Zugzwang and Pascal's Wager

Zugzwang, a technical term in chess, is originated from German meaning compulsion to move. Whoever is to move is put at a disadvantage. In the playing of chess, Black and White move in sequence without any disruption. No one can abandon a move. So, there may be conditions that it is your turn to move, and all your possible moves will make you worse, such as a Knight is to be killed or a piece is to block in your King's way and hence make it more vulnerable.

That reminds me of Pascal' wager. Pascal, the great French mathematician, when asked if he believes that there is a God, he did not go find the odds of God's existence, but to consider the consequence of his possible guesses. If he said that there is no God, and in the end, God does exist, then he would have serious troubles. If he said that there is a God, and it turns out that there is no God at all, then he has nothing to lose. Thus he could safely say that God does exist.

Zugzwang and Pascal's wager are two different concepts with similar mindset which I think very important in investment. Whenever I make a investment, I don't bother finding out the possibilities of every outcomes -- I can never get a precise answer. Instead, I try to make sure every possible outcomes are all good to me, or at least no harm to me.

Sometimes, I have to ponder whether to sell a certain stock. But all I do is making sure that, to sell or not to sell, all will be in my benefits. In other words, to sell it, I cash in the profits, while not to sell, I have a good long term stock in hand.

I will never put myself in Zugzwang.

The institutional investors seem always in Zugzwang. For example, when a fund in Taiwan is set up, it has to buy stocks within 3 months so that more than 70% of its portfolio has been built up. Another Zugzwang condition is so-called the forced cut loss. Every company has a rule to cut loss. When triggered, the traders are to clear all that particular stock out without any concerns. They call it disciplines, but I 'd like to call it stupid if you are a value investor. However, if you are a technical investor, please kindly forget and forgive my words.

About a month ago, I was invited to a lady's club to give a lecture. I told them that if only they can understand and apply the Pascal's wager, they would be better off for that very reason.

I hope they take my words for it.

Catching a Falling Knife

It is a common sense in the Wall Street that never catch a falling knife. However, I have just caught one. The stock I bought is a health equipment company that has just fallen out of favor: The Johnson Health Technology (喬山). Its share price falls form 290 to currently 57, because of earning surprise. The company had encountered a net lost last Q2.

I have no doubt that it was a good company, and I hope it still is. It is not my purpose to write all its merits here, but the company has an international brand name, and a strong earning record. People consider the U.S. recession had made it difficult to sustain a good earning level. Yes, due to the sub-prime problem.

The P/E ratio now is about 19 and EPS is 3. Why don't I wait until its EPS drops below 15? Or wait until P/B ratio is less than 1.5? Isn't it risky to buy at a 19 P/E?

That's right, I shall wait until the price goes down to a comfortable level. I have made a mistake to risk on this price simply because I think it has already dropped quite a lot. The price may go down further until its earning recovery. Until then, I shall wait. Somehow, I have taken a unnecessary risk.

I think over this problem again and again these days. And I get the point finally. Fortunately, I have bought the stock with only one third of my target amount. The other two third shall wait strictly until a proper price comes out.

Setting Up a Convertible Bond Trading Worksheet with Free Data Source

I have not posted anything for quite a while because I was working on a book that I like it very much. I have finished it finally! And I also had a lecture on last Friday about Greenspan's book, The age of Turbulence. That was a very special book club, in which, all members are women. I have a lot to say about the lecture, but for now, I am going to talk about Convertible Bonds, CB.

A couple of years ago, when people (in Taiwan) did not know very well about CB, I traded CB quite a lot, and made some money. The only reason that I made money is, people don't know anything about CB, and think it was a low liquidity, exotic instrument. So its price was underestimated, until it was converted to common shares or it was put.

Low liquidity is not a serious problem, but lack of information was, and still is. People don't know where to get the required information, and even if they know, they are not able to manipulate it.

I built a CB system several years ago in the company. But now, I am out on my own, so I don't have Reuters or Bloomberg, and I don't have a team to maintain the database either.

Fortunately, a lot of firms have found the merits of CB and joined the market. Although they have taken all the fruit in the lower branches, they somehow provide happy free data.

Yesterday, started from these free data, I set up a free CB worksheet. It is easy to maintain, and no pains. The spread sheet is dirty and quick, so it is not fancy at all, but you have almost every thing. By the way, it is real time.

The only thing I did is to take a free CB list form the securities house, and build a excel spreadsheet with DDE functions. That’s all.