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Well, it’s the end of the trading year and it’s time for me to review how well I did on the stock market in 2011.  I crunched the numbers today and here’s how I did:

Okay.

But that’s alright.  It wasn’t a great year for anyone on the market:

US Stocks – the US Stock market, as measured by the S&P-500 (not the Dow Jones, which is useless) was flat on the year.  It was up 0% (not a typo).  The Nasdaq, which contains newer stocks and more tech stocks, was down -1.8%.  Pretty flat.

Europe – Europe discovered it has a serious financial problem on its hands and was down –14% this year.

Far East – The far east doesn’t have the same financial problems as Europe, but their stocks did worse and they were down –17% this year.

Emerging Markets – To check this, I use Vanguard’s emerging markets ETF.  It is made up of China, Korea, Brazil, Taiwan, South Africa, Russia, India and Mexico for 85% of its countries.  So, there is a little overlap with this one and the Far East.  Unfortunately, this group of countries was a disaster, down –21%.

Thus, after lagging everyone for years, the US outperformed nearly every other country, and did so easily.

When I compare my performance, I compare myself relative to everyone else.  How did I do compared to everyone else?  First of all, I pick a benchmark.  Because I invest globally, I pick an index that invests globally and the one I use is the iShares ACWI (all countries in the world index).  Here’s how I did against the various benchmarks:

Against the ACWI – I beat ACWI by 7.8%, excluding dividends.

Against the S&P-500 (most common measure of the US market) – I underperformed by –2.0%, thanks to my exposure to Europe and emerging markets.

Against the Nasdaq – I underperformed by 0.2%, which is almost (but not quite) a tie.

Now, comparing myself against the US market is a little unfair because the foreign stocks dragged me down and normally I would never trade foreign stocks.  How did I do against the US markets excluding my foreign positions?  This includes my passive portfolio, my trades in my personal account and my trades in my Roth IRA.

Against the S&P-500 – I beat the S&P-500 by 7.8%.

Against the Nasdaq – I beat the Nasdaq by 9.6%.

That’s pretty good, I’d say that I am pleased with my performance this years (especially since I beat my benchmark by a good amount).  I haven’t included dividends.

However, there’s still one more important question.  How did I do against the Dave Ramsey portfolio?  To check that, I included all of the dividends that I got and then back and added all of the dividends to a portfolio that he recommends using passive indexes using Google Finance.

Against Dave Ramsey – I beat the Dave Ramsey portfolio by 4.8%, including dividends.  This was the most important one because I lost (by a lot) in 2010 and 2009.

 

There we go.  Much of my outperformance was accomplished by getting out of the market before all of my gains were erased as it crashed in the middle part of the year, and then not doing anything during that time period.  I just blindly followed my lazy strategy and rebalanced everything, collecting dividends.

I can definitely outperform the market by a wide margin when it is going up but when it is down I give up most of my gains.  I do this every time… except this year when I only gave up part of them.  Granted, it was a big part but at least it was everything.

Maybe I am getting better at this.

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I’ve written in the past here that there are some things I agree with Dave Ramsey about, but other things I think he is wrong. 

Well, it turns out Peter Schiff is another guy who got things wrong.  If you don’t know who he is, Peter Schiff runs a money management company and by his own admission is one of the 1% (he made a video where he went to Occupy Wall Street and talked with the protestors).  Thus, his is very successful in real life.  However, his big thing is that the US government is printing too much money and spending too much money.  As a result, the US dollar will decline in value and the US economy will decline.  It will be eclipsed by just about every other country.  He view on the US is very bearish (negative).  He continually advises his readers to buy precious metals, especially gold and silver because those are the two metals that hold their value when currencies decline.

Still, I subscribe to his blog feed because I like what he has to say even though I am not sure everything he says is right.  His latest post was entitled “2012 Outlook: Gold and Stocks.”  Here’s what it says:

I think you are going to have a lot of choppiness in the stock market, but in the end I don’t expect a lot of movement in stocks. I don’t expect a crash or a big run, instead I think prices will continue to move sideways. In terms of the stock markets relation to gold I think it will continue to fall as a ratio.

Schiff has been giving this advice for a long time, as long as I have been reading his blog (since March 2009).  He’s obviously richer than I am, and I am familiar with his beliefs (the US’s money printing press is contributing to inflation and thus dooming the US economy).

So is he right?

Well, let’s go back in time and see how good his prediction was for 2011:

  1. US dollar demise: Schiff does not see much safety in the US dollar.  Schiff says it is not just a dollar collapse, it is a bond collapse too; "avoid any kind of long term bonds, avoid treasuries, and avoid municipal bonds."

    The year is not over yet, there is still one more trading day so this can change, but in 2011 the US dollar is up 1.85%, basically flat.  No collapse in the dollar like what Schiff predicted.

    The 3-year Treasury bond fund (SHY) is up 0.56% (basically flat), 10-year Treasury bond fund (IEF) is up 12%, and the 20-year Treasury bond fund (TLT) is up 28%.  No collapse in treasuries like what Schiff predicted.

    I looked up three municipal bond ETFs (PZA, MUNI, MUB) and they are up 8%, 5%, and 10%.  No collapse in municipal bonds like what Schiff predicted.

