CIS was up thirteen million from a couple of weeks shorting Nikkei 225 futures. There was more blood in the streets than he had seen in years.
Price collapse in Chinese equities had infected the American market for weeks ending Monday, August 24th. Today was different.
Despite his massive profits shorting the free-fall, CIS could feel the tide turn.
The market began to rise on heavy volume. This was the first sign of positive price impact.
Volume shot index values skyward.
The Japanese day-trading cult figure known only as CIS grew convinced throughout the trading session that the market was on the rebound. He covered his short futures contracts.
This was looking like the mother trucker bottom of all Black Swan micro-crashes in the new century.
Why Thirty Four Million Dollars Are More Tempting than Eggs and Nattō
Most Japanese day-traders would have stopped for green tea and breakfast after making thirteen million in a two week short. CIS remained strapped to his laptop. He tested the new market strength by purchasing some index futures contracts.
Soon he had scaled into nine hundred and seventy contracts long a hundred and forty-five million dollars of Japanese equities. This according to Bloomberg.
The twenty-something trading ace nimbly skipped away from the market with thirty-four million in profits. He was eager to get back to playing video games and poker.
Others were not so lucky. Over two trillion in value was erased from household savings in just six days according to CNN.
Index futures are the most powerful tool for supercharging average returns. That is why CIS uses them so frequently.
But have you ever dreamed of a way to cover your stock market losses in a crash? … even as the market spirals downward? Index futures are a hedging solution that beats the pants off of equity ETF puts.
Stock market index futures allow you to control enormous sums of equity value for a small deposit. This initial margin is akin to the minimum bet you need to play Blackjack games up and down the Las Vegas strip.
E-Mini futures require $5K in margin to trade. This may sound expensive compared to the typical protective put on the SPY. But the E-mini perfectly hedges $100K of an indexed retirement portfolio stuffed inside a Roth or 401(k).
A protective put on an equity ETF protects a scant 100 shares. And when it comes to equity options you have to deal with time decay and other problems that are non-existent in index futures.
If You Want to Hunt Black Swans, Go to a Black Swan Farm!
A charismatic yet brutally direct national speaker in real estate investing used to say that he wanted to have such good odds in his real estate deals that it was like fishing in a barrel … with a bazooka. He reasoned that duck hunters get the most birds on a duck farm. Ron LeGrand went into neighborhoods where there were likely to be more real estate deals he knew he could profit from.
Research from top business schools shows that the stock market is no different.
An uncommon characteristic of Japanese cult figure day-trader CIS is that he trades an edge that is secret to most stock investors. His edge is price impact. The relationship between trading volume and trend is price impact. The trend is the slope of a fitted line of a graph of share price fluctuations over time.
Prices respond upward to new volume when price impact is positive. Falling prices on rising volume occurs when price impact is negative.
CIS is a master at trading price impact.
The relationship is simple. As volume enters the market CIS simply watches to see if the share price rises or falls. He seeks to go long when the slope of the price response to volume is positive. He shorts the index when price impact is negative… simple.
But there is more to it than that. Studies show that when the share price enters new highs or lows that it tends to rise. If piercing new lows, it will tend to continue to fall.
This is momentum.
Financial research from top B-schools has shown the best returns are garnered by momentum investors who trade price impact. They seek to ride the move to completion like a surfer rides a wave.
Studies conclusively show that such a momentum trend following system offers the highest possible returns to index futures traders. Momentum on price impact when combined with positive post-earnings announcement drift (PEAD) yields the highest possible profits for individual stock and equity option traders — whether trading by day or by position.
7 Average Returns That Can Make You Rich
Saving a hundred and fifty dollars a day invested at 12% will make you a millionaire in 10 years. Two recent reports from distinguished University of Chicago and University of California Berkeley business schools have carefully mapped out the expected returns to investors in each of the major ways you can invest your hard earned savings*.
Here are seven simple strategies that offer the highest returns to investors. The table shows the future value after 10 years of an investor starting with $1 of initial principal. He or she saves $150 a day ($4,500 monthly) where interest compounds 12 times a year.
Calculations showing 10 year benchmarks fall between eight hundred and seventy thousand to one point eight million dollars are according to the U.S. Securities and Exchange Commission Compound Interest Calculator.
The average geometric return on the indexes has been around 9%. You can expect equity index funds such as the Vanguard 500 Fund (VFINX) and the SPDR (SPY) ETF to return more (or less) than this about half the time.
The highest research returns arise from skipping in and out of foreign stocks during the months that earnings are reported. But this isn’t safe in practice.
High turnover has been shown to kill returns. The biggest profits are in the major moves in breakthrough stocks over a year or more.
It is easier to focus on stocks rising into new highs on strong volume (positive price impact) first and secondly filter on stellar profits.
4 Bad Investments People Mistakenly Think Are Good …
There are some investments that will never push your retirement portfolio to a 12% average return. Beware these four horsemen investments that could kill your retirement.
Nobel Laureate economics professor Bob Shiller of Yale has shown the expected returns to passive real estate investments in second homes to be much lower than people expect. This makes sense when you consider the fact that a middle (or whatever) class neighborhood will likely be middle (or whatever) class ten or even fifty years from now. Prices in such a neighborhood will only bear the income of a middle class family. This drives the expected profit on real estate to zero when adjusted for inflation.
Vacation homes are a waste of money in this light. Investors are better off renting a Chalet in Vail on Airbnb than owning.
A new study shows that John Maynard Keynes never made a profit in currencies. This is consistent with another study from University of Chicago Booth and New York University Stern schools of business that shows indexed currency returns with expected real returns indistinguishable from zero (commodity indexes don’t fare much better).
- Currency Index: 0%
- Real Estate: 0%
- Bond Index: 3%
- Commodity Index: 4%
Remember that all strategies with high expected returns are very volatile. This volatility generates fast profit when the share price moves in favor of your position.
Volatility shreds retirements to pieces when investors get it wrong. The trick to building a million-dollar retirement is to actively manage it in a way that (1) reduces turnover (2) maximizes return and (3) minimizes risk. The day-trader simply known as CIS has shown us just that. -Doc Brown
* See Barber, Brad, Emmanuel De George, Reuven Lehavy and Brett Trueman. 2013. The earnings announcement premium around the globe. Journal of Financial Economics 108(1). 118-138. and Eugene Fama and Ken French. 2012. Size, value and momentum in international stock returns. Journal of Financial Economics 105(3). 457-472.
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