Trading Strategy

[dydo 1,558]

I am starting this thread for members to share their actions on the market outside of single trade. I see a lot of good info coming from members which are commenting on a larger scale than solar. I also see that solar universe is becoming land-locked with its internal issues. While I fully understand opportunities in contrarian approach, frequently market does not offer awards for being right, and in particular in solar it hard to be awarded if you get ahead of conditions, see them delivered only to observe no reaction or even negative reaction.

Understanding limitations, this thread also combines beyond solar views. Finally, I am not sure where to package my thoughts on some plans I have for investing in dividend walks. For one, it takes a lot of time and effort to find things. It makes only sense to share this with those who support the cost of the side. I encourage everyone to share your views, in this scope.

Thank you

 

[dydo 1,558]

Let me start,

I am looking for the opportunity to jump from stock to stock and collect dividends in the quicker timeline than the average four times a year. There is a lot of concerns about this, as frequently stocks go down after the payment. Of course, it is also not easy to find the variable in payment timelines. Also, I am looking for a particular quality. For example in REIT setting, BV is essential in establishing value. In the definition of assets, I ask what type of mortgages, agency or not debts the company is involved in, to reduce risk of interest rate swings and defaults. Profitability is also an aspect of critical importance. If I get caught in a jump from play to play, I do not have to die slowly every day holding to something of inferior quality. 

This file contains some of the companies I have selected for consideration. Currently, I own ARI at 16.65 average as you can see  I am, $0.20 down on the $0.46 payment payable on April 15 to SOR March 31. My next objective is to jump to PMT. The company has not released its dividend date. I suspected this to happen next week. I suspect to see around $0.47 per share payable with up to 14% yield at today's prices.

For example, CAFD being higher priced pays 50% less per share.

Among that list, there is, at least, one more potential to create three dividend payments within  45 days. That alone gives an opportunity for 12 dividend payments instead of 4. Further block buying instead of buying at the same time the whole amount can result in different equity loss/gains creating a better return.

REIT-diversified companies are just one group of interest, but they have attractive yields. They also have a real equity potential, as they are being sold, in some cases worse than solar.

 

Dividend payers.xlsx

[explo 706]

1 hour ago, odyd said:

I am starting this thread for members to share their actions on the market outside of single trade. I see a lot of good info coming from members which are commenting on a larger scale than solar. I also see that solar universe is becoming land-locked with its internal issues. While I fully understand opportunities in contrarian approach, frequently market does not offer awards for being right, and in particular in solar it hard to be awarded if you get ahead of conditions, see them delivered only to observe no reaction or even negative reaction.

Understanding limitations, this thread also combines beyond solar views. Finally, I am not sure where to package my thoughts on some plans I have for investing in dividend walks. For one, it takes a lot of time and effort to find things. It makes only sense to share this with those who support the cost of the side. I encourage everyone to share your views, in this scope.

Thank you

Great idea to have a strategy thread. The past year I changed my investment/trading approach to a much more strategic one, which in short, as its primary function, sets tight range limits on the allowed exposure against different asset classes. I describe it and continuously track its development in my profile under the "About Me" tab to see how it performs against the TAN solar ETF and the S&P 500 index. For now I'll just copy that page here in the next post as a starting point for the description of my strategy.

At the end of each quarter I will post an updated chart in my profile of the daily portfolio, TAN and S&P 500 development since the implementation completion and inception of this new strategy on January 1 this year. The initial chart will be posted April 1.

It's too early to draw any conclusion if the strategy is beating the S&P 500 index or the TAN solar ETF in terms of risk adjusted return performance, but it can still be fun to follow. Usually these type of strategies have a hard time beating a stock index in bull periods, while in a full cycle that includes a set back on stock markets the diversified asset allocation strategy should outperform on risk adjusted return.

[explo 706]

My portfolio is focused on uncorrelated asset allocation with risk parity target and use of high leverage with the objective to maximize expected return at reasonable risk.

