Information About Myself [Optional Read]:
About one year ago, I began to start accumulating more money than my life costs to live, so I started thinking about where to put it. I started out on Bogleheads forums, learning about investing and asset allocation. I read a lot and began to study on how to build an optimal portfolio which would accumulate the most wealth possible over the course of my working life.
After a month or two, I felt that I had learned just about everything useful there was to learn about personal finance and investing, and was content to resign myself, hopefully, to average returns of about 10% per year.
A mantra over there, which I never had reason to question initially, was that the market was impossible to time, and although one might get lucky, anything other than a buy and hold was essentially taking a stupid gamble with capital that you should just invest and let sit for decades in order to grow into a few million to retire on, if you knew what was good for you.
However, I just couldn't accept the fact that 10% ROI was the best the market had to offer. I began to wonder why everyone didn't just take out loans at 5% interest if they were expecting 10% average returns from equities in order to boost their base ROI. I learned that this was called leverage, which everyone seemed to think was a stupid and reckless idea to utilize, but could never seem to offer me a rational reason as to why.
I still believed that the market was random at the time, and that all we had to go off of was past statistics. I began to theorize that if the maximum market drawdown was about 50% over the past however many decades, I could get my portfolio leveraged somewhere around 175%, and likely make drastically increased returns in most scenarios, while avoiding going bust in the worst-case scenario.
I began to look into other avenues to reduce my asset allocation's standard deviation in order to increase my leverage even further without a significant chance of going bust. I began to research ways to do this, and came upon futures and options. I began to craft some positive expectancy long-term strategies using some bull call spreads and synthetic longs while respecting my risk parameters, and I decided to send an email to my old business teacher who I vaguely knew had some involvement with the Chicago Board of Trade for some information about using options for leverage and advice on asset allocation.
He replied back to me, and I don't remember everything he said, but one line in his email drastically changed the direction of my efforts. It was something along the lines of, "You're going to load up on a leveraged all-long portfolio and risk losing more than half your money in the next market crash? LOL."
I was shocked that my extensively planned and researched portfolio was absurd to him, and for the first time I began to question whether the market couldn't be timed at all like I'd been taught adamantly from the beginning of my studies. I had no idea why I didn't think to wonder about it before now. I literally thought that a 50% drawdown was an eventual inevitability up until that point, and it was a ludicrous notion to him.
I began to think things to myself like, 'The market went down around 50% from it's all time highs in 2007, how likely is it that there was no way to distinguish the down-trend from it's normal state for that ENTIRE time?' I started to re-examine every premise I had taken for granted; I started to look at rational ways to quantify macro-trends in the market, and how to take advantage of that information.
I figured that if I could at the very least reduce major drawdowns by half with sidelining during very poor market conditions, the increased exponential growth I could capture would result in an extreme increase in capital from typical mutual funds and indexes over the years.
I stumbled upon this site along several others during my research, and continued to learn just how far down the rabbit hole goes. My next thoughts were, 'What if I shorted instead of sidelined during those periods of time, the returns would increase even further..' and, 'Wow, individual sectors move much faster than the broad-based indexes, what if I traded trends within those instead?'
Quickly, it finally began to sink in what a massive amount of opportunity the market provides if one could discard conventional wisdom and apply rational thought to the market despite the common opinions and conventions. Stocks move faster than sectors, option prices move much faster than their underlying, et cetera, et cetera...
Since then, I've probably read over a thousand thread pages on ET on various methods, tried several out myself, lost about a third of my account in the span of a few days right off the bat due to typical over-confidence and inexperience, learned a very important lesson about risk management, and have been slowly reducing the slope of my negative equity curve over the past six months since. I have about one-third of my initial balance remaining.
I was okay with my beginning account balance being tuition cost, if you will, and it's looking like I've learned enough to where I won't even need to re-load it at this point. That definitely wasn't the case when I was learning to play poker (which seems to be a pretty common theme among traders interestingly enough). All in all, I'm pretty satisfied with the way things have turned out so far. Or at least that's what I'm telling myself.
My Current Perspective:
And so, this brings me to today. I've been feeling like I've hit a plateau hovering just under break-even for some time, but recently I took a little time off from the market due to the birth of my second child, and I think the opportunity has granted me some perspective in order to fine-tune some of my goals.
For starters, I asked myself why I continue to use actual capital when I am perfectly capable of learning from simulation. With poker, using fake money drastically reduces the quality of the game, and therefore the opportunity to develop one's skills, but that clearly isn't the case here. I could only conclude that a subtle, previously unacknowledged sense of pride and perhaps a little greed has been influencing me in this case.
Also, I have actually had positive results with equities on longer time-frames, but stopped allocating my time to study and manage positions like those in order to concentrate more fully on experimenting with futures. Again, I feel that I have gotten ahead of myself instead of being patient with the process of seeking to continually optimize potential returns while continuing to develop previous success.
Lastly, I feel that I have slowly over-complexified my trading style itself as I've been swinging for the fences with trading futures, seeking to learn and master too many different market conditions at once instead of building things from the ground up, in a simple manner.
Recently, I read a post about how making a SINGLE tick per day in the ES futures market beginning with ONE contract amounts to an ROI for the year in the triple digits. It hit me then that I've started to drift off the mark over time, and that if I could reign things in and even focus on the goal of making a SINGLE tick per day, I could consider myself wildly successful by the standards of about 99.9% of the entire financial industry. And that, is the goal of this journal.
