Tag Archives: stock market

James Altucher’s Top 1% Advisory Report Review (Don’t Bother)

There has been some recent discussion about ‘James Altucher’s Top 1% Advisory Report’, which purportedly grants its subscribers access to the same lucrative investments ‘elite’ investors use.

Top 1% Advisory, a hugely
popular new research letter

Each month, multimillionaire investor James Altucher shows you how to make 100% to 500% gains… on the best ideas in the hedge fund and venture capital world.

Dear Reader,

The Top 1% Advisory – is a first-of-its-kind release by Stansberry colleague James Altucher, a multimillionaire entrepreneur.

My name is Jared Kelly, by the way. I’m a Director at Stansberry Research.

Normally – the Top 1% Advisory costs $2,500 for one year. Demand for this new letter has skyrocketed since its release last month… and has caused a major ripple throughout our industry.

I don’t need to part with $2,500 to know it’s bunkum. These sales gimmicks prey on the unsophisticated who have no clue about investing or how private markets work.

If demand is skyrocketing, that would make the investments in the letter overcrowded and hence less profitable for future investors. If these investments are so wonderful, why tell anyone? If a single startup or stock pick can make 10-100x your money, just do that over and over until you have a billion dollars or something. Even $25,000 is not enough if these purported returns are feasible. Thus it would seem more money is made selling newsletters than than actually investing.

Investing in start-ups has a lot of risk, and the top start-ups like Uber and Snapchat, which have yielded huge returns for venture capitalists, are inaccessible to the general public to invest. Only a handful of start-ups are successful (as in completing an ‘exit’ strategy), and you need a lot of money to bankroll the many companies that don’t exit and or shut-down, in the hope of finding a few diamonds in the rough. According to data compiled on Ycombinator companies, the success rate is only 12%:

Excluding startups who have only received funding and have not yet exited, as per Paul’s strict definition, we are left with a rate of success between roughly 56/468 ≈ 0.12 and 56/404 ≈ 0.14 or 12-14%.

“Success for a startup approximately equals getting bought. You need some kind of exit strategy, because you can’t get the smartest people to work for you without giving them options likely to be worth something. Which means you either have to get bought or go public, and the number of startups that go public is very small.”

Unless the company exists, your cash will remain tied up. Venture capital is a profitable endeavor but out of reach of anyone doesn’t have millions of of dollars. Investing in private markets require special accreditation that is only obtainable for the top 1% of income earners, and carries a high risk.

On the website he lists stocks that he invested in using his ‘system’, all of which have risen a lot, but fails to disclose the stock picks which have done poorly, and most importantly, these picks were purchased at the beginning of the current bull market, which is now in its 7th year and counting, and there is no guarantee the next seven years will be as prosperous as the prior seven.

Like James Altucher, I am bullish on the stock market and the economy, but his approach is wrong, particularity because some James’ stock picks (which he has disclosed to the public, not his newslettew) have tended to not do well. Two notable examples that come to mind are Vringo (VRNG), which he recommended in 2012 and has since lost some 95% of its value as of 9/13/2016 (it did a 10-1 reverse split though), and, in 2013, Corporate Resources (CRRS), which is effectively bankrupt due to accounting fraud. This is despite the S&P 500 rising 40%, so if you had invested in those two companies you would have lost all your money…pretty bad for a bull market. I know there are some picks that may have done better, but the overall average is strongly negative, which underscores the inherent difficulty of stock picking.

Besides my favorite stocks – Google (GOOG), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), and Facebook (FB) – I recommend large cap tech (QQQ), retail (XLY), and healthcare (XLV), all which have outperformed the market on a risk adjusted basis.

…Which brings me to a yet-to-be-disclosed service James Altucher is offering, which for the aforementioned reasons I am highly skeptical of.

Here is a link to the sales pitch, and while the story of his dad is a nice sentimental touch, the premise is inherently flawed. And here is the video, which I have embedded below:

Essentially, what James is offering is some sort of ‘insider’ system, based on James’ connections within the financial industry, that will allow you to trade stocks like the ‘pros’ do.

From the sales pitch:

look at a site like U.S. Securities and Exchange Commission and I look every month at all of my favorite investors and see what stocks they are quietly beginning to buy.

They don’t go on CNBC talking about these stocks. They don’t go to the newspapers. But they have to report their holdings to the SEC in obscure filings labeled “13-D” or “13-G” or sometimes “13-F”.

They don’t talk to anyone.

Well, that’s not true. They all talk to each other. They talk to me. The information and analysis gets passed from one to the other and that’s how ultimately the stocks go up.

