I just wanted to drop you a note and let you know how much I enjoy reading my daily emails from you. You provide tons of information in a clear manner - with humor thrown in to boot!
Great ideas for longer term investing that have more than paid for my yearly subscription already.
Keep up the great work.
Katrina
Tulsa, Oklahoma
There’s nothing like a swift kick in the shins, a slap in the face, and a good boxing of the ears to give you a healthy dose of humility.
That’s holders of the ProShares Ultra VIX Short-Term Futures ETF (UVXY) right about now. This is the popular ETF that rises when the S&P 500 (SPY) falls.
“Markets can remain irrational longer than you can remain liquid,” as my late mentor, the legendary economist and early hedge fund trader John Maynard Keynes, used to say.
I know this because it is inscribed on a post-it note taped to my screen.
This was only made possible by the Volatility Index falling to $14 in the past week, a multi-month low.
To see this happening with stocks at an all-time high is nothing less than amazing. The ($VIX) seems to be telling us that stocks are going sideways to up for the rest of the year.
The reason this fund can only fall over the long term is because of the contango that permanently haunts it.
While the front-month Volatility Index (VIX) was trading at a lowly $14, three-month volatility was at a lofty $19.9.
The (UVXY) buys three-month volatility and runs it into expiration. It then exacerbates this negative impact with 2X leverage. The guaranteed loss on this trade is, therefore, $2.80/$14 X 2, or 40%.
It is a perfect money-destruction machine.
Do this every month, and eventually, you use up all your capital. You see this most clearly on the long-term split-adjusted (UVXY) chart below, which has it going from $30,000 to $10.88 in only three years, a loss of 99.9%.
This is why you should only hold the position for a few days or weeks at the most and, even then, to hedge long positions in other stock or indexes.
The bulk of the trading in this instrument is, in fact, carried out by day traders.
You only want to own (UVXY) and the (VIUX) during the brief, frenzied volatility spikes that occur, as we did with the last trade.
You might want to ask the question, “Why aren’t we shorting this thing?”
The ($VIX) is prone to sudden, extreme moves to the upside whenever an unforeseen geopolitical or economic event takes place, such as a terrorist attack or a bad monthly nonfarm payroll number.
It can double in days as traditional long-side investors who are unable to sell short stocks or futures rush to buy some downside protection.
It has done this a few times in the past year. During the 2009 crash, the ($VIX) ratcheted all the way up to $90 and $65 during the pandemic.
Often, you get large moves of 20% or more right at the opening, as professional traders who are almost always short volatility, rush to cover short positions all at the same time.
As a result, many of the people who try this strategy often go bust.
On top of this, your broker is unlikely to extend the margin you need to put on a decent-sized position, especially to beginners.
The concern is that when the customer wipes himself out, they will take a piece of the broker’s capital with it. Customers who lose money in this way often end up suing their broker, another turn-off.
The people who do make money at this tend to be large teams of very experienced traders with massive computer and programming support executing complex, state-of-the-art risk control algorithms.
It costs millions of dollars to put all this together.
Needless to say, you should not try this at home.
Maybe the market is trying to tell me something. Like, quit looking for a seat after the music stops playing. Don’t trade if there is nothing there.
Nobody pays you to hold cash.
It looks like it is going to be a long winter. A long cruise is looking better by the minute.
“If you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels,” said Oracle of Omaha, Warren Buffet.
Global Market Comments
November 14, 2024
Fiat Lux
Featured Trade:
(JOIN ME ON MY JANUARY 3, 2025 PANAMA CANAL SEMINAR AT SEA LUNCHEON)
Global Market Comments
November 13, 2024
Fiat Lux
Featured Trade:
(DON’T GET SCAMMED BY THE MUTUAL FUNDS),
(TESTIMONIAL)
How many mutual funds would you guess outperformed the stock market since the bull run started four years ago?
If you guessed 1,000, 100, or even 10, you would be dead wrong and even off by miles. In actual fact, not a single mutual fund has beaten the market since 2020.
Remember all those expensive, slickly produced TV ads boasting market-beating ratings and top quartiles?
You know, the ones that show an incredibly good-looking, but aging couple walking hand in hand into the sunset on a deserted beach?
They are all just so much bunk. The funds mentioned rarely quote performance beyond one or two short years.
