Friday, February 24, 2012

Caution, Children At Play

I think I've been remiss in my blogging. I should have been posting caveats in each post, admonishing any readers that I am not a certified investment advisor of any sort. Lest you be enticed into attempting to replicate my own performance, let me repeat the traditional mantra of the stock market. Past performance is not indicative of future performance, your results may vary. I feel you might be best warned by a large rectangular yellow sign with the words "Caution, Children at Play." In my case, it might be better to state "slow children at play."

Caution is due when playing with leveraged ETF's. They are not for the faint of heart, nor those who are not well-healed, nor novices who cannot monitor the markets they represent closely. As has been stated by others, never play the markets on margin, and never play with money you can't afford to lose. As well, position limits might be a safe precaution. There are those who recommend no more than two percent of your portfolio being bet on any one speculative trade, so as to limit your losses if the wager goes south.

I tend to break all the rules, myself, that I would chasten others to abide by. Maybe Momma did raise a fool. Whatever the reasons, I tend to have a high tolerance for risk. The funds that I play my stock market games are within various 401k accounts, and I can afford to lose them, though that is far from being my goal. There is a risk/reward ratio involved in my trading, and I'm willing to assume tremendous risk as long as I'm very well rewarded. I'm up over seventy percent so far this year, but that could change in a heartbeat.

Let's take a look at the wisdom of using leveraged ETF's on a long term basis. The prospectuses of the various LETF's all warn that the basis of the leverage employed is intended to replicate the change in value of one day of trading. Over longer periods of time, that performance can so degrade as to completely distort the returns you might have expected. The link I am posting would make any explanation of mine redundant, so please take a moment to read

Okay, you're back? Did you get that? Over longer periods than say, just intraday at best, or one or two days, you will not achieve the performance you expect. I am confident that the silver market is in a long term bull, one that will rise steadily with more up days than down. So I will continue to employ LETF's myself. But today, when I reviewed some previous trades that were placed on 11/17/2011, I noticed an anomaly. Due to the high volatility silver pricing has undergone since that time, I am underwater on what should have been a profitable position.

Specifically, on that date I purchased 196 shares of USLV, using the proceeds from the sale of 164 shares of AGQ. Were I today to sell the USLV to repurchase the AGQ, I would actually lose ground on the trade, reacquiring only 162 shares in the process. This due, undoubtedly, on the vagaries of fate and idiosynchrasies of employing a short term vehicle for a long trip ride. Apparently, there were enough down days in that interim period that it exacerbated the losses, rather than the gains, even though silver has recently experienced a nice uptrend.

So how do I extricate myself from this mess? Well, I'll have to let the triples run for much longer, during an uptrending market, before converting back to doubles. I guess I've just discovered what my core position is of USLV, because I am loathe to sell at a putative loss. A fairly lengthy uptrend, say to $40 or $42 silver should be enough to clear the books, and I'll just need to be cognizant of this mischievous aspect of LETF's going forward. When you like to play in the fast lane, you need to keep an eye open for vehicles with undependable steering.

But Silver. Buy Gold. Save Copper. Start Now.

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