A different approach to asset allocation

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matt
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Post by matt » Wed Mar 30, 2011 11:11 pm

market timer wrote:Solving the inequality 10p <= 40(1-p), I get a value of p<=0.80 -- i.e., contribute whenever the probability of having to take a hardship withdrawal is less than 80%.
Just curious...back in September 2007, what was your estimated probability of failure with MYR?

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goggles
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Post by goggles » Thu Mar 31, 2011 10:45 pm

market timer wrote: I've been walking on thin ice for two years, but if all goes well, by this time next year I'll have $100K+ in retirement accounts, $100K+ in taxable, and the only remaining debts will be student loans on 25+ year repayment terms and a manageable 401k loan. Then I'll know I'm safe for a while.
I think you're going to make it! I've been rooting for you, crazy scheme and all. Man, if you keep saving at the rate you are repaying debt, you'll be able to buy a (non-bajillionaire) penthouse in a few years and still retire early.

What an odyssey!

billjohnson
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Post by billjohnson » Thu Mar 31, 2011 10:48 pm

Scott S wrote:MT has been editing the first post to update his chart and current net worth as time goes on.
Ok, that makes sense. Thanks for the info.

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LH
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Post by LH » Mon Apr 11, 2011 10:16 pm

6 years into it via the graph, and still a negative net worth, ouch.

How much would you have if you followed a passive index approach on wonders?

Would be interesting to put that along with your graph.

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market timer
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Post by market timer » Mon May 30, 2011 2:23 pm

ROUND TRIP
Net worth: $5K

The round trip is complete: 13 months to bottom, 2 months of shell shock, 28 months to return. I consider myself extraordinarily fortunate to have bounced back in a relatively short period of time without having to make painful sacrifices. Getting back to even this quickly required finding a job in the Great Recession, while trying to maintain $200K+ in unsecured debt at low interest rates during the credit crunch.

People often ask questions about how to manage debt, so I’ll briefly share my tactics. I tried to repair both sides of my balance sheet simultaneously, maximizing retirement account contributions and paying down debt with remaining savings. I’ve never had an emergency fund. On $200K of debt, every point of interest is worth $2000/year, so I focused on keeping borrowing costs low. This meant extensive use of promotional rate balance transfer offers from credit cards and borrowing from my 401(K). My order of debt repayment has been: (1) credit cards, (2) 6.8% interest student loans, (3) 401(K) loan. I currently have about $100K in student loans and retirement accounts, with no other debt.

For two years, my subconscious has been preoccupied with getting out of debt. Ideas would come to me in the middle of the night for how to increase income or cut costs. After witnessing the results, I have more respect for the creative and directive power of the subconscious mind. I believe it was my subconscious mind that nudged me to make a large bet on the market in summer 2007. My life was in a rut at the time. This bet ensured change, one way or another.

Accumulating wealth is not something to build a life around, though. The desire to accumulate is just a debt that cannot be repaid. I now appreciate how, even with every advantage, it is easy to make a mess of your life, accumulating all different kinds of debts. When the stars align and you have your health, wealth, and freedom, you have to follow your passion.

I expect this will be my last post for a long while. Thanks for your support.

"Liberty, Sancho, my friend, is one of the most precious gifts that Heaven has bestowed on mankind."

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baw703916
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Post by baw703916 » Mon May 30, 2011 3:38 pm

MT:

Congratuations! I wish you continued success.
Most of my posts assume no behavioral errors.

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nisiprius
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Post by nisiprius » Mon May 30, 2011 4:23 pm

Good luck, mt, and thanks for sharing. May I leave you with this thought:
In 'The Way of All Flesh,' Samuel Butler wrote:No man is safe from losing every penny he has in the world, unless he has had his facer. How often do I not hear middle-aged women and quiet family men say that they have no speculative tendency; they never had touched, and never would touch, any but the very soundest, best reputed investments, and as for unlimited liability, oh, dear! dear! and they throw up their hands and eyes.

Whenever a person is heard to talk thus he may be recognised as the easy prey of the first adventurer who comes across him; he will commonly, indeed, wind up his discourse by saying that in spite of all his natural caution, and his well knowing how foolish speculation is, yet there are some investments which are called speculative but in reality are not so, and he will pull out of his pocket the prospectus of a Cornish gold mine. It is only on having actually lost money that one realises what an awful thing the loss of it is, and finds out how easily it is lost by those who venture out of the middle of the most beaten path.

