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rseiser
ParticipantYes, I also have been doing very well on LEND, NEW, PHM, CFC, etc. So, this year I am doing better on my shorts than on my longs. But instead of blowing my horn on these few winners, I want to be honest and say that the short side is extremely tough, and it is not like it sounds, putting all the portfolio into some short positions and striking it rich.
Here are many aspects in the way of my success.
-Counting my losers. I started shorting mostly after the runup in 2003. Since 2004, the market has gone only up, up, and up, and who would have known that it can go on that long. I had many put options expire, and I even had a few bad picks that went quite against me. I have maybe more winners than losers now, but it is far from a home run.
-Timing. I shorted my first batch of TOL in 2004 in the $20s. Then again at $30, at $40, and at $50. Talk about insane. But with Piggington I knew how ridiculous it all was. Now it looks like I made all money back, with TOL at the initial price. But it was very very hard to hold on.
-Covered early. I occasionally took profits, sometimes I had to because of written puts. So I was out of NEW and LEND at about 2/3 of the way, and didn’t make the last 1/3.
-Getting too big. If I count all the underlying value controlled by options and short positions, I was short more than my net-worth. But options also lower risk and reward a bit, so it was not that extreme. Obviously, I was also long with the amount of my net-worth with other stocks which helped in the up market. But I couldn’t have shorted any more, and feeling maxed out is not a good feeling.
-Margin interest and dividends paid. My broker didn’t offset longs with shorts, and I still had to pay margin interest. Also, some of the loser companies actually paid dividends that I had to pay.
-Shrinking premiums on puts. No matter if time passes or stock prices drop, the premium shrinks in both cases. So it makes way less than a short position for the same dollar drop.After analyzing all this, I did realize the need to cut down my shorts, and I used written puts for this. I was even lucky, since I often collected extra premium. Or if I covered, I was sometimes able to short again a few dollars higher.
Still, it shows me my limitations even though I often got in at high prices. But when prices drop enough, I am forced to cover. I never want a short going against me again, which it could when stocks are down 80%.So I am again out of PHM, CFC, TOL, ACF. They might go lower or even bankrupt. But the risk is too high for me to press the last dollar. I rather hope for the opportunity to re-short them 10% higher, which I will if they bounce. I will also short a few more stocks that haven’t dropped but will if they eventually follow housing.
Maybe there are more talented or lucky traders than me, but I found that I cannot gamble but have to go for smaller but sure profits.
I updated a few lines in my shorting primer, which I wrote last year.Continue to be careful when shorting!
ParticipantThanks to everyone for their insight on this thread. I joined a monthly meetup group about trading, and I am always a little curious about what strategies are out there. In general my findings are similar to my experience in the energy sector. I have looked at 100 “new” alternative energy schemes, and 100 didn’t work.
At the same time you will find thousands of people telling you how much money they make in trading, and that their software really works, bla bla… But the only pattern I found is that when you ask for their track record, then they all of a sudden get offended.Most of the time it’s clear mathematics. First, let’s say I am a happy investor ala Buffet, and got to a 20% annual return on my investments. Since I hardly trade, I pay about 25% tax on my capital gains and dividends (15% federal + 10% state tax). It’s actually not applied every year, since I can defer tax payment until I sell. On day trading (stocks) I will be taxed 45% (35% federal and 10% state tax). So that alone shows that I would have to make at least 30% annual return to be even with my investment return. But wait there is more. Now I also have to pay some serious money for software, tools, data feeds, and of course the time that I am tying up. Depending on one’s wealth, let’s just call that another 10% extra that I have to make, meaning 40% annual return. Now that’s unleveraged for an apple-to-apple comparison to my investments. Well, I haven’t found the strategy yet that makes me 40%, but I will report when I find it…
Next is risk. That’s a difficult one. Some trading schemes could be safer than a tied up investment, since you could get out quickly, have stops in place, etc. But others could be riskier, if you have a few losses in a row, or something happens to the position you are concentrated in.
Now add leverage, the magic word of the trader. In general, I would say that this just increases your return at the expense of higher risk. Yes, you can leverage different amounts in different assets, but even in some investments you can leverage quite a lot (think real estate). So let’s keep talking in terms of the unleveraged return.
A lot of strategies are skewed to the nature of the market. There are some shallow and wide strategies that attempt to make an average of say 0.2% per day which would give you your >40% annual return. But then you notice that they are mostly long strategies, and in an up year most days might be indeed up a little. But this might not work in a down year (what I am more interested in).
