iBankCoin
Joined Apr 14, 2016
5 Blog Posts

Don’t Buy Stocks Today. Probably Not Tomorrow Either

One of the best things you can do when buying stocks is procrastinate. If you want to buy a stock, take a deep breath.  Chances are you will probably be able to buy that stock at a better price later.  How good a chance, you ask?  I can tell you.

I looked at the last 250 days of trading in $SPY, roughly a year’s worth of data. Other stocks or ETFs may vary, but if I ran the data, I kind of doubt it will vary much.

Buying at the open is considered to be amateur hour, and yeah, that the way it works out. Over the last year, if you waited to after the open, you got a better price 248 out of the 250 days, that’s 99.2%.  But, there were two days that the market went straight up from the open.  Not to worry, though, if we waited until the next day in one case, or three days later in the other, you could have got a better price.

Of course, the professionals, we are told, buy near the close. I’m sure they get the best price then, yeah?  Just a little better. 206 times you could have gotten a better price the next day compared to previous day’s closing price, that’s 82.4%.  Don’t buy at the close, either.

Are there some days you consider yourself the world’s worst trader. You could caught buying the high of day, maybe as part of short squeeze?  Yes, bad things happen.  92.8% of the time you can get a better price the next day.  So, if you do make a mistake and buy at the high, don’t expect to get bailed out the next day.

Oh, you’re the world’s best trader? You can consistently buy at the lows of the day?  Great, but don’t think about holding.  Even if you buy at the low of the day today, 45.6% of the time you’ll be able to buy it lower tomorrow.  Think about that.  Almost half the time, a perfect trade will end up losing the next day.

The moral to the story? Don’t try to be perfect when buying stocks.  It won’t even help.

 

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Stock Market Crashes Aren’t Good for Anybody

Ben Carlson at the A Wealth of Common Sense blog wrote a nice article on how stock market crashes and poor performance aren’t necessarily bad, especially if you are young.

The gist of it is that millennials have many years to go until retirement, and a crash or low return environment now gives them an opportunity to buy shares cheaply now, with the expectation that stocks will resume fair returns for the unforeseeable future.

Woe to anyone already close to retirement and fully invested in stocks if there is crash now, but that’s not Ben’s concern in the article.

However, I would like to take exception with the idea that crashes and low current returns are really any good for anybody, even millennials with a lifetime of investing ahead of them.

  1. Millennials cover a fairly large age range, but if you are 30, there is a good chance that you (or your parents in your name) have already put together a decent nest egg. If that 30 year old sees his account crash from $50,000 to $30,000 (which happened in 2008) it will take a number of years to work back up $50K. As they say, a 40% drop needs a 67% increase to back to even. Years of earnings spent getting back to even in the hope there isn’t another crash around the corner.
  2. Crashes don’t happen in a vacuum. Stock crashes or moderate declines are often accompanied by recessions, which result in layoffs. Many of those junior workers are likely to be the first ones whose jobs are eliminated. (As we say in the accounting business, LIFO, or last in, first out.) Difficult to maintain those 401(k) deposits if you don’t have a job. Well, really, impossible since 401(k)s are job specific.
  3. And if our fine young millennial has been able to start a family and scrape enough money for a house? We know what happened to house prices in the last recession. Yes, you never know what the fallout of a crash is going to be, but chances are it’s not going to be good.
  4. Lastly, there’s the psychological impact of a crash. The theory is that you benefit by continuing to put money to work at the darkest times. But, in reality, hardly anybody does that. Our Great Depression era grandparents or great grandparents never trusted the markets or banks again. It took many years for regular folk to get back in the markets after 2008 and studies still say participation is at historic lows.

Under the most perfect situation, a crash might help a few people. But, for most everyone, crashes and years of underperformance devastate savings and lives.  Don’t wish them on anyone.

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InTZAnity

Looking for an ETF to turn small caps into a small bank account? I’ve got it for you: The Direxion Daily Small Cap Bear 3X ETF ($TZA). This ETF is designed to give you daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the Russell 2000® Index. That is, three times the daily movement of small cap index that is the basis for $IWM.

The positives for this ETF?

  1. it makes outsized moves on a daily basis on small caps, so if you can accurately predict the daily moves, you can make three times what you would make from the IWM.
  2. small caps are pretty volatile, and the IWM does move quite a bit each day, the average daily difference from high to low since inception for this ETF is 5.1%!
  3. This ETF and its ilk can allow you to skirt margin rules, giving you three times the buying power without borrowing funds from your broker.  Usually, you aren’t going to be able to margin $TZA, not fully.