    I looked up one long term bond ETFs (BLV) and it is up 16%.  No collapse in long term bonds like what Schiff predicted.

    Indeed, every bond fund I checked was up big this year (and everyone one I wasn’t invested in was up more than mine).  Quite simply, what Schiff predicted would occur this year did not occur.

  2. Buy emerging markets and foreign currencies.  Schiff is focusing on Asia where people work hard, are producing and have savings.

    The emerging market funds (VWO, EEM) were down 20% this year.

    For currencies:

    Japanese Yen: +4%
    Australian Dollar: –0.9%
    Swiss Franc: –1%
    Canadian Dollar: –2%
    Swedish Krona: –3.06%
    Euro: –3%
    Chinese Yuan: –1%
    Mexican Peso: –11%
    New Zealand Dollar: –10%
    Russian Ruble: –4%
    US Dollar: +1.85%

    How did the US dollar do against some other currencies directly?
    vs Singapore Dollar: +1.48%
    vs Hong Kong Dollar: –0.03%
    vs South African Rand: +25%

    Looks like the US dollar did very well this year and held its own against almost everyone, contrary to what Schiff said.  Emerging markets also did poorly, contrary to what Schiff said.

  3. Buy precious metals and commodities.  Stay with gold, stay with silver.

    Gold is up +9% this year, so he got this one right.  However, silver is down –10% this year.  Copper is down 42%, Aluminum is down 45% and platinum is down 25%.  If you were lucky enough to buy a precious metal ETF, you could have made some money but not very much, maybe 3%.

    What about other commodities? The general commodities ETFs (GSG, MOO, DBA) are down 3%, 20% and 11%.

    The fact is that commodities did not do very well this year, contrary to Schiff’s advice.

If you would have listened to Peter Schiff this year, you wouldn’t have done very well in the market.  You would have underperformed it.  Everything he recommended was either flat (currencies), down big (emerging markets) or straight up wrong (collapse in dollar, treasuries and bonds).  He was right on gold but wrong on silver – and every other metal.  That’s 1 out of 7.

Now, you can argue (as Schiff does) that gold is a long term investment and long term, everything he is saying will turn out to be correct.  Maybe.  But for now, his prognostications are no more correct than anyone else’s.

He did say, after all, that this was his outlook for 2011.

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… but so far in 2011 I have made $666 in dividends from my stocks that I currently hold.

I am not making that up.

Ha, ha, ha, you know what?  I just thought of something funny.  Wouldn’t it be a hoot if I gave a bunch of donations to a church, and at the end of the year it totaled $666?

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Today on Facebook, one of my friends (who I didn’t block during my self-imposed exile from politics) posted in his status that the best way to stimulate economic growth is to give money to the poor.  He then alleged that the Congressional Budget Office had numbers to back up that assertion.

As anyone reading this blogs knows, the United States economy is sluggish.  It has been this way since the recession started in December 2007.  It then went full blown recession in 2008 but since it emerged out of it in March 2009, the economy has grown but very slowly.  It’s anemic, even.

Why is this?  Why is economic growth so bad?  What do we have to do to kick start it?  I was going to reply to my friend’s post but I need more time to delve into it than what is available in a simple Facebook reply.

My friend’s response reflects a theory pushed forth by the economist John Maynard Keynes.  This is the dominant economic model today in all the world’s economies.  In an oversimplified nutshell, this view says that economic growth responds to aggregate demand.  All of us buy stuff.  When we want more stuff, the economy grows because people who sell it will make more.  We buy more, people make more, and in order to make more they will hire more people and give them jobs.  More jobs = more taxes to pay = more government income and less unemployment.  It’s pretty simple.  More buyers = better economy.  If people demand less stuff, people make fewer things and lay people off, leading to more unemployment.

My friend’s view that giving money to the poor stimulates growth fits into this.  Since the poor cannot afford to buy things, there is not enough total demand in the economy.  If the poor had more money, they would spend it.  Producers would see “Oh, there’s more demand for my stuff” and hire more people. 

Where would this money to give to the poor come from?  From the government.  Where would the government get this money?  From rich people.  Rich people do not spend all of their money, therefore, there is potential capital sitting on the sidelines.  If the government were to take their money (in the form of taxation) and give it to the poor, or we were to give it voluntarily, the poor would spend it whereas the rich just horde it.  Unused money sitting in a bank account is less efficient than poor people spending it and driving economic growth. 

In truth, my friend’s view is an extreme one; most Keynesians say that the government should tax the rich and spend it – the government does the hiring or gives it to private businesses to do the hiring (i.e., the government needs to build a dam therefore they hire an architectural firm to do it; this is what they mean by shovel-ready projects).  They don’t take from the rich and give directly to the poor, instead, they employ them in order to make them productive citizens.

To sum up, according to my friend, the more people who are buying stuff, the better the economy.  Giving money to poor people takes unused money and gives it to people who will buy stuff.

More in my next post.

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Today is one of those days.

I have been holding onto shares in Netflix for 8 months or so.  This is a stock that goes up and pulls back, goes up and pulls back, etc.  It does this regularly on a predictable cycle.

I decided I was going to make some money on the downside.  Just when I thought Netflix couldn’t get any higher, I bought a put option.  This means that you make money when the stock goes down.

