40 Latins & the Gringo Bear: 129% per year
How a Partner, Even the Bear, Beats Dancing Solo
7.13 years June 28, 2002--August 14, 2009
Worldwide ETFs Portfolio--Hypothetical
Weekly
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We have witnessed often in the past on these pages the pairings of ranks of two funds. Their crossings signal a switch to buy one fund and sell the other. But never before have we used a bear-market fund as the foil for the other to play against.
The results are gratifying--bumping ILF's respectable buy-and-hold annual return up from 24.3% to 32.6% by periodic switching back and forth with Ursa (RYURX) as the counter fund. The logic is appealing--using a high performance fund versus its most antithetical opponent, a broad bear-market index fund of any stripe.
As usual, I am curious about the effect of leverage on the returns. And beyond that, how to obtain actual leverage in the market without the inevitable, possible wipeout risk that lofty multiples hold for investors and traders.
Witness the 'blow-up' stories from the current panic and crisis--with 30x to 100x multiples of leverage--and previous ones through history. In 1929, 10x was bad enough to destroy the market and segue to the Great Depression holding all the world thrall for 13 years until 1942.
TABLE OF RESULTS
Relation of Leverage to Profit & Loss
ILF & RYURX--Seven Years
|
profit |
compound |
%worst |
|
levg |
%/yr |
tot%gain |
drawdwn |
|
1 |
32.6 |
646 |
-33 |
|
2 |
63.0 |
3157 |
-56 |
|
3 |
85.7 |
8136 |
-73 |
|
4 |
95.0 |
11571 |
-84 |
|
5 |
87.1 |
8591 |
-91 |
|
6 |
61.3 |
2924 |
-95 |
|
7 |
21.0 |
290 |
-98 |
|
8 |
-27.4 |
-90 |
-99 |
The drawdowns seem not tolerable,
but they are harmless.
See why here.
Enter options. They define specific risk with a precision unavailable by any other means.
In place of the % worst drawdwn column in the table above, you may insert a fixed, limited risk of any amount you wish, say -4%. It represents the maximum real loss you could theoretically undergo on the trade. In practice, that will never happen because a switch signal will occur before expiration. If it does not, you simply roll out to the next longest expiration option available. If a switch signal occurs giving a loss in the option, it will always be less than the full amount invested because of the delta mechanics of options valuations.
The question now is what level of leverage is desirable and practical, and how do I get it? To answer those questions, we must look the options themselves.
LONG OPTIONS RESULTS
Derived from ILF & SDS*
Leverage Multiple 4x
Underlying ETFs
|
Date |
wks |
%P/L |
%cum |
|
start |
|
|
100 |
|
6/28/2002 |
44 |
5 |
105 |
|
5/2/2003 |
58 |
61 |
169 |
|
6/10/2004 |
6 |
127 |
385 |
|
7/23/2004 |
101 |
32 |
506 |
|
6/30/2006 |
9 |
519 |
3134 |
|
9/1/2006 |
76 |
0 |
3134 |
|
2/15/2008 |
8 |
301 |
12578 |
|
4/11/2008 |
15 |
26 |
15853 |
|
7/25/2008 |
41 |
0 |
15853 |
|
5/8/2009 |
14 |
14 |
18006 |
|
8/14/2009 |
open |
107 |
37237 |
|
|
|
|
|
avg |
37 |
129 |
|
* SDS (ProShares Ultra Short S&P 500)
surrogate for RYURX
Compound average return 129.4% per year
Position still open as of 8/28/2009
Avergage holding period 9 months
Average profit per switch 108%
Losses 2 out of 10 trades
(Chart of column 4)
In the table above, on each date listed a switch occurs from one fund to other based on the crossover of their respective rank levels depicted in the chart.
For example, on 6/28/2002, SDS completes its trade 44 weeks later on the following date, 5/2/2003. Its profit is shown on the 6/28 row, 5%, resulting in a cumulative profit of 105%. On 6/28, simultaneously ILF opens its trade which it completes 6/10/2004 58 weeks later with a profit of 61% . . . and so on down the list, with two events occurring each date, a sale and a purchase, with the closeout profit or loss being shown on the date.
The results table above shows every trade multiplied by 4 times leverage and accumulates the compounded return. Why did I choose 4 times leverage? That was determined by calculation in the following manner.
On Friday, I priced ILFand SDS exchange-traded funds and their in-the-money call options (10 to 12 percent in the money) expiring March 2010. They were trading at prices that reflected an actual range of leverages between 4 to 16 times the cost of the options. I chose the lowest multiple to be conservative. Cost per contract was $3 to $6 including calendar spreads.
The 0 entries in the third column are actually losses in the switching sequence. But since they are a fixed value set by each individual trader, I have excluded them from the table.
The magnitudes of the numbers in this and similar studies should be taken as suggestions of possibility, not as precision records towards a gospel of the future. Can they be attained? Absolutely. In the early 1980's, Buzzy Schwartz and Frankie Joe routinely snapped out 200 to 400%, and more, in verified profits every four months in Norm Zadeh's United States Trading Championships over several years. That beats the numbers you see above.
There are differences. They traded blizzards of transactions per day, all day, every day. The ranking-switch system in this article trades three transactions per year with a 20 second review once a week. One position lasted just three weeks short of two years. The point is that big numbers are actual and have been achieved by many people. There are different ways to achieve them.
The second point is there are ways to dramatically reduce risk to a specific controlled number while expanding profits-potential exponentially--based on systems that reliably select and time which investments to make and when.
Written
8/28/2009 5:31 p.m. EDT
Posted
9/1/2009 5:34 p.m. EDT
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