The major problem here is two fold: First, if the information is publicly accessible, such as on the SEC’s website, then in accordance with the EMH (efficient market hypothesis) the information will be instantly priced into the stock. Thus, the stock will likely rise of fall based on the disclosed information before you can react. James makes it sound like the ‘Securities and Exchange Commission’ website is some clandestine organization – that someone how he has stumbled upon something new, when, in reality, hedge funds have algorithms that automatically scan these databases for updates.

Second, and probably more importantly, active management has actually done quite poorly, as indicated by falling ‘alpha’. Fund mangers, especially in recent years, have failed to beat their benchmarks. It’s incontrovertible: everyone, including the experts, sucks at picking stocks:

Why Active Management Fell Off a Cliff – Perhaps Permanently

Whack-a-mole fund managers can’t beat index funds

‘Scale and Skill’: Why It’s Hard for Managed Funds to Beat the Indexers

Poor performance catching up with active stock fund managers

Investment: Loser’s game

86% of investment managers stunk in 2014

To say active management is bad is an understatement – it’s downright awful.

It’s hard enough picking the right sectors in this schizophrenic bull market, but picking individuals stocks is many magnitudes harder. Even Warren Buffett is having some difficulty, with major holdings such as Coke, IBM, and American Express lagging the S&P 500 since 2012. The main reason why Berkshire Hathaway stock (BRK) has done so well in spite of mediocre stock picks is because of its large private holdings like Geico. Emerging market have done poorly since 2011, and small and medium caps have also lagged since 2014. As part of the winner-take-all theme, the stock market and economy has become much more myopic, with lots of losers and fewer winners.

To exploit the tendency of overcrowded investments to lag the broader indexes, a good strategy could be to find which stocks and sectors are the most widely held by funds and then short these stocks, with 50% allocation also going long the S&P 500.

So even if these experts are feeding James information, very little, if any, will be of any good. Essentially, the data shows that the funds are as clueless at stock picking as retail investors – the only difference being they collect commission fees, which is really how the money is made, not stock picking. I believe there are some individuals and firms that do have genuine stock picking and market timing ability, but they seldom accept outside money, and they sure as hell will never disclose their secrets to James, or anyone else for that matter.

The FOMO Stock Market

Form The Reformed Broker: Why Bull Markets Make Everyone Miserable

There’s also performance envy, fear of missing out (FOMO) and a whole litany of cognitive issues revolving around whether or not each of us has received our fair share of the bull market. Spoiler alert: No one thinks they have, regardless of how much they’ve made.

FOMO has become acutely relevant in post-2013 society. It’s a real thing. Centuries ago, people had FOMO over not going to heaven, but now it’s FOMO over missing out on the stock market.

No one you’ll talk to believes that we “deserve” to be here, given the upcoming election mess, the state of earnings growth, continued uncertainty about the Fed and economic growth, etc. Add in the ever-present discussion around the effect that buybacks are having – “they’re propping up the market!” – and you get the sense that sentiment is as bad as it was 13% ago when a full-blown bear market was in sight.

The left has been saying this for years to justify why the market should not be so high, and they keep being wrong as the market keeps making new highs. The PE ratio of the S&P 500 is still only 15-20 (depending on your source), which is still far from bubble territory.

This is not the same as saying they’re not buying. They are buying. They have to buy. It’s their job. The modern world of asset management is a Roman trireme; the benchmarks beat the drum and professional investors row like mad to keep pace with the drummer’s rhythm, lest they feel the whip of redemptions across their backs. We’ve been rowing at “ramming speed” all spring, our heads bowed to the task, our expressions mirthless.

They are also buying because the underlying fundamentals – profits & earnings – are strong, despite all the doom and gloom headlines. Companies like Disney, Nike, Google, Microsoft, Facebook, Walmart, and Johnson & Johnson are printing cash quarter after quarter and don’t care about whether Trump or Hillary becomes president, the latest media-generated crisis or scandal, whatever is happening in Russia or the Middle East, or if wealth inequality is ‘too high’.

If you’re doing any kind of hedging or risk management or even diversification, the longer a bull run continues, the more of a schmuck you look like. A seven year bull market like the current one makes all responsible investors look schmucky to some extent.

Suffering can be lessened by staying away from bad investments and sources of misinformation. I’ve seen enough doom and gloom on the internet (sites like Zer0h3dge) to know to ignore it, because it’s wrong 95-99% of the time. America is still the best> place to invest, despite all its problems.

