I
was mostly wrong about my expectations for 2013. I was bearish on
U.S. stocks, neutral on bonds, bullish on gold. I was wrong on stocks
and gold. Bonds were down big as measured by long treasuries,
however, the total bond market ETFs were only down about 2% after
dividends. Here are a few ETFs that I track:
IWM +36.8% Russell 2000
SPY +29.7% S&P 500
EEM
-5.8% Emerging Markets
TLT -15.9% 20-year U.S. treasury
GLD -28.3% gold
SLV -36.3% silver
I
pivoted to bullish on stocks, in part, because of two anecdotes. Two
people that I know were both extremely bearish on the U.S. stock
market early in the year. The first guy is a lifelong stock investor,
who wanted to sell everything and move to cash. What!? Why would
someone that has owned stocks all their adult life want to do that.
The one word answer: fear. The longer answer, media scare tactics and
zeitgeist (mood of the market).
The
second person, retired, with a
huge net worth wanted to play very safe and mostly avoided the stock
market, calling it a bubble. There were many times I held my nose and
bought, despite agreeing with their logical and bearish arguments. In
late April 2013, I posted a storm warning on this blog for the U.S.
stock market,
based on long term valuations and sentiment (link). The red flags are
still flying. However, just like long term weather forecasts, there
may be a lot of sunny days before the next big storm.
In
2013, I had a lot of small winners. APC Anadarko Petroleum, BRKB
Berkshire Hathaway, LGF Lions Gate Entertainment as well as the ETFs
SPY S&P 500, and IWM Russell 2000, were traded over and over
again. Another constant was heavy use of the terms: worms and small
fish. These terms are slang for high probability trades that generate
tiny profits.
Again, readers should not be excited at the high win
percentages each month or for the year. The odds going in are 80% to 90%, and the
payoffs are scaled accordingly. Using a fishing analogy, I spent a
lot of time on shore digging for worms, or in the wading pools
gathering bait fish instead of going out to the deep ocean looking
for Marlins. With the stock market up about 30%, aggressive bulls
did much better than me, the cautious hedger. That said, for the most
part, I avoided the pits of staying in cash, or trying to short the
stock market, and the virtual black holes of being strong and long in
gold or 20-year bonds.
Ironically,
one of the best winners in terms of return on capital was selling
puts on GDX (gold miners ETF). I took the trade when a Yahoo
columnist wrote that it would be in the worst 1% of stocks for the
next few months. Even though GDX had a horrible year, it held its own
during those few months and the puts expired worthless for about a
30% return on capital.Unfortunately, it was for a very small dollar
amount.
The
worst percentage loser came at the end of the year, when a court
decision went against APC Anadarko Petroleum and the stock tumbled.
Fortunately, even an eye-popping 900% loss (basis the option premium
collected), the small position size meant only a modest dollar loss.
Some other losers include short strangles on LGF Lions Gate, and
their movie Enders Game disappointed, and Catching Fire only did
about as expected. There was also the literal catching on fire of two
Boeing airplanes when I was short puts on BA. I often tempered my
bullishness by selling calls. Being short calls during a up 30% year
isn't so good. I was short calls on TSLA Tesla Motors during one of
its big up moves and covered for a modest loss. Option traders can
always play what if. Some Tesla call buyers made 5000%, or 50x their
money in a few weeks. The home runs are why small fish traders buy
options. The options are like lottery tickets, a few come in, but
overall the house wins.
For
2014, my "sure to go wrong predictions" are +5% for U.S.
stocks, +3% for bonds, -5% for gold. As always, predictions are
mostly for entertainment (and for selling subscriptions or books).
Keep in mind, that I was wrong, wrong, and wrong for my 2013
expectations. However, given what I believe is the semi-random nature
of the prediction game, maybe my turn in the sun will come in 2014
and I will double my readership. In any case, the money is made
trading, where risk management is just as important as market calls.
Even if a person is as wrong as I was in 2013, if they are open to
what the market is telling them, that person can have a decent year.
So Happy
New Year and thank you to all my long time readers. I know this blog
isn't as exciting as most. I don't swing for home runs. I tend to
stay away from the most popular stocks. I do tend to have a huge
percentage of winners, but it isn't due to hindsight trading or bogus
paper trading like many others on the Internet engage in. The trades
tend to be high probability trades at entry (the other side of these
trades is the tiny worm sized profits). I don't go into politics or
conspiracy theories, which is what seems to attract the huge page
views on some other blogs. I see 99.9% of the political and
conspiracy theory discussions as a waste of precious time and energy
for traders.
This
blog is as much for me as it is for the readers. I recommend that all
traders keep a trading journal. It doesn't have to be public, like
this one is. Keeping a journal is sure to improve your trading, your
processes, your objectivity. I feel like my trading has advanced
leaps and bounds by sharing my journey, as I enter my eighth year of blogging, and my
27th year of trading.
May
2014 be the best year ever. Cheers!
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