A day of trade. Learning short positions.

My editorial on You Tube

I am betting on short-term developments in the stock market. Yesterday, the stocks of biotech and medical companies in the Warsaw Stock Market went through a rapid depreciation. I decided to play short-term today. This is something that has NEVER worked for me in the past, yet, this year, I want to learn new things about investing in the stock market.

During the day of yesterday, the profits I described in my last update, entitled ‘Doing things we don’t quite know how to do well is what we, humans, do all the time’, suddenly melted down, to a large extent. The strategy I am going to test today consists in selling, in the morning, three of my positions – Airway Medix, Biomed Lublin, Biomaxima – betting that their price will fall today just as deeply as it had fallen yesterday, and then buy them back at the end of the day, at a lower price. Selling them today in the morning will allow me to consume the profits I have still left on them, and, if I am betting correctly on the today’s developments in the market, their price will fall even more today. By the end of the today’s trading session, I should be able to buy them back at a lower price.

In the table below, you can see a short summary of the situation.

Company (position)Rate of return on April 7th, 2020 (YESTERDAY MORNING)Rate of return on April 8th, 2020 (THIS MORNING)Remarks
Asseco Business Solutions-5,88%-5,88% 
Biomed Lublin410,20%246,94%For sale in the morning, to buy back by the end of the day
Biomaxima21,82%1,82%For sale in the morning, to buy back by the end of the day
Airway Medix116,82%72,73%For sale in the morning, to buy back by the end of the day
Mercator Med.19,33%-5,95% 

Why am I not waiting for the early-morning developments in the stock market? I could wait like 30 minutes, from 9:00 to 9:30 a.m., and then decide whether I sell. If the prices of those three – Airway Medix, Biomed Lublin, Biomaxima – bounce back in the morning, there will be no point in selling. There is one caveat to that: if the day is a downwards revision day, the first 30 minutes of trade, precisely between 9:00 and 9:30, are usually marked with a very sharp drop in price. This is a recurrent pattern I have already noticed. Thus, if wait that first half-an-hour, I can lose some opportunities to make profit.

I need a plan B, in case the daily developments in the market go against my expectations. There are two issues, as regards my expectations. Firstly, it is possible that prices of those three stocks rise during the day and I cannot buy them back at a lower price. Buying them back at a higher price would not be good business. I need a plan what to do with the proceeds from the morning sell-out, if these particular events play out differently from what I expect to happen. I thought I could observe the movements in prices on the remaining 4 positions –  11Bit, Asseco Business Solutions, Bioton, and Mercator Medical – and maybe buy into those. I am particularly interested in Bioton. In the past, that stock gave me a huge gain, and in that whole portfolio of mine, this is the only clearly undervalued position, with a market-to-book ratio of 0,73. There is potential for growth in this company.

Secondly, for the moment, I assume there will be no big quake on my other positions. What of the entire market goes amok about downwards revision, today? That is a good question. There are two opposite logics to that. Logic A says ‘cut your losses short, don’t keep positions with negative returns’, whilst logic B protests: ‘it is a first principle of business that you sell at a higher price than the one you bought at, unless you really need cash or unless that thing is just never going to go up in price’. From my own experience, which I developed more broadly in the update entitled ‘Which table do I want to play my game on?’, I know a third logic, a cognitive pattern in myself: I need to have at least the impression I understand the rules of the game. Sometimes, I feel that my investment decisions – at least some of them – become so uninformed that what I am doing is actually pure gambling for the gambling’s sake. My experience is that in such moments I should just pull out of the game.

That third logic, which is strictly my own, is certainly an impediment when it comes to quick trade on short positions. I intuitively pull out of situations when I feel forced to make very quick moves, or, if I stay in such a situation, I start making haphazard moves. I have hard times to step back emotionally, and to figure out a quick, on-the-spot strategy. By doing what I am doing today, I expect, precisely, to develop my skills for such situations. I want to force myself to understand quickly the rules of a short-term game in daily trade.  