I call this InTZAnity for a reason, because of the negatives:

  1. If you don’t predict this accurately, you can lose big for the same reasons as 1 above.  Remember, if you lose 110% (not out of the question in day on this crazy ETF) you need to make back 12.5% to get back to even.
  2. Like all these leveraged ETFs, it loses value over time in conjunction with its companion Bull ETF, $TNA. Look a one year graph of $TZA and $TNA against each other.  Under normal circumstances, both graphs slowly deteriorate over time…  Holding this over extended period, like more than a week, is like swimming against the stream; you may get somewhere, but it’s going to be a lot harder
  3. Small caps have been one of the best investments over the long run.  By buying $TZA you are making a bet the small caps will decline.  Why?  Are you that sure you can predict that this is the time the overall market will dive?  If so, can you let me know?

So, you can trade this on a daily basis, try to get it right and racking up substantial commissions or you can stay away from it completely and concentrate on something sensible, or you can try to short it over the long term.  Yes, essentially, short a short. DISCLOSURE:  that is my current position, I am short $TZA, planning for the long haul.

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The Big Question

The Big Question is how can we be at 18,000 on the Dow and 2,100 on S&P 500 when things are so bad.

  • Interest rates are near zero until you get out 10 years, many places in the world have negative rates,
  • GDP is in the toilet,
  • Market overvalued on a price/earnings basis
  • Buybacks distorting the market
  • and who knows have many negatives people can drum up that I haven’t bothered to pay attention to. Things can’t get much worse, right?

What if the bears are right and things really are pretty bad in the investing world right now? And yet we are at 18 thou Dow.

Maybe (prepare for heresy) 18,000 really isn’t very good. Maybe if things were really cooking, we’d be at a lot higher than 18,000. Maybe double. (Wasn’t there a book on Dow 36,000?) Adjusted for inflation, the all-time highs for the Dow are up a ways from here.

If you look at 18,000 Dow as the result of the worst case of circumstances, it changes things.What would it take to drop the market even further?  A recession?  Not likely, job numbers keep improving.  What would it take to push us higher?  Even a bit of good news?

Under this assumption, things would have to grow even worse for the bear scenario to happen. If things stay as they are (admittedly crappy) then there isn’t much that needs to go right in order to the market to move up exponentially.

I can’t predict the future, and I don’t even want to appear to try. But those of you waiting for the market to crash may have already seen it and good times aren’t too far away from happening.

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Prospecting for a Nugget

If you are a millennial, or even if you’re not, you probably are trying to desperately turn your small account with a discount broker into a giant fund that will enable you buy, say, a Microsoft Surface, so that you can use it to track your giant fund.

As such, you need a big hit. Yes, you could invest like Master Hedge Fund Manager Ray Dalio, and generate like 20% annual returns year after year.  But look at the math as it pertains to small accounts:

Start with $2,000, add 20% every year, and in 10 years you will have $12,000, or enough to buy a candy bar, or Samsung Neutron, or whatever it is they are selling in ten years. You’re just not going to become a millionaire starting with a small account if you invest like a sane person.

Fortunately for you, there are investment (ha!) vehicles that allow you make (or lose) a lot more money a lot faster.

Let’s start with a real popular one, the Direxion Daily Gold Miners Bull 3X ETF or $NUGT. This Fund is designed to give you three times the daily move of the Gold Miners ETF, known as $GDX.  Note the important word there, Daily. We’ll come back to that.

When the $GDX moves a little, $NUGT moves a lot. You get it right, you make a lot of money in a short time.  You get it wrong, you hear from Marg.  Yes, margin call, if you are able to get margin on these.  Thankfully, you usually can’t, so you’re safe, unless your wife is named Marg.

With $NUGT, if you can predict the daily moves properly using TA or voodoo or whatever, you can make big moolah. I’ve designed a little test to see if this ETF is right for you:

  1. You can’t predict the minute by minute moves of an ETF, accurately? Then stay away from this.
  2. You can? They why do you have a $2,000 account? Go work for Carl Icahn. He has billions, and will be happy to pay you millions for that kind of ability.
  3. You don’t know? See A.

Your homework for today is to look up “investing” in the dictionary. I am pretty sure there isn’t anything about guessing daily moves of an ETF that is based on another ETF.

For fun, there is also a comparable Bear ETF. It’s no better.

I know I said I would get back to the Daily thing, but I think you’ve learned enough for one day. Let’s just say that you can short this ETF (often), buy it (sparingly) but you should never hold it.  It will eventually tank badly.

I suppose I should say here that professional traders have the ability to use these as hedges and may get some value out of them as part of larger portfolio.  But, seriously, you weren’t going to use them like that, were you?

Disclosure: I am short $NUGT and $DUST now, and may be at any given time.

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