Well, it didn’t go down.  It kept going up. Eventually I rolled my eyes and took my loss.  The stock went down the next day.  Had I held, I would have recovered 2/3 of my losses on that one.

But that’s not why I hate trading.

Today, Netflix released its earnings after the day closed, and in after-hours trading it is down 28 points (about 10%).  I could have made a lot of money by buying a different put option and then waiting until tomorrow to sell.  But no, instead, I lose money waiting for it to go down – which it did but not in time – and then by holding it some more the stock gets slaughtered (in truth, they did that to themselves with their ridiculous increase in prices).

Some days, I hate the market so very much.

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I decided to login to my Scottrade account this morning and I saw an advertisement for commission-free ETFs.

“What the—?” I said.  “Free ETFs?”  I decided to check them out.  They are a bunch of Morningstar funds that are brand new.  They are so new that they don’t show up in Yahoo Finance or MSN Money when I try to get quotes on them.

What is a commission-free ETF?  It means that when you login to your trading account and buy them, you don’t pay a commission to trade.  This is a game changer for me.  Not only that, but the expense ratios of these funds are about the same as the Vanguard funds, and low expense ratios are something I have been preaching for years!

I tested the theory.  I set up a trade to buy a fund and guess what?  The commission was zero dollars!

The funds are limited only to US stocks, but this is going to have to force me to evaluate my investing options.  I don’t see what the dividend rates are (might be too new to forecast it) but if they do pay dividends then I am going to have to adjust my lazy portfolio strategy.

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A few weeks ago, I wrote about how I disagreed with Dave Ramsey’s investment philosophy when it comes to mutual fund investing.  The portfolios that he recommended, I surmised, were not optimally allocated.

Since then, I have seen his DVD lesson on it and there are some things that I have to change.  When he makes recommendations for allocation (i.e., what to put your money in), he uses the terms differently than how people in the investment community use them.  For example, when he says “Aggressive Growth” what he means is a small cap fund.  Since smaller companies grow faster than larger companies, they are aggressively growing but also experiencing larger swings in the market.  Ramsey uses the term “Growth fund” to refer to a mid-cap fund, that is, a mutual fund made up of mid-size companies.  Finally, he uses “Growth and Income” to refer to a large cap fund, that is, a mutual fund that invests in large companies. 

That’s actually not how the industry uses the terms.  Income refers to stocks that pay dividends and are not growing very fast, if at all.  These are also frequently referred to as Value stocks.  Growth refers to companies that do not pay dividends but are there for capital gains (i.e., you buy the stock and it goes up in value).  I like to divide Growth and Value by the average p/e ratio of the stock market (i.e., the average price of the average stock).  Anything above it is Growth, anything below it is Value.  That makes the definition less arbitrary.

Ramsey recommends a 25% weight across Aggressive Growth (small cap), Growth (mid cap), Growth and Income (large cap) and International funds.  The question to me is the following: is this a good weighting?

In my view, it’s pretty decent.  Here’s a more in-depth analysis:

  • The percentages aren’t bad, but they are heavily weighted in US funds rather than International funds.  Still, if that’s what you want to do, here’s what your portfolio should look like if you want to invest in Exchange Traded Funds (I’d have to look up what the mutual funds are):

    VB – Vanguard Small Cap ETF – 25%
    VO – Vanguard Mid Cap ETF – 25%
    VV – Vanguard Large Cap ETF – 25%
    VEU – Vanguard All World except USA ETF – 25%

    That gives you a split of 75% US and 25% International exposure.  Altogether, you’d have the following exposure:

    North America – 77%
    Europe – 11%
    Pacific Rim – 6%
    Emerging Markets – 6.25%

    Alternatively, you could just simply decide to buy one ETF that tracks the entire global index of stocks, all in one shot.  That is the Vanguard Total World Stock ETF, VT (the mutual fund is VTWSX).  You’ve got big caps, small caps, and mid caps in there.  North America and International.  If you did that, you’d have the following exposure:

    North America – 46%
    Europe – 26%
    Pacific Rim – 14%
    Emerging Markets – 15%

    My advice?  I’d probably go with the all-in-one.  Simpler to manage, you have built-in diversification and you get the same exposure.

  • Ramsey published his stuff in 2007 before the market crash.  However, obviously, even before that people were calling him and protesting that his advertised rates of 12% return for a good mutual fund was easily attainable.  He shot back that he’s got funds that are doing it and that Morningstar makes it possible for average people to get those returns.

    He’s wrong.

    As I have stated before, and Yahoo Finance agrees with me, the most important criteria for picking a fund is how low the management fees are.  In all my selections above, those are Vanguard funds which are index funds that track the market.  They are not actively managed and therefore have very low management fees.  The fact is that 80% of funds cannot be the general indexes after fees.  They especially can’t do it year after year and if they do it one or two years in a row, they most likely won’t do it a third year.  The market is too complex, and the bigger the fund the more difficult it is to beat the market.

    Ramsey protests this, but the reality is that sure, some of his funds got 12% or better.  What did the rest of the market do?  My lazy portfolio got 14% in 2010.  But I underperformed the US market (but outperformed the international ones).  The fact is that you might be getting better than 12% but if the rest of the market got 14%, then you are lagging it.  Returns go up and down all the time but for the most part they revert back to the long term mean.