Annual returns

Portfolio / TAN / S&P 500 old performance stats, 2015-12-31

• Inception 2009-01-01
• Return since inception 131.58% / -56.52% / 126.23%
• Max drawdown -97.85% / -87.94% / -27.62%
• CAGR 12.75% / -11.22% / 12.37%
• Risk-Return-Ratio 0.13 / n/a / 0.45
• IRR 14.56%

Portfolio (stocks, funds) / TAN / S&P 500 new performance stats, 2016-03-25

• Inception 2016-01-01
• Return since inception -5.39% (-2.96%, -2.51%) / -27.09% / -0.39%
• Max drawdown -10.94% (-6.56%, -8.12%) / -33.86% / -10.51%
• Volatility 22.20% (11.32%, 17.23%) / 43.18% / 18.57%

Asset allocation

• Cash 6.25%
• Individual Stocks 7.50%
• Stock Funds 10.00%
• Hedge Funds 76.25%

Currency exposure

• Local -27%
• USD 126%
• CAD 1%

Performance comments

Since more capital was invested in the old portfolio during its higher return periods the IRR has been better than the CAGR.

The old portfolio volatility has been extreme. The -97.85% drawdown during 2.5 years (from late 2010 to early 2013) means that the total return was 10667% during the 4.5 years outside that period to reach a total 131.58% over 7 years. The CAGR was thus -78.47% during the 2.5 years drawdown period and 182.86% during the other 4.5 years. Extreme indeed.

During the same 7 years period the solar ETF TAN, which is the closest portfolio benchmark since my portfolio has been US listed solar stocks focused, returned -56.52% and the S&P 500 returned 126.23%.

Allocation and currency comments

At this point in time I'm satisfied with the capital return achieved during the past 7 years and I am now reducing my risk significantly in a new portfolio with the described asset allocation strategy. The goal is to more than double the average annual return of the portfolio to 30% while reducing its max drawdown risk more than a factor 3 to 30%. Thus improving the Risk-Return-Ratio more than a factor 7 to around 1.0. To track these new targets the portfolio performance stats are reset 2016-01-01 (old closes and new starts).

Around 75% debt is used to achieve 4x leverage. This means that the exposure of the portfolio capital to cash, individual stocks, stock funds and hedge funds is around 25%, 30%, 40% and 305% respectively. The high leverage is enabled by risk parity in the asset allocation, where the risk of the hedge funds portion, despite its large size, equals the sum of the risk of the rest of the portfolio. Thus the portfolio consists of two uncorrelated parts, each of a risk magnitude corresponding to 70% stocks exposure.

The currency exposure is not an active choice. It directly reflects the currency denomination of the portfolio assets (and debt). The US dollar should however be a solid currency for the rest of this decade so I'm not adding any currency hedging instruments to the portfolio.

Return requirement analysis

With 30% levered return requirement, net after interest and tax expenses, the gross levered return requirement is 37%, since the 4x leverage, after discounting 1% for the cash, is costing around 7% in interest and tax expenses. This means that the gross unlevered return requirement is 9.25%. Since 6.25% is in cash the average gross unlevered return requirement on non-cash assets becomes 9.9%. This is possible to achieve with good asset picking.

Right now the interest rate is very low. As it rises the leverage will become less accretive. When that happens I'll likely need to reduce the leverage in the portfolio. As an example if the interest rate would rise 100 basis points then the average gross unlevered return requirement on the portfolio assets increases from 9.9% to 10.5%. The extremely low interest rate environment right now is thus the main rationale behind the design of the portfolio strategy currently applied.

Stock trading

The stock class of the assets is in turn subject to internal allocation of its allocated capital to its individual assets (stocks). This also applies to the funds based asset classes, but the re-balancing of the stocks follow an aggressive scheme while the funds based classes follow a dollar neutral scheme (dollar allocation of a fund asset does not change with the price of its share). Basically this means that the stock allocations are adjusted by their share price moves, i.e. if the share price goes up its allocation goes down and vice versa. The idea with this aggressive scheme is to effectively reduce cost of shares held. While the stock basket's dollar allocation is kept constant the dollar allocation for the stocks with currently bargain share prices relative to the overall stock basket are over weighted and the high-flyers are under weighted.