Last, higher inflation is slightly in favor of the investor. If we enter a time like the 70s, or even worse, where the value of the dollar drops every year, trading in and out of cash will have you more exposed to the losses in the dollar. Right now prices have probably doubled in ten years, despite the productivity gains. If that gets worse, trading back and forth might make you a return just to keep even with the price of eggs or milk, while every investment might perform equally.
I met a few people that do trading as a full-time job, so they must do something right. But maybe they made their money on their house or just inherited a few million and are really just treading along. I will report if I meet someone really trading himself from the bottom up (like Chris J?).
For myself I would consider putting 10% of my capital into a trading strategy if I think it gets close to the above criteria (return/leverage/risk), and if it makes sort of fundamental sense with some statistical evidence. At least it diversifies me a little which could be great in a down year.
ParticipantThanks to everyone for their insight on this thread. I joined a monthly meetup group about trading, and I am always a little curious about what strategies are out there. In general my findings are similar to my experience in the energy sector. I have looked at 100 “new” alternative energy schemes, and 100 didn’t work.
At the same time you will find thousands of people telling you how much money they make in trading, and that their software really works, bla bla… But the only pattern I found is that when you ask for their track record, then they all of a sudden get offended.Most of the time it’s clear mathematics. First, let’s say I am a happy investor ala Buffet, and got to a 20% annual return on my investments. Since I hardly trade, I pay about 25% tax on my capital gains and dividends (15% federal + 10% state tax). It’s actually not applied every year, since I can defer tax payment until I sell. On day trading (stocks) I will be taxed 45% (35% federal and 10% state tax). So that alone shows that I would have to make at least 30% annual return to be even with my investment return. But wait there is more. Now I also have to pay some serious money for software, tools, data feeds, and of course the time that I am tying up. Depending on one’s wealth, let’s just call that another 10% extra that I have to make, meaning 40% annual return. Now that’s unleveraged for an apple-to-apple comparison to my investments. Well, I haven’t found the strategy yet that makes me 40%, but I will report when I find it…
Next is risk. That’s a difficult one. Some trading schemes could be safer than a tied up investment, since you could get out quickly, have stops in place, etc. But others could be riskier, if you have a few losses in a row, or something happens to the position you are concentrated in.
Now add leverage, the magic word of the trader. In general, I would say that this just increases your return at the expense of higher risk. Yes, you can leverage different amounts in different assets, but even in some investments you can leverage quite a lot (think real estate). So let’s keep talking in terms of the unleveraged return.
A lot of strategies are skewed to the nature of the market. There are some shallow and wide strategies that attempt to make an average of say 0.2% per day which would give you your >40% annual return. But then you notice that they are mostly long strategies, and in an up year most days might be indeed up a little. But this might not work in a down year (what I am more interested in).
Last, higher inflation is slightly in favor of the investor. If we enter a time like the 70s, or even worse, where the value of the dollar drops every year, trading in and out of cash will have you more exposed to the losses in the dollar. Right now prices have probably doubled in ten years, despite the productivity gains. If that gets worse, trading back and forth might make you a return just to keep even with the price of eggs or milk, while every investment might perform equally.
I met a few people that do trading as a full-time job, so they must do something right. But maybe they made their money on their house or just inherited a few million and are really just treading along. I will report if I meet someone really trading himself from the bottom up (like Chris J?).
For myself I would consider putting 10% of my capital into a trading strategy if I think it gets close to the above criteria (return/leverage/risk), and if it makes sort of fundamental sense with some statistical evidence. At least it diversifies me a little which could be great in a down year.
ParticipantHi there,
I also live in Irvine, and in general it is pretty nice. Since it is a little inland, it is always warm and sunny and doesn’t have as much of a marine layer. Everthing is clean, and the streets are wide an comfortable. Only during rush-hour is it painful to drive, especially on I-5 and I-405. I had some trouble finding an apartment close to work. There are either industrial areas or residential areas, but they are far apart. In the past I rented a 1-bedroom from the Irvine Company across the freeway of Quail Hill. It was noisy from the freeway and too expensive ($1650/mo when I moved out). Now I rent in Westpark. Buying is of course out of the question. The 2-BR/2-BA rents for $1700, and apparently goes for >$500,000. That’s a factor two in the mortgage/rent ratio. They are building a ton of developments just north of me. All stacked tight, and I wouldn’t even want to buy anything like that.Hey, btw, if you are interested to meet in that area, I just opened a meetup page yesterday. It’s not housing related, but piggingtonians are smart and always welcome.
