Make Money While Cruising - List

[frank_f]

Thanks Delfin and Certeza.

I see I have a bunch of homework to do.

I followed the link you sent Delfin and have been stuck in Wikipedia for the last three hours following links (outside of checking my email to see how this thread is progressing). I do actually understand what buying long and selling short mean now (though I still don't understand how you can sell something you don't own). as well as what a call and put option is.

Still a little shaky on spreads. I know that I'm buying one commodity (i.e. soybeans) and selling another of the same type (i.e. soybean oil) but I don't understand the why and when yet.

Again, is there a starting place? "Commodities investing for Dummies" or "Investing in Commodities and not having a tractor pulling into your front yard". Something like that?

[Certeza]

Originally Posted by Delfin

If you wanted to limit volatility to a draw down of 5-6%, then you have no business investing in spreads. On that basis, you shouldn't invest in stocks, since a 10% correction is common. Or real estate. Or anything else I can think of other than a bond portfolio.

Completely false statement.

[Certeza]

Originally Posted by Delfin

Or, if you put $1 million into the account, you would have an even more meager investment return. I guess the question is why anyone with a brain would do that, since all you need is around $40k committed, with maybe another $40k in reserve if you get run over for a few months. Which by the way, is about a 10% possibility. Certainly can happen, so a very good idea if you chose to go down the path of investing in spreads.

You're missing the point. Sure they can only tie up the $40k as the aggressive portion and use the $1MM elsewhere, but when they state return they must do so on the entire portfolio. That's what I tried to explain in my post about notional funds.

As you suggest, if someone held another $40k in another account "just in case", their return is no longer 100%, it is 50%.

[Certeza]

Originally Posted by Delfin

Frank, some trades will work out, and some will not. Trading spreads is not for those who can't tolerate the potential of a draw down in equity, but as noted, I would say the same advice applies to virtually any other type of investment short of CDs or bonds. The question is, how much money do you have to commit, and do you have any reserves to draw on if things go bad for a period of time. Spread trading across all categories many time over the course of a year (Moore's method) yields consistent returns. However, depending on the luck of the draw, you may need backup margin if you happen to enter the cycle at a point where you see negative returns. If that isn't possible or comfortable, then don't do it.

You don't need "backup capital" if you don't expose yourself to excess risk in the first place. And obviously people have varying tolerance for drawdown. The amount being suggested here exceeds the tolerance of about 99.99% of the population.

[Delfin]

Originally Posted by frank_f

Thanks Delfin and Certeza.

I see I have a bunch of homework to do.

I followed the link you sent Delfin and have been stuck in Wikipedia for the last three hours following links (outside of checking my email to see how this thread is progressing). I do actually understand what buying long and selling short mean now (though I still don't understand how you can sell something you don't own). as well as what a call and put option is.

Still a little shaky on spreads. I know that I'm buying one commodity (i.e. soybeans) and selling another of the same type (i.e. soybean oil) but I don't understand the why and when yet.

Again, is there a starting place? "Commodities investing for Dummies" or "Investing in Commodities and not having a tractor pulling into your front yard". Something like that?

I think one of the best ways to learn is to setup a play money account at Interactive Brokers, take a free trial for 30 days of Moore's service and play with it. You'll learn what you need pretty quickly, although I have to tell you, figuring out Interactive Brokers is more of a headache than getting your head around spread trading. There are many investing alternatives of course, one of which is to turn your money over to someone with a vested interest in convincing you that you're too stupid to do this yourself. Such is the world of investment advisers. Best of luck.

[jostalli]

Originally Posted by Certeza

You don't need "backup capital" if you don't expose yourself to excess risk in the first place. And obviously people have varying tolerance for drawdown. The amount being suggested here exceeds the tolerance of about 99.99% of the population.

OK it is clear at this point that Delfin and Certeza disagree on Delfin's investment strategy. Certeza, even though you do not manage small accounts please for the sake of argument tell us what would be the best investment strategy for a $40k account.

[Certeza]

Originally Posted by jostalli

OK it is clear at this point that Delfin and Certeza disagree on Delfin's investment strategy. Certeza, even though you do not manage small accounts please for the sake of argument tell us what would be the best investment strategy for a $40k account.

We don't disagree on his strategy. Seasonal commodity spread relationships are widely understood and accepted in the industry. Tons of professionals trade them.

We disagree on the way he is stating the success of it. Relative to the risk, the returns aren't very great. He is presenting it in a way that makes it appear more profitable and less risky. Literally, if I advertised my performance that way, I would likely get shut down, and if clients lost money I would possibly face jail time.

To answer your question, you must indicate what an acceptable loss is for you. If you had a $40k account, how low could it go before you were up at night worrying about it, or at what point would you be ready to pull the money and invest elsewhere?

[jostalli]

Right. Thanks for clarifying.

I think most people understand risk/reward as it relates to investing. If someone were explaining an investment opportunity to me where I could double my money in a year I would certainly expect high risk. If you want to make a lot with just $40k then you are risking it.

[Certeza]

Originally Posted by jostalli

Right. Thanks for clarifying.



I think most people understand risk/reward as it relates to investing. If someone were explaining an investment opportunity to me where I could double my money in a year I would certainly expect high risk. If you want to make a lot with just $40k then you are risking it.

You can risk as much or as little as you want. You decide the risk first, then find the best returns for that level of risk. Not the other way around.

[jostalli]

Originally Posted by Certeza

You can risk as much or as little as you want. You decide the risk first, then find the best returns for that level of risk. Not the other way around.

OK can you double your money in one year with 10% risk? How about 20%? 30%?