    The market’s average rate of return, including dividends, is 10.5%, not 12%.  Pick funds that track the broad market with the lowest fees.  That’s how you win when it comes to mutual fund investing.

Those are my views.

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9 days ago, I posted that I was paranoid about the market.  It had risen up a large amount and I had a bad feeling about it.

It turns out that paranoia was justified.  That turned out to be the exact top of the market (well, my portfolio) and since then all of my positions have started crashing and burning.

Whereas before Baidu was up 34% now it is up 18% year-to-date.  Netflix was up 40% and now it is up 19%.  Acme Packet was up 41% and now it is up 27%.  Everything has given up a lot of gains in the past week and a half.  I am now faced with a dilemma.  My gut feel turned out to be 100% correct last time I posted about this.  I had no real way to explain it other than I felt uncomfortable.  I couldn’t rationalize or justify a move out of my positions and go to cash.  Yet going with my gut feel would have been the correct thing to do – I didn’t have to sell my positions, I could have purchased put options.  I even looked into buying some on Netflix.  Had I bought even one, I’d have made $3000 since then – not a bad way to offset market losses (I love making money when the market goes down).

Had I had a bit more money in my trading accounts I probably would have hedged my positions.  But I’m not sure how I would have explained it to my girlfriend.  Hmm, that’s a thinker… would she have bought the explanation “I have a bad feeling about this and am protecting myself from the downside”? 

Do I have good intuition about the market?  I’d really have to say no, for the most part.  But sometimes, every once in a while, I do.

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2011 in stock trading for me has been an incredibly easy year to make money so far.  All I’ve done is sit back and do nothing and I have been making good money.

My lazy portfolio consists of 75% of my individual trading account but only accounts for 25% of my performance to date.  My individual stocks are 25% of my capital but account for 75% of my gains.

There were some corrections going into 2011, some of my individual positions were down.  But I have decided to measure my performance both from the time I bought the stocks as well as year-to-date – it’s just easier that way.  It really is.  Using the year-to-date criteria, my position in Baidu is up 34%.  In Acme Packet, it is up 41% and in Netflix it is up 40% (if you don’t subscribe to Netflix, please do so you can make money for me).  But the question now is that I am getting extremely paranoid.  I am ever fearful of the inevitable correction that is soon to come.

You see, 2011 has been a fantastic year for stocks.  I don’t think I am particularly brilliant at picking these winners, I’ve just been riding a rising tide.  But I keep wanting to lock in my gains.  Yet had I done so before I would have missed out on a lot more gains.  I want to go out at the top even though I know it is impossible… yet I fear that a huge correction will shake me out.  What do I do?

I trade better when I do nothing.  That’s worked for me so far.  Yet selling a winning position has always been my Achilles heel.  But I’ve wondered if I should use another strategy?  My girlfriend once asked me if I would tell her what trades I am doing.  I replied I would have no problem with that since my trading strategy is fairly boring.  If I wanted to sell my stocks, could I justify it to my girlfriend?  It’s easy to justify buying.  But selling?

The answer right now is no, I couldn’t justify it.  My position in Netflix is going up by leaps and bounds.  I want to sell.  Yet if I did, I’d have to justify it to my girlfriend.  On the one hand, it has gained too far too fast.  Yet on the other hand, they just announced today that they are going to support streaming on Android devices.  In addition, they are one of the heaviest shorted stocks which means that eventually the shorts will have to cover… and that means a lot of buying pressure which can send it up.  If I were going to explain selling my position to someone who isn’t a trader, could I justify it based upon that?  The answer is no; my gut feel isn’t good enough.  So I stay put.

Maybe it’s a good thing my active trading is such a small component of my overall strategy.  It keeps me from making too many impulsive decisions.

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Learning from my errors

This past Tuesday, I made two trades on a bet that the market was going to go down.  I bought a put option on F5 Networks (FFIV) and the Bear fund on small cap stocks.  When the market goes down, both of those positions would have made money.  I based that upon the fact that I believe the market had staged a false breakout two weeks ago and had reversed using a very strong signal in technical analysis.  My second bear fund trade is an index that tracks the inverse of the market.  I believed that it was in a good position to make money.  My other trade was based upon the belief that the stock had run up too far, too fast and was breaking down.  I had other indicators to support this theory.

Unfortunately, two days later, the market rallied hard the other way and forced me out of both of my positions.  I ended up taking a big hit on my options position and a small hit on my bear fund position.  Even today, the market bounced at its 50-day moving average and may be setting me up for a big move down.by staging a false rally before breaking down some more.

And then again, maybe it’s not.

I used up all of the spare funds in my account by buying two stocks that I should have bought a long time ago.  One option position I took a major loss on back in June is Acme Packet Inc, a telecommunications equipment maker.  This is a stock that survived the summer correction with zero loss and has continued to rally.  I had been waiting for a long time to get into it, and on Thursday I did so.  That was a lucky piece of timing because today, the stock moved up very large – 8.8% today.  I ended up making back a good portion of my losses and so I feel good about that.  This was one stock that beat me up (a lot like my girlfriend does) and I learned from that.  I watched the stock for months and it is a very powerful one.  I discovered that I shouldn’t bet against it.