To evaluate the scheme I will look at the effect on two stocks that have triggered a lot of re-balancing trades since their first positions were taken, TERP and GLBL. First position is defined as the amount of shares held before the first re-balancing sell trade was triggered. All prices and gains include trading and forex fee costs as well as forex gains/losses in order to reflect net effect of re-balancing trading. For the same reason dividends are net of tax. Numbers are per initial position share. Besides the cost of the initial position shares still held, the cost of all shares currently held are also calculated by adding the effect of net average down/up or net profit/loss taking change in amount of shares held from initial position amount of shares with the assumption that the net change in shares were traded at the current price per share.

Note that the transaction amounts in local currency for initial price paid, dividends earned and trade gains have been converted to USD at the current exchange rate. This means that although these amounts have not changed in local currency the USD converted values fluctuate a little with the exchange rate.

TERP, 2016-03-24

• Initial price paid: $15.91 (September 28-30, 2015)
• Dividends earned: $0.84
• Trade gains: $5.18
• Net cost of initial position shares still held: $9.89
• Share count change "gains": $0.00
• Net cost of all shares currently held: $9.89

GLBL, 2016-03-24

• Initial price paid: $6.59 (October 5-6, 2015)
• Dividends earned: $0.43
• Trade gains: $3.64
• Net cost of initial position shares still held: $2.51
• Share count change "gains": -$0.04
• Net cost of all shares currently held: $2.55

[disdaniel 73]

1 hour ago, odyd said:

Among that list, there is, at least, one more potential to create three dividend payments within  45 days. That alone gives an opportunity for 12 dividend payments instead of 4.

I don't mean to be a wet blanket odyd, but have you observed a historical underpricing of dividends (or lead up to divi) in these stocks?

I guess it seems to me that all this dividend information (barring changes or "news") is well known.  Doesn't the market typically adjust (i.e. price steps down to account for dividend on ex-div date) for these payments?  Good luck and if you've found a free lunch, please enjoy it.

[explo 706]

1 hour ago, odyd said:

There is a lot of concerns about this, as frequently stocks go down after the payment. Of course, it is also not easy to find the variable in payment timelines. Also, I am looking for a particular quality. For example in REIT setting, BV is essential in establishing value. In the definition of assets, I ask what type of mortgages, agency or not debts the company is involved in, to reduce risk of interest rate swings and defaults. Profitability is also an aspect of critical importance.

Thanks for the sheet of dividend payers. I find the quality aspect above of particular interest as my strategy involves hold and trade between dividend payments and thus longer time exposure than the dividend walk. But it will also be interesting to follow "the walk" to see how much can be tapped from inefficient dividend pricing "arbitrage".

 

[dydo 1,558]

4 hours ago, disdaniel said:

I don't mean to be a wet blanket odyd, but have you observed a historical underpricing of dividends (or lead up to divi) in these stocks?

I guess it seems to me that all this dividend information (barring changes or "news") is well known.  Doesn't the market typically adjust (i.e. price steps down to account for dividend on ex-div date) for these payments?  Good luck and if you've found a free lunch, please enjoy it.

That's it, Daniel. Dividend stocks are not what they used to be. They offer a lot of equity fluctuation along the yield dividend variable. You will be able to see how my strategy works. Generally, I find  people stay away from active trading. So I look into active trading things nobody considers trading. I am also looking across industries, to diversify views. There is a lot here which is in my head. Hopefully, I will be able to describe it and be successful at it.

[dydo 1,558]

11 minutes ago, explo said:

Thanks for the sheet of dividend payers. I find the quality aspect above of particular interest as my strategy involves hold and trade between dividend payments and thus longer time exposure than the dividend walk. But it will also be interesting to follow "the walk" to see how much can be tapped from inefficient dividend pricing "arbitrage".