That’s an interesting thing from the scientific point of view. What is my personal, cognitive distinction between a game I know the rules of – the Abraham de Moivre’s game – on the one hand, and the Bayesian game, where I have to figure out the very space of the game and my essential bearings inside of it?

I have just realized another thing. I can update myself on how the daily trade is going on, at the Warsaw Stock Exchange, with a 15-minute-lag (in practice, it is 20 minutes of lag), and this sets something like a pace of observation for playing out my today’s strategy. Oookay, here comes a report from the battlefield: my selling orders have been executed. Let’s see. Biomed Lublin sold at PLN 3,13 per share, 219,39% of return on this one. Right now, I mean at 9:28, it was at PLN 3,03. For this one, my plan seems to be unfolding nicely, as for now. You know, that’s the thing about big plans: they seem to be unfolding nicely, up to a point. Airway Medix sold at PL 0,718 per share, 63,18% of return in this position. Keeps falling, was at 0,68 on 9:28. Biomaxima sold at PLN 21,60 per share, and, unfortunately, this one comes with a loss of – 1,82%. In this case, the follow up is less clear. It plunged in the morning, but now (9:35) it is climbing back and is at PLN 20,8 per share.

OK, step A done, let’s outline the strategy for step B, to be carried out during the today’s trading day. From the sales of 1000 shares of Biomed Lublin, I have proceeds amounting to PLN 3 130,00  PLN, and I had to pay a brokerage fee of 0,35%, which I will have to pay once again should I be buying back into this stock. Thus, my break-even price for the daily trade would be: PLN 3,13 * (1 – 2*0,35%) < PLN 3,108. That’s the condition I need to strike.

As I have sold my position of 2300 shares in Airway Medix, I have PLN 1 645,62  PLN of proceeds net of brokerage fee. I do the same calculation as for Biomed Lublin, and it goes: PLN 0,718 * (1 – 2*0,35%) < PLN 0,713. In the case of Biomaxima, I can reuse, to buy back in, the PLN 430,49 of proceeds net of brokerage fee, provided the condition PLN 21,60 * (1 – 2*0,35%) < PLN 21,449 is met. Ve vill zee…

Now, a quick look at the remaining sheep in the herd: 11Bit, Asseco Business Solutions, Bioton, and Mercator Medical. 11Bit jumped nicely right after the opening of trade, up to PLN 375, which reduces slightly my loss on this position. Asseco Business Solutions remains stationary, no movement at all. Bioton, my tacit preferee, is at PLN 4,77. Good. It is climbing nicely. If my intuition is correct, investors are moving capital inside the biotech-medical sector, from the clearly overvalued positions (see ‘Doing things we don’t quite know how to do well is what we, humans, do all the time’) to the undervalued ones. It is good financially, as my so-far loss on Bioton is getting shallower each minute, yet it is bad cognitively. If Biomed Lublin, Airway Medix, and Biomaxima go down, as I expect, and Bioton goes up, as I expect as well, which way to go: buy back into those three sold ones, or buy further into Bioton? Oh dear, life is complicated…

Mercator Medical is going nicely up, it was PLN 27,10 on 9:57, which puts me back in saddle, so to say. I start making profit on this one, just 0,74% for the moment, barely to pay for the brokerage fee, yet it looks promising. As I look at the volumes traded, there is a lot of reshuffling. Big volumes get purchased. Looks as if people were buying into this one.

Now, I face two alternative paths. Path A, I go psycho, I keep staring at the quotes in the stock market, whilst writing a live account in this log. Path B, I step back, into the safe realm of science, I think and write a bit about collective intelligence, and then I come back into the market like early in the afternoon, to decide about the closure of my trade for today. I think I like stepping back more than going psycho, and I choose path B. I am busying myself at phrasing out some intuitions about collective intelligence. What we do is in loop with what we claim we should do, and what we do is the stronger of the two. In other words, behaviour is in loop with consciously formulated cultural content, and, on the long run, behaviour is the spiritus movens of that interaction. In my so-far work, I apply this claim mostly to strategies and ethical values. The latter, i.e. collective ethical orientations, are particularly fascinating for me. I have developed a very simple neural network to uncover the values of a society, out of quantitative socio-economic data. As regards this path of thinking, at the limit of science and philosophy, you can find it developed a bit more in the You Tube video (https://youtu.be/TEdqkprPSS8 ), which accompanies this update.