The other stock I bought is Netflix.  If you don’t know what it is, Netflix is a streaming media company that lets you view TV and movies on your computer.  More and more people are abandoning cable and instead getting Netflix which lets you view stuff on demand.  I originally discovered Netflix back in January when it was around $50/share.  I didn’t buy it then and have been kicking myself since that time because it’s now trading at $170.  It, too, got through the market correction with nary a scratch on it.  It’s a very powerful stock and the company is growing rapidly.  I’ve been waiting for a good buy point and this one is experiencing a flattening consolidation pattern.  Hopefully it continues to rally.

Let me get one thing straight, though – I have not given up my lazy portfolio investing.  I am still doing that.  Trading is restricted to 15% of my total portfolio.  Options trading should be maybe 5-10% at the most because every time I buy them I get my posterior handed to me.

With any luck, these stocks that I own (also have Baidu) will hold up.  My technical analysis skills say that this is just a bounce and that lower prices are ahead.  However, I have no capital to take advantage of that unless I buy on margin.  On the other hand, we are in the strongest time period of the year historically (November – January) and we are entering into the 3rd year of a presidential cycle (historically the best year on the market).  So while I think that the market should go down, my goal is to make money no matter what I think it should do.  The market acts the way it acts without any input from me.

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It has been about a year since I engaged in the creation of my lazy portfolio.  My lazy portfolio is my term for buying a bunch of index funds and then forgetting about them, rebalancing every year to match my targets.  I am going to review my trading over the past year to see how well things have done.

  1. My lazy portfolio consists of 50% foreign markets, 35% US market, 10% real estate and 5% bonds.  Since Oct 28, 2009, I am up 12% in one year.  In my opinion, 12% is an impressive return without having to do anything.  Including dividends, I am up 14.6% in one year.  I don’t know about you, but I’d rather have a 14.6% gain than the 1% you might get in a savings account.  The only drawback is that the Bush tax cuts are going to expire and I am going to have to pay a heavy capital gains tax on these guys.

    However, a 12%/14% gain is only impressive when you compare it to a benchmark.  I may be up 12% but if the market is up 25% then that means I underperformed the market.  That’s not good.  So how did I do against the rest of the market?

    It depends on the benchmark I choose.  If I select the S&P 500, the broadest indicator of the market, it is up 13% since Oct 28.  That means that I underperformed the US market by 1%.  I don’t include dividends in this.  If I compare myself to the Nasdaq, it is up 18% since Oct 28, 2009.  That means I underperformed the Nasdaq by 6%!  Not good!  Even doing nothing I cannot beat the market!  If I compare myself against the Russell 3000 (a broader index that includes stocks from both), then I underperformed by 2.9%.  Ugh.

    However, I don’t use either of those three indexes as my benchmark.  My investing style specifically requires me to invest abroad across the entire world.  During 2010, the US market lead the rest of the world, which is unusual compared to the past few years.  However, next year it could reverse and my lazy portfolio could end up beating the US market by the same amounts I lagged it by.  Therefore, I need an index that tracks the entire world’s market (US, EMEA and emerging markets).  For that, I use the MSCI World Index.  This is an index that invests in companies throughout the entire world and represents each country in approximate proportion to the GDP.  The MSCI World Index is up 10.2% since Oct 28, 2009 meaning I beat my benchmark by 1.8% (excluding dividends)!  This is fantastic news for me!

    Ironically, the US market contributed 5.7% of my gains and the world ex-US contributed 2.7%.  Bonds contributed 0.2% (barely anything) and real estate contributed 3.8%.  Real estate did phenomenally well considering that it consisted of only half of my portfolio.  Overall, I am happy with this return on investment against my benchmark.  It is returns relative to your benchmark that is important.

  2. However, I did a second round of lazy portfolio infusion in March, 2010.  I bought more stocks/indexes and buffeted up my positions.  On that second round of investments, I am up 5.6%, and 7.2% including dividends.

    Against my benchmark, the MSCI World Index, I am up 1.2%, against the SP-500 I am up 2.1% and against the Nasdaq I am up 0.7%.  This suggests that from Oct 2009 – March 2010, the US market outperformed the rest of the world but from March 2010 – Oct 2010, the rest of the world outperformed the US market.  That’s why it is important to ensure that you are exposed to the entire world rather than one particular market.  It is difficult, if not impossible, to predict who is going to lead.

  3. While I m pleased with my performance, there is one mistake that I made – I did not buy an indexes in emerging markets.  I thought that my EMEA fund exposed me to these but I was wrong.  It’s mostly Europe and I want to be exposed than more than just Europe.  I did some calculations on world GDP and then looked for a fund that got me into these emerging markets and I found one that does – Vanguard’s VWO fund, which also pays a dividend.  So, yesterday I bought some shares in VWO and adjusted my other markets accordingly – 40% in EFA (Europe, Pacific Rim), 30% in VTI (United States) and 15% in VWO (emerging markets).  Had I bought some shares in these last year I would have had even greater gains than I do now.  It was a mistake not investing in emerging markets but it is one I have corrected.  This is an easy correction.
  4. My bad trades this year have been options trading, which in my case is down ~$1500 after being up ~$4000 after my first couple of trades.  This is mostly due to a string of 10 consecutive losses in August and September, 8 of which were all up.  I lost the ability to make money in options and in an intermediate up market (which we are now in and have been since early September), then I think it makes sense to switch to buying stocks or longer term options.  Thus, I plan to go back to my regular stock trading strategy or keep options at a mere 10% of my total portfolio.