 

I am suprised to see a lot of concerns while most have bought into dividend SUNE complex without a lot of consideration for ex-dividend condition. Just becuase something offers 20% fluctuation instead of 40% fluctuation in equity shift, it does not mean it is not undervalued, hence every time dividend is paid it has to be depleted in value. I expect this to happen, flex the dividend payment, but I am not buying PG here.

[dydo 1,558]

I am also looking at couple of pipeline distribution stocks as part of evaluation,

NuStar Energy L.P.

DCP Midstream Partners LP

[explo 706]

I've calculated the individual return, max drawdown and volatility from the individual stocks asset class and the combined (stock funds and hedge funds together) funds asset classes to see if one of the classes is inferior in its risk adjusted return contribution to the portfolio.

Note that the funds asset classes have 11.5 times higher allocation than the individual stocks, so equal return, max drawdown and volatility performance would mean that the funds contribute 11.5 times more of that to the portfolio than the individual stocks do. If my picks and trading are successful maybe the individual stocks can perform better than the funds.

Note that the individual risk contributions cannot just be summed up or multiplied. The combo is supposed to have better risk properties (from diversification effect) than the sum of parts. For the return the combo equals the parts multiplied.

The strategy description post above has been updated to show these individual contributions.

[dydo 1,558]

The dividend walk will be impacted by an immediate reduction in the share price upon dividend payment (or ex-dividend date). Of course one way to beat it is to buy lower than the price minus the dividend, second to wait long enough to get paid and have equity come back after such payment.  In order to transition to another payment, a couple of things are required: another stock(s) and an actual timeline allowing for a jump and, of course, no loss of equity. I am not going to jump otherwise.

I am not trying to say that the drop will not be there after the payment, but I am hoping that drop will be indifferent as the stock was bought cheaper than the after-the-reduction price. If not, I am hoping it will recover before the jump needs to take. To make a jump one need to have more than one option to do a jump. It would be the best to have variable timelines as well.  The concept is not that hard, but it takes a lot of data mining.  I am sure someone is already doing it.

[dydo 1,558]

This is the news I am waiting for the second pick on dividend walk

http://finance.yahoo.com/news/pennymac-mortgage-investment-trust-declares-203000298.html

[dydo 1,558]

Going after AMTG, the object of the takeover by ARI would be a better deal than ARI, at least as it appears today. The stock pays $0.48 per share and just went ex-dividend today, payment being made only by April 29th mind you. It already added half gain versus the dividend. The case of PEGI which also went ex-dividend today, gaining numbers from yesterday's drop, shows that not all ex-dividend dates cause drops in price. Most of the energy stocks had gained today on the ex-dividend date. I am not sure if this is going to be a pattern, but certainly the formula of the drop in value is not obvious.

[dydo 1,558]

It is painful to watch and I am not patient. I sold ARI and bought PMT, small gains, but gains nevertheless. I am staying cash at 60% right now, checking in to solar

[dydo 1,558]

Currently, if all equal I am looking at PMT, CSIQ and NYLD as potential purchases. CSIQ under 19 looks good while I still consider lower prices. I am wondering if Q1 release will be impactive outside what we already know. JKS seem expensive at current pricing.

[explo 706]

On 2016-03-24 at 5:06 PM, explo said:

At the end of each quarter I will post an updated chart in my profile of the daily portfolio, TAN and S&P 500 development since the implementation completion and inception of this new strategy on January 1 this year. The initial chart will be posted April 1.

Attached are the charts (they will also remain on the "About Me" tab in my profile).

Quick comments.

The portfolio outperformed the TAN and S&P 500 for much of the quarter, but the S&P 500 came out significantly on top end of March as the portfolio was hit by simultaneous weakness in its funds, the USD and solar stocks in March.

The S&P 500 ended flat after a weak start. The portfolio ended close to the quarter low. The TAN started the quarter horribly and never recovered.

Looking at the two portfolio components the funds outperformed the stocks for much of the quarter, but dropped off a lot in March, partly due to a large USD exposure, leading to the stocks ending on top.

