Raising Lazarus, the Leveraged ETF Investor ~ The Risk Averse Alert

Saturday, June 20, 2009

Raising Lazarus, the Leveraged ETF Investor

This past week reader J.R. (neither of "Dallas" fame nor to my knowledge the former NFL coach) sent me an article you might be interested in reading. The subject involves an issue you may not be familiar with.

J.R. was alarmed by what he learned, saying...

"Tom....this one is right up your ally. It will seem crazy at first but I need your undivided attention on this very detailed explanation. Perhaps, Cramer may have a point as to why SKF doesn't quite do what it's supposed to. Worse, it does do what it's supposed to, just not what we thought it is supposed to do. Crazy stuff here, but a seemingly educated and well done case against ETFs, especially Ultra ETFs.?"

Here's the article. I recommend you read it...

Now, I was aware of the risks the author raises. Yet since you might not be, and because the author does a nice job of explaining the matter simply, I wanted to pass this along.

Let me also share my reply...
I am familiar with the risk presented in the article you forwarded. And I accept this risk. I appreciate the fact that, "you are almost mathematically guaranteed to get a return that is not double that of the index" with ProShares 2x fund positions held for any period of time. Nevertheless, with a reasonable degree of correct timing over some relatively short-term duration you still can do better than the underlying index. Even when I was wrongly positioned earlier this year (Jan - Mar), the market's subsequent recovery brought my position back to the point where the loss I suffered was acceptable. Had I held the position a little longer I would have suffered no loss at all.

Cramer definitely has a point regarding SKF. It is the same point the author makes. However, does this mean they should be banned? I rather think Cramer is talking Wall Street's book (particularly Goldman's). He believes these leveraged ETFs punish what are otherwise good stocks. Contrarily, I believe most of the stocks in XLF (GS included) are grotesquely leveraged pigs waiting to be slaughtered. To blame the SKF for the recent travails of these companies is just plain ludicrous.

Can't say any valuable lesson was learned from my experience being on the wrong side of the [leveraged ETF] trade earlier this year ... other than that some significant portion of long equity players who were still positive at year-end '08 probably should have been expected to lock in their [reduced] profits at the start of the year. I should have foreseen this and not have been so quick to think the recovery we saw post-March bottom might come sooner. Unfortunately, the thought of "profit taking" at the start of the year never crossed my mind. Nevertheless, that recovery did come as anticipated proved the savior of my position. Since this is what I believed would happen, I did not panic out of my position late-February, early-March, despite the fact it was getting clobbered.

I think the underlying stance many leveraged ETF commentators have toward "market timing" submits to belief that such endeavoring is an exercise in futility. Of course, at some level I would agree with this. However, as an overriding theme of one's investment philosophy I reject the notion that mass psychology is entirely chaotic and indiscernable. Investing is one place where humanity's tendency to behave like lemmings is reasonably quantifiable.

Not sure if any of this helps answer the question you might have about whether I actually know what I am doing, or whether I am running on luck. To be perfectly honest it's a little of both. I suspect that, even Warren Buffett would confess the same at some level. That said, though, I do not suppose I could have matched his performance over the past 40 years were I his age. Then again, past performance is not indicative of future results and it is quite possible Mr. Buffett's unswerving faith in American capitalism might be put to the test straight ahead.

Quite the windbag, aren't I?

Anyway, my observation about "profit taking" at the start of the year was something I have been wanting to write about. Profit taking is not something you would expect following last year's unraveling. However, fear being a very powerful emotion and U.S. tax law working off the calendar year, selling at the start of the year originating from players fearing full loss of long-term capital gains makes a lot of sense.

And once this got under way, then came the lemmings...

* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!


Anonymous said...

I Received $400,000 to my LR account in 24 hours from Libertyreserveinvesting.com for my $10,000 deposit
Security-Investment is a High Yield Investment Program run by a group of investment professionals, We are backed up by Forex market trading, Financial market betting, Sports arbitrage wagers and various other investments in online and

offline funds. We are well diversified to provide our members with very safe return of 1000%-9000% after 24 hours You can think of this as a longterm secure investment pool.
As you know, many programs out there promise extremely high daily returns which are virtually impossible to live up to. We don't make any ridiculous claims, we simply provide program with a lucrative returns. Interest will be paid daily

at up to 5%-10% flat rate until payout period is reached. We realize that there are no guarantees in this market, however, we feel that our strategy of diversification and risk management will allow us to provide you consistent returns

well into the foreseeable future. In the future, we will design another plan for your long term investment as your diversification option in one place, in here.
Our program is a fully automated; meaning referral payouts, deposits, withdraws made automatic. Interest payouts are scheduled to be done one time during day, and will be made directly to your Liberty Reserve account.. Payments will be

made 7 days per week.
Invested amount 24 hours profit
$300 - $1000 1000% of your spend after 24 hours
$1100 - $5000 2000% of your spend after 24 hours
$5100 - $10000 4000% of your spend after 24 hours
$10100 - $30000 6000% of your spend after 24 hours
$30100 or more 9000% of your spend after 24 hours
If you are looking for secure offshore investing with guaranteed returns, join Security-Investment and you will see that we are the investment company for you. If you are looking for secure offshore investing with guaranteed returns,

join Security-Investment and you will see that we are the investment company for you.
Payment proof
Date: 2009-08-07 17:18
Batch: 182352XX
From Account: U6526268
Amount: $400000.00
Memo: libertyreserveinvesting.com

Do You want to earn $400,000 serious profit instant? Just deposit $10,000 in following site

Mail to me if you made a deposit use my referral link.I will return 15% of your spend instant.100% guaranteed money back.
MY email:cypkucjiox@gmail.com

HYIP monitor hyip programs monitoring high yield income program paying paid, HYIP hyip programs monitor, hyip monitoring, best hyip, paying hyip

Make millions liberty reserve and perfectmoney in paying hyips fastest Real Investment

Make $50k libertyreserve money daily on forex trading

Read news about hyips.make money fast and easy

More news about paying hyips

Post Your AD on 1000+ Forums
The Best HYIP Rating. The Fairest High Yield Investment Programs Monitoring Service