Gnon Index (turning $10k into $95k)

Amazon, Facebook, and Google stock individually have far out-paced the S&P 500 since Jan. 2013:

And when combined (each weighted 33% in the portfolio and re-balanced annually), is up over 200% vs. just 60% for the S&P 500:

Investing $10,000 and using 3-1 leverage such as by using options would have turned into $95,000 in less than four years (excluding commissions). The only way to lose the initial $10k is if everything falls 30% or more, but that’s very unlikely given strong overall economic fundamentals for the US economy and the even stronger fundamentals for these companies.

Owning shares of these companies, which are the strongest candidates for carrying out the singularity and eventual control and dominance of the world, is a way to profit from the inevitability of the technological-commercialism:

‘Gnon insurance’ could be a way of profiting from the success and inevitability of the second cathedral, by buying and holding shares of companies like Google, Facebook, and Amazon, in the possibility that should the second cathedral accede to power that shareholders of aforementioned companies will have some power, be deemed ‘worthy’, or at least more power than those who do not own shares or resist techno-commercialism.

Also like: Visa (v), Mastercard (MA) and Paypal (PYPL) stock.

30% hypothetical annual returns compounded over 50 years (an adult lifetime) gives about a 500,000x return on investment. Although one can argue that the global economy will never be big enough to support such significant returns, somehow these companies will find a way. For example, if Amazon takes over all of retail, and eventually all physical and most digital commerce. And Google and Facebook take over media and advertising, over of all mediums. And also, global population growth, expansion of the global middle class, and productivity-enhancing technologies. The United States has a GDP of $17 trillion – 16% of the global total – but a population of just 330 million (4% of the global total). If the rest of the world catches up the Unites State’s standard of living, the economic growth will be immense. It will be like the entire post-WW2 economic expansion but multiplied by a magnitude of 100.

Right Again: Tech Companies Keep Posting Blowout Earnings

Over and over again, I keep being right.

In mid-2015, in the article Why the Web 2.0/Tech 2.0 ‘Bubble’ Refuses to Burst, I wrote:

But I am pessimistic about the hardware unicorns (Fitbit, Skullcandy, GoPro, Jawbone) as opposed to the app/website ones, so It’s not like I am emphatically bullish about everything, and these hardware companies would fare much worse during a correction. The fact that hardware unicorns trade at a much smaller multiple than website/app ones is evidence of this vulnerability to macro economic factors, and the general tendency of hardware to be susceptible to fads and change in user tastes.

Since then, shares of hardware companies (Fitbit, Gopro) have done poorly, and social networking/ad-based internet companies have thrived.

As of July 2016, the S&P 500 closed at another record high, and Google, Facebook, and Amazon reported yet another quarter of blowout earnings:

Facebook crushes Q2 earnings, hits 1.71B users and record share price

Amazon just posted a record profit for the third straight quarter

Alphabet’s stellar earnings send its share price soaring

Facebook stock is above $130 (it was at $20 in 2012 back when pundits thought it was doomed due to the bad IPO and unfounded fears over Facebook being unable to adapt to mobile usage), Google above $780. (Times TWO for the A and B shares – combined it’s almost $1,600. Mind-blowing considering it was at $100 combined in 2004…let that sink in.) Amazon now at $770.00 share….was at $7.70 in the early 2000′s. That is not a misplaced decimal. Everything just keeps going up and keeps being better then expected, as much as the media keeps repeating the same lines about the ‘economy being weak’, the ‘stock market being overextended’, or ‘tech valuations being a bubble’.

Does that make me a superforecaster? Maybe, but a lot better than z3r0hedge and Karl Denninger of MarketTicker.org, who have been collectively banging their heads against the wall about the same ol’ doom and gloom stuff since 2009 to no avail. You got to know when to throw in the towel and admit being wrong, or that you have no talent at predicting things (of course, z3r0hedge has built a very lucrative business out of scaring people to buy overpriced gold and other bad investments). Most people would be better prognosticators if they tuned out their personal biases in the prediction making process, or if they had a better understanding of macroeconomics (QE is not money printing, for example), investing (index funds beat individual stock picking, with few exceptions), and the stock market (stocks rise because of profits & earnings growth…everything else is noise).

Somewhat related: Donald Trump doesn’t read much. Being president probably wouldn’t change that.

He said in a series of interviews that he does not need to read extensively because he reaches the right decisions “with very little knowledge other than the knowledge I [already] had, plus the words ‘common sense,’ because I have a lot of common sense and I have a lot of business ability.”

