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When someone asks me what is the essence in my Investing and Trading Framework (“ITF”) over four decades, I don’t know how to answer the question. I have pondered on it for a long time until today (Oct. 8, 2022, which happens to be 2 days before my 83rd birthday).
The clear distinction between Investing (in the long term) and Trading (in the short term) is the backbone of my work on the stock market. In my ITF, two components are equally integrated.
My 2016 article explained:
“There are three ways of handling our financial assets: One way is to invest money for a long term (perhaps in three years or longer), by setting reliable portfolios. The second one is to trade individual securities or exchange-traded funds in brokerage accounts. The third is a way of both – investing and trading…”
The Focus
The focus of the article has three pillars:
- Real-Time Trading (RTT).
- Real-Time Controlling (RTC).
- An illustration of the controlling process.
The (Manual) “RTT” Work
The most distinguishable features of my work, compared to others’ work on the stock market is:
- I’m doing, while others seem to be waiting for something.
- I’m analyzing with paper and pencil, while others with computer software (i. g., composite indexing or charting).
- I and Automatic Trading Machines (“ATM”) are on real time (“RT”) while others are not on RT.
- I’m controlling both the trading accounts and the long-term portfolios (until 2020, and online savings since 2020) on RT while others perhaps do it differently with a long time-lags.
Doing Vs. Waiting
I’m trading for 9 hours from 7:00 a.m. to 4:00 p.m. (ET) on M-F and preparing for trading for at least 5 hours a day on weekends. My extensive work on the market over four decades and my fully devoted actions can fruit a significant edge over my major opponent, ATM, and other professional and individual traders.
Why Do I Work So Diligently At My Age?
First, I’m fortunately very healthy. Second, as a second generation of a commended civilian-army general, my grandfather (who is in the Army Memorial Park in Daejeon, South Korea, and his bronze statue in Ham-yang — his birth town), I sincerely want to make a lot of money to set up a scholarship fund to cherish his sacrifice as well as all my family’s extreme hardship during the colonization period in the first half of 1900s.
Paper And Pencil Vs. Computer Software
Although I’m an expert in computer software, experienced 1) IBM 370 IBM mainframe during in 1970s in the Bank of Korea, UConn, NYU, and CIBCR), 2) the TSP (Time Series Processor) Instructor at NYU, Graduate School in the last half of 1970s, and 3) the Spreadsheet (Lotus 1-2-3 and Excel) since in the early 1990s, I prefer using pencil and paper than computer software because:
“[Business] cycles and economic activities on the aggregated level are extremely complex and delicate because multi-level interactions among all industries, all different regions, and all sectors with different time lags to adjust the impacts of economic policies – monetary and fiscal – and other geopolitical disturbances, and natural damages, and so on…
Burns and Mitchell collected data, analyzed business cycles, and dated turning points in economic and market activities, mostly with paper and pencil. This way still can compete with the business-cycle models, backed by the advanced technology, and far-well-developed computer software, and the abundant data and indicators.”
Real-Time Trading (RTT)
ATM and I trade on RT, (which means that “describes various operations in computing or other processes that must guarantee response times within a specified time (deadline), usually a relatively short time.” (Wikipedia)) while other investors are not trading on RT.
Actually, comparing ATM’s RT, my RT is different: The former is backed by software, but I do it manually. Every morning my radar screens a couple of dozen “Daily Targets” and I jot it down on paper with pencil. Then I’m ready for my RT trading through an entire session.
Some Takeaways On RTT
- In general, an uptrend (“UT”) is more productive than a no-trend or a downtrend (“DT”).
- In a powerful UT, repeat trading (twice to six times in my record) for the same target.
- In a mild DT, still some rising targets (albeit less available than a UT) can be traced, but in a deeper DT some deepest targets (i. e., a -3%-and-4% bend) are selected for long trading.
- The gain threshold 1% would be somewhat relaxed to a range between +0.5% and +1.5%, depending on the market situation.
Two Previous Recessions, High Inflation, The Fed’s Rate Hike, The Ukraine-Russia War, The Bank of England’s (BOE) Gilts Purchase, And OPEC+ Production Cut
The 2008-2009 Great Recession (December 2007 – June 2009) was severest after the Depression, and the 2020 Covid-19 recession (February 2020 – April 2020) was the shortest one in history.
In the aftermath of the two-month pandemic recession, inflation came back far higher than the Fed’s target (2%), and the Fed is in the process to curb the high inflation by raising the Fed benchmark rate to hit the terminal rate (4.5%) by the end of the year.
On top of them, 1) the Ukraine-Russian War (started in Feb. 2022), 2) the BOE’s decision to buy the guilts (on Sep. 28, 2022), and OPEC+ Oil-Production Cut (on Oct. 5, 2022) together are dragging the global economy (Europe in particular) into a recession.
As a consequence, the risk level of the various groups of investors elevated in a short term:
- Short sellers in general (dividend-paying stocks holders in particular) are in a difficult position when the market moves in a narrow range for a couple of months.
- Risk on-off investors seem to be very hard to decide their next movement whether or not to return to the market, and when.
- Heavy-Cash Holders (i. e., 50% or more in checking a/c’s) are very anxious to guess their entry point.