Ernest had had his facer, as he had had his attack of poverty, young, and sufficiently badly for a sensible man to be little likely to forget it. I can fancy few pieces of good fortune greater than this as happening to any man, provided, of course, that he is not damaged irretrievably.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by FireProof » Mon May 30, 2011 8:44 pm

Also going for leverage in my low-worth youth (based on Ayres's work), although more like 150-175%, since I'm using margin (as well as ETNs) and don't want to worry about calls, and using a diversified portfolio including 20% bonds.

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Post by Epaminondas » Tue May 31, 2011 10:03 am

FireProof wrote:Also going for leverage in my low-worth youth (based on Ayres's work), although more like 150-175%, since I'm using margin (as well as ETNs) and don't want to worry about calls, and using a diversified portfolio including 20% bonds.
Is that a joke?

Snowjob
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Post by Snowjob » Tue May 31, 2011 10:13 am

nisiprius wrote:Good luck, mt, and thanks for sharing. May I leave you with this thought:
In 'The Way of All Flesh,' Samuel Butler wrote:No man is safe from losing every penny he has in the world...
Best wish MT, glad you're out of the hole.

Nisi-- you've quoted this book so much that I actually picked it up at the local library book sale ! Hope to sit down and read it at some point this summer.

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Post by FireProof » Thu Jun 02, 2011 12:52 am

Epaminondas wrote:
FireProof wrote:Also going for leverage in my low-worth youth (based on Ayres's work), although more like 150-175%, since I'm using margin (as well as ETNs) and don't want to worry about calls, and using a diversified portfolio including 20% bonds.
Is that a joke?
Er, no. Why would it be? Reducing risk while increasing return seems like a no-brainer. If you mean because of this thread, a single anecdotal short-term experience in the past by someone who didn't even follow the method hardly compares to a century of long-term backtasting in multiple markets and thousands of long-term Monte Carlo simulations (as well as a very strong intuitive logic). That's like the people who've given up on the stock market because it declined in 2008.

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Post by Snowjob » Thu Jun 02, 2011 5:55 am

FireProof wrote:
Epaminondas wrote:
FireProof wrote:Also going for leverage in my low-worth youth (based on Ayres's work), although more like 150-175%, since I'm using margin (as well as ETNs) and don't want to worry about calls, and using a diversified portfolio including 20% bonds.
Is that a joke?
Er, no. Why would it be? Reducing risk while increasing return seems like a no-brainer. If you mean because of this thread, a single anecdotal short-term experience in the past by someone who didn't even follow the method hardly compares to a century of long-term backtasting in multiple markets and thousands of long-term Monte Carlo simulations (as well as a very strong intuitive logic). That's like the people who've given up on the stock market because it declined in 2008.
Fireproof -- I admire your willingnes to think outside the box, I was hopeing to understand your portfolio as it stands today. Would you be willing to start a new thread that documents your progress ? Not saying you need to put in the time that market timer did, but it would be helpful for the rest of us to see your experiment. I'll reserve any furher comment untill I see the idea fleshed out in detail.

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Post by Valuethinker » Thu Jun 02, 2011 6:16 am

FireProof wrote:
Epaminondas wrote:
FireProof wrote:Also going for leverage in my low-worth youth (based on Ayres's work), although more like 150-175%, since I'm using margin (as well as ETNs) and don't want to worry about calls, and using a diversified portfolio including 20% bonds.
Is that a joke?
Er, no. Why would it be? Reducing risk while increasing return seems like a no-brainer. If you mean because of this thread, a single anecdotal short-term experience in the past by someone who didn't even follow the method hardly compares to a century of long-term backtasting in multiple markets and thousands of long-term Monte Carlo simulations (as well as a very strong intuitive logic). That's like the people who've given up on the stock market because it declined in 2008.
Actually the reason to give up on the market because of 2008 was the speed of the rebound.

Real bear markets are either event driven (UK 1972-74) or they are valuation/macro driven, and go on for *decades*.

Andrew Smithers and Stephen Wright's work on this is salutory and you should read it.

Remember Smithers has spent much of his professional career thinking about Japan.

Taylor here can tell you about being in a family reliant on the stock market in the 1930s. There's a reason no one went into finance as a career for 30 years-- our fathers became doctors, lawyers, engineers, civil servants NOT stockbrokers and fund managers.