ParticipantOk, see you guys. I hope I am not late for once.
ParticipantMost likely I am coming.
ParticipantBy the way, I just had something annoying happening to me. My brokerage in Germany contacted me to close my account. Even though I have a German passport, I properly declared that I am a resident in the U.S., and I always paid taxes on my capital gains in the U.S. They said that they are now required by the IRS to not take U.S. investors anymore, and there is nobody they can recommend who does.
I tried to find another brokerage in Germany, but no luck so far. Please let me know if anybody knows brokerages abroad who accept U.S. residents.
Are you coming to the meetup, heavyd?ParticipantI think this is a great thread, and thanks for the good suggestions. I haven’t bought any stocks outside the U.S., although I am from Austria and have a brokerage account in Germany. It makes perfect sense though, since one has to take opportunities as they come, and in the U.S. they are limited, simply because U.S. stocks are popular. I have had a few ADRs and ETFs, e.g. EWM, which have run away from me for now. But I know I will get a chance to buy something again.
Often it is difficult to invest in foreign markets, since one either doesn’t have the knowledge or doesn’t have an account.
Regarding the first, I, for example, was reluctant to invest in my home country since I only knew U.S. stocks and how to research those. This is a good thing, since it doesn’t make sense to buy what you don’t know. But a few years ago I saw that there is an ETF for Austria, and I tried to find information. It seemed that the P/E was about 10. I thought that this wasn’t great since people in Austria are usually lazy, and so there won’t be much growth or excitement that would deserve more than 10. But speaking as a value investor, a P/E of 10 is pretty good, especially if it is stable earnings, and if they had a long time of consolidating. Then this can improve, and also often after a while of nothing happening, some good news comes along. Austria started to benefit from the east expansion of the EU. And while the earnings rose, the P/E rose, and one always got the earnings along the way, and it would have been an incredible gain to hold on for a while (chart).
I totally missed it, but it showed me that I should always keep looking for similar inexpensive opportunities.ParticipantGive it to Rich. We agree on most things, and as far as I know, he manages money very similar to me and my colleagues at Liberty Valley. We have used a diversified approach, and I hope it will continue to beat inflation. Here is our track record. Login with guest/guest to view the 2007 holdings. It is a non-profit investment club, so make sure you read the disclaimer.
Participant- What can I do to protect myself or to profit from it?
Are you dissapointed that I didn’t tell you the exact rate of inflation for the next years? It is exactly because it is unknowable, and even more so, we have come to such extremes that it can go either way. If one learns one thing, that is that coming inflation might not be between +8% and +12%, but could possibly be between -10% and +30%. That’s the all important conclusion: to be very careful. Note, that I still estimate the mid-point of +10%, which is basically the “status quo”, and what the government probably likes to continue. But there is no guarantee that we couldn’t see -10% where stocks and houses get crushed (1973-1974), or +30% where oil and gold soar and cash becomes worthless (1979).Clearly, I believe we are similar to the 1970s, where deficits came home to roost, and where we were on a fiat currency. Something like the 1930s is out of the question since the dollar is not backed by gold anymore.
So overall, the best way to invest is probably cautiously diversified towards continued inflation. Avoid bonds and stay low in cash, but also don’t take too much credit to speculate on rising prices. Try to diversify into the hard assets that are historically cheap. Some precious metals for sure, oil and gas companies since they have low P/Es. Avoid historically expensive assets such as stocks and real estate. But they might make sense in other countries, or away from the mainstream speculation.
Next, let’s keep monitoring what the government does in the next years. If we get a time like the late 1970s where rates of inflation accelerate, will a Paul Volcker come along to realize the mistakes and cause a recession, or will it turn into a Weimar Republic?
Here are the clues:– Will the government lower interest rates so that savers will again get screwed? In this case, take your money and run, like most people will probably do next time. Interest rates would have to be 5% higher anyways to compensate me for inflation, and a widening of this gap will want me to hold even less cash. Just short-term liquidity.
– Watch the government’s rhetoric regarding prices catching up. The more people realize inflation, the more they anticipate it by buying fixed assets. If the government starts to blame someone else for rising prices and wants to hand out money to alleviate the problem, things are going to get worse fast. Remember, giving the government control will also result in less production, and then prices will rise even more. Like in the Weimar Republic we could quickly go from 10% to 11%, 13%, 17%, 23%, 35%… if the government plays catch-up.