- Multi-basket (which contains all asset categories) investing is too thinly spread so in the long run, capital gains of some assets would be offset by losses of others. As a result, they concern the weak assets every session, and in the long run, don’t get any significant gains. They must try to have only One Basket with well-selected assets.
- In my case, I believe, my financial condition has not been worse than the above four cases, either in good markets or in bad markets.
The Real Time Controlling (RTC)
Controlling Trading A/Cs And Savings A/Cs (Or The ETF Portfolios Until 2020)
Note that “Savings A/Cs” (in the subtitle above) mean the online Savings accounts at Marcus: Goldman Sachs (which yield 2.15% APR (Annual Percent Rate), daily compounded, and protected by the FDIC), and which replaced the well-diversified ETF Portfolios in 2020.
“[I manage] a dual portfolio with two key controls – The Asset-Allocation (or “A-A”) Decision, and The Cash-To-Capital (or “C/C”) Ratio. The C/C Ratio is a near-term control in one to three weeks, and the A-A Decision is a short-term control in one to three months.”
“The C/C Ratio” is a built-in safety measure in a dual portfolio. The C/C ratio moves in the same direction of the market. The market moves higher or lower, so does the C/C ratio.” The A-A Decision, however, is a sort of a countercyclical control, which moves the opposite direction of the market. The market moves higher or lower, it does lower or higher.
“The C/C ratio changes not only by the actual movements of the market as seen above, but also, more importantly, by expectations for the downside risk in a very near term.”
“A Dual portfolio with the C/C ratio would shield you. The portfolio reflects not just the long-run market perspective, but also the short-term market outlook. The effectiveness of a defensive strategy has weakened noticeably in recent years. Therefore, careful maneuvers of the C/C ratio can reduce the blow of sudden severe downswings. The portfolio is also flexible enough to capture a near-term profit opportunities. As a consequence, a dual portfolio minimizes the downside risks without losing the upside potentials significantly.”
The market in 2022 is really irregular because no momentum/trend upward has ever been registered yet. My two controllers are designed by the historical record of the momentum/trend: The C/C Ratio is a near term (or momentum) control in 1-3 weeks, and the A-A Decision is a short-term (or trend) control in 1-3 months.
Although this year is different, distorted by various external forces, still the dual target (i.e., 40% and 60:40) is adjusted on RT successfully.
My work foundation is a top-to-bottom approach, which:
- Determines the direction, based upon the macro-data,
- Supplements some details from micro-data, and,
- Finally optimizes the reward and minimizes the risk, by controlling the RT balance between two Risky A/Cs and two Anchoring A/Cs properly.
As a byproduct, a contrarian ingredient is added in my work.
An Illustration Of The RTC In 2013
“The A-A Decision and the C/C Ratio are mutually constrained. In a near term (in a couple of weeks), however, the C/C Ratio is somewhat free to maneuver to take an advantage when any security is mis-priced, disregarding a target of the A-A Decision (for example, a 50-50 or a 60-40). On the other hand, in a short term (in a couple of months), the A-A Decision would dictate by rebalancing toward a target allocation, leaving the C/C Ratio disrupted temporarily.”
“How do these two controls get a target? They are determined based primarily on various macro-data such as business cycles and monetary policies of central banks (led by the Federal Reserve) in the globe…Any rigid matrix to extract a target number is not pursued because it would be improper.”
The current targets of the C/C Ratio and the A-A Decision are 40% and 60:40, respectively. Even though there have been no clean signals of the momentum and trend in 2022, two controllers still acutely have worked out on RT.
The following quote has a similar season (by only about three-week apart each other: Sep. 16, 2022, and Oct. 8, 2022), and the targets differ slightly (25%/50:50 and 40%/60:40%), respectively), and the economic environment is a bit different. But it’s good enough to grasp the main feature:
“The equity market has held pretty well, and that trend is expected to continue until the end of this year. As a result, in November the A-A Decision changed to a 55-45 from a 50-50, and the C/C Ratio reduced to a 15% from a 25%. If a budget compromise would not be concluded by Dec. 13, the C/C Ratio would be lifted up to 25%…
If there would be no sign to resolve the fiscal impasse by the end of this year, the C/C Ratio would be raised to 35% to take an opportunity from a last-minute panic selloff. If the U.S. defaults, unfortunately, a 35% cash holding surely minimizes the damage from that event. Will the unthinkable really happen? The chance would be fairly low but cannot be completely ruled out.”
Investing Vs. Politics
Politics, Economy, and Investments are closely intertwined with one another. The election season will be much jolted this time. I view a lot of politics-driven comments, politics-influenced articles, and politics-biased data-doctoring. I want to quote the following:
“As a voter, we would join political and ideological debates but as an investor, we should not be distracted by them. It’s better to focus only on the impact of them, by assuming that all politics and fiscal actions – election outcomes, laws, or executive orders, etc. – are given.”
A Simple Investment Advice
“If you are a long-term (5 years or longer) investor, you don’t have to do market timing. You would invest with a reliable portfolio anytime. A typical Vanguard exchange-traded (or mutual) fund portfolio (with six funds) is recommended as:
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