Trump said he is skeptical of experts because “they can’t see the forest for the trees.” He believes that when he makes decisions, people see that he instinctively knows the right thing to do: “A lot of people said, ‘Man, he was more accurate than guys who have studied it all the time.’ ”

I kinda feel the same away when it comes to making economics predictions. I don’t need to read dozens of technical books to understand the gist of the situation, relying more on intuition, yet pretty much all my predictions have been right. It’s more about applying existing knowledge and filtering out the noise, than just absorbing as much as possible. Many experts, both on the left and right, were wrong since 2009. Krugman, in 2012, predicted that the sequester and budget cuts would cause a major decline in employment and possible recession, and he also predicted the unraveling of the Euro – wrong on both counts. At the same time, on the ‘right’, there were many failed predictions of hyperinflation, crisis, bear market, recession, and dollar collapse. Interestingly, James Altucher, despite not being an economist, like myself, also predicted everything correctly. I think that agrees with how experts and ideologues sometimes get it all wrong, whereas outsiders with a clear mind can make the correct connections instead of being clouded by too much information or personal biases.

But everything keeps going up, and will continue to do so: Bay Area real estate; S&P 500 and Nasdaq 100; tech stocks like Google, Facebook, and Amazon; leading web 2.0 companies like Slack, Snapchat, Uber, Pinterest, Air BNB, and Dropbox.

Amazon, Facebook , Google – three stocks to rule the world. They cannot do any wrong, and I don’t mean that sarcastically. Buying these stocks is like investing in the companies that are building the matrix, but it’s real life.

It’s just nuts..even Microsoft and Cisco in the 90′s..the growth was finite, but there is no limit to Facebook, Google and Amazon. Every quarter is a crusher…over and over, year after year.

Just when you think their growth is ‘stalled out’, something new comes along. Now it’s mobile. Or it’s ‘messaging’. In a few years, maybe it will be virtual reality.

The small mobile screen is perfect for advertising. Adsense ads are everywhere – Bloomberg, Forbes, Fortune, etc. Sometimes major brands try Adsense alternatives but always go back because Adsense pays the most and has the most advertisers. Whenever someone clicks those ads, Google makes money and so does the publisher. Facebook also plans to unveil a similar 3rd party ad platform.

The most common retort is that something ‘new and better’ will replace Facebook, Google, and Amazon. Fat chance (or at least not for a verrry long time):

People said the same thing about Google in 2004 ‘Anyone can make a search engine; Microsoft has so much money they can crush Google’ (Despite dozens of iterations and expensive marketing campaigns, Bing never grew.)

Same thing about Facebook in 2010 ‘Anyone can build a social network’ (Many have tired and failed.)

Same thing about Apple in 2003-08 ‘Sony/Microsoft/ etc can make a music player/phone’ (Zune anyone?)

In the 80′s, how would have guessed that Microsoft, decades later, would still be the dominant player in operating systems? Apple and Linux never got above a couple percent. Only thirty years later has Microsoft become ‘slightly less relevant’, but the company continues to generate enormous profits, and has diversified its business substantially beyond Windows.

The ‘Big Three’ (Ford, GM, and Chrysler) enjoyed a reign that lasted over fifty years until foreign brands gained a foothold.

Too many people are trying to extrapolate the future from the past, using the tech crash of 2000 (a single data point) for predicting the future, when the empirical evidence suggests that successful, profitable companies with market dominance can have decades-long uninterrupted expansion in growth and share prices. Walmart…anther example. Only recently, after nearly half a century of uninterrupted growth, have things finally begun to slow down. But part of the reason why companies like Google, Facebook, and Amazon are so successful, even more so than Cisco and Microsoft in the 90′s, is because of their huge network effects and market dominance. Snapchat is another one. Air BNB. These are not flashes in the pan, but have enormous, entrenched userbases that are not only loyal and will stick around, but the advertising potential is also significant. Just look at Facebook, and the power of advertising and market dominance (quoting from a comment):

Facebook will be doing $16 to $20 billion in profit within five or so years. They’ll have accumulated $60 to $80 billion in cash. They’ll have a half trillion dollar market cap in the next few years. They’ll liberally use the cash and market cap to buy into any market they’re missing out on, just as Microsoft purchased LinkedIn and Skype to try to stay in the game.

These types of companies do not dislodge so easily such that they get “eaten for lunch” in the mere span of ten years. It’s the exception for one of them to implode. This is especially true given that Facebook is still ramping, their sales growth is still extraordinary and their daily actives are still growing just fine for their size. They likely won’t even peak on users for a few years, at a minimum; and afterward, they still have years to grow their non-US ad business a lot, because that part of their business is wildly non-optimized.

