Walmart (WMT)

Walmart (WMT) needs little introduction to most investors.

2015 has been a depressing year for WMT, The stock had fallen by about 20% from the start of the year to mid-August. After WMT’s investor day in mid-October, the stock plunged 10% as the company warned that they expect profits to drop as much as 12% in 2016 and flat revenue growth. The stock is on pace for its worst year since 1973.

Walmart is a company with a wide economic moat coming from its efficient scale and low cost advantage It’s size allows it to negotiate lower prices with suppliers, which then allows it to offer lower prices to customers. Of course, this moat is under threat from the rise of internet shopping. However, I don’t  think Walmart is going to go away anytime soon.

Many of the reasons cited by the company for it’s lower expected numbers for next year are justified or even necessary. For example, raising the minimum wage for workers should reduce the high employee turnover rate and also motivate the staff.  WMT plans to spend almost $2 billion over the next two years to improve it’s e-commerce operations, hopefully stemming the loss of business to Amazon, and maybe even winning some customers back.

Morningstar gives WMT a 5-star rating at below $60, with a low uncertainty rating. I sold puts on the name, giving me a ~8% return on the investment if the puts expire worthless. I’m happy to be put the stock at an effective buy price of $53, giving me a position in a low risk company with a wide economic moat.


Holding a Position

On further analysis of the market action over the past month, I’ve realized another error that I’ve made is that I’m not very comfortable holding losing leveraged positions. One of the reasons for this is because my position sizes have become too large relative to my portfolio. Secondly, it’s because my boss at my day job is a panicy person which doesn’t allow for this. As a result, this has affected my thinking. If I had held my short positions, while I probably would still be losing, I wouldn’t be losing as much.

Life is a Marathon, not a Sprint

The past quarter has been a roller coaster ride for me, especially the past 3 weeks. During the CNY period, as well as during the past 3 weeks, I made and lost a fortune.

During CNY, I went to Dubai for holiday. During that time, I made and then lost about 7.8% of my portfolio. From March 13 to 20, I made 11.5%, but lost 10.3% on the night of 20th March. On 23 March to 25 March, I made back another 6.5%, but lost 9.5% from 26 to 29 March. In fact, I am now down year to date, which is remarkable given that at one point I was up 13% for the year, handily outperforming the S&P500.

In both the CNY and the recent 3 weeks of volatility, I made a few similar mistakes. The first was to have a big open position during a time when I could not monitor the position. The first, because I was on a plane to Dubai and also on holiday which meant my schedule was disrupted and was less able to look at the portfolio, while on 20 March I was at a concert.

The second mistake I made was that I forgot that life is a marathon and not a sprint. As a result, I had huge futures positions in crude oil, wanting quick gains. I forgot that I had initially started trading in futures through very small positions, only have one or two open contracts at a time. Instead, I started trading up to 10 contracts, not including options. This was perhaps foolhardy.

On the bright side, I did learn that I am surrounded by a few encouraging friends. Other traders such as Charles, Ma, and WR were all encouraging me even as I questioned my trading ability. It was most heartening to know that I have surrounded myself with such sincere friends.

Deutsche on DSX

I just read a recent article from Deutsche bank on shipping. They expect a weak Q1 and Q2 dry bulk charter rates. Interestingly, they mentioned that DSX has a breakeven charter rate of $12k/day. They expect DSX to be the best positioned for long term investors due to their low balance sheet. Also, they feel that the currently low rates is precisely whats needed for a recovery in 2017 onwards.

Portfolio Hedging Review

In the past, I’ve written about how I buy puts on the SPY index to hedge my portfolio. Since I started doing so opportunistically about 3 years ago, I’ve found this to be rather ineffective. This could be because the markets have on the whole been on a huge upward move, with hardly any corrections. However, I do feel some dissatisfaction at wasting money on puts that almost always expires worthless.

Since November, I’ve switched to using the E-mini S&P500 futures contract instead. I’ve done a total of 6 round trip transactions. The benefits of using options was that your downside is capped at the original amount of premium you paid. The benefits of using futures on the other hand is that there’s no money spend on implied volatility, or a theoretical premium to what the protection is worth. The flipside is that you have to actively manage the position. In many ways, you are selling short futures because you think the market is going to fall, but you find it difficult to sell your stock posiitons because, for example, they are undervalued.

When calculating my performance, I’ve once against lost a bunch of money on this new tool. On closer examination, I believe I have lost less this way, than if I was to use SPY puts. I believe there are a few reasons to this. Firstly, you don’t lose time value while holding the position. Secondly, the leverage that the futures provide means that I usually only have an open posiiton of 1 contract. The leverage allows me to have a smaller position. Hence, I plan to continue to use this as a tool instead of options.

Soybeans 2014 Review

zsx14This has been a very interesting year for soybeans. While I’ve done a fair number of trades for soybeans, this post will focus on the main trade which was to sell the SX14 (Soybeans November 2014) contract short. I made a total of 26 round trip transactions for this contract from June to October 2014.

A good friend of mine told me that the planting season had gone very well and it was expected that there would be a bumper crop during the harvest in 2014. Hence, selling SX14 short would be a good trade. However, since I’m not so close to grains as I wish, I was a little hesitant so most of my trades were short sales before USDA report releases. I also sold short SX14 when it broke $10, seeing that as a very bearish signal.

In hindsight, it would have been a much better trade to keep a short position in SX14 and adding to the position before every potential catalyst such as the USDA report release. An epic error I made was during the June report. The report announced that soybean acreage was 3 million acres more than previously thought. The market absolutely plunged and there was follow through selling throughout the session. In fact, SX14 started drifting much further down over the next few days and never went back to the level when the announcement first came out. Since I was unfamiliar with the existing situation, I didn’t have the confidence to be so aggressive and so missed most of the move and left most of the money on the table.

Having said that, shorting soybeans have been another source of profit for me this year.