    I wouldn’t consider my options trading a disaster, or even a bad investment.  It was a learning experience wherein I experimented with what works and what doesn’t.  I am a better trader because of it.  I don’t classify these as investments, these are trades.  They were bad trades, not bad investments.

  5. The one position that I would call my worst investment is my position in Microsoft, a large position I have had since I joined the company.  Microsoft stock is down -9.5% since Oct 28, 2009.  By contrast, Google is up 0.56%, Apple is up 56%, and Baidu is up 152%.  Those are all companies I have owned in the past but no longer own shares in.  Clearly, it has been an unequivocal mistake owning Microsoft and not owing any of those other companies.  There are pretty much no time periods in which Microsoft didn’t underperform the rest of these stocks.  Owning a position in Microsoft has been a mistake and a bad investment.  I really have no choice but to sell my position in Microsoft and pick up one of these.

So that’s what I have learned this year in my passive trading.  My active trading – options – did not work out so well.  However, I am bullish (for some reason) going into the next few months as the market climbs a wall of worry.  I think there will be a short correction soon to work off an overbought condition but other than that, we will probably see higher markets going forward.  There are a variety of reasons for this which I won’t go into, but I am going to get long with a partial cash position to make strategic trades.

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Penalty box

I’ve decided to put myself into the penalty box.  I am taking the rest of August off from active trading.

I’ve taken too many losses in a row and all I am doing is erasing my capital.  The success and promise I showed in May and early July has been eroded.  Everything I do goes against me and I have a rule that says when I am down a certain amount in my total capital from the start of the month, stop trading for the rest of it.  I still plan to paper trade and track the market but I am not going to put any more money on the line.  I am tired of losing.

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Today, I became unbelievably frustrated with my trading.  So frustrated, in fact, that I am considering walking away from trading for a while.

The reason is that no matter how much I learn, and how many tools I have in my arsenal to preserve my gains, it’s never enough.  I am still losing money.  I buy options and my holding period was 5 days, which was a day too long so I reduced it.  I still lost money.  I reduced that to three days, and then two.  It still doesn’t matter!  And when I am up a position, all it takes is one day to knock my gains down by 25% and turn a 45% gain to a 20% gain in one day.

Just yesterday, I bought a position in gold and today it was down 77%.  In a single day.  I have gone from net profitability to a net loss in one day.  I track my progress and I had been making some small, consistent gains. Then the market turns and I am underwater.  I have lost 8 out of my last 11 trades, and 7 of those 8 losses were gains, and each of the three winners had been several hundred dollars larger at some point.

At this point, I don’t know what I can do.  Today, I hate trading.

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Trading update

I’ve been tracking my trading on options for the past 3 months, and I put together a little chart.  My trading has been very frustrating.  No matter what I do, I always seem to give money back to the market.  I started out with a trading timeline of 3-5 days and extended it, and figured out that was a mistake.  When I switched, I made money.  Now, even 3-5 days is too long.  I have lost money on 6 out of my last 7 trades.  The frustrating thing is that all of them were profitable at one point.  Every single one.  Out of my 14 losses, all but 4 were profitable at some point.

My latest two sting.  I was profitable after one day and under water the next.  The only positive I can take away from them is that I am cutting my losses short… but otherwise more or less flat.  Below is my equity curve:

image

You can see I really have not made any money (the green is my total overall profit).  I make some money and give it back, make some and give it back, make some and give it back… If I go long, I am up and then the market takes it away to reduce my gains by 30%.  If I go short, I get up by 25% and then the next day I am down 25%.

This is getting incredibly frustrating.

On the other hand, perhaps I am being too hard on myself.  Rather than see the negative, I should look over my goals and figure out what I am doing well.  My goals in trading, as I have had for years and iterated on this blog, are the following:

  1. Protect capital.  My initial losses were my smallest and my middle losses became much, much larger.  However, after that, after my recent string of four in a row and now two in a row, those did become smaller.  Over my last few bad trades, I have been quicker to reverse my position and get out when the market starts to go against me.  Before, I would get out when it went against me too far, now I get out sooner than that when I think it’s going against me.  In other words, I wait for confirmation much, much sooner.
  2. Consistently make money.  This is the goal that has been so very elusive for me.  No matter what I seem to do, I can never hold onto those gains.  I started to play around with the idea of (trailing) stop orders, that is, when the stock goes down to a certain price, it executes automatically.  I had not been doing this because I wanted to let my positions ride and give them room.  I am now finding that virtually never works for me.  All it does is give the market time to erase my losses before I turn on my computer.  In five of my past six losses, stop orders would have kept all of my losses as small gains.  For my gains, it would have hurt me by taking me out too soon with a stop order, but a trailing stop order once I am already up would seem to work.
  3. Hit the occasional home run.  Ah, this is what got me hooked on options trading to begin with – the ability to double my money in a short time frame.  I have managed to do that a few times early on, only to give back everything in short order.  But I know that I can do this and with options it’s only a matter of time before I do it again.

