Saturday, February 28, 2015

Revisiting stop losses and position sizing

Hey, I hope you guys have been doing well. After learning more about the oil industry, I’m ecstatic about the potential opportunities that the sector presents. The attractive investment opportunities available plus the awesome video games I’ve been playing lately equals to good fucking times for me. Anyway, I’ve been thinking about position sizing and stop losses. I know I’ve written a little about those risk management techniques a while back. But considering all the stuff that has been going on lately, I think it’s a good time to revisit these concepts.

Update on the Greedy Dragon portfolio: I recently took a position in Comstock Resources and increased my position in Natural Resource Partners. Please do your own research before investing in anything. I also reduced my stake in Uranium Participation to raise some cash.

I now think that stop losses definitely have a place when it comes to riskier investments. I personally have never imposed a stop loss on any of my investments as I was confident that I could tell when an investment got impaired. I guess I was wrong as there were times when I only realized a permanent impairment when it was too late and incurred hefty losses. In most circumstances, I still think that I would avoid using stop losses. However, I definitely should use stop losses when it comes to investments that are exposed to sudden devastating risks. Risks that could just come out of the corner and curb stomp your position before you even realize that an impairment has occurred. One example is my investment in National Bank of Greece (NBG). The bank could be managed prudently (and I think management have indeed been doing a decent job, considering the hand that they were dealt) but shareholder wealth could still get destroyed due to a government that’s against austerity coming into power. I’m not saying that NBG’s shareholders will lose their shirts (again), but the risk of investing in the bank certainly has increased due to the new anti-austerity government taking over. I definitely would have been better off if I was stopped out of the position with a 25% loss or whatever; now I would be happy just to recoup my initial investment.

Disclaimer: If you’re a shareholder in NBG, please do your own research before deciding what to do with your position. Don’t rely on this article for investment advice.

I’m kinda gambling here as I should just cut my losses, grab some Haagen-Dazs to feel better about the whole thing and call it a day. But it’s a small position so I guess I’m just going to let it ride. I know I’ve said many times that I would be happy if stock x or stock y dropped another 50% as I would be able to get even more value. Well, that’s not the case with the riskier investments as a lot of the capital losses could very well be deserved. I will admit that I should have avoided making any investments in Greek banks in the first place as the country has so much debt that a lot of things could go wrong. I should also have foreseen something like this happening because a country with a big government that has been spending beyond its means for a long time doesn’t just embrace free markets and financial discipline overnight.  

Another possible use of stop losses is to protect big gains in cyclical investments as it’s more or less inevitable that these investments will experience another bust. The only thing that’s uncertain is when the bust will happen. It could be very dangerous holding onto a cyclical stock when it is going into a bust; just look at shale oil stocks, some of them were 80+% off their highs and may never see those highs again. So, a stop loss can be used to reduce the risk of the investor giving back all of his gains or maybe even more when the bust eventually happens. However, putting stop losses too early on cyclical investments could result in you missing out on huge gains if those investments were simply hitting a speed bump instead of entering a bust. It’s difficult to know when to start using stop losses in the case of cyclical investments, but I guess it depends on how much returns the investor is personally satisfied with. I would like to clarify that I would only use stop losses to protect gains and not to mitigate losses when it comes to cyclical investments. I know that there is a chance that the oil and coal stocks I invested in could see their prices plunge even further. However, instead of limiting my losses, I would rather take the losses with the knowledge that I have the potential to make some badass returns if those stocks survive this rough patch.

My opinion on position sizing hasn’t really changed much. I limit the size of my positions based on risk. If I could invest in a high quality company like Google at 5 times earnings (it would be fucking awesome if I ever have the chance to invest in Google at such a low valuation) then I wouldn’t lose a second of me time (masturbation) even if the position made up 30% of my portfolio. Similarly, I would limit riskier investments to a small percentage of my portfolio. Also, I will generally not double down on those positions unless there is a change in their fundamentals or the size of my portfolio grows significantly. That’s why you don’t see me buying more NBG or Mongolia Growth Group even if their stock prices have dropped significantly.       

So, these are my current views on stop losses and position sizing. I hope you guys found this article useful. Thank you for reading. Take care and stay rational.

Sunday, February 8, 2015

Analysis of Alpha Natural Resources

Please read the disclaimer here: Enjoy the article, bitches!

Sup guys, today I will be analyzing a company that I previously added to the Greedy Dragon portfolio but didn’t write about as I was busy with other stuff. Alpha Natural Resources is a coal mining company that’s listed on the NYSE (stock code: ANR). I first took a position in ANR at $2.23 per share and added to my position at $1.54 per share. The stock closed at $1.16 per share on Friday. I don’t think that things have deteriorated significantly enough for me to reassess my investment in ANR so I’m not worried about the paper loss. And no, I’m not the kind of asshole that dismisses his investment mistakes as mere paper losses (I may be an asshole, but I’m not that kind of asshole).  I will readily admit that I made investments where the fundamentals eventually got impaired and I had to accept that the losses were permanent. Investing in coal mining companies right now is risky because some of them might actually go bankrupt if coal prices remain at depressed levels for a prolonged period of time. However, I think that I have a chance at making some serious money if I can find coal mining stocks that are able to survive this rough patch.     

Excluding depreciation, depletion & amortization, asset impairment & restructuring, and amortization of acquired intangibles, ANR experienced a loss before tax of $53.74 million for the quarter ended September 30, 2014. There may be other non-cash expenses and non-cash income, so the company’s financial performance may actually be better or worse.  You might be wondering why I don’t just look at the cash flow statement to find any other non-cash items. Well, it’s because the cash flow statement in the quarterly report was for 3 quarters, and the prices ANR got for its coal could be different in each quarter. I want to know how the company is doing with coal prices that are as recent as possible (coal prices could have fallen even further since September 30, 2014. I just hope that if there was a decline in coal prices, it wasn’t a significant one as that would suck dick). It’s really important for investors in coal mining companies to check the realized coal prices and financial performance of their investments often.

While ANR did lose money in the quarter ended September 30, 2014, the company does have a significant cash buffer. The company had cash and cash equivalents of $809.41 million and short term marketable securities of $374.52 million as at September 30, 2014. ANR’s long-term debt of $3.71 billion is indeed a significant amount, but the company does have some time before the more sizable chunks of its debt starts to mature.  As at September 30, 2014, the company’s current portion of long-term debt was $176.94 million. The company has $153.65 million of debt maturing in 2015 and $345 million of debt maturing in 2017. It’s from 2018 onwards where more sizable chunks of its debt start to mature.

I think I will conclude the article here. It’s kinda short as I’m only analyzing the survivability of the company and not long-term profitability. I hope you enjoyed reading this article anyway. Thank you for reading. Take care and stay rational.