Sunday Edition: Setting Reasonable Investing Expectations

The story of the tortoise and the hare teaches us that the prize doesn’t always go to the swift, who are sometimes easily distracted, but often ends up in the hands of the one who perseveres regardless of speed.

This apologue is even more true when applied to investing. Many investors are too easily lured by “get rich quick” investing schemes and strategies, rather than safe and consistent compounding month after month, using what some might consider a boring strategy.

I shudder at the thought of comparing Thomas’ nearly 30% annual returns over the last two years to the tortoise. Especially when his returns exceed those of investing greats Buffett, Ichan, and Tepper. But when compared to the pipe dream some investors have of earning 100% + annual returns buying options and futures contracts, then it most certainly appears “boring.”

Sure, some investor might have a banner year buying leveraged options and futures contracts, but lets see him string together two, three, or four years of similar performance. Any trader who more than doubles his account in a year, or even 18 months for that matter, will have been helped by lady luck much more than he cares to admit.  

The fact is, for every gunslinger who doubles, triples, or even quadruples his trading account in less than 18 months, there are 50 other traders who attempted the same thing, and completely blew up their trading account. You don’t want to be one of them.

In today’s reprint of Thomas’ Rebel Income newsletter (annual subscription $1,164), he talks about his own experience trading leveraged futures contracts and why he is sticking to the more “boring” strategy of selling put options.

Week 2: Setting Reasonable Investing Expectations

“How much money can I expect to make if I use your system?”

This is a question I often see from new potential subscribers. It’s essentially the same question I used to deal with on a daily basis when I worked for a major mutual fund in the 1990s. It’s a natural question that many of us ask when we’re thinking about putting our hard-earned money into an investment.

The natural answer, of course, is to point to previous results. I make my trading log available through the Investiv website so you can see my trading results almost as quickly as I make trades, and I’ve used it quite a lot in customer communications to illustrate what I think is a reasonable example of what is possible using the Rebel Income system. At the same time, though, I remember that I got tired very quickly of telling potential customers to look at the historical returns of the funds I was trying to get them to put money into. I came to realize why every performance graph I could show people included the disclaimer “past performance is not a guarantee of future results.”

With mutual funds, performance often varies wildly from one year to the next for any number of reasons. For example, we had a very high profile manager managing our flagship fund who decided to retire. His replacement was highly intelligent, educated and groomed in the same basic approach his predecessor had used to beat the market year after year, and was this manager’s first choice as his successor. And yet in the first few years after the switch, the fund lagged its previous performance in glaringly obvious ways. The fact is, the new guy wasn’t the old guy, and so thinking their approach was going to be the same—and that the fund would just keep chugging along the same way it had—wasn’t actually very realistic. Through it all, the instructions I kept getting from management was to rely on the fund’s average historical numbers, which tended to obscure the more recent data (with the new manager) because the older performance (from the old manager) had been so strong. This was one of the first ways I learned to distrust funds that trumpeted their historical returns for everybody to hear.

Where does that leave individual investors? As you’re trying to make investment decisions that will provide for current or future needs, what are you supposed to hang your hat on? Marketing material out there tends to work with the most impressive numbers they can come up with, because nobody is going to pay attention to an ad promising conservative results. We are all cursed by the the consumption-based society we live in; we want maximum benefit/pleasure/entertainment value with minimum work/effort/money spent. It makes it easy to pay attention to the shiniest, newest, and best-looking thing out there, and hard to care about anything that is dressed up in any other way.

Several years ago, I had a good friend who was achieving some really spectacular investing results as a day trader. He had begun trading futures, which were highly leveraged contracts on commodities like gold, oil, and even on the broad stock market indices. He was doing so well in just a few months of time that he had paid off the mortgage on his house, his college student loans, and every other debt he had, and was living almost entirely off of his trading income. Naturally, I was impressed and asked him to show me what he was doing. His approach seemed simple enough, and so I decided to give it a try. I thought I had everything to gain and little to lose, especially since I started my trading with just a few thousand dollars that wouldn’t have gotten me into trouble to lose.