And of course there is the 1968-1979 period in the US when stocks dropped, after inflation, something over 40%?

Those bear markets can be *loooong* although you won't realize you were in a bear market until after the end (what you'll experience is the roller coaster).

My own intuition is we are half way through a 20 year bear. The cult of the equity has not yet been truly killed. Too many people out there listening to Siegel and not Shiller, still.

Valuethinker
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Post by Valuethinker » Thu Jun 02, 2011 6:17 am

market timer wrote:ROUND TRIP
I expect this will be my last post for a long while. Thanks for your support.

"Liberty, Sancho, my friend, is one of the most precious gifts that Heaven has bestowed on mankind."
All the best with where you voyage and what you do there.

FireProof
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Post by FireProof » Thu Jun 02, 2011 1:03 pm

Valuethinker wrote: Actually the reason to give up on the market because of 2008 was the speed of the rebound.

Real bear markets are either event driven (UK 1972-74) or they are valuation/macro driven, and go on for *decades*.

Andrew Smithers and Stephen Wright's work on this is salutory and you should read it.

Remember Smithers has spent much of his professional career thinking about Japan.

Taylor here can tell you about being in a family reliant on the stock market in the 1930s. There's a reason no one went into finance as a career for 30 years-- our fathers became doctors, lawyers, engineers, civil servants NOT stockbrokers and fund managers.

And of course there is the 1968-1979 period in the US when stocks dropped, after inflation, something over 40%?

Those bear markets can be *loooong* although you won't realize you were in a bear market until after the end (what you'll experience is the roller coaster).

My own intuition is we are half way through a 20 year bear. The cult of the equity has not yet been truly killed. Too many people out there listening to Siegel and not Shiller, still.
Well, I'm a Boglehead, so I don't believe in market timing (or giving up on the stock market).

With that said, you've hit upon precisely the most important reason for leverage. There are long bear markets (and long bull markets), so diversification over time is very important. If a 20-year bear market (or the Great Depression) hits right at the end of your career, so you're getting killed right when you have the most invested, your retirement savings will be crippled. By increasing the amount invested when you are young with leverage, you become effectively invested for a much longer period of time, exposed to a variety of market cycles. Thus your overall results are much less reliant on the short period at the end of your career, and risk over a 45 year period is reduced.

In the unlikely event we do have 10 more years of stagnation (in the entire world market) now, that's not so bad . Even with leverage, I'll have a smaller fraction of my career earnings invested now than later, since the leverage cap is fairly low. The effect on my long-term performance will still be lower than if that happened at the end of my career.

And Ayres included Japan in his back-testing, and leverage still was safer. Of course, I would never invest 100% in the equities of a single country (or even more than 30% - the US), so I don't think anything even as bad as Japan is likely.

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White Coat Investor
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Post by White Coat Investor » Thu Jun 02, 2011 2:00 pm

Impressive. That was fun to watch.

Much better to learn from others' mistakes than make them yourself. People will be linking to this thread for a long time to come.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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greg24
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Post by greg24 » Thu Jun 02, 2011 2:04 pm

Its nice that now that Market Timer has brought his NW back to zero, a new lamb has entered our midst.

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Post by Bongleur » Fri Jun 03, 2011 3:41 am

Read thru pg 3 so far before skipping to the end... What is Market Timer's field of employment? What's his PhD in (if he got it)?

EDIT

Was this error your downfall? How would you have fared on Jan 21, 2008 if you had maintained your 200k limit?:

http://www.bogleheads.org/forum/viewtop ... c&start=50

Market Timer said:
<
I'm not an active trader. What I've tried to do is to get exposure to the type of portfolio I'd be able to create after about a few years of working. I could easily maintain exposure of $200K long term, but got carried away and let exposure rise to $340K. You can get too much of a good thing.
>
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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LH
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Post by LH » Fri Jun 03, 2011 7:09 am

For my part, the "balls" timing award goes to MT.

So much ex post trash, its really the only gutsy hard call that I have seen besides munchin man.

So anyway, Market Timer is the real deal. Kudos.

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Post by kakapo » Fri Jun 03, 2011 7:23 am

just another post to say kudos and thanks for sharing! you accepted all criticism with grace whether it was rational and deserved or not.

