It’s Worse than you think. Under Water after 18 years of investing?

Written on March 16, 2009 by OptionsRopeaDope

My apologies for the long periods of silence on this blog - I’ve been all cash since October 5th and intend to stay that way for awhile longer. Not that I don’t look at the market, in fact, I look at it constantly with the luxury of having no emotional investment at stake. And so after watching the meltdown and things get worse each day, (and when I noticed that the market has to rise around 70% just to get to where it was 10 years ago! (it was 90% last week)) I decided to do a little research to answer the following questions -

• What are the lump sum returns in the market each year going back to 1970 or so? (easy)
• What are the returns with Dollar Cost Averaging for each year, and how do they compare to lump sums? (harder)
• How do each of those strategies compare to Treasuries over similar time periods?

Now dshort.com has lots of graphs about the performance of the market, but I haven’t seen a DCA chart (which I think is probably much more relevant to 401ks and retirement savings than anything else. So I went to Google Spreadsheets (pretty awesome if you don’t use them) and looked up some GoogleFinance functions, and graphed them out. I shared the results with a few friends, but after hearing the President’s Press Secretary Robert Gibbs saying how the stock market has always been a great return over time, and after seeing more than a couple of CNBC guests smugly saying treasuries are a terrible investment, and anyone would obviously do better in stocks, I decided to share my results with the world. Here is the graph I came up with. The most spectacular point -

• At current market levels, dollar cost averaging (DCA) into the S&P or DJIA has NEVER outperformed treasuries for any currently living person’s working life (assuming 60-70 years of investing max).
• If you started dollar cost averaging into the market 18 years ago (1991), you’d be under water today. Not just worse than treasuries, or factoring in inflation - worse than rolls of cash in a mason jar in the backyard. That’s pretty much everybody 42 years old and and younger.

(Sorry for the resolution, I suck manipulating images. Original image in the Spreadsheet link below.) 

Some other notes -

• The later you started DCA, (that is, the younger you are), the worse you’ve done.
• If like most people, you’ve increased your investments over time, you’ve done even worse.

And think about this - the market would need to rise to around 1400 TODAY in order for the DCA return curve to be beat the level of treasuries over the past 30+ years (and even then, its spotty.)

Now the graph doesn’t take into account inflation (that would be a little too complicated for me) but I have a funny feeling that if inflation was added in, you’re under water no matter how long ago you started investing with DCA. It’s shocking. This has the feel of the entire financial planning industry basing their professions on complete lies (fact - for any currently living person’s working life, the stock market has never returned 10%/year, lump sum or otherwise.) I don’t have the answers, but for my money, I’d say real estate, and businesses I’m personally involved in are where my money is best invested (Warren Buffet style - that is, seat on the Board, special stock with dividends the public doesn’t get, etc.) The public markets have made suckers out of everyone. Just to throw a wrench in the mix, I’d love to see this stat brought up to all the pundits!

For your own reference here are some links -

• The raw Google Spreadsheet (uses GFinance to auto update index levels every day.) I didn’t include dividends, etc. For naysayers, note that if I had, it would have made the compounded returnseven worse if I said they were reinvested (which they usually are). Index levels only go back to 1970, but the trend farther back is very similar.
• Here’s the equation I used for dollar cost averaging returns.
• I used 1 year TBill constant maturity, and just assumed reinvesting at the new rate each year. I got the rates from here a couple of weeks ago. In most cases, longer term bills would have had even better returns, since rates have been steadily dropping for much of the last 30 years.

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Look out Below

Written on November 20, 2008 by OptionsRopeaDope

First - to the commenters and emailers that have asked where I’ve been, is the blog dead, have I fallen off the planet, etc: I closed my last trades on Oct 5 (some Iron Condors that got very sick that day and needed to be closed for a loss). Over the previous weeks I had noticed a couple of other blogs saying they were getting out until after election day. Frustrated at my flat performance lately, I wanted to hang in and grab what I thought was “fat premium.” Not fat enough  The VIX is over 80 today. If you look at a chart you’ll see that was a good time to get out. The S&P has fallen over 300 points since then. I’ve been in cash since and felt like a person that was going down a hill with no brakes on when I decided to jump out of the car and take a couple of scratches from the gravel, only to watch the car go over the cliff and explode in flames on the rocks at the bottom. A little shell shocked (but with my capital intact thank god) I’ve been directing my attention at some other business interests. It’s humbling to think traffic has increased here while I’ve been gone. Hell, RSS subs have nearly doubled. I imagine it is because of the Greek calcs I’ve messed with - if it is, expect more of those in the future as I get back in the saddle.

Now on to today - The S&P 500 closed at 752. For fun, on TOS I brought up the 10 year chart for the s&P 500. 10 years ago the S&P closed at 1163. The market will have to have a 54% rise to get to where it was 10 years ago. Wow. That means an entire generation that has contributed to 401ks FOR 10 YEARS has lost money on every one of those contributions. 

I don’t know what to think, except that I don’t know where the bottom is (no one does) but I know this isn’t it. The government has already increased the national debt by 700 billion (or trillions if you count the investments in AIG, Fed actions, etc) and it hasn’t stopped the bleeding. I’d actually be scared if the government tried to do more. I’m 38, and does my generation and generations younger than mine really have to bear the burden of all the mistakes these bozos have and are and will make? Please, the government has already oured enough into this hole.

And given the speed of this drop (S&P has dropped over 50% in a year, over half that in the last 6 weeks) and the credit crunch for businesses, I think the business failures have a long way to go. And there will be some domino effects for a long while.

I wouldn’t plan for a bottom. I’m not betting either way right now, in any case.