[boden36]

It seems to me that Certanza is using theory to show that spread trading as we do it does not work, and we are saying that we have a track record of actually doing it successfully and for significantly reliable profit.
The inference here is that unless we employ an expert like Certanza, then we are not going to make a regular profit. We have found that inference unfounded in real world experience.

Regards,
Richard.

[Certeza]

Originally Posted by jostalli

OK can you double your money in one year with 10% risk? How about 20%? 30%?

It would be very difficult for you to double your money, year after year, with only 10% max risk. Same with 20% max risk. Starting to get a bit more doable at 30-40% risk.

But why do you need 100% annual returns? Starting at $40k and getting half that you'd be at $2MM within 10 years.

[Certeza]

Originally Posted by boden36

It seems to me that Certanza is using theory to show that spread trading as we do it does not work, and we are saying that we have a track record of actually doing it successfully and for significantly reliable profit.
The inference here is that unless we employ an expert like Certanza, then we are not going to make a regular profit. We have found that inference unfounded in real world experience.

Regards,
Richard.

Not at all! I've never said you have to employ a professional. And I fully acknowledge the consistency of returns over time. I'm correctly identifying that according to Moore's published graph, there are frequent periods of large drawdowns, and that the volatility of returns on a $40k acct is extremely high. Doesn't take theory to accurately analyze a return graph.

[Sondor]

Originally Posted by boden36

It seems to me that Certanza is using theory to show that spread trading as we do it does not work, and we are saying that we have a track record of actually doing it successfully and for significantly reliable profit.
The inference here is that unless we employ an expert like Certanza, then we are not going to make a regular profit. We have found that inference unfounded in real world experience.

Regards,
Richard.

I've been enjoying this thread and greatly appreciate Certeza's real-life risk expectancy examples, but I'm a bit baffled. We've all been reading the same posts I assume?

Why is it so hard to understand that Certeza is simply demonstrating that risk should be demonstrated in an apples to apples basis. Not for the SEC, not for blowing smoke etc... but to keep trading strategies truly comparable?

Perhaps an extreme illustration would help. Let's pretend for a moment we are back in the early 80's in Miami. There are three of us sitting down to a few cocktails and a chat on investing.

Person A - Grandpa has no tolerance for risk. He's into capital preservation and not capital appreciation at this stage in his life. Grandpa happily places his life's earnings into Treasury Bonds. Grandpa sleeps well knowing that no matter what happens short of a nuclear war he'll earn ~12%-15% with virtually no risk to his hard-earned capital.

Person B - Farmer Bob is middle aged and earns his keep as a farmer. Bob knows that most years he invests ~$100k in seeding, tending, and harvesting his crops each year, however he typically earns ~$200k for his efforts at the close of each year. Sure now and then Bob's crops return a fraction of the $100k invested, sometimes as low as say $25k, but hey, locusts happen?

Person C - Drug Smuggler Slick Willy is young and willing to take great risks. He knows that a kilo of cocaine purchased in S. America for $500 will net him 40x his money ($20k) back in Miami.

Slick Willy eventually gets busted and not only loses some of his capital, but also his freedom. Luckily Slick Willy has a good Attorney on retainer and gets sentenced to just 5 years in a plea-bargain. Slick Willy will be out of jail in just a few years (good behavior) and sees it as a reasonable level of risk for the earned reward which he has wisely stashed for the most part.

Certeza is simply clarifying that risk needs to be fairly evaluated for any investment, and expected returns are based on the level of risk you are willing to take.

Taking Slick Wily risks for Farmer Bob level returns is not a great investment strategy.

If you are going to take Slick Willy risks, at least earn Slick Willy returns.

(I'm not trying to imply by any stretch that Moore's system is at all illegal. Just trying to exaggerate risk vs. reward for illustration purposes only.)

Speaking of the early 1980's, as some of you know the classic 1983 movie Trading Places was based on a bet between Richard Dennis and his friend William Ekhardt. Dennis believed anyone could be taught to trade, whereas Ekhardt believed he had an innate ability that couldn't be taught.

Dennis placed an ad in the Wall Street Journal looking for newbies he could train to test his theory and a bet made with Ekhardt. These recruits (students) became known as his "turtles".

The outcome was Dennis was proven correct and there were some valuable lessons learned from his turtles suitable for anyone to follow:

1) Anyone willing and intelligent (he selected people who excelled in their respective fields to be his turtles) *can* be taught to trade successfully by following a general system

2) If you have a $10k account, you should never-ever put more than $2,500 at risk at any given time.

There were plenty more lessons, but the key takeaway for the sake of our discussion is number two as again it relates to risk vs reward. Note the cap of a 25% drawdown? Risk is risky and should be rewarded accordingly, but never taken on without fully understanding the... RISK

Dennis famously turned an initial $5k into over $100 million. He's obviously fully on the risk-taking bandwagon, but even he has a level of risk tolerance he's not willing to exceed, and that level of risk (25%) is FAR less than Moore's system as touted!

(several books have been written on or even by the Turtles if you're interested - great reads!)

[Delfin]

Originally Posted by boden36

It seems to me that Certanza is using theory to show that spread trading as we do it does not work, and we are saying that we have a track record of actually doing it successfully and for significantly reliable profit.
The inference here is that unless we employ an expert like Certanza, then we are not going to make a regular profit. We have found that inference unfounded in real world experience.

Regards,
Richard.

Thank you, Richard. Better said than I. Ask one man what time it is, and he says 3:30. Ask another and you'll find out to build a watch, then explain to you why time doesn't exist.