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Post by Bongleur » Fri Jun 03, 2011 9:53 am

market timer wrote:Mon Sep 15, 2008 9:10 pm
It is annoying and humiliating; for example, requesting an advance check from payroll. I wish there were a way for me to securitize, or otherwise somehow borrow against, human capital.
It used to be called Indentured Servitude.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Post by SunDevil » Tue Jun 07, 2011 8:59 pm

nisiprius wrote:
In 'The Way of All Flesh,' Samuel Butler wrote:No man is safe from losing every penny he has in the world, unless he has had his facer. How often do I not hear middle-aged women and quiet family men say that they have no speculative tendency; they never had touched, and never would touch, any but the very soundest, best reputed investments, and as for unlimited liability, oh, dear! dear! and they throw up their hands and eyes.

Whenever a person is heard to talk thus he may be recognised as the easy prey of the first adventurer who comes across him; he will commonly, indeed, wind up his discourse by saying that in spite of all his natural caution, and his well knowing how foolish speculation is, yet there are some investments which are called speculative but in reality are not so, and he will pull out of his pocket the prospectus of a Cornish gold mine. It is only on having actually lost money that one realises what an awful thing the loss of it is, and finds out how easily it is lost by those who venture out of the middle of the most beaten path.

Ernest had had his facer, as he had had his attack of poverty, young, and sufficiently badly for a sensible man to be little likely to forget it. I can fancy few pieces of good fortune greater than this as happening to any man, provided, of course, that he is not damaged irretrievably.
This quote is truly apropros for this epic thread. After skimming through, it seems that Market Timer's approach was representative of the mindset of many individuals/businesses in 2007. Very similar to people using maximum available leverage to finance real estate. May we all remember and heed the lessons we learned over the past few years.

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Post by bond50 » Wed Jun 08, 2011 10:00 am

MT is at least half right on the theory of time diversification, absent tax considerations and costs. Take a concrete example of a lawyer that graduates law school at 25 and wants to retire at 55. If he literally didn't believe in leverage, then he would wait until he had paid off his student loans, home loan, and cars loans in full before putting a dime into retirement, at least past the company match if law firms do that. By the time that he starts investing for retirement, he is thirty five. However, he is conservative and wants to glide to 100% bonds by retirement. Hence, he starts to age out of stocks at forty five. Effectively, his stock market performance is largely determined by a ten year period. No one, not even Siegel, would call ten years the long run.

The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls. Even, if someone in their twenties was comfortable being 150% in stocks, the most logical place for someone that age to invest, IRAs, prohibits buying on margin. If someone invests in taxable accounts, then taxes narrow the equity spread. Further, for loan balances under $20k, Vanguard brokerage charges interest rates of 7.75%, which is above the yields on even junk bonds.

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Post by airahcaz » Sat Jun 25, 2011 10:10 pm

bond50 wrote:MT is at least half right on the theory of time diversification, absent tax considerations and costs. Take a concrete example of a lawyer that graduates law school at 25 and wants to retire at 55. If he literally didn't believe in leverage, then he would wait until he had paid off his student loans, home loan, and cars loans in full before putting a dime into retirement, at least past the company match if law firms do that. By the time that he starts investing for retirement, he is thirty five. However, he is conservative and wants to glide to 100% bonds by retirement. Hence, he starts to age out of stocks at forty five. Effectively, his stock market performance is largely determined by a ten year period. No one, not even Siegel, would call ten years the long run.

The problem is that this theory is not actionable. None of the leveraged ETFs and leveraged index funds come close to actually replicating 2x the index minus expenses due to daily compounding. LEAPs exclude dividends, which is a major component of the stock market yield. That leaves investing on margin with the risk of margin calls. Even, if someone in their twenties was comfortable being 150% in stocks, the most logical place for someone that age to invest, IRAs, prohibits buying on margin. If someone invests in taxable accounts, then taxes narrow the equity spread. Further, for loan balances under $20k, Vanguard brokerage charges interest rates of 7.75%, which is above the yields on even junk bonds.
Besides margin, Long LEAPS calls were the primary options instrument of discussion for MYR. What if the vehicle were Naked LEAPS Puts, whereby one can add cash to the account monthly, avoiding any potential margin calls? Similar to Bogleheads regular and persistent investing for the long term, akin to Dollar Cost Averaging, but the cash is being parked and not invested per se, merely parked until the put expires, and then the next naked put position is enacted. The question would be what strike relative to SPY at the time of execution.

