LUKE PUPLETT

A friend recently told me he’d started spread-betting and had a misguided perception that I know a thing or too about it, might even be good at it. I thought the truth would make for an interesting off-topic blog post, so here’s what I know.

The recent crash cleared out all my winnings and then some. I eventually liquidated everything last month and was, over 10 years of trading/investing, about £3k down, probably all the trading fees!

I learned a number of lessons.

Back in 2004, I opened an account with IG Index so that I could expose myself to gold. There were no ETFs then so spread-betting was the only way to go. I opened a position with £700 in the account at £50/tick opening at $450/oz. A man called from IG Index doing a survey, and asked why I chose gold. I told him that inflation was rife. The CPI was about 1.5% so he audibly laughed! So I knew I was right.

Contrarian investing goes along the thinking that there are no people left to sell/buy a position so it cannot go lower/higher, this is best when something becomes accepted as a law, a constant that will never change, such as to suggest the opposite invokes derision.

But my reasons for taking this view was that in 2004, copper and lead prices were double the previous year, sugar, too, and yet nothing was more expensive in the shops and nothing said in the press. Prices were flying up, in stealth mode. At some point it'd hit consumers in the shape of massive inflation.

I once predicted the net result of this in an email to a trainee credit derivs trader at the bank, saying:

(If I’d known something about the RMBS market and CDOs, maybe I could have predicted the bigger collapse)

Today gold is at $1,200-ish but I didn't make £37,500. The reason is that I tried to trade the position so that I bought back in at low points. The obvious logic is that, even though you're a bull, why hold the position during weakness when a) your money can be used elsewhere b) you can get by more later, lower?

The problem is that when you're onto a good thing, you often don't know how right you are. You sell and make a profit and the price weakens but you don't buy, it's going lower. It goes higher. But it'll go lower and you'll get back in. You don't want to buy back in and then it goes lower and you lose and then you'll be doubly annoyed because you *knew* it was going lower but were weak willed. It goes higher. It goes higher. You never buy back in. Months later when you’ve forgiven yourself and your mind has cleared, you buy back in, but you missed it.

This isn't actually the main lesson. I bought back in after they released an ETF, Gold Bullion Securities (GBS.L). I held this at the same time as a load of shares. My thinking was that with a financial apocalypse ensuing, gold will go through the roof and hedge any losses elsewhere.

What actually happened was that gold did nothing. I remember watching gold during the deepest darkest days of the meltdown and it actually did nothing. The financial system of the entire planet about to implode and gold did nothing.

Then I had to sell my position because the ETF was backed by a subsidiary of SG, then by an Australian company and underwritten by AIG, who were going bust.

And later it came out that China was buying dollars by the hundred-billion-load during the crash. This kept gold up. They were secretly buying from the Fed to manipulate the currency because China’s wealth in denominated in USD and they could not afford for that to sink.

The lesson is two-fold. With AIG, it showed that the whole system is linked. You can’t escape it. As Warren Buffet once said, it’s like insuring the Titanic via a company based on the Titanic.

The second part shows that even when you know stuff, you don’t know stuff. I didn’t know that much bigger powers would manipulate the market to prevent my perfect plan from working out.

The next main lesson was discovering the ramifications of something you know from day one: that share prices are quite literally nothing, zero, to do with the company or its performance. Share prices are in the minds of the participants.

“The market can stay irrational, longer than you can stay solvent.”

Because there is no link between a share price and the reality of a company’s financial health, it means that a perfectly profitable company with a good outlook can have a share price of nothing, and can go bust because of it. Share prices, company’s fates, the stock exchange and the world’s wealth are driven solely by mass human hysteria. The system is ridiculous.

If enough people think that everything is going to pot, then everything will go to pot. This is why exchanges have daily limits and cut offs. It’s to stop everyone from running to starboard.

For me, this meant that, as in the case of a gold mining company I invested in, I was able to draw up a financial model of their company, ins, outs, raw materials prices, and predict their profits to within a few hundred thousand pounds, I was unable to translate this incredible knowledge into gain, because the market does NOT care for reality. The market is perception, and perception is usually masses of stupid humans doing stupid things.

Investing/trading takes up a lot of time. My biggest profits came from the stuff I never touched. General ‘ideas’, such as China’s growth, Brazilian industry, natural resources; my funds did quite well though all of this, up 25%, and I spent an hour a week researching, if that. If I’d put all my money in funds, I’d be much, much better off.

I bought and held a general idea, let someone else manage it, and sold years later. These days, I’d put my money into someone I can trust, have 100% control over, and enjoy the process – myself, my business or my home. For savings and pensions, I’d use trusts, but revise it every 6 months.

The problem with most people and pensions that end up worthless, is that they buy and hold something good in 1969 and never take an interest thereafter and it dies while the world changes. Buy and hold, but keep control and tweak it according to world issues.

And there you have it ;) – lots of time wasted, lots and lots of stress, much reduced focus on my core skills as a programmer and all for nothing. Or maybe all for a life lesson…

…at least I learned all this now and not when I am 60.

Luke

P.S. Check out Robbie The Trader (nakedtrader) online. While I’d try and make thousands per position, Robbie makes many, many meagre profits. http://www.nakedtrader.co.uk/trades.htm

He used to run a café and has amassed >£750k from an ave. £200 profit per trade. It’s funny because the rare times I have played a fruit machine I took whatever was there and went away a winner, but I couldn’t apply it to shares, as Robbie does.

This is how I won the Warrants trading competition, it wasn’t real money and with so few people in the game, in profit, I knew that all I had to do was make a small profit in ALL weeks because most people would suffer at least one week of immense losses.

Labels: finance, investing, tangent