Looking at it this way, I see that I am probably not that far off from achieving (2) by refining my strategy.  I have managed to make progress by making my time frames short.  I know now that in an uptrend, I have to trade more volatile stocks in order to make it worth my while to catch a down movement.  I went long on CREE again today (after having gone long last week) because I think it has pulled back to a logical entry point.  I resisted getting into another position because I have been trading so poorly lately.  However, if I can discipline myself enough to put in a trailing stop after I am up a certain point, then I can let myself collect profits and then wait for the next entry point.

I have now made 27 options trades this year, this is not yet my most busy trading year but by the end of 2010 it will be.  When it comes to the end, I think I will have a pretty good view at how good (or bad) a trader I am and if I have made improvements over time.  The chart above currently says no.

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Trading update

I’ve been tracking my trading on options for the past 3 months, and I put together a little chart.  My trading has been very frustrating.  No matter what I do, I always seem to give money back to the market.  I started out with a trading timeline of 3-5 days and extended it, and figured out that was a mistake.  When I switched, I made money.  Now, even 3-5 days is too long.  I have lost money on 6 out of my last 7 trades.  The frustrating thing is that all of them were profitable at one point.  Every single one.  Out of my 14 losses, all but 4 were profitable at some point.

My latest two sting.  I was profitable after one day and under water the next.  The only positive I can take away from them is that I am cutting my losses short… but otherwise more or less flat.  Below is my equity curve:

image

You can see I really have not made any money (the green is my total overall profit).  I make some money and give it back, make some and give it back, make some and give it back… If I go long, I am up and then the market takes it away to reduce my gains by 30%.  If I go short, I get up by 25% and then the next day I am down 25%.

This is getting incredibly frustrating.

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Market turning point

Last week, I was expecting the market to go down.  There were a bunch of stocks I was further expecting to weaken and fall a significant amount.  I ended up buying put options in 3 positions and 2 days later (last Friday) I was up 25% on my money.  All of my market signals suggested lower prices were soon to follow and that I should hang on, even though I only like to hang on 3-4 days.  At 2 days I figured I was safe.

Monday came by and it was an up day.  No biggie, nothing goes down every day in a bear market.  However, on Tuesday the market had a big up movement although it was a weak movement with a possible head fake.  Wednesday it started strong and faded into the close and I figured that my initial analysis was right: it was still a correct (bear market?) and that there was more weakness to come.  However, today (Thursday), I have to change my tune.  I have to flip my bias to up and that the earlier weakness is fading away.  My 25% gain in 2 days is now a 30% loss in 6 (6 trading days, 8 calendar days).  6 trading days is too long for me to hold anyhow, I should have sold after 3 days – my optimal holding period.  Not sure why I held on more, that wasn’t a good idea.

Below is a stock, CREE, that I bought a call option on at 5.15 and last Friday it was at 7.2, which is a 40% gain in 2 days (before trading fees).  Yet today I had to sell at a loss.  You can see that after it peaked in April, it came down to test the 60 level 4 times.  However, this last time it failed to test the 60 level and it seems to have broken out above it’s previous high as well as broken the trendline.  To me, this indicates a change in trend from down to up, and that’s where fortunes are made (supposedly).  I decided to go long here and picked up a couple of options.  Hopefully I can recover those losses.

Man, I should have sold on Monday or Tuesday…

image

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Good news/bad news

Over the past couple of weeks, I have opened up a couple of trades.  Yesterday I closed two of them.  The good news is that both were profitable.  The bad news is that had I waited one more day, it could have been a lot more profitable… like twice as much.

On June 30, I opened up a position in a Google call option.  Google had sold off 9 days in a row and I thought that was excessive.  It continued to sell off for four more days, taking it down 13 days in a row!  I held on on the assumption that it would spring back.  And I was right.  Yesterday I closed it for a 140% gain in two weeks.

I also opened up a position in Medifast on a similar theory that it would snap back after excessive selling.  Again, I was right and I closed it yesterday for a 110% gain in less than a week.  Not bad, I’d say.

The problem is that had I held on and closed today, I’d have a 230% gain in Google and a 220% gain in Medifast.  I basically missed out on banking another $1800.  The Google trade would have replaced Baidu from two months ago as my new all time best trade.  Had I waited, it would have been enough to eradicate 75% of my massive string of losses that I experienced in June.  As it stands now, it only erases 40% of it.

So did I make a mistake?  Well, I knew that Google would snap back but I didn’t know how far.  I probably could have held on to it another day but it hit my conservative target.  And I like selling too soon rather than too late.  Stocks tend to go up in runs for 4 days on average and I had hit the fourth day.  Should I have known that 13 days of selling would have implied another up day?  Maybe.  Who knows.

Medifast is another story.  I probably could have predicted that it would have hit its 50-day moving average.  So maybe I should have held on there, too.  Indeed, at least here I bought 5 option positions instead of 1 (unlike Google) so maybe I should have sold only half my stake.  Oh, well.  Better luck next time.  At least I didn’t lose money.  And opportunities are made up easier than money.  Besides which, I sold into strength and that’s what you are supposed to do.  Maybe I didn’t sell into extreme strength… but better than selling into weakness.