Like my college math professor used to tell me, “Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential.”
Recently, the New York Times studied the performance of 2,862 actively managed domestic stock mutual funds since 2010. It carried out a simple quantitative analysis, looking at how many managers stayed in the top performance quartile every year.
Their final conclusion zero.
It gets worse.
It is very rare for a manager to stay in the top quartile for more than one year. All too often, last year’s hero is this year’s goat.
The harsh lesson here is that investing with your foot on the gas pedal and your eyes on the rearview mirror is certain to get you into a fatal crash.
The Times did uncover two funds that stayed at the top for an impressive five years. They turned out to be small-cap energy funds that took inordinate amounts of risk to achieve these numbers and have since lost most of their money.
The reasons for the woeful underperformance are legion. Management fees are sky-high and grasping. Hidden costs are everywhere. Read the fine print in the prospectus, as I do, and you would be shocked, shocked.
Real talent is in short supply in the mutual fund industry, with all the real brains decamping to start their own 2%/20% hedge funds. The inside joke among hedge fund managers is that employment at a mutual fund is proof positive that you are a lousy manager.
Let’s go back to those glitzy TV ads, which cost millions to produce. If you are a mutual fund investor, you are paying for all of those too. They are made at the expense of a lower return on investment on your money.
And those sexy performance numbers? They benefit from a huge survivor bias. As soon as fund performance starts to tank, the managers close it, lest it pollute the numbers of other funds in the same family.
The number of funds with good, honest 20-year records can almost be counted on one hand.
Now, let me depress you even more.
An industry performance this poor underperforms random chance. That means chimpanzees throwing darts at the stock pages of the Wall Street Journal would generate a higher investment return than the entire mutual fund industry combined.
So much for all of those Harvard MBAs!
Are you ready to throw your empty beer can at the TV set yet?
If you think all of this stuff should be illegal, you are probably right. But since you watch TV, then you have probably been trained like a barking seal to oppose the regulation that would reign these people in.
This is what the attempt to kill the Dodd-Frank financial regulation bill is all about. The mutual fund industry complains bitterly that they are over-regulated and spend millions on lobbyists to get themselves off the hook. By the way, these expenses also come out of your fund performance as well.
These are all reasons why the Mad Hedge Fund Trader is able to generate such high-performance numbers year in and year out.
I am not charging you with any of my overhead. I am not jacking up your commissions. Nor am I selling your order flow to high-frequency traders for a tidy sum so they can front-run you.
Being a small operation of a dozen or so people, I’ll tell you what I don’t have. I lack an investment banking department telling me I have to recommend a stock so we can get the management of their next stock issue or a sweet M&A deal.
I am absent from a trading desk telling me I have to move this block of stock before the prices drop and my bonus gets cut.
And I am completely missing a boss screaming at me that if I don’t get my orders up, my wife would have to become a prostitute to support our family (yes, some asshole sales manager actually told me that once. I later heard he died of a heart attack).
You just need to pay me a low, flat annual fee, and I’m done. I don’t need any more. It’s up to you to search out the best deal you can get on executions.
Don’t even think about trying to give me your money to manage. I don’t want it.
This is why the overwhelming bulk of investors are better off investing in the cheapest Vanguard index fund they can find, diversifying holdings among a small number of major asset classes, and then rebalancing once a year (click here for my “Buy and Forget Portfolio”).
Welcome to the brave new world.
But We're In the Top Quartile!
After losing money with a million different advisory services and registered brokers I finally found YOU, and YOU make it all worth it!!! Thanks a bunch. I have so much confidence in you!
Stefano
Quarona, Sesia, Italy
"In investment management, the progression is from the innovators to the imitators, to the swarming incompetents," said Oracle of Omaha, Warren Buffett.
Global Market Comments
November 12, 2024
Fiat Lux
Featured Trade:
(WHY YOUR OTHER INVESTMENT NEWSLETTER IS SO DANGEROUS)
Global Market Comments
November 11, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or S&P 500 6,000 TARGET ACHIEVED, plus REPORT FROM THE FROZEN WASTELANDS OF THE WEST),
(CCI), (DHI), GLD), (SLV) (JPM), (MS), (BLK),
(CCJ), (NVDA), (AMZN), (TSLA), (DGE)