On an amusing side story, roll back to this article I pointed out about Warren Buffet selling puts. I think those liabilities were way, way underestimated. I’ve no idea what the premiums were, but I imagine right now that they are under water several times what the initial premium he collected was. Wow.

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Worst Financial Condition Since the Great Depression

Written on September 16, 2008 by OptionsRopeaDope

.. at least that’s what the talking heads are saying. My account balance doesn’t agree

 My apologies for the lack of updates. As of this moment all of my open trades for September are closed, with the exception of a put wing on my SPY Condor (at 113-115). The volatility increase puped it up a bit, but I want to wait a couple more days to regain it. Here is how my other trades worked out, some of which required some rope-a-doping.

RUT Iron Condor - closed for 14.88% profit (a large gain mainly due to rolling the initial call wing down early in the trade)

RTH Calendar - closed for 15.61% profit after adjusting to a double calendar (I opened a call calendar at 100 early last week, when RTH popped to 99 or so)

WMT Calendar - closed for 7.53% profit (I had made this a triple, but last Thursday closed the 57.50 calendars out and purchased new 62.50’s, making a new double)

I closed RTH Friday, and WMT yesterday. Both of those will make nice charts, and I’ll try to update them, going back in time for the greeks. Towards the end of the month I tend to slack off on watching them so closely…

Overall, at the moment I’m up 8.4% for September (that includes a loss earlier on IBM). With the extra premium in SPY I intend to strangle out, that should be a little more.

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Posted in Real Trades, Iron Condors, Calendars, RUT, SPY, RTH, WMT 2 Comments »

Cake Review

Written on September 9, 2008 by OptionsRopeaDope

Cake looks like a pretty cool new website, set up to exploit alot of the “Web 2.0″ trends out there such as social networking, groups, connections, etc. What makes Cake special is that it does applies all of this to an overall investment portfolio perspective. The “edge” Cake claims is that you can see other top performers, and network with them to share investment ideas, etc. Sounds like a great idea honestly. I decided to try it out.

Without signing up you can see some pretty cool insights, including under the “Insight” tab, which shows the top buy and sell symbols for the last day or two. Individual symbols also have some information, but it is very sparse. For example WMT was held by only about 10 members. I would have expected it to be more.

A basic step is to link to all of your brokerage accounts to get your full “portfolio” of investments. And that’s where my experience ended. For two reasons:

• Cake does not support OptionsHouse
• Cake does not support Think or Swim

.. which happen to be my brokers. They also don’t support TradeKing, another popular options brokerage. They do support OptionsXpress though.

As soon as they expand the list of brokerages they support, I’ll try again. Too bad for now though. Click here to try Cake out for yourself.

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Adjustment: WMT to triple calendar

Written on September 5, 2008 by OptionsRopeaDope

Easy decision here - WMT has been fighting the rest of the market, and broke throuh 60.60 on the upside.Earlier in the day I had an order to close it for a 15% profit (it got to 13% or so), now it is at a 6% profit.

My adjustment point was probably a little higher so I had a choice to make. Stick with it, and profit heavily if WMT moved down (or gapped down on Monday), or watch it turn into a losson a further move up? Or, make an adjustment and protect the profit, with a trade off of watching the profit develop a little slower.

I chose the second option. Not going to let this turn into a loss on a coin flip. I sold half of the 57.5 put calendars, and bought the same number of 62.5 call calendars.

Here’s the new profit graph.

Given how WMT is a very slow mover, this is a very high prob outcome for me, even if I have to wait a few days longer to take it off. A less mature me would have rolled the dice. And probably lost fast!

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Sep Position Updates - 2 Calendars, 2 Condors

Written on September 4, 2008 by OptionsRopeaDope

After flirting with adjustments (and losses) the last couple of days, today’s downward move yielded some great returns for my positions.

A note on the graphs - I’ve decided to ampilfy the price movement, as on the scale price movement is hard to spot. I’m going to try amplifying it by a factor of 4.

Also, I opened up an OCT RUT Iron Condor today and will scale into it further, but it won’t get mentioned yet. This update is focused on September expiration trades.

RUT Iron Condor - 650/660 puts, 780/790 Sep Calls  

Delta/Theta = .59

1 Day 1 Std Dev Move (11.6 points)

My short call hit a delta of 25 for about 5 minutes. After today, it is at 5, and the short put is at 8. Progress:

With a fuller chart, the interaction with IV, price movement, etc, is pretty clear.

SPY Iron Condor - 113/115 puts, 136/138 Sep Calls  

Delta/Theta = -3.26

1 Day 1 Std Dev Move (1.6 points)

The RRDelta is a little higher than normal because I don’t have calls any longer on the trade. Closed them out today for .03. My short put is at 10 with two weeks to go.

WMT Double Calendar - 57.5 Sep/Oct Puts, 60Sep/Oct calls  

Delta/Theta = -2.74

1 Day 1 Std Dev Move (.86 points)

WMT flirted with going up too far with WMTs earnings, but got dragged down with everything else, thank goodness. Check out the profit line… moving up nicely along with the IV.

Overall, I am sitting on around an 8% profit on the overall portfolio. All the odds are on my side for now. 

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Adjustments on IBM, RUT, SPY - SPX below 1260?

Written on September 4, 2008 by OptionsRopeaDope

First a note that nearly all of the tecnical analysis blogs I read (hat tip to Slope of Hope) say that when the SPX breaks/broke 1261, that puts are on the menu. Today it closed at 1236. Lots of pressure for further downward moves, which is fine by me right now.

A few adjustments the last few days -

I closed out IBM on Tuesday for a loss, probably around 20%. Fortunately, it was my smallest position.

Closed out my call wings on SPY (for a .03 credit) and RUT (.15) condors for a profit. Still have the put wings with low deltas.

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