MT, would be interested in your opinion as well.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

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Post by GlennC » Sat Jun 25, 2011 10:47 pm

LEAPs exclude dividends, which is a major component of the stock market yield.
Dividends are factored into the pricing of LEAPs. However, you have to forecast changes in dividends and you have to forecast changes in volatility. Forecasting both may be very difficult.
. What if the vehicle were Naked LEAPS Puts, whereby one can add cash to the account monthly, avoiding any potential margin calls?
I don't understand what you're getting at.

Naked puts is similar to buying stock and selling calls. If you want to leverage without facing gambler's ruin, you want to buy stock AND buy calls (not sell them). Or just buy call options. However, this may not increase your expected return.
I am one of those dirty active management people.

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Post by market timer » Sun Jun 26, 2011 10:27 am

Cash-secured short puts won't get you leverage. As GlennC notes, the position is equivalent to a covered call. But they may be useful for other reasons.

I've been using cash-secured puts as a way to get exposure to both stocks and bonds for the past two years. Instead of receiving interest income or dividends, I receive capital gains. As I still have six-figure carryforward losses, any capital gains I receive will go untaxed for a while. The current zero interest rate policy makes this strategy extremely tax efficient for those with carryforward losses.

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Post by airahcaz » Sun Jun 26, 2011 7:46 pm

market timer wrote:Cash-secured short puts won't get you leverage. As GlennC notes, the position is equivalent to a covered call. But they may be useful for other reasons.

I've been using cash-secured puts as a way to get exposure to both stocks and bonds for the past two years. Instead of receiving interest income or dividends, I receive capital gains. As I still have six-figure carryforward losses, any capital gains I receive will go untaxed for a while. The current zero interest rate policy makes this strategy extremely tax efficient for those with carryforward losses.
I'd be interested in what underlyings (still SPY?), how far out are you writing them, and what strikes...

On the tax side, naked LEAPS are all considered short term capital gains eh? :(
1) Invest you must 2) Time is your friend 3) Impulse is your enemy 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course. (Plagiarized, but worth stealing)

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Post by marco100 » Thu Jul 07, 2011 3:57 pm

Fascinating thread.

Kudos to Market Timer.

Clearly there is a book in this--and, if you decide to publish one and it's successful--you may have the last laugh, after all.

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Post by Random Musings » Thu Jul 07, 2011 4:07 pm

Market Timer,

Perhaps mentioned in another thread which I didn't read, but I notice the net worth has disappeared from your info pack......

RM

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market timer
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Post by market timer » Thu Jul 07, 2011 7:48 pm

Random Musings wrote:Perhaps mentioned in another thread which I didn't read, but I notice the net worth has disappeared from your info pack......
Yes, I feel like this adventure has come to an end. I don't even feel regret for the losses anymore. The laptop used for trading and tracking net worth has been destroyed.

Now that my debts have mostly been repaid and I've trimmed my budget, I'm saving $10K/month. While MYR has been fun and entertaining, I'm looking forward to embarking on an even larger adventure. When all is said and done, and the book is written, this MYR episode will simply be background information.

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Post by nisiprius » Thu Jul 07, 2011 8:41 pm

bond50 wrote:Even, if someone in their twenties was comfortable being 150% in stocks,
The two Yale professors say 200%, not 150%...
the most logical place for someone that age to invest, IRAs, prohibits buying on margin.
Those two Yale professors would like to see that changed.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by DRiP Guy » Fri Jul 08, 2011 6:53 am

market timer wrote: I feel like this adventure has come to an end. I don't even feel regret for the losses anymore. The laptop used for trading and tracking net worth has been destroyed.

Now that my debts have mostly been repaid and I've trimmed my budget, I'm saving $10K/month. While MYR has been fun and entertaining, I'm looking forward to embarking on an even larger adventure. When all is said and done, and the book is written, this MYR episode will simply be background information.
(bold added)

You are most certainly an odd bird. I wonder if you've even Groked your own cut-n-pasted footer, or if you are (as I often suspect) being purposefully provocatively 'naive' just to needle others, while not really taking in the import of your own casually flung references... given your own self-documented history, I feel confident it is not even near a personal 'attack' to question this, but merely a reasonable inquiry into an apparent schism that you yourself both present and seem to even gleefully highlight.

Curious indeed.

"I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt." -Irving Fisher


I would counter with a quote of my own:

There are Old pilots.

There are Bold pilots.