Looking at the FOREX effect the USD was down 3.6% to my local currency in the quarter. With the portfolio having around 125% exposure to the USD on average in the quarter the USD contributed with a loss of around 4.5% or around 70% of the total portfolio loss of 6.6% in the quarter. I hope this FOREX loss can be reversed and muted or turn into a gain for the rest of the year.

Considering that the stocks portion of the portfolio is solar stocks focused and having more than a third of the stock exposure in the volatile SUNE yieldcos the total portfolio performance being a lot better than the TAN during the quarter is a bit of a testament to purpose fulfillment on the risk management side of the portfolio strategy.

[explo 706]

11 hours ago, odyd said:

It is painful to watch and I am not patient. I sold ARI and bought PMT, small gains, but gains nevertheless. I am staying cash at 60% right now, checking in to solar

After a couple of "walks" it would be nice to see some gains metric like percentage of gain to dividend, i.e. 20% if the dividend was $0.50 and "only" a total gain of $0.10 could be pocketed. As long as it is positive it works even if full dividend can't be harvested, but it might need to be put into a risk perspective to be more relevant. A risk measure could be based on how much and how long the position was out of the money even if it at some point time offered a close in the money. I think it is still to early for this analysis, but if you run the strategy for a year it could be interesting to summarize over the year.

[dydo 1,558]

35 minutes ago, explo said:

After a couple of "walks" it would be nice to see some gains metric like percentage of gain to dividend, i.e. 20% if the dividend was $0.50 and "only" a total gain of $0.10 could be pocketed. As long as it is positive it works even if full dividend can't be harvested, but it might need to be put into a risk perspective to be more relevant. A risk measure could be based on how much and how long the position was out of the money even if it at some point time offered a close in the money. I think it is still to early for this analysis, but if you run the strategy for a year it could be interesting to summarize over the year.

The gains seem insignificant versus the amount of money involved and particularly seeing swings in many percentage points trading solar equity. Time investment is also significant plus the work involved. I think I have not enough money to make this work in this fashion.

[explo 706]

5 minutes ago, odyd said:

The gains seem insignificant versus the amount of money involved and particularly seeing swings in many percentage points trading solar equity. Time investment is also significant plus the work involved. I think I have not enough money to make this work in this fashion.

So I guess you've concluded the strategy then as not worth the effort and risk to continue for you at this point (although there are some small gains that can be harvested)?

 

[dydo 1,558]

48 minutes ago, explo said:

So I guess you've concluded the strategy then as not worth the effort and risk to continue for you at this point (although there are some small gains that can be harvested)?

 

Basically,

[explo 706]

On 2016-03-25 at 3:56 PM, explo said:

I've calculated the individual return, max drawdown and volatility from the individual stocks asset class and the combined (stock funds and hedge funds together) funds asset classes to see if one of the classes is inferior in its risk adjusted return contribution to the portfolio.

Note that the funds asset classes have 11.5 times higher allocation than the individual stocks, so equal return, max drawdown and volatility performance would mean that the funds contribute 11.5 times more of that to the portfolio than the individual stocks do. If my picks and trading are successful maybe the individual stocks can perform better than the funds.

Note that the individual risk contributions cannot just be summed up or multiplied. The combo is supposed to have better risk properties (from diversification effect) than the sum of parts. For the return the combo equals the parts multiplied.

The strategy description post above has been updated to show these individual contributions.

I've stopped posting the return, max drawdown and volatility separated for stocks and funds. Instead I've separated out 2 other components of the portfolio return, the interest expense and the tax expense. These non-asset specific components were previously included in the stocks and funds returns by their asset size proportion. I think breaking them out gives a better picture of the stocks and funds actual contribution to the portfolio return as the relative allocation of asset classes is not affected by the amount of leverage chosen and thus the return difference between the stocks and funds should not reflect the amount of leverage used.

So instead of tracking these now 4 portfolio components in daily updates in the "About Me" tab in my profile (it becomes to messy with too many numbers) I'll just include them in the quarterly updated performance charts. In these performance charts I will also show the unlevered return of the portfolio. The levered return equals 4 times (this is the leverage factor) the sum of the unlevered return contributions from the stocks, funds and tax expense components plus the negative return contribution from the interest expense.

