Return to Blogs
1/17/2010 2:05:26 AM - Superluminal Investments Inc.
The winning streak continues. I just completed another successful month of options trading on Friday, January 15, 2010 - that's 16 or 17 months in a row. I've never had a losing month since I stopped holding shares/units in companies/MLPs/ETFs/etc. and just decided to trade options...and, most impressively, that includes trading profitably through the absolute worst of the biggest recession since the Great Depression. When financial markets around the world were plummeting in the late Fall and Winter of 2008 (following the collapse of Lehman Brothers), I was racking up my largest gains. When the markets bottomed in March of 2009 and then skyrocketed throughout the year, I continued to earn significant percentage returns on a monthly basis. Regardless of the overall market's direction, I've managed to regularly generate substantial returns.
I made about 2.73% in four weeks this time - a pretty average month for me. Admittedly, the monthly returns are now less than half of what they were when the VIX - a volatility index - was a lot higher, but I'm far more interested in profit consistency from month to month than I am in swinging for the fences and hoping that the long-term average (that would likely include a considerably larger number of losing months) is where I want it to be.
I've often thought about starting up a hedge fund - a flexible investment company for a small number of investors. If I didn't think that the paperwork would be a pain, I'd have probably started one a while back. Assuming that the idea doesn't run afoul of some law, though, I might try a simpler approach and just form an investment company as an S Corporation. Investors would then have the option of purchasing shares directly from the company (in order to obtain ownership of a commensurate stake) or selling shares at specific times (back to the company, which would redeem the shares for cash.) Given my trading style, it would actually be considerably simpler to enter and exit than a traditional hedge fund (which often makes investments in illiquid assets and thus often has very strict and inconvenient rules about getting out of the fund.) Being an S Corporation would allow profits to avoid being taxed twice (at both the corporate and personal levels), but shareholders would wind up getting a tax bill every profitable year regardless of whether they actually liquidated any shares (because of the increase in value of those shares.)
I'd have to consult an attorney familiar with investing law to ascertain whether forming such an investment company would run afoul of any regulatory laws. While it seems perfectly legitimate to form a simple company in which investors could purchase and sell shares (from and to the company) whose primary business was financial trading, I'm not sure where exactly such behavior crosses a line - if at all - and requires additional legal and regulatory burdens.
I've long been enamored of finance and business, having been an avid reader of The Wall Street Journal, Fortune, Forbes, Business Week, SmartMoney, The Kiplinger Report, a variety of financial web sites, and loads of other information sources for over 20 years. Call me crazy, but I actually keep all of my old Fortune and Forbes magazines...and select issues and articles of some of the magazines and newspapers...and web pages of particularly interesting financial articles. CNBC is the background noise to which I typically work or relax, and The Kudlow Report gets recorded on the DVR daily. (As opposed to Jim Cramer's "Mad Money", you'll actually find a fair amount of intelligent commentary on that show.)
There's a lot of work to be done before I'd be ready to take that step, though. In particular, my trading methodologies need additional refinement, diversification, and risk control. It bothers me greatly that unforeseen events can have a catastrophic effect on a portfolio, and leverage only makes the situation worse. Imagine the effect to your portfolio if, for example, a nuclear bomb went off in Israel. The markets would probably drop 20 or 30% instantly, and if you're using any leverage the effects could be absolutely fatal, regardless of whether or not the markets rebounded shortly thereafter (since a margin call would likely force significant liquidation of your holdings while the market was down.) Alternatively, consider 1987's Black Friday, when the Dow recorded its largest ever one-day decline - 22%. While decades may pass without any such events occurring (the largest one-day percentage drop during the current financial crisis was "only" about 10%), the wise investor - or perhaps I should say trader - must nevertheless plan for them lest a lifetime's worth of savings disappear in an instant. Guarding against such events will inevitably cause either the average monthly return to decline or else increase the volatility of the monthly returns...and possibly both. Striking the right balance between anticipated average monthly returns, expected levels of volatility, and downside protection is what I've been recently contemplating. As an example, one might seek a strategy that would hopefully return 1.5% monthly, with typical (but not absolute) temporary volatility of 35% or less of the S&P 500, with a maximum loss potential of 35% in one month (which would presumably only be realized if something truly catastrophic occurred, and is almost assuredly far better than what the maximum downside would be for most investors/traders.)
Additionally, I need to develop my own equity and options analysis software since I haven't found any third-party applications capable of analyzing the types of data that I inspect in the ways that I need. My primary goal in that endeavour would be to have the software constantly analyze selected areas of the marketplace looking for patterns that I've specified and, when appropriate, bringing such events to my attention for trading consideration.
If I decide to start such an investment company, you'll be able to read about it - and probably find information about investing in it - here.
- TZ
|