In ten years, Facebook will just be reaching the equivalent business plateau that Microsoft hit circa 2000-2003. They’re still a very young business in the first half of their growth phase, they haven’t even reached mild stagnation yet. A business doing $2 billion in quarterly profit, growing sales at 50%, and they’re going to get eaten for lunch within a decade? It’s extremely unlikely, as the mountain of cash they’re accumulating will buy their continued place in the ecosystem, whether the anti-FB crowd likes it or not.

Compare that to the 90′s when you had much higher PE ratios and much weaker earnings. In 2000, the Nasdaq 100 had a PE ratio above 100; it’s only 20 now. The S& 500 had a PE ratio of 35; now it’s only around 17. There are real fundamentals at work here behind these high share prices, not just euphoria.

Post-2008 Wealth Creation: A Guide, Part 5

Edit: Part 3 contained a mistake in the integration that has been fixed

Part 4 discusses the allocation and the past performance of the strategy. In the fifth and final section, I’ll show how to place the orders.

To recap, the the method involves using 50% of the capital to short TMV and the other 50% to short SPXU or SPXS (they are identical except for price). Note: margin account and option trading ability is required for this to work.

As of 7/25/2016, SPXU is trading at $23.70 and TMV is trading at $16.60. For a $50,000 account, about 1050 shares of SPXU must be shorted and 1500 TMV.

However, the shares may be hard to borrow, so you may see a message like this:

Or you may have to pay an annual fee (usually around 2-3%) to short them. There is a way around fees and hard-to-borrow, by using options, which is to sell the collar to create a synthetic short. This means you buy an in-the-money put and sell an out-of-money call.

Here is what the order execution screen looks like for 10 collars of SPXU for 35 strike, March 2017 expiration:

The 35 put and purchased and the 35 call is sold, forming the synthetic short.

This is also done with TMV:

The nice thing about TMV is because is it typically has much less extrinsic value than SPXU, so only buying in-the-money puts is necessary to create a decent short. In the screenshot above, I chose the 28 puts that expire in Feb. 2017. Because there is extrinsic value of around 20 cents per contract, the total ‘fee’ is around $300. This can be mitigated by selling the out-of-the money call at the 25-28 strike, but I find that it’s not worth the loss of buying power.

The total annual ‘fee’ is around 1% (due to commissions, slippage and other factors), which is why the performance is not quite as good as the screenshot in part 4, but it’s very close.

But this a pretty good way to make money on autopilot. In early 2015 I had someone put $30k into something similar to this and the account balance is at $50k now, a gain of 66% vs. a 6% gain for the S&P 500. The newest version, as described in this 5-part series, is better.

Post-2008 Wealth Creation: A Guide, Part 4

This is the penultimate installment of the post-2008 wealth creation guide. In part three, I discussed shorting inverse leveraged funds like SPXU and SPXS, which are 3x inverse versions of the S&P 500. As of 7/20/2016, SPXU is trading at 23.50. Shorting $10,000 worth would require shorting 425 shares. If it drops 20% to $18.8, your unrealized profit is $2,000. However, because it’s a 3x fund, if the S&P 500 were to drop 5%, you would lose around $1,500 ~ 435($23.5*1.15-$23.5). The ‘decay formula’ given earlier will give a more exact answer. There is a high degree of path dependency that typicality, over many months, helps the short seller, which is why shorting these leveraged inverse ETFs good strategy in most market conditions.

So the big problem, though, are large loses should the market fall a lot. There is a way around this, to some extent. It’s far from perfect but it helps a lot.

The solution is to buy treasury bonds such as TLT (an ETF proxy for the 30-year treasury bond), which tend to be inversely related to equities. This means if the S&P 500 falls 1% for the day, maybe the 30-year bond will rise .6%, offsetting some of the loss. This results in smoother returns and smaller dips, as shown below:

In 2008, the hypothetical bond-stock portfolio only lost 20-25% vs. a 40% loss for the S&P 500.

Like the S&P 500, bond ETFs pay dividends (about 3% a year for the 30-year bond proxy TLT), and this compounding affect helps immensely. This also helps when you are shorting inverse leveraged bond ETFs like TMV, the inverse 3x version of TLT. Since 30-year bonds pay 3% a year, TMV decays 9% a year just from the yield alone.

Like SPXU and SPXS, the ‘decay formula’ gives an annual decay of around 13% for TMV. Adding the yield decay, and the total is around 20% per year, even for a flat bond market.