About one year ago, I began to start accumulating more money than my life costs to live, so I started thinking about where to put it. I started out on Bogleheads forums, learning about investing and asset allocation. I read a lot and began to study on how to build an optimal portfolio which would accumulate the most wealth possible over the course of my working life.
After a month or two, I felt that I had learned just about everything useful there was to learn about personal finance and investing, and was content to resign myself, hopefully, to average returns of about 10% per year.
A mantra over there, which I never had reason to question initially, was that the market was impossible to time, and although one might get lucky, anything other than a buy and hold was essentially taking a stupid gamble with capital that you should just invest and let sit for decades in order to grow into a few million to retire on, if you knew what was good for you.
However, I just couldn't accept the fact that 10% ROI was the best the market had to offer. I began to wonder why everyone didn't just take out loans at 5% interest if they were expecting 10% average returns from equities in order to boost their base ROI. I learned that this was called leverage, which everyone seemed to think was a stupid and reckless idea to utilize, but could never seem to offer me a rational reason as to why.
I still believed that the market was random at the time, and that all we had to go off of was past statistics. I began to theorize that if the maximum market drawdown was about 50% over the past however many decades, I could get my portfolio leveraged somewhere around 175%, and likely make drastically increased returns in most scenarios, while avoiding going bust in the worst-case scenario.
I began to look into other avenues to reduce my asset allocation's standard deviation in order to increase my leverage even further without a significant chance of going bust. I began to research ways to do this, and came upon futures and options. I began to craft some positive expectancy long-term strategies using some bull call spreads and synthetic longs while respecting my risk parameters, and I decided to send an email to my old business teacher who I vaguely knew had some involvement with the Chicago Board of Trade for some information about using options for leverage and advice on asset allocation.
He replied back to me, and I don't remember everything he said, but one line in his email drastically changed the direction of my efforts. It was something along the lines of, "You're going to load up on a leveraged all-long portfolio and risk losing more than half your money in the next market crash? LOL."
I was shocked that my extensively planned and researched portfolio was absurd to him, and for the first time I began to question whether the market couldn't be timed at all like I'd been taught adamantly from the beginning of my studies. I had no idea why I didn't think to wonder about it before now. I literally thought that a 50% drawdown was an eventual inevitability up until that point, and it was a ludicrous notion to him.
I began to think things to myself like, 'The market went down around 50% from it's all time highs in 2007, how likely is it that there was no way to distinguish the down-trend from it's normal state for that ENTIRE time?' I started to re-examine every premise I had taken for granted; I started to look at rational ways to quantify macro-trends in the market, and how to take advantage of that information.
I figured that if I could at the very least reduce major drawdowns by half with sidelining during very poor market conditions, the increased exponential growth I could capture would result in an extreme increase in capital from typical mutual funds and indexes over the years.
I stumbled upon this site along several others during my research, and continued to learn just how far down the rabbit hole goes. My next thoughts were, 'What if I shorted instead of sidelined during those periods of time, the returns would increase even further..' and, 'Wow, individual sectors move much faster than the broad-based indexes, what if I traded trends within those instead?'
Quickly, it finally began to sink in what a massive amount of opportunity the market provides if one could discard conventional wisdom and apply rational thought to the market despite the common opinions and conventions. Stocks move faster than sectors, option prices move much faster than their underlying, et cetera, et cetera...
Since then, I've probably read over a thousand thread pages on ET on various methods, tried several out myself, lost about a third of my account in the span of a few days right off the bat due to typical over-confidence and inexperience, learned a very important lesson about risk management, and have been slowly reducing the slope of my negative equity curve over the past six months since. I have about one-third of my initial balance remaining.
I was okay with my beginning account balance being tuition cost, if you will, and it's looking like I've learned enough to where I won't even need to re-load it at this point. That definitely wasn't the case when I was learning to play poker (which seems to be a pretty common theme among traders interestingly enough). All in all, I'm pretty satisfied with the way things have turned out so far. Or at least that's what I'm telling myself.
My Current Perspective:
And so, this brings me to today. I've been feeling like I've hit a plateau hovering just under break-even for some time, but recently I took a little time off from the market due to the birth of my second child, and I think the opportunity has granted me some perspective in order to fine-tune some of my goals.
For starters, I asked myself why I continue to use actual capital when I am perfectly capable of learning from simulation. With poker, using fake money drastically reduces the quality of the game, and therefore the opportunity to develop one's skills, but that clearly isn't the case here. I could only conclude that a subtle, previously unacknowledged sense of pride and perhaps a little greed has been influencing me in this case.
Also, I have actually had positive results with equities on longer time-frames, but stopped allocating my time to study and manage positions like those in order to concentrate more fully on experimenting with futures. Again, I feel that I have gotten ahead of myself instead of being patient with the process of seeking to continually optimize potential returns while continuing to develop previous success.
Lastly, I feel that I have slowly over-complexified my trading style itself as I've been swinging for the fences with trading futures, seeking to learn and master too many different market conditions at once instead of building things from the ground up, in a simple manner.
Recently, I read a post about how making a SINGLE tick per day in the ES futures market beginning with ONE contract amounts to an ROI for the year in the triple digits. It hit me then that I've started to drift off the mark over time, and that if I could reign things in and even focus on the goal of making a SINGLE tick per day, I could consider myself wildly successful by the standards of about 99.9% of the entire financial industry. And that, is the goal of this journal.
