jaudio shorts

In a few blogs and emails, I have been ridiculed, scoffed, and scorned. The nice SLO players just ignore me. I really can't blame you for hitting me for my insanity. You may be surprised to know that I agree with most of your criticisms. The most recent comes from James Anthony in his "A Welcome Market Gift" blog entry, a well thought out and well written blog in my opinion. Vad has made some comments regarding short ETFs, all of which are sound. However, there are reasons why I do what I do. Let me give you some insights to my strategy and game play.

First of all, the statistics show that about 75% of fund managers can't beat the S&P after transaction costs. These are the esteemed, educated, market mavens that we could only aspire to be. Some of those in the top 25% barely beat the market. Some are above average, and a select few are well above average. This gets hidden with Mutual Fund survivorship bias, an ugly truth too big to comment on here. I will humbly admit that I am not one of those elite that can beat the market year after year. With that in mind, I know that when the SLO is all wrapped up, we will probably fall within this statistic, give or take a few percentage points. Because of the 75-25 statistic, I wanted to diversify by having ETFs that tracked the broader markets. Theoretically, if I bought an index fund, I would be able to defeat 75% of the opponents. I sincerely hope there is a full after action report on our performances, complete with individual stats. A SLO player (i don't remember the name, all apologies) has given updates now and then on the performance of the S & P if it were a player. Thanks for that watchful eye on the S&P, and it will be interesting to see how the S&P stacks up against players at the end to confirm or deny the 75-25 stat.

Second of all, statistics show that people who trade frequently have lower returns than those who buy and hold. Again, some frequent traders are part of an elite group that beat the market handily over and over again, but we can't all be Peter Lynch. Most of us have a trading history that doesn't match our egos. I fall into this group, also. That is why, as a rule, I have few trades compared to others in the SLO. So far, I have a total of 37 trades for the entire duration of the game. Only 11 of those trades happened after my initial buy in, and of all trades, 4 are sells (one because of a mistake, another for rule compliance, and the other two because they closely resembled two others I had) . I really don't know for sure how my trading activity stacks up against the average SLO trader, but I view portfolios of the top 100 all the time. Some players have near total turnover in their portfolios, so I believe my trading activity is on the bottom end. Since I am not sure if the data will be compiled at the end of the game, shoot me a quick comment of your total number of trades, even if you are not in the top 100. It will be interesting to see if the frequent traders in the SLO end up being concentrated or evenly dispersed throughout.

Thirdly, in order to beat the broad markets using broad market indexes, I would either have to use ultra long ETFs or Ultra Short ETFs. This is where I go off the reservation and get declared clinically insane by the SLO clan. Nobody stacks a portfolio with only Ultra Short ETFs or only Ultra Long ETFs. Most follow the Vad approach and get long or short ETFs to "decrease the volatility of the overall portfolio". I chose to stack my portfolio with Ultra Short ETFs.

Why?

My choosing Ultra Shorts was a result of a few things. The biggest reason I chose Ultras was for their high risk. They aim to double or inversely double the index or sector they follow. With Ultra Shorts, I only have to make the right decision on which way the market will go, either up or down. If I am on the right side of the market, then my portfolio will theoretically double the return, although it doesn't quite do that in the real market. It is better than picking individual stocks because I will pay for only 1 mistake, that is, being wrong about the direction of the market. A mistake on an individual stock may cost me and it would never recover. Ultra ETFs can go from a 20% loss to a 20% gain and back again quickly.

Do I go Ultra Long or Ultra Short?

That was an easy one for me. We are in one of the longest running bull markets ever. Markets have cycled up and down since the advent of markets. Even those good old days of Nasdaq 5000 will come back if enough time elapses. Being in a long lasting bull market coupled with the problems in real estate and banking make me bearish. The lowering of interest rates may make inflation pop again, although, maybe not soon enough for me. The "R" word keeps getting thrown around, and the high price of oil and gasoline exerts pressure. I also read a lot of MSN's whipping boy, Bill Fleckenstein, who would devour Goldilocks if given the chance. The bull cannot last forever, as well as a bear cannot last forever, but they do come and go. Choosing the Ultra Shorts not only guarantee that I will beat the market when it goes down, it will also mean that I will beat many of the SLO players that have went long on individual stocks that get pulled down when the bear rears his ugly head. In addition to this, no other SLO player has the stones (or the stupidity) to load up on the short side like me, so if the market tanks, I will be toward the top.

These are the three points of my strategy: Buy Index and Sector tracking ETFs, have few trades, and go Ultra toward the short side. Built into the strategy is an assumption that I can take the pain of big gains and big losses. It's an amazing thing, really. None of the money is real but the psychological effect of seeing a 10, 15, or 20 percent hit will rattle you, even when you know it's coming. The temptation to bail is always there after a sustained loss. Now it doesn't even faze me. The 300 plus Dow gain on Tuesday didn't even make me flinch. Again, most players believe this is insane, and if the markets stay within 5% up or down of where they are now, then memories of Jaudio will go into the SLO ash heap never to be heard of again. However, if the markets get pounded down, one percentage point at a time, my portfolio will rise from the ashes and the lunatic will be running the SLO asylum while players spit in my direction at the luck.

"The key is not to have a secret trading strategy, but rather, have a public strategy so cockamamie no one will follow it".

Comments: View Comments |  Wednesday November 14, 2007