I think there has been some confusion here at Bull Markets recently.
- I think the long term risk:reward favors bears. That doesn’t mean I’m long term bearish yet. Market outlook and risk:reward are not the same things.
- I think there’s a 70% chance the stock market goes on to make new all-time highs, or at least comes close to making all-time highs in 2019.
- December is going to be volatile (this isn’t something that you need me to tell you – just look at the charts).
But there’s something else I’d like to mention.
Since starting this website, I have advocated using $SSO and $UPRO to trade. It’s clear to me that some members don’t have the stomache to trade $SSO and $UPRO.
From 2008 – 2017
As some of you know, I worked in my family’s fund from 2008 – 2017. During that period, we 40x’ed our capital, which amounts to an average annual return of 44.6%
Our fund exclusively traded USLV (silver’s 3x leveraged ETF) and NUGT (gold miners leveraged ETF), with smaller positions in UPRO.
But how did we achieve such high returns? High returns comes with high risk and high volatility. You simply cannot have one without the other. (This explains why most traders can’t beat buy and hold. They want stock-market like returns with bond-market like volatility.)
Let me give you a sense of our portfolio’s volatility from 2008 – 2017
- There were 3 times when we were down -50% from our high watermark, and countless times when we were down -30% (NUGT is crazy). Our strategy for NUGT was to buy into crashes. When it comes to “catching the falling knife”, you can almost always expect big losses in the short term (because no one can catch the exact bottom), followed by massive gains in the medium-long term.
- There was 1 time when we made 500% in 9 months.
Hence, a lot of our conversations would go like this in the afternoon “how much are we down this morning? -30%? That’s normal.”
Most traders are scared of volatility. We weren’t, because we generally knew what we were doing and which drawdowns were within normal parameters. Moreover, a big loss didn’t have a material impact on our finances. Past a certain point, money can only buy you so much unless you intend on purchasing private jets and islands. Since our drawdowns didn’t have a material impact on our financial wellbeing, we were able to remain unemotional and calm during drawdowns, which ultimately helped us massively outperform in the long run.
Why am I telling you this?
I started Bull Markets with the intention of helping people achieve the returns that we had. Not 10%. Not 20%. 30%+ (my parents used to say if you’re not making at least 20% a year, you’re wasting your time. Those were the high expectations we set).
Achieving 40%+ returns can only be done through greater than normal leverage, which also means the occasional large drawdown.
However, I now see that most readers cannot stomache this kind of volatility. When creating this website, I thought that everyone could have the same kind of risk tolerance and pain tolerance that we had. Clearly I was wrong.
It’s a sound strategy in the long run, but most people simply cannot stomache it. Everyone is entitled to their own risk-tolerance.
Hence, going forward, I recommend that people trade $SPY and $SSO instead of $SSO and $UPRO. Your returns will decrease, but you need to use the kind of leverage that you are emotionally and psychologically comfortable with.
So if you’re going to use $UPRO, please see the Medium-Long Term Model’s max drawdowns and understand what’s within the normal parameters.