The charts to date for the 16H1 view have been attached. For now the asset returns are not even covering the negative return from the interest and tax expense. The funds being 11.5 times larger in asset size than the stocks is expected to return 34% on average annually and the stocks only 3% annually with equal asset return requirements. This would cover the interest and tax expenses and leave a net 30% annual portfolio return.

So far the portfolio is performing below expectation on return, but as expected on risk. The unlevered portfolio has much less risk than the stock index (not to mention the high beta ETF) and the leverage effect seem to put the levered portfolio on the same order of volatility and drawdown risk as the stock market index. This is as intended although the portfolio is long-term expected to have 50% more volatility than the stock market index but only half the drawdown risk of the stock market index.

It is too early to evaluate the strategy now though, but could still be interesting to follow.

Edited April 9, 2016 by explo

[disdaniel 73]

5 hours ago, explo said:

is expected to return 34% on average annually

what fund are you investing in to get that expected return?

[explo 706]

29 minutes ago, disdaniel said:

what fund are you investing in to get that expected return?

Mainly local ones. As described in my profile the asset value of the funds are 345% of the portfolio capital, while the stocks' asset value is only 30% of the portfolio capital (11.5 times lower). Thus if both stocks and funds would achieve my 10% average unlevered return on assets requirement (needed to achieve my 30% levered return on capital goal) they would contribute 3% and 34.5% return on portfolio capital respectively and the interest and tax components would contribute -6% and -1.5% respectively for a total of 30% levered return on portfolio capital. The benefit of the funds (dominantly hedge funds) is more in the low risk (enabling the high leverage) than in high return.

The funds I use have a historical average return closer to 11% than 10%, so from a historical perspective the 10% return requirement is reasonable for the funds. For stock markets however the long-term index gains tends to be around 7%. To get to a 10% long-term average one would have to be very successful in beating the market, but 7% does not include reinvested dividends. If that's included (which is the fair measure of long-term average return on stocks) the long-term average return on stocks gets close to 10%. Then with active trading effort there is further potential to add trading gains if successful in trading, thus not really requiring to beat the market in stock picks, just to be close to par with a broad index.

Edited April 9, 2016 by explo

[disdaniel 73]

2 minutes ago, explo said:

The benefit of the funds (dominantly hedge funds) is more in the low risk (enabling the high leverage) than in high return

You are losing me here...how can 34% expected return be considered low risk?

Or are you saying that both stocks and funds have 10% expected return, and then you leverage that (initially low risk fund return) up?

 

[explo 706]

7 minutes ago, disdaniel said:

You are losing me here...how can 34% expected return be considered low risk?

34% is achieved through high leverage. High leverage requires low risk. The funds I use have low risk and thus allow high leverage and thus enables high levered return. What's special about them is not super return, but good return at super low risk. Like you say here:

7 minutes ago, disdaniel said:

Or are you saying that both stocks and funds have 10% expected return, and then you leverage that (initially low risk fund return) up?

Edited April 9, 2016 by explo

[disdaniel 73]

I think I get it now.  For every $100 you put in the account, you buy $30 of stock and $345 of funds because you are allowed to borrow money to buy the low risk funds.

Never mind doing dd on the individual stocks, you better be damn sure you know what your "low risk" hedge funds are doing...imo

[Jetmoney 51]

Explo, Under this low interest environment, the 10 to 11% low risk seems very good. 

I am sure that you are aware of some Ponzi scheme peer to peer lending that happened in China that caused almost 1 million people to lose their money.  This scheme also gave people who lend money around 10% return.  The funds make up fake project to borrow money. 

Please be careful.

[explo 706]

18 minutes ago, disdaniel said:

I think I get it now.  For every $100 you put in the account, you buy $30 of stock and $345 of funds because you are allowed to borrow money to buy the low risk funds.