There are no Old Bold pilots.
-- some crusty old bird

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nisiprius
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Post by nisiprius » Wed Jul 20, 2011 9:24 pm

I wonder whether Market Timer is familiar with this fine old bit of doggerel and is aware of its curious characteristics:

"Quixotic boys who look for joys,
Quixotic hazards run;
A lass annoys with trivial toys,
Opposing man for fun."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Snowjob
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Post by Snowjob » Thu Jul 21, 2011 6:37 am

market timer wrote: While MYR has been fun and entertaining, I'm looking forward to embarking on an even larger adventure.
Financial Adventure??? :shock:

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HomerJ
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Post by HomerJ » Thu Jul 21, 2011 9:39 am

nisiprius wrote:Good luck, mt, and thanks for sharing. May I leave you with this thought:
In 'The Way of All Flesh,' Samuel Butler wrote:Ernest had had his facer, as he had had his attack of poverty, young, and sufficiently badly for a sensible man to be little likely to forget it. I can fancy few pieces of good fortune greater than this as happening to any man, provided, of course, that he is not damaged irretrievably.
Great quote...

Misfortune, early on, can be such a great teacher, that it changes the rest of your life for the better... That kind of misfortune can almost be called "lucky"

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HomerJ
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Post by HomerJ » Thu Jul 21, 2011 9:45 am

LH wrote:For my part, the "balls" timing award goes to MT.

So much ex post trash, its really the only gutsy hard call that I have seen besides munchin man.

So anyway, Market Timer is the real deal. Kudos.
Yeah, but Munchkin Man never came back and posted about his losses. Someone else had to point out that he was way down based on his previous buy posts before he would admit it.

I agree that Market Timer has my respect for his honesty in this thread, and for not declaring bankruptcy and instead paying off his debts.

Remember in the future, MT, the willingness and the NEED to take risk... With your large salary, you have zero need to take risk. You can become financially independent very easily the safe way.)

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Re: A different approach to asset allocation

Post by banrep » Tue Nov 22, 2011 6:58 pm

Sorry to bump this old topic, but just felt like it was appropriate because I'm repeating many of the mistakes that Market Timer made and I am in the process of blowing up my account through overleveraged futures trading. I may still get bailed out if the market makes a small recovery, or at least stops falling so the time premium on the covered calls restores my losses. Long story short is I was a straightforward investor in index and mutual funds since I turned 18. I'm 25 now with no debt and I built up around 85k between a taxable account and my IRA. Then I transfer my funds over to Interactive Brokers, which is geared towards professionals so it offers basically any investing products you could want, tons of leverage, and no baby sitting. If you want to leverage up to 15x on futures with 10k in equity then they'll let you, even in an IRA.

Through experimentation with lots of different products I found I like selling put options on major indexes like SPY, QQQ, and IWM. I had a strategy where I would sell mostly weekly put options, starting at around 1x leverage and every time we had a relatively big down day I would sell more, averaging down my cost and increasing my leverage so a much smaller price movement would get me even. Put options on these indexes have a 20% margin requirement so you can get 5x leverage. But they only trade from 9:30-4 and I found I liked being able to trade 24 hours a day, so moved over to futures. The e-mini futures (ES for S&P, NQ for Nasdaq 100, and TF for Russell 2000) have margin requirements that offer around 12x leverage, they trade 23.25 hours a day on weekdays, and they all have option markets. I was loving it. The only drawback I saw with futures was the bid-ask spread on NQ and TF options were a bit worse than ES since they are much more thinly traded.

But I probably should have viewed the margin availability as a drawback, or at least it turned out to be one. My idea of increasing leverage on down days somehow left me at nearly 10x leverage at the close on Friday. I had sold a ton of weekly puts that all ended up in the money, and so I was assigned 13 e-mini contracts which are now worth around 675k. The markets were down 4% on the week, but my leverage put me down 20%. Rather than cut my losses I sold new weekly call options last Friday. I priced them a little above the market value, picking strikes that if reached the combination of the gains and the time premium received would get me back to even, all my futures would be assigned away and I would have been bailed out and back to no leverage.