– A falling dollar might also make things worse. Not just because imports get more expensive, but also because a lot of dollars will come back to the U.S. The past acceptance of dollars world-wide as reserve currency has benefited the U.S. greatly. We could expand the money supply, which is essentially free, to get real products from abroad, while foreigners more and more stored our dollars. This has kept price increases low, but if foreigners decide to send all these dollars back in exchange for products, it will work in reverse.
– Also, watch the public. Most people have been so brain-washed by the government that they are really happy the way things are. Just the fact that people allow the government to print money to erode all the productivity that would otherwise lead to much lower prices. Count electronics together with oil and you get a 2% CPI, something most people are still happy about. In reality such a CPI should show -5%. The difference of course the 7%, that the government can pay to everyone in their reach who now doesn’t need to work to produce anything. It will only be the citizens who can eventually prevent the government from inflating. No signs of that though.
So in summary, things like gold still have their purpose. Even in the unlikely event that inflation stops and gold drops somewhat, other assets will drop so much more, so you will still be able to buy a lot with it.
And try to bet on inflation in a tax efficient way. IRAs and foreign accounts might be the way to go, but it is getting more and more difficult to avoid the tax paid on phony capital gains.Participant- What is the rate of inflation, and what will it be in the future?
The inflation today is easy to determine by looking at the money supply. It is about 10%. The problem is, that not all of that is issuance of permanent new dollars, but a big part of it is credit. The credit temporarily adds more dollars into the economy and drives up prices, such as stocks, real-estate, commodities, precious metals, your gardener’s daily wage, etc. But there is always a chance that credit goes away, e.g. if people default on their debt or if they had enough of speculation and rather want to pay it back to have a peaceful mind.
Both components of inflation are hard to predict and can vary in a wide range.a) The credit component could vary from a huge negative number (in a credit collapse) to a moderately positive number (if speculators continue to borrow dollars to invest in assets).
The upper boundary will be somehow restrained by the ability of servicing the debt and by the margin requirements. We are at quite high levels of debt, and most people couldn’t afford to take on much more, since their monthly interest would eat up all their income. But if interest rates go down to 1% again or say to 0%, you could service an infinitely large debt. But you also have margin risk, e.g. if the asset you bought drops by the amount of money you put down. So you probably don’t want to take credit in the amount of 1000% of your assets, since if prices drop 10%, you are bankrupt. But some people do it anyways.
The lower boundary can be defended by the governments and banks to keep the party going. They will just prevent you from paying back your loan or defaulting on your house, simply by lowering interest rates again and convince you that you can ride it out.b) The money component will always be positive as long as we are in a fiat money system, and as long as we have a government that likes to spend and citizens that are pleased with it. The government can so easily issue new dollars, e.g. by purchasing their own bonds, that the possibilties are unlimited. They can pay their salaries, their lobbying groups, the military, old, poor, and sick citizens. They can just deficit spend (on and off-balance sheet) as long as nobody complains. They can spend little, when credit and the economy grow by themselves and when people get wary of the rising prices. They can also spend a lot, especially if times are bad or credit is contracting, under the umbrella of helping the economy out. One thing is for sure, they will spend, and it will be paid for by new money. They won’t raise taxes to 60% to pay for social-security and medicare, they will just create new dollars every year to pay the recipients.
Add up the two components and you get the total inflation.
ParticipantInflation is one of the most difficult things to understand and forecast, although most crucial to allocate one’s investments.
First, forget looking at the price of items alone, especially mass manufactured goods. They have nothing to do with inflation. If we had no inflation at all, prices of most things would go way down since we always get more efficient through productivity.
I am using here the Austrian definition of inflation, i.e. “the supply of money and credit”. It tells you how much more prices go up compared to if there was no inflation. So if we have inflation of 7%, and some widgets are now dropping 10% per year, they would otherwise drop 17%! It therefore tells you clearly how much purchasing power your money loses “compared to a fixed asset”. You wouldn’t declare that if you keep cash under your mattress, and you can buy 10% more widgets next year, that your money has gained in purchasing power, when in reality there are 7% more dollars, and you are 7% behind compared to the government’s expenditures (with new dollars) or 7% behind your neighbor who has no cash but fixed assets.
The problem is, there are really no fixed assets, since everything is consumed or produced at some rate, and also fluctuates during bubbles and busts, see real-estate, oil, and gold. But in the long-run these three have worked out well to rise fairly well with inflation. I would say that a “working hour” should also be fairly fixed over long periods of time. I mean you hope that if you worked 30 years ago for one day, that you could now get someone else work for you for one day in exchange (despite him using some advanced machinery).