Like SPXU, TMV is in a state of constant decay. It cannot retain any of its gains for very long and keeps going lower:

Same for PST, an ETF that is a 2x inverse of the 10-year treasury bond:

Its decay is even smoother than the 30-year one…strait to zero.

So what happens if someone shorts, allocating 50% of the portfolio value to short SPXU and 50% to short TMV, and then rebalancing it quarterly?

Turned $100 into $1,300 after seven years. The sharpe (a measurement of risk-adjusted returns) is about 1.7, twice as good as the S&P 500. This is about as good as any strategy that does not involve exceedingly high leverage. This assumes that bonds and stocks both perform well, but even if they are flat, the 20% annual decay still gives a total compounded return of 250% over seven years. This also ignores transaction costs. When those are factored in, the performance diminishes a little bit.

A common retort is that ‘stocks and bonds have been in a bull market since the early 80s’ but, going as far back to the 1930′s, 10-year T. Bond produce positive yearly returns 80% of the time, according to Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current.

Post-2008 Wealth Creation: A Guide, Part 3

I intend to make good on my promise of an investing strategy.

In part one, I discuss how we’re in a ‘winner take all’, ‘bigger is better’ economic environment dominated by large entities – be it multinational corporations, large content providers, the S&P 500, and the treasury bond market itself. The investment strategy described here allows individuals to profit from this trend by going ‘long’ arguably the two biggest, strongest markets in the world: the S&P 500 and the treasury bond market.

Part two discusses leveraged ETFs, in review 3x ‘long’ etfs like SPXL (a 3x version of the S&P 500) and TMF (a 3x version of the 30-year treasury bond market). These are hurt by decay.

But there is a way to profit not only from the positive trend of S&P 500 and the treasury bond market, but also from various forms of decay. This requires short-selling levered inverse ETFs (yeah that’s a mouthful to write), some examples being SPXU and SPXL (3x inverse versions of the S&P 500) and TMV (a 3x version of the 30-year treasury bond market). By ‘inverse’, these go up when the underlying goes down. So if SPY (the ETF proxy for the S&P 500) goes down 1%, SPXS and SPXU will rise 3% that day. This property also makes inverse ETFs very prone to decay, more so the than 3x ‘long’ version discussed in part 2.

For example, if the S&P 500 rises and falls 1% for 100 consecutive days, SPXU will decay roughly: ((.97)(1.03))^50 ~ .96

The reason why it’s 50 in the exponent instead of 100 is because each pair of days is treated as a ‘cycle’.

This means SPXS will lose about 4% (1-.96) of its value simply due to the oscillations of the market. Even if the S&P 500 is flat for the entire year, SPXS and SPXU will still fall due to these fluctuations, which can be likened to gravitational radiation in general relativity, except the inverse ETF is decaying with each passing ‘cycle’ that is analogous to an orbit for a binary system.

The ‘cycle’ approximation for decay is crude, and a better approximation can be found using the properties of Geometric Brownian motion, yielding the ‘decay formula’:

The proof is kinda complicated and can be found in Zhang 2010.

S_t = level of the underling index at time t

S_o = present level of the index

r = interest rate

f = expense ratio

b = leverage factor

t = time in years; 1 = one year

λ = borrowing cost

σ = volatility

L_t/L_o = decay rate

For the sake of brevity, most of these variables can be set to zero.

For this example, t=1 , r=0 (interest rates are close enough to zero), f = 0 (close enough), λ=0 (I’ll show to to get a zero borrow cost), b= -3 (inverse 3x etf), σ=.15 (average historical volatility of the S&P 500).

I’m going to assume the S&P 500 500 is flat for the year, meaning that S_t/S_o=1.

Because σ and λ are a constant and not a function of t, the integrals are σ^2*t and λ*t respectively.

Putting it together, it’s simply e^(-.135) ~ .87

This means SPXS and SPXU will decay about 13% a year due to fluctuations in an otherwise flat market.

But there’s more. The S&P 500 pays a 2% annual dividend, and as I showed in part two, this is not insignificant. Short-sellers must pay the dividend. Thus in addition to volatility decay, inverse ETfs also have dividend decay, which for SPXS and SPXU is about 6% a year.

This puts the total annual decay at around 19% – even in a flat market. In 2015, SPXU decayed 17% despite the S&P 500 being down approximately 1% for the year.

It’s quite apparent how quickly this decays…but also, how quickly the price falls every time it tries to go higher:

Shorting $10,000 of SPXS is like going long $30,000 of S&P 500, so there is leveraged involved and a risk of losing a lot of money should the market fall a lot, but this risk will be mitigated to some degree using a second method that will be discussed later.