Well, you can probably guess what happened Monday. Between yesterday and today that markets are down 3% more, which for me is 30%. It was cushioned a little from the calls, but in total I'm down 33% from Wednesday afternoon, I have exposure of over 10x now that my equity has dropped, and I could be one day away from getting liquidated since I have so little cushion over the minimum overnight liquidity (which probably would be a good thing, but I probably wouldn't let it stop me). I know I should quit while I still have 2/3rds of my starting capital, but the losses have messed with me and I desperately want to get even. What I've built up over 7 years could be destroyed in less than 7 days. It shouldn't really matter what's already happened because the losses are a sunk cost at this point, but I'd feel sick if a 6% drop caused me to lose 1/3rd of my money, sell, and then have the market go back to where I started with me still down 25% overall. At the moment I feel resigned to go down with the ship if necessary, but hopefully I either get bailed out or at least reach a psychologically significant balance where I feel comfortable drastically cutting back my leverage. Four relevant values to me are:

Value I transferred into IB since I started trading at IB 2 months ago: 85k
Peak last Wednesday: 100k
Last Friday when I should have cut my losses: 80k
Today: 66k

All the call options I sold going into this week are worthless and offer no remaining value time decay, so I just sold new calls for December expiration. I picked strike prices that if we reach them I will have almost exactly 100k in assets again. My strike prices were around 3% over current market value, and I received almost 1.5% in time premium. If we break even between now and December 16 I'll have recovered 1/3rd of my losses (around 10k), and if somehow we can get a 3% or greater gain all my futures will be called away and I'll be bailed out of my crazy gamble. We'll see what happens...

stat5
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Re: A different approach to asset allocation

Post by stat5 » Tue Nov 22, 2011 7:27 pm

I always say with gambling that the more you win the more you eventually lose. I have seen this with family members who lost it all at the casino. In the beginning they would come back from a trip to the casino with $15,000 of winnings. Once they got a little taste of the rush and easy money it was all over. They lost their life savings, house and more. It is a horrible thing to witness.

The sad part is if you take the loss now and resolve to stop gambling forever you'd probably be better off than if you make your money back by gambling. If you make your money back you will probably continue the gambling. I wonder what advice Market Timer would have for you.

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DRiP Guy
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Re: A different approach to asset allocation

Post by DRiP Guy » Tue Nov 22, 2011 8:14 pm

hopefully I either get bailed out or at least reach a psychologically significant balance where I feel comfortable drastically cutting back my leverage. Four relevant values to me are:

Value I transferred into IB since I started trading at IB 2 months ago: 85k
Peak last Wednesday: 100k
Last Friday when I should have cut my losses: 80k
Today: 66k
banrep, it seems clear to me that you would do well to re-read the books on the topic of investor psychology, in particular 'anchoring'.

Emotion has no place in trading. And since we are all emotional when we gamble... :idea:

(I honestly think we all end up at the same 'ah ha' point eventually, some just take different paths to get there.)

Good luck.

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Re: A different approach to asset allocation

Post by banrep » Tue Nov 22, 2011 9:10 pm

Yeah, I understand that what I bought in at has absolutely no bearing on what the stock is worth or where it's going, and so shouldn't enter into my decision. And if I were starting fresh I definitely wouldn't enter into these same positions given my balances, so that's another reason to sell. But it just gets harder to want to sell the further down I go, because I now how difficult it will be to recover versus how easy it was to lose it.

Oh, and futures are down almost 2% since the close, so that's 9k down for me. This will be over much more quickly than the Market Timer saga. 56k balance now, in liquidation zone.

The messed up thing is this isn't a big drop, not even for the year, let alone what happened back in 08. We're only down like 7% from last week, I can't imagine what would have happened if we had a truly big drop like one of those limit down days. I guess it's bound to happen with a strategy that is the stock equivalent of martingale, high chance of a small win but with a chance of total ruin.

On the plus side I'll get a tax write off for many years. And I get to research Roth re characterizations since if I bust this my 5k contributions would have been better as traditional, but that account has fared much better and is only down 10%. My taxable is down 60%.

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Re: A different approach to asset allocation

Post by market timer » Tue Nov 22, 2011 9:40 pm

Becoming a good trader requires not just identifying the right path but also following it. You know you've made a mistake, because you wouldn't initiate this position with your current capital. If you learn from this mistake, you won't put yourself in this position again. Fortunately, it doesn't appear to be that costly.