Ok, now that we got this out of the way, the more difficult questions still remain:
- What is the rate of inflation, and what will it be in the future?
- What can I do to protect myself or to profit from it?
I will answer these in my next posts.
ParticipantI wonder about the same questions as you guys. Maybe a gold standard is good, and we just have to live with the busts. (Maybe then we will be more cautious and the busts won’t be that bad).
Or we could not have a gold standard, and whoever wants to use gold, just uses it (like now). But then the government brainwashes everyone against it, and you have to live with the busts in gold once a while (like during the 90s).But to the last sentence of Wiley: Credit creation is still possible (like in the 20s), and once it reverses you have the deflation, because now you can’t print money. Even here I am slightly in favor of the gold standard. Because when everyone knows that, then the credit boom might not go to such extremes. And if there is deflation afterwards, so what. Why not just live with it. It reorganizes capital, and if people don’t spend, maybe they are thinking about producing something down the road. If there is a mild deflation, I think people will still spend, since interest rates will be low, and the opportunity to invest or spend now is still worth something (opportunity cost) compared to saving all for later.
On the contrary, I am slightly against fiat money. Too many loopholes for the government to change the rules on us constantly. And where is the limit here? The government creates more and more credit (not necessarily money), but when credit shrinks everyone expects them to print the money. Then overall money supply doesn’t contract but goes sideways. Nice in theory. But since everyone knows that, now credit extends even more, and the more credit expands the more people want to take credit to jump on the increasing asset price bandwagon. And if the government doesn’t decide to stop, there are no limits. Normally, one would be restricted by either market interest rates being one step ahead (higher) to force savings, or by getting so leveraged that smaller and smaller volatility would wipe one out (say a 1% drop if one is leveraged 100:1). But the government doesn’t even have those limits, since they control interest rates AND can print infinite amounts of money to avoid every little drop. That means there are no small busts along the way, but a worthless currency in the end, with nobody having saved anything. Possibly less production too, since speculation becomes the occupation of the day.
The summary of my opinions:
Fiat money needs a prudent leader, while the gold standard needs prudent people (to avoid excess credit creation). I prefer the people taking the responsibility, since they are the ones who have to live with the outcome. But I admit it is not guaranteed if it would work better in our complex world. The contrary is not proven either though, just because it has worked for the last 30 years, which was an accelerating credit phase. And it is a small sample compared to all the other fiat experiences that didn’t work.ParticipantPS,
I think the only chart you can use is a plot of gold, inflation adjusted in today’s dollars, using a reasonable rate of inflation (not some ridiculous 2% CPI number). There you will see that the window for gold is $300-$2400, and there is no reason to believe that gold should trade much outside this window, since it hasn’t for 3000 years. Of course, this window will move up with inflation, so in 10 years it could be $600-$4800. Within the window gold will trade according to fear, investors expectations, loss of faith in currency, etc. So if investors will sell everything else, the money might go into gold, and therefore prices will gravitate towards the upper end. The only way money won’t flow anywhere is if government lets our huge credit bubble collapse without printing money – highly unlikely. Even then, gold can move to the upper end of the window, but the window will move down.Will gold go to $3000 in between and then crash again to $600? Who knows, why not. But sometimes you have to know what is cheap and what isn’t. Since gold is $650, it is closer to the lower end than to the higher end, and chances are still in your favor. If gold goes to $1500 the reverse is true, and I wouldn’t rush out to buy it. I might sell some and hopefully find better investments then.
It’s like a 5 year old Toyota, that you can get for $2000-$8000. I would buy it for $3000, and I wouldn’t worry that it can go to $2000. If you are afraid of things like that, you will never make money in investing.
So to summarize, these are the basic beliefs that you must have when buying gold:
-That gold will trade in the same range it has been for hundreds of years.
-That inflation is real, and that interest rates are not high enough to offset your loss of purchasing power. (including protection in a crisis)
-That other asset classes are overpriced and that this won’t last forever.
-That you can only buy it when it is realtively cheap or not at all. After the price moves up and everyone rushes into gold, the risk/reward will not be as favorable anymore as it is now.If you don’t share these basic beliefs, then don’t buy it. Nobody will ever be able to offer you a guarantee since nobody can predict the future.
- What can I do to protect myself or to profit from it?
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