Finally, I bought a position in Intuitive Surgical.  That one was down 60% in less than a week but today is slightly profitable.  That one I did hold on to.  Maybe I will let that position ride.

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Today, I experienced yet another loss in trading.  I had a couple of small victories but interrupted that winning streak with yet another couple of big losers.

Yet, I feel alright with this one.  The reason is that I feel like I did everything in my power to trade correctly.  I couldn’t foresee the market’s huge drop today and therefore, taking a loss when something like this happens is acceptable:

  1. I bought a call option in Google last Friday.  Google had traded down six sessions in a row which almost never happens.  I bought a call option betting that it would go up in the near term since even in bear markets, stocks rally sharply.  I bet on a reaction to the upside since Google had done it twice since this correction began.
  2. I missed out on Apple’s collapse today.  I had Apple hand me my posterior in my second last trade in it (I made $40 this past week – hooray!).  But Apple had a good correction and then paused… and my paranoia said “Get out!”  I did but I thought that it might collapse.  But given how long Apple had been able to buck the market trend I couldn’t take the risk.
  3. My general market indicators were not telling me that there were extremes in either direction. The percentage of stocks trading above their 40-day moving average was 40%.  Readings below 20 and above 90 are extreme and are reliable.  40 is ambiguous.  Looking on that and seeing it rally, I would have bet on an up movement, which is why I was long Google.
  4. The Bulkowski Indicator, which I had been using, had been generating a lot of whipsaws.  I decided to ignore it because it wasn’t giving me anything useful and my reliance upon it cost me in Apple and APKT.

Seeing all of this, I think that my analysis was correct.  I couldn’t have foreseen this huge drop today and therefore all I can control is my entries and exits.  Yes, I lost money.  But I followed my plan.

And now the one thing that gives me hope is that the Nasdaq has gapped down, and there is an old saying – All gaps must be filled.  This is true nearly 100% of the time, and Google is still oversold.  I figure I can buy some call options again and recover some of my losses.  I see an opportunity here for a quick snapback.

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This evening, for the past 45 minutes or so, I have been reviewing my trades.  I have been trying to narrow down my mistakes.  To do this, I divided up my trades into the following categories, looking for patterns:

  • Average length of time the short term trend was in place when I made the trade
  • Number of days after I purchased that the trend reversed
  • The result (Gain/Loss)
  • The type of trade – Fade (trading against the short term trend in anticipation of a reversal) or Trend (continuation of a short term trend)

Looking at everything this way, using Excel, using my limited 13 trades (7 winners, 6 losers) I have some interesting stats:

  • For a winning trade, the existing trend is shorter – an average of 2.1 days vs 2.8 days for losing trades
  • For a winning trade, the average reversal period after I purchase is 3.2 days vs 3.8 days for losing trades.

Combining these two, it doesn’t help me.  Trends are shorter for my winning trades than they are for my losing trades, although it does suggest that I get in as close to a reversal point as possible.  The optimal time period for me to stay in is between 3-4 days.

This doesn’t help me all that much.  I decided to look at it by type of trade (Fading vs Trending):

  • For winning trades, when I Fade the average existing trend period is very short (1.5 days).  For trending trades, it is double (3 days).  This means that if I intend to fade, the reversal period has to be very close.  For a trending trade, I can take my time a bit more.
  • Losses is where it gets interesting.  My losing Fades look pretty similar to my winning Fades.  However, my losing Trends have an existing pre-trend of 4.67 days. 

Going by this, I can create a rough guide: If I am going to trade in direction of the trend, I must get in by the third day.  The holding period doesn’t matter as much, but when the reversal eventually comes, it comes hard and erases gains incredibly quickly.  The optimal holding period after purchase is 2-4 days.

Doing this explains explains my two biggest current losers – Apple and APKT.  Apple was profitable for two days and then reversed.  APKT was never profitable but I did wait too long to get in.  I bought it and then it promptly reversed.  But in both cases, the trends were in place for 5 days (Apple) or 6 days (APKT).

The only one that could not have been avoided is my trade in Intuitive Surgical (ISRG).  I faded it 1 day into the (counter) trend and then it promptly reversed on me two days later.  There’s no way I could have foreseen a reversal that narrow.  That one I can live with.  The others… less so.

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I’m getting extremely frustrated with my trading recently, especially today.  It’s making so disgusted that I am thinking of stopping it altogether, I am so frustrated with myself.

I’ve been trying really hard to dig myself out of my hole that I dug for myself with my recent two bad trades.  As of yesterday, I had put on two new positions, and one of them had erased 80% of my one bad trade, and the other bad one had erased 2/3 of its loss all on its own.  That was as of yesterday.  I was thinking to myself “The market has really gone down a lot, I should close.”  But I didn’t.  I held on because I figured I still had a bit of a gain to go.

And now today, the market has rallied big time and all of those gains have been erased and losses extended.  A position that was up $1170 (in a week, 90%) is now down $90.  That’s a reversal of over $1200 in one day.  One day!  And I knew I should have gotten out, but I didn’t.

This has happened to me a lot.  My short term trading paranoid strategy was working for me, yet for some reason I deviated from it.  And I refuse to learn my lesson.  Why do I do this again?

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