ACCUMULATING WEALTH

Lessons Learned from the Black Swan Event – Part 2

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In January, we talked about the geopolitical tension that developed between Iran and the US. In merely a month, we have witnessed how the COVID-19 virus outbreak from China has severely affected the whole world. At the time of writing, over 70,000 people have been infected and close to 2000 people have died from this pandemic. Analysts have concurred the economic losses would be much higher than the SARs, as China has now accounted for four times more of the global GDP than 17 years ago.

Domestically, Bank Negara announced that Malaysia’s 4Q19 gross domestic product (GDP) growth slowed to 3.6%, which is below market expectation. With the new black swan and depressing news prevailed, there is no wonder the KLCI Composite Index (KLCI) tested the lowest in five years at 1518 before rebounding. Ironically, despite the severe outbreak, the Dow Jones Industrial (DJI) Index has shrugged off the COVID-19 and stands at the historical level at above 29000 points.

So, let us continue discussing the lessons learned from the black swan event. First, here is how our portfolio performed up to 14th February 2020:

Disclaimer:
The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.

The portfolio above shows a gain of 308% since November 2015. In February, we were entitled for a 1.2 cents dividend from FOUNDPAC Group, which is RM1440. Our new cash level is now at RM94,361.

So, apart from the four lessons we shared in the last issue, let us continue with another four lessons here:

1) Take Profit

Taking profit is the hardest thing to do for many traders or investors. Yes, even though you are sitting on 10-20% profit, it is never easy to execute. Reasons? Greed! As a human being, if you have 10% paper profit, you would desire to earn 20%, and so forth. It would never end. As a result, your hesitation would turn your profit into losses. By then, you would be more unwilling to sell, because there is pain in cutting losses. Owing to this indecisive behaviour, you hardly have spared cash to buy when opportunities arise. Therefore, you must take profit when it hits your target.

2) Set Plan

Many people tend to adapt the ‘see how, see first’ approach. Unfortunately, it would not work. Instead, you need to have a trading plan such as setting your exit point prior to buying. Exit points consist of profit target and loss cutting point.

If you can sell at your profit target, you would have extra bullets to use. Likewise, if the market does not go your way, you will preserve your capital. Remember; you set the loss cutting point based on your risk appetite, whether it’s 5%, 10% or more. Quite often, I have seen my friends’ capitals getting wiped out because of not willing to let go when the trade did not favour them. Once your capital is gone, you are out of the game.

A trading plan is a basic approach. You can fine-tune your plan and make it more agile. The next point shows how.

3) Switch Counter

You switch based on two scenarios:

First, the counters you bought has turned into a downtrend of sideways. It means the probability of winning has reduced. Therefore, switch to another uptrend counter.

Second, switch to a strong bullish counter when a black swan hits. Quite often, this kind of counter could correct to 10% in a day when panic sets in. However, because of its strong momentum, its robust moving average (MA) lines, such as MA50 or MA100 tend to support. So, always have what counters and price you want to switch to in mind, so that when the time comes, you can execute more easily.

4) Buy Uptrend

If you look at our portfolio, you can see these counters have one thing in common: they all technically uptrend. As the saying goes, “The rich get richer, and the poor get poorer”. It applies to stock trading, too.

Uptrend counters mean more smart money are still buying. Therefore, the probability to continue going up is higher. Nevertheless, there is no guarantee. So always stick to your trading plan.

Conclusion

So after experiencing two black swans in two months, plus some lessons learned, you would have some ideas on what to do next. Instead of feeling fearful, it is time to sharpen your saw and embrace the moment when it comes.

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