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Resident Trader
2007 was a good year to trade Aussie microcaps
Will Kraa, January 9, 2008
With the festivities out of the way it’s customary to take time to look back over the last year’s performance to see what the results are, especially compared to the market as a whole. So first let’s have a look at my CFD trading. I have two currently operating CFD accounts, one I use for occasional trades using risk management based on the value of the account itself and for the other the risk management takes into consideration the fact that it is only a very small portion of the capital I have currently invested in the market. This means I could easily top up the account and therefore take more risk than I would otherwise.
This account (where I take more risk) did very well in the early part of the year but took a big hit in July/August. I did not in fact top it up (as I could have) but used stricter money management to build it up again. This worked until November and with the slump in the market the account went back to the levels seen in August. I do not at this stage intend to put any more capital into it but will see if I can build it up again. There is still enough money in it to make this quite feasible.
The account where I used money management consistent with the size of the account has done much better. I took a substantial sum of money (profit) out of it and it is still well above the initial amount used to fund it. In fact the proceeds of this account alone would have been sufficient to provide a good living for an initial funding outlay of only $35,000 just over a year ago.
Overall, including my SMSF and other share trading accounts, I have been able to outperform the market by a very wide margin during the year. Most of this has been achieved using no leverage nor have I used a margin loan. I am fortunate to be able to make a lot of money doing something I enjoy.
The small E*TRADE account I use to demonstrate trading shares that suddenly jump up in price and volume has done very well. To refresh your memory about this account you might like to read the article from mid-last year again, and a similar trade using this strategy described in this article from the end of last year. This account now has well over $50,000 in it which is more than twice what it had in it one year ago. I have not done a lot of trading to achieve this return and even though the stocks I have traded in this account would most likely give the “value investor” a heart attack, most of the trades give a very good profit. No leverage of any kind has been used in this account.
In my SMSF I invest in microcaps and this has produced well above average returns. It was more recently that I have noticed that I am not alone in finding this kind of investing to be very profitable. I came across articles highlighting the superior returns of funds investing in this part of the Australian market. I would suggest you read the excellent article by Peter Shmigel on this subject. The fact that I am a private investor means I can invest in companies too small for managed funds, some of them trading at only a few cents per share and most of them not yet at the earning stage.
I am not comfortable using leverage such as CFDs in my SMSF so I have found the microcaps to be the next best thing to get returns which are well above the average. Not all investments are profitable of course but by using stops to cull those that don’t perform, losses are kept to a minimum and most profits are such that they are very much larger than the losses.
One of the companies that gave me a good return is Atlas Iron (AGO) which I bought as prices had fallen to interrupt the rise which had started in late May. I was able to buy 50,000 at $1.15 for a total outlay of $57,619 including brokerage. It was not so much technical analysis that led me to this purchase but rather the fact that it was a promising microcap with a rapidly rising price available at a good price.
As I expected the uptrend resumed as things got back to normal until the price had more than doubled and on 25 October I was able to sell them at $2.63 giving total proceeds of $131,467 and a profit of $73,848. My reason for the sale was the fact that the troubles in the USA were far from over and I wanted to lessen the exposure to likely downturns. The rapid rise of this stock was due for a correction so it was a candidate for selling and as the chart shows I got out at about the right time.
Another stock I invested in was Dominion Mining (DOM) which was written up in a mining report I subscribe to. This article correctly stated that this was most likely the last chance to buy this stock below $3 and seeing the chart showed it was in a good uptrend I bought 21,000 of them at $2.95 on 9 August. As so often happens, the market became very enthusiastic about this stock and by 25 October it was well above the “take profit” (green) line on the chart. Keeping in mind my desire to lessen exposure to the market at this volatile time it also was one to sell. I sold at $5.80 for total proceeds of $121,817 and a profit of $59,834.
As you can see on the chart I could have got a higher price a few days later (that is in hindsight of course) but, as I expected, the price has taken a rest since then. You might also notice that the price dropped below the 2ATR10 exit line shortly after I bought but this was not confirmed on the weekly chart so I did not sell then.
I mentioned that not every trade is as good as these two but a surprising number are and losses are quite small in comparison. The good part is that my SMSF is no longer in the accumulation stage so that there is no tax to pay on these returns.
While the market as a whole since November has given back quite a portion of the gains from earlier in the year, my share trading accounts have not. My super fund has had quite a good portion of cash in the last couple of months of the year but also some stocks that have done very well so that it is still at the highs of late October. So all in all 2007 has been a very good year for me.
Note
If the term ‘2ATR10’ does not make any sense to you I would suggest you read my series of articles on Volatility. Those also explain the green ‘take profit’ line.
More articles from this edition of CompareShares:
Trader profile: Life as a full-time trader – Fay Benjamin offers her survivor tactics
Stocks: A stock for a lifetime
Resident Trader: 2007 was a good year to trade Aussie microcaps
Investing: Rivers of cash from sovereign funds to impact equity and currency markets
Smart Investing: Early retirement - dreams versus realities
Expert Panel (Futures): Ask the expert - how do I predict commodities prices?
Forex: Australian Dollar - to parity in 2008
Housing: Recovery emerging in housing sector
Whatever your views, you can discuss this article - or any of Will's articles - on our message board Your 2 Cents.
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