Wednesday, January 01, 2014

2013 year in review, grade B-

For calendar 2013 my trading account is up a bit more than +14%, which sounds good until a person looks at +30% for SPY (S&P 500) and +37% for IWM (Russell 2000). Long bonds (TLT) were down -16% and gold down even more (GLD) -28%. For someone that might trade all three asset classes, +14% might be considered a decent year. Overall, I give myself a B- for 160 winners and 20 losers. Before new readers get too excited about the high win percentage, understand that I mostly do high probability trades that pay very little. The person buying options with a 10% chance of winning are hoping for 10-to-1 payouts. I am getting the other side, the 1 side for perhaps risking the 10. It isn't exciting, but it does add up.

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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