Never Tell Me the Odds

I know the advice of  the investing and personal finance world, and yet I find myself turning a bling eye. Warren Buffett advises an S&P 500 index fund yet I own none. John Bogle the founder of Vanguard recommends a decent asset allocation with zero leverage, yet I use almost 300% leverage every day in my trading. Furthermore, I am using credit cards to keep very little cash on hand so that I can put the cash into 300% leveraged exchange traded funds. Of course, all of this is in direct contradiction to the teachings of my favorite personal finance experts Clark Howard and Dave Ramsey. So, why am I taking so much personal financial risk in direct contradiction to these experts? Like most of us, I find myself where I am today from a chain of seemingly uncorrelated events and lessons, but this is where I am.

As a young teenager I found myself attending investing conference with my father in Salt Lake City, Las Vegas, and Kansas City. These conferences taught participants how to trade stocks and options using the proprietary trading methods of the company. There was a hefty fee for the course, but it all boiled down to, “When our four indicators turn green you need to buy. When they turn red you need to sell.” As a young teenager I was sold by the simple idea that I too could be rich. I promptly started trading my $1,000 dollars saved from mowing lawns and planned to turn it into enough money to not have to go to college. I manged to turn it into $600.

After my early loss I remained interested but kept stock market investing on the back burner. I later discovered that the indicators promoted at those conferences were by no means proprietary. In fact, they could be recreated quite easily in something as simple as Microsoft Excel. In college I began using Microsoft Excel to test how effective those indicators were. I did this by downloading old stock market data and running simulations to see if those indicators could actually provide an edge. I quickly found that after applying the simulations that they simply did not work well after the effect of fees and taxes. That was that. I was done with actively trading the markets…until I read the book Buffett by Roger Lowenstein.

Post college I read the book Buffet killing time on a plane and in a hotel room on a work trip in Kensington, Ohio. That book inspired me to give it another shot. My focus turned to treating stocks like little slices of businesses just like Buffett does. After a couple of years of trying to successfully trade like Warren Buffett I realized that it was quite difficult even though it is certainly a valid way. I found that you simply need lots of money for a 20% rate of return to really be worth any extra effort  when you could get an 8% return with virtually no work. I still do some of this as a hobby, but don’t feel like I am confident that I can consistently outperform the market doing this.

After putting individual stocks in the hobby-only category, I found volatility trading – in layman terms high risk insurance on the stock market! I came up with custom indicators. When these indicators showed a high chance of growth in the markets I would essentially sell insurance on the markets using XIV. When a downturn seemed probable according to my indicators I would essentially buy insurance on the stock market via VXX. In retrospect this wasn’t a bad strategy except that I was putting nearly all my money into XIV most of the time which was highly risky. It is not diversified like a mutual fund or index ETF, but what a ride it was.

For the first five months of trading this way from August 2017 through December 2017 I made a 58% return. I was thrilled and already thinking of which charities to support with my future philanthropy. My custom indicators I had come up with were working perfectly! Then boom!

XIV dropped 80% in a few hours and was removed from the markets.  My cash cow was gone! Fortunately my indicators were good enough that I did manage to get out before the drop. I began looking for a replacement for XIV. While searching and testing I made some bad assumptions and got a little too aggressive with my programming causing a loss of about 33%. I eventually did find some replacements and still trade volatility today, but I no longer put all my money into one high risk position and take many more conservative measures than I did back in 2017.

Eventually I started looking more at cryptocurrencies. I started dollar cost averaging into my own cryptocurrency index fund of sorts and even managed to avoid most of the cryptocurrency bear market of 2018.

Then, in February of 2019 I took a vacation to Hawaii and read several books that gave me new inspiration. The power of a book and a vacation are amazing! Suddenly what I read in the books began to swirl together with my previous experiences in volatility trading, price indicators from the conferences as a teenager, and the lessons on patience and fee reduction I had picked up from listening to Buffett and Bogle.

I began to envision a highly leveraged portfolio that that operated on the assumption that time in the market beats timing the market, yet it still uses asset diversification, volatility indicators, and technical indicators to limit the downside risk.

After a few months of testing checking and rechecking I started trading this live with my own assets and tracking it for all to see. It is off to a great start, nearly tripling the returns of the stock market. Only time will tell if this turns out well.

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