Although shorting these ETFs is not a new strategy, the mathematics of why it is profitable tends to be ignored.

Part four will discuss the specific shorting strategy, which involves multiple leveraged inverse ETFs.

Post-2008 Wealth Creation: A Guide, Part 1

Entrepreneurship is too hard, America’s ‘pioneer spirit’ is gone, and the news is pretty much a waste of time. Blogging, writing, etc. also mostly a waste of time and usually doesn’t make money.

In our post-2008 winner-take-all, bigger-is-better economy and society, instead of trying to compete directly with the big and rich, why not piggyback off their success by buying the same rapidly appreciating asset classes that they use to become rich? That leaves two ways to make a decent passive income, or even wealth: real estate (which I already discussed several times here) and investing, also a popular topic here. Both of these take advantage of low interest rates, which boost asset classes. I imagine hundreds of millions of dollars of venture capital could have not been squandered on such duds as Ello (remember that?) trying to compete with Facebook or Google, by instead investing the money in index funds or real estate or returning the money to the investors.

Pre-2008 wealth creation: jobs (enough good-paying jobs, for all levels of intellect and credentials), entrepreneurship, investing (all stocks, all sectors), venture capital (all tech industries), real estate (all regions).

Post-2008 wealth creation: fewer jobs (but lots of low-paying service sector jobs, lots of credentialism and competition for medium-paying and even low-paying jobs, as the middle class gets squeezed and pushed to the periphery), real estate (especially in high-end regions like the Bay Area, Manhattan, Orange County, etc.; less expensive regions have failed to recover fully), investing (only index funds, large cap stocks with market dominance, NOT small or medium-sized individual stocks), venture capital (mostly Web 2.0, and only Uber, Snapchat, Air BNB, Dropbox, Pinterest, Slack, and a handful of others).

It’s obvious that wealth creation in post-2008 society is much more selective, choosy, and concentrated in fewer industries and sectors. It’s much easier to make mistakes when the targets are smaller. What worked decades ago likely will not work anymore.

From Post-2008 Capitalism: A Guide:

But overall, when pundits proclaim ‘capitalism is dead/dying’, they may be referring to an antiquated meaning or idealization of capitalism that does not take into account how capitalism is changing, but this does not mean capitalism is dead -hardly by any stretch of the imagination – instead, it’s evolving to a more efficient, technological, network-driven, ad-based, winner-take-all version of capitalism that we have now. Capitalism, like much of the post-2008 economy, has become bifurcated, with winners being high-IQ capitalists and ‘high-IQ’ capitalist endeavors, and less intelligent people and ‘low-IQ’ businesses are struggling.

Perhaps post-2008 capitalism is characterized by the following ‘themes’:

1. High-IQ favoritism – both in the business/investing world and individually, with smarter people and smarter businesses succeeding over their less intelligent peers.

2. Winner-take-all/bigger-is-better (small business failure at record highs, expensive real estate regions keep getting more expensive, Web 2.0 valuations at record highs for a handful of companies, etc.).

3. Flight to quality (similar to #2) – observed in the investing world, venture capitalism, Bay Area real estate, and strength of the treasury bond market & US dollar vs. weakness of foreign peers.

From 2014, The New Gilded Age; The Post-2008 Economy, Part 4:

The best investment strategy right now (and for many, many years to come) is to take advantage of the bigger is better market environment and go long large cap tech, such as Facebook, Google and or the S&P 500, while hedging it with a combination of emerging market short positions and or small cap shorts. Or you can short ALL markets excluding the US while going long the S&P 500. Since 2014, in the wake of the fear of recession in Europe and elsewhere, we’re seeing a huge flight to safety. Fund managers are taking money out of the smallest, weakest stuff and pouring into the safest and highest quality stocks, indexes and sectors such as the S&P 500, healthcare, biotechnology, and large cap technology such as Microsoft, Google and Apple. Again, this trend will continue of the big getting bigger and companies with huge growth and zero competition being rewarded with enormous but sustainable valuations. Such high-growth companies include Facebook, Snapchat, Uber, Tesla, Dropbox, Pinterest, Tinder, and Air B&B.

So far, two years later, that strategy has paid off handsomely.

And with the S&P 500 at new record highs (in agreement with my predictions), I remain optimistic [1] as ever about the US stock market (record high profits and earnings; globalization; strong exports and consumer spending), treasury bond market (‘flight to safety’ and ‘flight to quality’ due to weakness in Europe and emerging markets; global liquidity boom), and expensive real estate (due scarcity, rich foreigners, Web 2.0 boom in Silicon Valley).

