You can buy all of the best stocks and still lose money, providing you buy them at the wrong time.
Back in the old days, I would go “all in” and “all out” like a fucking maniac, making outrageous splashes along the way. However, in time, I came to the realization that my buy and sell points will almost always be wrong.
The sooner you realize that no chart or divine intervention can enable you to time the top or bottom perfectly, the sooner you will stop making an idiot of yourself on Wall Street.
Investing is all about “staying in the game.” Preservation of capital during arduous times is key to making a fucking killing when times are good. In other words, you can’t make shit without food, if you know what I mean.
For young/novice investors, I suggest keeping individual positions small, no bigger than 5% of capital. This way you can experience the market, without breaking your face open on a bunch of dumb shit.
In the past, I’d recommend an asset allocation model that would mirror the S&P 500. For example, 20% banks, 10% industrials, 15% tech etc. However, since the market spits on people who do that now, I have altered my investment philosophy dramatically.
Instead of asset allocating, I now hedge my portfolios, via a myriad of long/short trades.
Let’s say I have 100k to invest and I am willing to allocate 70k on the short side, since I am a bearish motherfucker. Of the 70k, I want to allocate 10k into FAZ (300% short banks). Note: 10k into FAZ gets me 30k exposure, since it is 300%. It’s important to recognize the leverage, especially when hedging with upside longs.
With 10k to spend on a maniac etf, it’s VERY important to get good prints. Knowing my first trade will be wrong, I buy an initial 2k or 20% of my FAZ funds, at the market. I get filled at $70.
Ideally, I will buy FAZ in 5 parts, all $2,000 orders.
Right after I buy it, FAZ shoots higher to $74 and looks ripe to break the fuck out. Quickly, I buy more, with the caveat that the new purchase will be sold quickly, since the etf is on fire. Remember, I expect to lose money on my first trade.
But, life does not always work out the way you want.
So, now I have 4k in FAZ with an average cost of $72 and life is grande. The next day, unbeknownst to me, the fucking government reveals some new plan to inflate all bank stocks, sending FAZ reeling down to $60. Now I am fucked, right?
Well, not necessarily. First of all, I was only allocating 70% of my funds to the short side and I did not have a chance to go “all in” yet. To date, I only spent 20% of the 70% or 14k. With 30% set aside for long positions, quickly, I hedge my FAZ and other shorts, buying some FAS amd UYM. Trying to stay in line with my target ratios, I only spend 6k on my longs.
I know this is getting confusing, bear with me.
Let’s assume the market continues to melt up, sending my FAZ down another 10 to $50. Considering FAZ is down almost 30% from my initial purchase price, I decide to buy more.
So I step in and buy another 2k worth at $50. After my third purchase, my average cost is $62.6.
Understanding I am on the wrong side of the trade, I must be extremely patient with my next two buys. After all, they will define my final cost basis. If FAZ is to gap higher and eclipse my average cost of $62, before I get the chance to allocate the remaining 4k, so be it. At this point, I find myself in a hole. Risk management is key, not greed.
So, a week goes by and the market is on an idiot streak to the moon. Aware of my surroundings, I decide to allocate the full 30k or 30% set aside for longs. I buy all sorts of stupid shit, like FAZ, UYM and URE. However, since I base my investments on a blend of price action and fundamentals, my goal to sell a large portion of my longs, if not more, at the next inflection point, otherwise known as the time when I will become Godly.
Remember, my bias is on the short side and I am sticking to it.
A few more days pass and the market is simply out of its mind with bullishness. The news is still horrid, but stocks are going higher anyway. Almost everyone I know is bullish and mostly everyone I know is stupid.
Perfect.
By this time, FAZ is printing $35 and I am down 43% from my initial purchase point, on a 3/5ths position. Assuming I allocated 60% of the funds set aside for shorts, or 42k, and my losses in the other shorts vehicles are equal to my maniac FAZ position; total losses, following a mind numbing melt up, should be approximately 18k or 18% of my starting capital (100k).
However, because I rode the wave of inept optimism with my longs, all 30k worth, my total losses are somewhat muted. Due to my stubbornness, I was late to the bull rally. Nonetheless, I ended up making a sweet 30% on a variety of leveraged longs, or 9k.
So, net-net, my losses are 9k or 9% of my assets, aka “a fucked up start.”
With 14k left in cash, my next trades must be perfect. Bucking the trend, I step in and buy another 2k worth of FAZ at $35, despite my “smart friends” begging me not to. Now, my cost basis on FAZ is $51.94.
A few more days go by and I sense an inflection point. Quickly, I sell off some of my profitable longs, at least 25% of the positions, and allocate the last 1/5th of my short funds, as the market begins to roll over. I get filled on my last trade of FAZ @ $41.
With my target exposure (70%) on the short side fulfilled, my cost basis for FAZ is $49.50. My cash position, from the sale of 25% of my longs (39k), is approximately 9k or 9% of assets—which will be set aside for an emergency or trading opportunities, such as FAZ taking another dive lower or “hot tips.”
Over the next week, “The Fly’s” prophecies come true. The market swan dives into pig shit and vomit. Along the way, I scale out of most of my longs, leaving my long exposure at a mere 5%. Net-net, I end up making 15% on my longs or 4.5k.
As God would only have it, my FAZ position spring boards to $60, gifting me a 20%+ gain. Not trusting the market, I take my profits and go to cash, leaving a token 5% short position.
On my shorts, I end up making 20% or 14k.
Unfortunately, along the way, with the 9k in cash, I made a few errors, due to the market chopping around. I end up losing 2k on erroneous trades, mainly because I listened to the advice of my “smart friends,” who had some “hot tips.”
After it’s all said and done, starting with an initial 100k, I end up booking 16.5k in profits or 16%.
Moreover, I have a 90% cash position and anxiously await to do it all over again.
UPDATE: Wood is talking about position sizing too. Get your BBQ sauce and head on over there now, ya hear?
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