For about the first six weeks, I did okay; I almost doubled my account value by applying a similar method that my friend showed me with some rules that I customized for my own purposes. I was having a lot of fun, telling people I was a day trader and bragging about how astute I was. After that sixth week, though, the market shifted, and I didn’t shift with it. The thing about futures trading is that the leverage that pays you so well when you’re right takes it away from you even more quickly when you’re wrong. I saw my profits evaporate within days, and didn’t have the sense to stop what I was doing to figure what I needed to change. I was so upset about how things had turned against me that I was convinced I just needed to keep trying. I watched my account drop all the way to $0, and then put in a few thousand dollars more and tried again. Within weeks, all of the money I could put towards futures trading was gone. All I had to show for it were a lot of lumps, a big slice of humble pie and a very hard lesson learned.

As time passed and I was able to think more rationally about my experience and my failure, I realized that one of the problems was that I went into futures trading with guns blazing; I relied on the experience and knowledge I had built by investing in stocks and trading options to make my futures trading decisions. I didn’t take the time to really study and learn about the futures market first. It’s true that futures form trends just as stocks do, but it’s also true that futures behave in ways that are very different from anything I was used to at that time. My ignorance about that reality kept me from recognizing trouble when it was in front of me.

I also learned an important lesson about expectations. I assumed that because my friend had achieved such fantastic results, I could too. I’m not saying that setting ambitious goals is a bad thing – but when you base your expectations of your own success or failure on what somebody else has done, you’ll usually end up disappointing yourself. I was so determined to prove to myself that I was just as good as my friend that it blinded me to the need to apply what I was seeing in the market properly for my own trading system. I stopped thinking about the fact that we were different people, with different perspectives, experiences, and investing styles. My expectations became completely unrealistic because I was trying to be like my friend instead of just being myself.

In the years since that experience, I’ve stayed away from the futures market. I’ve decided that part of what makes me successful as an investor is to work with investments that make it easy for me to stay grounded – not only to what I know works, but also to what I know I can manage effectively and rationally for my own purposes. I’ve realized that I don’t have to trade the coolest, sexiest markets to get what I need out of my investments. My expectations are simpler, and because of that, the system I use is more effective and easier to manage.

The purpose of Rebel Income is to highlight income-generating trades each week that you can use to provide for your own needs; so what does everything I’ve just said about my expectations mean to you? My system is based on my own study and experience of what a fundamentally strong stock with a great value proposition is. I’ve worked hard to ground that system in principles and concepts that have been proven by time and by the wisdom of other investors. Even so, I don’t believe you should take the things I write about in this Rebel Income on blind faith. That’s why we’ve provided a lot of educational resources for you, in the form of the Homestudy Kit (my e-book and training video library) and the videos available in the Getting Started area of the site to Rebel Income subscribers. It’s also why when I write about subjects like position sizing and diversification, or trading based on overnight information, I tell you about what I do. I don’t necessarily want you to do the same thing, but if you know how I approach those concepts, you can decide for yourself if my logic makes sense or whether you need to apply a different method that works better in your case.

Setting expectations isn’t really about how much money you can make with a given investment or system, even though that’s naturally the way we all tend to think about it. Setting expectations  is really about thinking about a given investment or system in the most practical terms you can, against what your own investing style, risk tolerance, and needs look like. In my case, I decided that the futures market didn’t offer the right fit for my investing style or my needs. That doesn’t mean it’s a bad investment, or even that I might not use it at some point in the future, only that I decided it would be easier for me to not spend more time, energy or money on trying to make it fit when I already had a system in place that did. If you work with the Rebel Income system, make sure that you’re evaluating it based on how easily it fits, or can be adjusted to fit into your own preferences and needs. That’s really the only way you’ll be able to get what you want from any system or investment in the long run.

Through his own market experience, Thomas has gained a unique perspective on investing expectations, and has most certainly carved out a niche selling put options to generate income.

Quite frankly his track record is unheard of in the financial publishing business. He’s closed exactly 101 trades, of which 98 have been winners with only 3 small losers.

To become a tortoise and finish the race, we’ve arranged for you to follow Thomas’ put selling income picks for the next 30 days for only $9, with no obligation to continue, and get two incredible bonus items free, click here.


Shane Rawlings
Co-founder, Investiv