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How to always beat the S&P 500

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Apr 5, 2009 5:28 am

 Gaddock -  I cant believe you think you have actually found some kind of “unknown” system to make money for clients with little or no risk. Those opportunities are not out there. They may present themselves month to month or year to year, but they wont last for ever and they aren’t something you can hang your hat on.

Apr 5, 2009 9:08 am
Here is the specific question   A guy has 5 million and will give you 1% as long as you consistently beat the S&P. You're not allowed to take risk that exceeds the implied risk of the S&P, within reason. IF the account is off by 2% at anytime you loose the account on the 2% tick.   What would you do?   ALL ANSWERS FROM ANYBODY AGE GREATLY APPRECIATED       You are giving me 2% leeway?  Easy money, and I would have over $4.5mm in cash.  Constantly roll the forward S&P contract.  Leave the remaining 90+% in cash earning interest.  Far more efficient than using SPY (slippage) and deep out of the money calls (liquidity, large bid ask spreads).
Apr 5, 2009 12:04 pm
Sam, more than one way to skin a cat!!   Ice, It's in a wrap account, no transaction fees.
Apr 5, 2009 12:19 pm
Ron 14:

 Gaddock -  I cant believe you think you have actually found some kind of “unknown” system to make money for clients with little or no risk. Those opportunities are not out there. They may present themselves month to month or year to year, but they wont last for ever and they aren’t something you can hang your hat on.

  You're kidding right? Do you think that I have such an ego as to believe I've done something nobody else has? As I said before, that trade you are speaking of is called a Reverse Conversion. I'm not hanging my hat on anything. BUT I will take the trade when they present. My overall strategies are built around a core position of long term buy and hold blue chips that are enveloped by options. Any other opportunity that meets or exceeds my methodology and risk parameters, I take that trade. 9 out of 10+ of those positions end with the desired outcome giving me one hell of an edge.    Would you feel better if it was one of the managers you use doing it? Morgan Stanley takes these trades and cuts them into strips and sells them like hotcakes. Getting beyond the huge haircut would it make you feel it's real if a firm does it and keeps the larger part of the profit?   The fact of the matter is, speaking of the trade in the other thread. I find them everyday. Current positions include X, GM, C, MGM, GE & CBI. All expire within 90 Days. I've even given you the numbers on several of them. I guess maybe you think I'm making this up. Cool by me. You can see the numbers were there on the day I posted it. As long as there are no special divs paid I'm gold on all of them. My clients are feeling special and getting much more than their previous broker gave them. They are my advocates and actively promote me. I'm now landing foundations instead of a little cold call IRA.   Kind of sad you cant get your head around taking advantage of anomalies, you yourself said you cant shoot holes in it and that it's free money. Why not take the trade?   Analysis paralysis? To good to be true? Yet there it is for people like me to bang out large returns none the less.
Apr 5, 2009 1:21 pm

Are New Broker training programs these days teaching kids to be asset gatherers or fund managers? Or are those six months enough time to master both now?

Apr 5, 2009 1:30 pm

[quote=YHWY]Are New Broker training programs these days teaching kids to be asset gatherers or fund managers? Or are those six months enough time to master both now?
[/quote]


Apr 5, 2009 1:37 pm
YHWY:

Are New Broker training programs these days teaching kids to be asset gatherers or fund managers? Or are those six months enough time to master both now?

  So ahhh are you saying you have no strategy or thoughts that can build upon the point of this thread?   Don't feel bad, not many do. I suppose that's why mutual funds are so popular.
Apr 5, 2009 1:42 pm

My point is that, after 19 whole months, you don’t even know what you don’t know yet.

Apr 5, 2009 1:47 pm

Point taken. Safe to say I'm not a spring chicken.

They say that a person can be an expert on any subject after 5000 hours of study. If you consider insurance sales (employee benefits) a financial product and prop trading for 2.5 years after being trained to work arbitrage models pertinent, I've been dealing with such products for 20 years. I'm not claiming to be an expert but I am professional. I've put in far more than 5000 hours of study as well.   Point is I can see a good trade when it appears and will pull the trigger. I'm beyond disgusted with managed money after their terrible performance over the last twelve months. Maybe it's short lived but I've been making rather large profits even through the crash.   That success can be measured I believe by my production & AUM and the amount of referrals received.   Enough about me ..... HOW WOULD YOU ATTEMPT TO BEAT THE S&P CONSISTENTLY????
Apr 6, 2009 2:01 pm

I am going to look again at the fund managers I mentioned to you, but I am almost positive that options are not a part of their model at all and are not in the prospectus. I admitted to you that if what you are saying is true and the entire trade is delta neutral it is a money maker. I just don’t think those opportunities will always be out there and as your book builds you will need to do more and more size that just won’t be available. That is my opinion. And as I said, my business is not about beating the S&P and I don’t believe many rational advisors are building their practice in that manner.

Apr 6, 2009 3:44 pm

It’s not sexy, but simple dollar-cost averaging will consistently beat the benchmark, but this assumes that the investor does not have a large lump-sum to invest initially.  I’ll give you “consistently”, but am glad you backed away from “always”.  I’ve yet to see “always” hold true with market-based investing.  I do appreciate your intelligence and confidence, though.

Apr 6, 2009 6:24 pm

Not sure if this was addressed in the thread, but if you are able to use any asset class, I think using generally higher returning asset classes (vs. S&P), and some alternative asset classes to reduce volatility will do it most of the time.

