Investment Idea #1 with SVXY

Still a slow news cycle with the usual Ebola, Iraq, Gaza and Russia stories. The S&P 500 fell 2.5% last week. Just another dip buying opportunity for those keeping score at home. But some are probably asking, “How can it be a slow news cycle with all that stuff happening?” The outcome of these events is pretty much established. We know there will be no peace between Israel and Palestine. There will be back and forth displays of aggression and posturing, with Obama being a feckless leader as usual. Odds are there will be no escalation in Russia, Ukraine or Iraq, nor a resolution – just more muddling along for many more years. Putin has a lot to lose by pursuing aggression, so he will cooperate. The good news about the Ebola virus is isn’t nearly as as big of a threat as the doom and gloom liberal media is making it out to be. Ebola, unlike influenza, cannot be spread through the air, and the virus is very fragile. It dies quickly when exposed to air or with hand washing. The left wishes it would get worse so that the economy fails and Obama can save the day – just like he took credit for killing Bin Laden, even though Bush deserves it.

Anyway

Awhile back, I promised some posts that would help people make money in the stock market. There are many strategies. Here’s one of them (however, this is not for novices):

Some background reading

http://seekingalpha.com/article/1567282-the-best-etf-of-our-time-aka-how-to-become-a-billionaire-without-really-trying

http://sixfigureinvesting.com/tag/xiv/

http://seekingalpha.com/article/2314035-significant-returns-possible-with-these-inverse-volatility-etfs

$1 invested into SVXY in 2004 would be worth $20 today, but with up to 90% draw-downs such as in 2008.

The method: invest 1/2 of your money in SVXY now and put the rest in cash. If it drops 70% from the record high deploy the cash. If SVXY returns to the last high, sell half so that you are back in 50% SVXY and 50% cash.

With the Goldilocks economy of low rates and tepid growth showing no signs of ending, there is a good possibility this low volatility streak that began since 2012 may continue for a decade or longer, so your initial investment will probably explode in value. Why should you be optimistic about stocks?

1. The fed probably won’t raise rates until 2017 and history shows that even when they do, stocks can still rise, as was the case in 2004-2007 when the fed raised interest rates from 1% to 6% and the market still rallied 60%.

2. Record profits & earnings for 6 consecutive years

3. M&A, dividends, and buybacks shows no sign of slowing

4. Consumer spending showing no signs of slowing

5. Weak job market mean accommodating fed policy for many more years to come

6. Unstoppable globalization and technological progress

7. Huge foreign investments into American assets and institutions

But if you are wrong and the market falls a lot, then you will get in at a good price when you deploy the cash on the sidelines. SVXY cannot vanish like a stock, so you can buy the dips and hold long term with some degree of confidence. (unless the fund is shut down which I think is unlikely)

Here is a simulation. You have $20k cash and SVXY is at $100

Put $10k in SVXY at $100. We’ll consider the worst case scenario, which is that market somehow crashes and SVXY falls 70% to $30. You buy 333 shares at $30 with the other $10k on the sidelines. Total equity: $13,000

The market recovers and begins a two to three year period of low volatility. SVXY rallies to $300, like shown below:

As per the instructions, you sell half at $100, so you get your 10k back. The 10k you invested at $30 grows to $100k. Total equity: $110,000

But then it crashes 70% again to $90 and you are reduced to $40k equity. You put the other 10k back in. You sell it when it goes back to $300 so you have $33,333 from it. If it goes to $900, the $30k goes to $300,000 so your total equity is $333,333 – a 17x return.

If you just put all the $20k cash it at $100, you would have $180,000 or a 9x return. That’s why I like the idea of keeping cash on the sidelines.

But why sell half at $100 or $300 if it will go up 10x? Because you have no way of knowing if it will go up that much. For the sake of this model, I’m assuming it will, but there are no guarantees. SVXY can fall very quickly and trying to predict the top is a fool’s errand.

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