My Strategy


“Is there a risk that the United States could lose its triple A credit rating, yes or no?”
“No risk of that.” - Timothy Geithner, Apr 25, 2011.

Beliefs are more important than what's empirically true.  Trading is hard because you are walking a tightrope of staying true to your beliefs, not jumping from one hot strategy to the next, yet flexible enough to change these beliefs when they no longer reflect reality.  Here are some of my beliefs:
  1. Timeframes determine why prices move the way they do.  Short term movements derive from short term traders, who trade on sentiment and technicals as fundamentals rarely change day to day.  Long term movements require long term investors--value guys, pension funds, etc, who mostly trade based on valuations and fundamentals.  
  2. Economists in general make the worst traders.  Everything they learned in micro is priced in and everything they learned in macro is wrong.
  3. Mark Twain said it best: "Whenever you find yourself on the side of the majority, it is time to pause and reflect."
  4. There is nothing innately special about stocks.  It is not an asset class that is divined by the gods to always go up "in the long term."  Financial prices in the long run always reflect reality.  There are plenty of stock markets that go to zero throughout history.
  5. Everyone has his own trading rules.  There are no Commandments for trading.  It is much more important to realize that each one's trading rules are so because they fit his personality. 
  6. Fear and jealousy are the main sentiments driving the market--fear of losing, fear of missing out and jealous of those who did not lose or miss out.  
  7. There is no such thing as the correct price for a share to trade at.  That's the whole point behind a stock exchange.  Market price is by definition EPS x a multiple.  The EPS is truth, but the multiple changes depending on the mood of market participants.
  8. The best hedge possible in all market conditions is cash.  It is an all-in-one.  It is your dry powder, it smoothes your peaks and troughs, and it is liquid.  
  9. For every buyer there's a seller.  If you are buying, are you sure you know more than the seller?
  10. Survival is the first criteria in determining competence.  Only after does actual performance matter.
Trading Philosophy

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. - John Maynard Keynes

--Updated 6/2015--
Trading TNA was not the best idea as small caps underperformed large caps the last few years.  Even so, the strategy itself proved robust and by switching to UPRO (3x SPX), I should be able to consistently outperform as long as I bet the overall market direction correctly.

--Updated 10/2013---
Time for more leverage to be added.  I recognize that if markets mean revert, I will look dumb as bricks.  The underlying strategy hasn't changed.  Instead of normal etf's, I will be using TNA as core position since I only need 33.3% of portfolio to mirror a normal 100% allocated portfolio.  I will use the other 167% to buy on dips.

---Updated 6/2013---
I have added the use of margin in my portfolio.  It is contradictory to my original philosophy below, but it wouldn't have been right to edit out the flip-flop.  Time will tell if I made the right decision. as it is impossible to tell whether my decision to use leverage had more to do with well-reasoned logic or good old envy and greed.

Starting out in a secular bear market means I am obsessed with safety.  I recognize the recency bias and if the next one hundred years is like the last one hundred, my returns will be subpar to the broad markets by a sizeable margin.  Yet, my strategy needs to match my temperament and I will gladly sacrifice potentially greater returns for definitely greater peace of mind.

First, I decide on an allocation percentage.  This is based on fundamental, technical, and sentiment analysis.  The most important include monetary policy, stock leadership, advance/decline divergence, and macroeconomic trends determined by consumer confidence, ISM Manufacturing/Service data, new jobless claims, etc.  Note how none of this is proprietary.  There is no magic here, just my brain.

Ultimately, the percentage allocation represents the confidence of the fund that the current environment is conducive for a higher stock market for the next twelve months.  For example a 50% allocation means I am only half sure of a continued rise in the market.  This percentage is then applied to two equal sized portfolios.

The first will be a core portfolio where positions are rarely touched except to conform to any changes in percent allocation.  Most positions will be in ETFs.  The second is a trading portfolio where I buy dips to sell into rallies.  This essentially smoothes out the performance of the core portfolio.

On the surface, it seems an inefficient use of cash, almost hoarding them when markets are at their strongest.  Yet the cash's presence is the crux of this fund.  Rather than hedging with short instruments, cash gets rids of a variable, instantly making positions easier to manage.  Having cash also means I am never helpless.  If prices drop and I am already completely committed, my choices are extremely limited.  Having cash means you are never in a position where your choices range from bad to worse.  Cash is my way into an unforeseen opportunity and my way out of an unforeseen disaster.  I will gladly sacrifice a portion of potential profit for these benefits.

Expected Returns

I think it's [recession] going to be pretty bad and whether it starts in 07 or 08 I think is immaterial and I also think it's going to last not just for quarters but for years.  - Peter Schiff, Aug 28, 2006

--Updated 12/2015--
Overall, this type of strategy should marginally beat bull markets while saving +50% losses from bear markets.  It has been able to achieve this so far since switching over to UPRO in June.

---Updated 10/2013---
With the addition of even more leverage, I expect to average a minimum of 20% annual gains over a 3 year period with a maximum drawdown of 20%.

---Updated 6/2013---
With the addition of leverage, I do not think it makes sense to compare myself to hedge funds.  Rather, I expect to handily outperform commodities, real estate, bonds, and stocks over any six month period as expressed by the ETF's DBC, VNQ, BND, and VTI respectively.  I also target a 15% annual return averaged over any 60 month period.
This fund is not a high flyer.  Getting rich quickly with this plan is impossible because of the lack of leverage and a large cash position.  Instead this fund aims for the following:


Obviously the thing to do was to be bullish in a bull market and bearish in a bear market.  - Edwin Lefevre/Jesse Livermore

Your biggest returns will always come from avoiding taxes.  It's a tax free ~25% gain (depending on your bracket).  Technically you pay them after, but your pay post-retirement will be a lot lower, plus they get to grow tax free as well.  This means: max out IRA, 401k/403b/HSA etc before even thinking about a regular brokerage account.

There are some great money managers out there, but you will never be able to find them.  Why?  First, if you can't pick stocks, what makes you think you can pick people who can pick stocks?  Second, if they are good at this, richer people than you will be throwing so much money at them that they will no longer be able to perform.  But they will almost always be too greedy to tell their backers enough.  Third, most people in the stock market lose, they just lose.

If you are a regular dude, max out your tax deferred accounts, put them in those retirement 20xx funds then do something fun with your life.  I only do this because I truly believe I have an edge.