Never mind doing dd on the individual stocks, you better be damn sure you know what your "low risk" hedge funds are doing...imo

Yes. The credit mechanism from my broker is complicated, but I've set things up to view it more simply:

If I put $100 in my account I borrow another $300 from my broker, then I reserve $25 for cash buffer, use $30 to buy stocks and the remaining $345 to buy funds.

Due to much lower inherent volatility of and correlation between the funds in the funds basket than the stocks in the stocks basket the return volatility (deviations from average) of the funds basket in absolute dollar is only slightly larger than it is for the stocks while the expected average return of funds basket is size proportionally larger (11.5 times) than the expected average return of the stocks basket.

This can be seen in my chart as the amplitude of swings for the funds return on portfolio capital is only slightly larger than for the stocks. While the average return is not yet proving to be 11.5 times higher for the funds than the stocks. But the average return for them need to get positive first before that comparison becomes meaningful. Ideally one needs to view it over a full economic cycle of maybe 10 years to include both a crash and a recovery period for the stocks.

 

Edited April 9, 2016 by explo

[BIPV Investor 10]

Expo, if you are being offered "low-risk" 10% returns you are being taken for a ride. I don't know how else to put it, as I know you have a very solid financial head on your shoulders. With negative interest rates in several major countries and US 10-year rates at 1.72%, I would be very skeptical of any low-risk investments that return 10%. Here in San Diego investors continue to pile into real estate driving CAP rates below 4% for hot properties. Many of us thought that yeildcos provided low-risk returns over 10%, only to be very quickly proven wrong. 

Expecting a 10% return is inline with S&P long term averages if dividends are reinvested though. Personally I would be very cautious maintaining a 3.5:1 leverage ratio though as one unexpected crash can wipe you out, but I know you fully understand what you are doing. Any long time member of the solar investor scene has seen the number of option players come and go as making the wrong leveraged bet can make you broke just as fast as making the right one can make you rich.  

[explo 706]

35 minutes ago, BIPV Investor said:

Expo, if you are being offered "low-risk" 10% returns you are being taken for a ride. I don't know how else to put it, as I know you have a very solid financial head on your shoulders. With negative interest rates in several major countries and US 10-year rates at 1.72%, I would be very skeptical of any low-risk investments that return 10%. Here in San Diego investors continue to pile into real estate driving CAP rates below 4% for hot properties. Many of us thought that yeildcos provided low-risk returns over 10%, only to be very quickly proven wrong. 

Expecting a 10% return is inline with S&P long term averages if dividends are reinvested though. Personally I would be very cautious maintaining a 3.5:1 leverage ratio though as one unexpected crash can wipe you out, but I know you fully understand what you are doing. Any long time member of the solar investor scene has seen the number of option players come and go as making the wrong leveraged bet can make you broke just as fast as making the right one can make you rich.  

The much lower risk is in terms of max drawdown which is relevant to the risk of leverage. The normal risk concept of volatility (which is relevant to IRR impacting investment timing risk) is also lower than stocks, but not that much for some individual funds. Both types of risk are significantly lower in the basket than individually due to low correlation between the funds while different stocks usually have high correlation (to market and thus eachother) through their positive beta, especially in down periods, making it hard to reduce max drawdown in a stocks basket a lot through diversification.

The youngest fund is 12 years old and the oldest one 18 years. They all achieved the above 10% average return since inception and experienced very low drawdown during 2001 and 2008 market crashes. Their max drawdowns are between 10-15% (stock index max drawdown is above 50%) and the basket would have had less than half of that. Thus the leverage holds in historic simulation. Future not repeating history might break the strategy though. I think the risk that the future return will be much lower than historic is much bigger than that future risk will be much larger than historic, but it only takes one new record negative event to blow up the portfolio and more. Only one very low risk fund expose more than 100% of the portfolio capital. 

I guess I'm the SUNE or LDK of investing. I just hope that I'm smarter than those guys in how I apply my leverage. The idea is that my risk level should be much lower with my new strategy than the old one. But I can understand that combining this with much higher return expectation than achieved with old strategy as well might sound too optimistic.

Edited April 9, 2016 by explo