Yeah I agree. I never argued otherwise.BogleBobby wrote: ↑Thu Aug 22, 2019 2:52 pmYou can see lose both your original investment and all of your borrowed money in this scenario. For instance, if you have $100k and borrow $200k @ 6% to get 3x leverage in the stock market with a 300k total investment, and you see a loss like the 1920s when we saw an 80% downturn, then you are left with a 60k investment and a loan payment of $12k (6% x $200,000). If the market doesn't recover quickly, you will eventually lose your original investment and all of your loaned money, for a total loss of $300k initially, plus you'll still need to pay off the $200k loan that you took out (and the interest you pay on that loan will continue to accrue until you pay it off).305pelusa wrote: ↑Thu Aug 22, 2019 11:15 amThere are forms of leverage that eliminate the path dependency AND eliminate the possibility of total loss. That's known as "uncallable" debt, and it's ideal if you have access to it. Mortgage, HELOCs and deep in the money calls are examples. They are more expensive of course, which demonstrates that the risk of total liquidation is also a compensated risk interestingly enough
In fact, you can see that this scenario would've happened in Simba's worksheet if you took out a loan of $200k @ 6% in 1929. You actually would've survived the initial downturn in the early 1930s, but the market didn't rebound too strongly and you would've run out of money in 1949 (and be left with a 200k loan to still pay off).
With a 3X daily leveraged ETF, we don't have the numbers for this time era because of a lack of daily data, but even if you assume a total loss of principal, you'd come out way ahead ($100k loss of original investment in ETF scenario vs. $300k loss in HELOC scenario along with interest payments on unpaid loan). Another thing to consider about 3X ETFs is that because they deleverage in downturns, they also are borrowing less money in downturns, so they don't get hit with big debt payments when they can't afford them.
The reality is that the LETFs take on an uncompensated risk due to path dependence. That's fine if you argue that other forms of leverage that don't have that have their own unique problems related to other things.
The benchmark of this strategy is a portfolio of 100% equities with no leverage. This does not suffer from the above uncompensated risk, it does not pay 1% a year in fees, it does not rely on correlations, etc (basically everything I mentioned earlier). Fundamentally, it feels to me like such a benchmark should come out ahead in terms of risk-adjusted returns and maybe even total returns. It's what makes sense to me. It is hard to rationalize these thoughts with seeing the strategy do so well thus far so I am excited to see it keep going and see if my intuition is correct over a longer period of time.