Part Two will describe the specific method I and others are using to take advantage of this.

[1] Whether it’s finance, investing, economics, or HBD, Grey Enlightenment represents a reality-based approach divorced from wishful thinking and delusions. Or you can listen to losers at Zerohedge, who haven been predicting since 2009 a bear market, bond market collapse, and hyperinflation, to no avail. Same for Peter Schiff, who has also been wrong about everything since 2009 (as usual, Mike Stathis has the best takedowns of Peter Schiff and other losers who peddle overpriced gold and other bad investments).

Source: avaresearch.com

But anyway, the stock market is driven primarily by two things: profits and earnings. It doesn’t care about about student loan debt, wealth inequality, national debt, whether Trump or Hillary becomes president, the latest media-generated crisis or scandal, Europe, or whether some pundit (including even George Soros) is bearish – as long as profits and earnings keep rising, so too will stocks. As shown below, profits and prices are correlated:

There was a large divergence in the late 90′s during the ‘tech bubble’, but such a divergence doesn’t exist now, suggesting prices are aligned with fundamentals (not a bubble).

Correct Predictions, Part 3

Awhile back, I wrote that stocks would be a good buy should the market fall on ‘exit’ win.

In agreement with James Altucher, for long-term US investors, Brexit doesn’t mean anything (it may actually be a positive), and I remain optimistic about the US stock market going forward. Brexit will not prevent Facebook and Google from earnings billions of dollars in ad clicks, nor stop people from shopping on Amazon, going to Disneyland, or eating at McDonald’s.

The S&P 500 fell about 4% following the vote, only to rebound 5.5% two weeks later:

Not only has the market recovered all its Brexit losses, it has made new multi-month highs.

Bexit is not going to keep people from spending, won’t keep people from using Facebook or Google.

Secondly, a month ago I used a simple calculation to show that the bad non-farm payrolls number a month ago was an outlier that, statistically, was due to happen and not in any way proof of recession or long-term trend.

Sure enough, June jobs data crushed expectations: US created 287K jobs in June vs. 175K expected, unemployment rate at 4.9 pc

Jobs watchers had been expecting Friday’s jobs report to show a substantial rebound from May’s unexpectedly weak growth, but the June number easily topped expectations.

Economists surveyed by Reuters said they were, on average, expecting nonfarm payrolls to show growth of 175,000 for June, and the unemployment rate to rise to 4.8 percent.

Millennials Make a Killing Day Trading on Reddit

Millennials Make a Killing Day Trading on Reddit

MarketWatch’s Shawn Langlois and Sally French join Quentin Fottrell and Priya Anand with the details on how Reddit became the go-to place for rowdy millennial traders to gather in 2016.

Again, not to make this too political, but many on the left keep repeating the same narratives despite an abundance of counter-evidence:

-That the stock market is a bubble and or an impending bear market (the S&P 500 as of this post is only a couple percent from new highs despite the endless predictions since 2009 of collapse.)

-That that stock market is a ‘sucker’s bet’, a ‘scam’, and that it’s ‘rigged’. (See above video of daytraders who are consistently making a killing with stocks and options despite the left’s insistence that this shouldn’t be possible due to the market allegedly being rigged. I guess those daytraders did not get the memo.)

-That those who are successful have an ‘unfair advantage’, ‘connections’, or ’10,000 hours of practice’, and those who fail are the victims of ‘racism’, ‘classism’, ‘sexism’…whatever. (People succeed because high IQ, as the video above and other examples show, not ‘unfair advantages’. None of these traders have special connections with Goldman Sachs, but instead are succeeding due to an ingrained ability/talent in reading market direction, owing to superior critical thinking skills, economic analysis, and pattern recognition abilities.)

-That all millennials are broke and in-debt. (While some are broke, many are not, as the above video shows. There are many millennials who are making 5-6 figures in various STEM profession , who have hundreds or tens of thousands of dollars in savings and or real estate or stocks. The problems is that the left is generalizing all millennials as broke, ignoring the many successful ones who are making money and or did not major in a worthless subject.)

This video is also an example of the synthesis of wealth, individualism, and intellectualism, as shown by the social taxonomy. People are getting rich through their talents, through individualism and being smart, not collectivism. Millions of millennials as aspire to be rich and successful, unlike Bernie Sanders who resents the rich and seeks to spread wealth from the most successful people to those who did nothing to earn it.