  You use small cap value, large cap value, international, sprinkle in some real estate, gold, other commodities, managed futures, global fixed income.  Now, problem is, this would have destroyed the S&P the past 10 years, but that is just hindsight.  In the next 10 years, US large caps could do phenomenal (doubt it, but nobody knows).   Fact is, stastically, there is no way to beat ANY specific index with 100% certainty in advance.  You simply CANNOT account for black swans.  Now, I have seen many, many different investment theories, that over time consistently beat the S&P.  But in any given year, you have no idea what's going to win.  And bottom line is, one year shoudl not make your investment policy.  It shoudl be about getting a consistent return over the mid-term (I hate when fund companies talk about 30+ year time horizons).    It also depends what time period you are investing in.  If you started investing at the beginning of a Secular Bull Market (i.e. early 80's), you can pretty much buy a basket of equities and hang on for the ride.  Start investing at the beginning of a Secular Bear (i.e. 2000), and you NEED to be well-diversified with many different asset classes, and do a better job of timing.  So the entire question of beating the S&P has to be put into perspective of when you are investing.   One other thing - Bill Miller may have beat the S&P for years, but his total returns over time were nothing extraordinary.  If I were retired, I would much rather have missed the S&P by a little bit, and had far less volatility than Miller's fund.  
Apr 6, 2009 6:37 pm

Exactly, you can’t beat anything with certainty in advance and to base an advisory practice on returns or beating benchmarks is just not something I want to play with. Even the idea of trying to “time” different asset classes makes cringe. Nobody can with any consistency.

Apr 6, 2009 7:07 pm

Gaddock—long term returns would probably be better using puts on SPY at some level below current price (say 5 or 10%) and not having “blow up” months or quarters.  Then you’d capture ALL of the upside on the hugely positive periods (like the last 4 weeks or other big moves up).  The “consistently beating S&P” #s might go down, but your total return over long periods of time is likely to be better.  Case in point:  if you had a 5 or 10% put hedge in 4th QTR 2008 (esp 5%), you weathered the storm quite well and had more capital to go back up on 3/9/09.

Apr 6, 2009 7:21 pm
Cowboy93:

Gaddock—long term returns would probably be better using puts on SPY at some level below current price (say 5 or 10%) and not having “blow up” months or quarters.  Then you’d capture ALL of the upside on the hugely positive periods (like the last 4 weeks or other big moves up).  The “consistently beating S&P” #s might go down, but your total return over long periods of time is likely to be better.  Case in point:  if you had a 5 or 10% put hedge in 4th QTR 2008 (esp 5%), you weathered the storm quite well and had more capital to go back up on 3/9/09.

  Another angle I'll have to play with. The only thing is the cost of the hedge. When it was down in Feb selling a put to average down would hav e worked well too.
Apr 6, 2009 7:22 pm

Ron,

Who said anything about basing a practice on it? I just thought it would be an interesting topic to hear other peoples thoughts. As for the other trades my software is finding them all over the place. Maybe they wont be here next week, does that mean you shouldnt take 'stupidity liquidity' where you find it? Counting on a bunch of other managers to run your book seems aweful boring to me. Diff strokes I suppose.
Apr 6, 2009 7:29 pm
Gaddock:

[quote=Cowboy93]Gaddock—long term returns would probably be better using puts on SPY at some level below current price (say 5 or 10%) and not having “blow up” months or quarters.  Then you’d capture ALL of the upside on the hugely positive periods (like the last 4 weeks or other big moves up).  The “consistently beating S&P” #s might go down, but your total return over long periods of time is likely to be better.  Case in point:  if you had a 5 or 10% put hedge in 4th QTR 2008 (esp 5%), you weathered the storm quite well and had more capital to go back up on 3/9/09.

  Another angle I'll have to play with. The only thing is the cost of the hedge. When it was down in Feb selling a put to average down would hav e worked well too.[/quote]   Yes, gets quite expensive when the market is scared out of its mind....if you can spend some of your call premium in "normal" times on put protection (when it is much cheaper), you have a compelling story about downside protection (to add onto your outperformance story).
Apr 6, 2009 8:01 pm

Yes, I am counting on managers to run the investments in my book. I will manage changes in client situations and their emotions.

Apr 6, 2009 8:55 pm

[quote=Ron 14]

Yes, I am counting on managers to run the investments in my book. I will manage changes in client situations and their emotions.

[/quote]   And that takes all of 20 minutes a week? WOW maybe that's the reason you do it. I would be board to tears.   Side thought, I've found the best way to manage a clients emotion is to make money for them.
Apr 6, 2009 8:57 pm
Cowboy93:

[quote=Gaddock][quote=Cowboy93]Gaddock—long term returns would probably be better using puts on SPY at some level below current price (say 5 or 10%) and not having “blow up” months or quarters.  Then you’d capture ALL of the upside on the hugely positive periods (like the last 4 weeks or other big moves up).  The “consistently beating S&P” #s might go down, but your total return over long periods of time is likely to be better.  Case in point:  if you had a 5 or 10% put hedge in 4th QTR 2008 (esp 5%), you weathered the storm quite well and had more capital to go back up on 3/9/09.

  Another angle I'll have to play with. The only thing is the cost of the hedge. When it was down in Feb selling a put to average down would hav e worked well too.[/quote]   Yes, gets quite expensive when the market is scared out of its mind....if you can spend some of your call premium in "normal" times on put protection (when it is much cheaper), you have a compelling story about downside protection (to add onto your outperformance story).[/quote]   If Bernake starts giving speeches during market hours, shorting against the box is the cheapest hedge in town. I used it a lot during the last 8 months.