I decided to keep the position open until the next day (yesterday) and sold them right at the open when the stock was lower (before finishing up for the day).Ironically the stock quickly went from overbought to oversold and there was an opportunity for a brief pop yesterday morning, which I captured with some Zero Days to Expiration (0DTE) options, but that's a story for another day because I want to do a deep dive into 0DTE options, a high risk (and sometimes high reward) approach to derivatives.For the main trade, I had a thesis and it worked out, with a sprinkling of luck and timing. Sometimes strategies work and money is made, while other times they don’t (like my Celsius Holdings trade).For me, though, these types of mean reversion trades are among my favourite setups, always remembering the need to have a solid reason to commit money to a trade (or investment), and a clear plan forward with proper position sizing and risk management.See you next week,Evan

My Two Cents is an Evan Sotiropoulos production. The information shared within is for informational purposes only and should never be considered investment advice nor relied upon to make specific investment decisions. © My Two Cents 2024