It is 12:05. A quick update on the market. Biomed Lublin – on 11:50, it was at PLN 3,53, and it is essentially climbing. Much above my break-even threshold. The situation unfolds, as for now, unfavourably for my strategy. With that price, there is no way I should buy it back. Airway Medix – on 11:52, it was at PLN 0,74. Too expensive. Am not going to buy back in. Biomaxima – the price is growing, on 11:50 it was at PLN 23,60. Not buying back.  11Bit –  falling gently, on 11:56 was at PLN 359. Asseco Business Solutions stays firmly stationary, almost no trade at all. Bioton – sort of hesitating, swinging up and down. On the whole, it shows a descending trend. On 11:57, it was at PLN 4,45. Mercator Medical shows a gently ascending trend in price. On 11:58, it was at PLN 27,50.

For the moment, my attempt at short-term trade in the surfing-the-descending-wave style has failed lamentably. Even if I decided to sell the same positions I have actually sold, the later during the day, the better profit I would have. I yielded to panic, and this is something I need to work on. I noticed that I tend to consider profit on my investment positions as something really my own: I develop an emotional attachment to those margins. I need to step back. Still, this is good learning. There is some hope, though. Yesterday, prices really collapsed by the end of the day. Maybe today it will be the same?

As I have feeble prospects to unfold my initial strategy, the plan B, i.e. buying into the positions still held, sounds like a good idea. I am going to wait until around 2 p.m., and then it will be time to go into the fine details of the plan B. For now, I take a partial decision: I am buying further into Mercator Medical. The price is growing steadily over the day, there is no apparent reason why it should fall. I decide to place a ‘buy’ order on this one, 40 shares.

As I am waiting for the right moment to conclude on my biotech positions, I am observing the market. There is that gaming company, Artifex Mundi, sort of a cousin to the 11Bit I already have in my portfolio. I wonder: maybe it would be a good step to diversify, from that overexposure in the biotech sector, into the IT? That Artifex Mundi thing has a nice growth today, and it looks as if they were bouncing back from a temporary trough. Looks like a classical configuration of bull horns. What if I spread the cash I have in hand between Bioton, 11Bit and Artifex Mundi?

I ask myself strange questions. I have set my limits for buying back into Airway Medix, Biomed Lublin, and Biomaxima. Does it mean that I will ever buy their stock again only if their respective prices go below those limits? What if they don’t? Should I refrain like forever from buying those stocks? Funny, I haven’t thought about it before. How long is enough to forget that I could have done a better business?

In the meantime, I notice that I have received the money transfer from my international investment account with the DEGIRO platform. Happened faster than I thought. I am forwarding this money into my Polish investment account.

2:15 p.m. Another market check today. 11Bit keeps swaying gently. It could be interesting to buy in. Biomed Lublin is anchored around PLN 3,50, above my critical threshold. Airway Medix is at PLN 0,71. Just at my threshold, buying those shares back would be stupid now. Artifex Mundi keeps an interesting high, could be worth having a go. Asseco Business Solutions went down slightly. I don’t know what to think about it. Bioton is at PLN 4,40. It does not look good. I prefer to wait with buying into this position. Mercator is around the same position. Biomaxima at PLN 23,80, way above my break-even-threshold.

3 p.m. Decision time. I split my investment between four companies: 11 Bit, Artifex Mundi, Bioton, Airway Medix (at 0,7, below threshold, I buy back 2400 shares; a bit of risk, but workable).

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