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Re: A different approach to asset allocation

Post by bearcub » Wed Nov 23, 2011 7:11 am

Hey market timer,thanks for your honesty.I was tired of reading or hearing folks say how they got out in 2008 + and back in the market in time to get the big gains.I"m a skeptic + think many folks are full of it.I have seen people post their holdings on this and other forums.Not necessary but I respect that, even if I agree with them or not.Myself I invested poorly in the past because I was clueless.Could of,should of,would of.The less I tinker with my investments the better I do.Sometimes easier said than done.Best wishes,and I hope you continue to post.
Cheers

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Re: A different approach to asset allocation

Post by banrep » Wed Nov 30, 2011 5:10 pm

Looks like I got my bailout this week I'm lucky and I know I should have sold long before this point. My account balance was down 52% in less than two weeks at it's lowest point last Friday. I was liquidated four times, being forced to sell 4 of my contracts at the bottom and cover my short calls. Because of that I didn't fully participate in this upswing, so I'm still down around 10%. I'll sell off five more contracts now. That still leaves me about 2x leverage, but I'm okay with that because they are covered calls which expire in two weeks and are 1% in the money, so with 2x leverage my delta is less than 1. On December 16th when these all settle for cash I'll probably be done with futures. The access to leverage and 24 hour markets make it too easy to take on excess risk and waste commissions overtrading.

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Re: A different approach to asset allocation

Post by zaboomafoozarg » Sat Dec 03, 2011 1:55 am

I came, I saw, I read the whole thread.

And there's so much here.

More than anything, I find it to be the Ultimate Argument against this type of leveraging. Really, just insane. Getting out in 2 years is great, but it could have been much more difficult.

Of course, things could have been bull for the past 4 years and MT could be sitting on a mega amount of money now.

But we don't know what's going to happen in the future, and neither did MT. For that reason this is too crazy, too risky, and just an overall Bad Idea.

Wow.

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Re: A different approach to asset allocation

Post by DRiP Guy » Sat Dec 03, 2011 7:54 am

zaboomafoozarg wrote:I came, I saw, I read the whole thread.

And there's so much here.
....
Wow.
Yup, quite a ride! Unfortunately, I think those inclined to do such things in the first place are unlikely to be swayed by reading about the angst and personal circumstances such a strategy can lead to.

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Re: A different approach to asset allocation

Post by caklim00 » Mon Sep 24, 2012 1:35 pm

Curious as to whether you are finally positive again?

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Re: A different approach to asset allocation

Post by market timer » Mon Sep 24, 2012 7:27 pm

caklim00 wrote:Curious as to whether you are finally positive again?
Yes, I went positive in May 2011. Currently, I’m at somewhere around $220K, not counting my wife’s assets. This has all been from savings and gains from short term trading, not due to the rally in stocks. I was forced to stop mortgaging my retirement in March 2009. If all goes well, we’ll reach financial independence, having enough passive income to cover our living expenses, in about 2.5 years. It would be great to start parenthood without being required to have a job, though I expect to continue working into old age. I’ve been exceedingly fortunate for the past three years and am taking nothing for granted.

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Re: A different approach to asset allocation

Post by DRiP Guy » Tue Sep 25, 2012 11:31 am

market timer wrote:
caklim00 wrote: I went positive in May 2011. Currently, I’m at somewhere around $220K, not counting my wife’s assets. This has all been from savings and gains from short term trading, not due to the rally in stocks. I was forced to stop mortgaging my retirement in March 2009. If all goes well, we’ll reach financial independence, having enough passive income to cover our living expenses, in about 2.5 years. It would be great to start parenthood without being required to have a job, though I expect to continue working into old age. I’ve been exceedingly fortunate for the past three years and am taking nothing for granted.
I'm sure folks here would love to see those trading records, and understand your investing processes, if they differ from what you outlined here...

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DRiP Guy
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Re: A different approach to asset allocation

Post by DRiP Guy » Tue Sep 25, 2012 11:32 am

DRiP Guy wrote:
zaboomafoozarg wrote: Wow.
Yup, quite a ride! Unfortunately, I think those inclined to do such things in the first place are unlikely to be swayed by reading about the angst and personal circumstances such a strategy can lead to.
...or from post hoc stories of near-miraculous and instant success....

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Re:

Post by ejvyas » Wed Feb 20, 2013 8:57 pm

nisiprius wrote:Market Timer, I think you should consider making a pilgrimage to Gloucester, Massachusetts, and visit the Babson Boulder Trail. Pay homage to pioneering financial statistician Roger Babson. Bow slightly as you reach each boulder, and, when you reach this one, burn some scripophily in his memory:

Image
I live in MA so this goes on my summer things to do!

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