Short term vs. Long term investing

[neroden]

Trading options can be very successful, but I do it the simple way with calls, although I would consider puts.

I've been selling puts, mostly because the premiums have been unusually excellent -- there are a lot of people betting against TSLA out there....
I would have made much better returns by just buying more TSLA stock, but selling the puts is far more conservative. If I have a price where I think TSLA is defnitely a good buy, then selling puts with that strike price is a good deal; while TSLA stock is higher-priced than that, buying the stock outright becomes a riskier choice.

I think a lot of options traders are trying to magnify their gains; I was aiming for a less-risky option than straight stock investment.

Each person has to weigh their risk tolerance. Just about everyone who has known me and discussed investing says they couldn't sleep at night or wouldn't have the balls to do what I do. That, very simply, is why they don't have the money I do.

It's also worth noting that different people get unnerved by different things. I do not sweat short-term price changes at all -- I don't even blink about it. This has allowed me to do a lot of long-term investment where others were too afraid. I can wait out a year-long slump, no problem. However, there *are* things that make me nervous, including taking on debt, which I avoid like the plague -- so I have a much larger uninvested cash cushion than the vast majority of people. Even having a car loan would make me extremely uncomfortable unless I had the cash for the every payment escrowed (in which case, what's the point).

It's not just "risk tolerance", it's *what sort of risk* you're willing to tolerate which determines what investment style you should use.

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I am not in. I lost more poker games by setting dollar goals like this.

It causes a behavior distortion. Unless there's some specific reason why you need to target a specific dollar amount, it never makes sense to do so. Having a contest with a "winner" causes similar behavior distortion.

The reason I do not have a dollar value goal on my portfolio (especially with a time goal) is because if you make a few bad plays human nature tends to take on riskier and riskier plays to try to make up for the huge losses because going back to the small plays feels like a waste of time. I'm so glad I learned this lesson playing small poker games.

The thing is, if you're in a funny position ("if I have $1 million I can start my business, and if I don't I'll probably have to declare bankruptcy anyway") then this sort of risky play can make sense. (Which is why people who get in those positions do stuff like that.) But most of us aren't in that position.

I had a small amount of Roth IRA money which I can't get out for 30 years in any case. If I lose it, it's no skin off my back, since it was such a small amount of money relative to my total assets. But if I manage to convert it to a lot of money, then it becomes a useful aid to retirement, and tax-free at that. So it made sense to put it all into stock like TSLA which would either do extremely well or go bankrupt. It made no sense for my regular portfolio (which is more diversified). And now that the Roth IRA does have a lot of money in it (thanks to TSLA) it makes no sense to gamble on yet riskier things, because it's now actaully useful.

I am personally glad that 2008 happened. Because of this I am in the process of making a plan to survive a similar type crash. Since I am almost completely in options if that type of crash would occur I could not have survived the 3 year come back, which I suspect most of us with straight options portfolio are in the same boat.

To counter this I am working on the safety plan of pulling some of my gains out and moving them into an emergency fund. It's kinda like the emergency fund for your household living expenses only this one is for investing.

Since I'm only on the sell side of options... I don't need one for investing. For living expense emergency fund, I've been more conservative than average and I keep two years' worth free-and-clear at any given time. My parents are even more conservative and decided to keep *three* years worth. I've been working on the problem of hedging against bank & brokerage failures (keeping the emergency money split up at different banks which are unlikely to fail simultaneously, staying under FDIC limits, checking the financial integrity of banks and brokerages, etc.) I keep some shares of stock, in a particularly conservative and recession-resistant business, in my safety deposit box just... in... case.

People will tolerate different forms of risk. You may see that my tolerance for certain forms of risk is very low.

 

[DaveT]

I am not in. I lost more poker games by setting dollar goals like this. The reason I do not have a dollar value goal on my portfolio (especially with a time goal) is because if you make a few bad plays human nature tends to take on riskier and riskier plays to try to make up for the huge losses because going back to the small plays feels like a waste of time. I'm so glad I learned this lesson playing small poker games.

My only investing goal is to keep trending upwards. And for my family and me I feel options are a way better way to grow our investments than buy and hold common stock.

Thanks TheShadows for sharing your thoughts. Now that I’ve had some time dwell on it, I’ll share some ramblings.

I do agree that there could be danger is setting goals that are too high and fast in that they might give unhealthy pressure. That said, I think the right level of goal can be very motivating and possibly healthy. But it probably depends on the person.

Personally when I look back over the past several years, goals have played a large role in me finding the best investment opportunities. Back in 2008 I spent several months defining my investment philosophy and values. I decided that I wasn’t going to be satisfied with “normal” gains (ie., 10-15% a year). Rather, I felt the potential of investing was far greater than that and that I should be able to at least achieve 25-30% annual gains allowing me to double my money every 2.5-3 years (4x after 5-6 years, 8x original amount after 7.5-9 years).

I spent a lot of time looking into various investment opportunities and finally discovered an amazing opportunity where I could confidently 4-6x my money after several years. The opportunity was in residential real estate in distressed areas in southern California. To make a long story short, I was 98% confident that I’d make at least 4x my money within several years purchasing residential rentals with 25% down in the areas that had been hit by 60-70% price drops. From 2009-2011 I executed on 1/3 of my plan and then decided to look elsewhere for other opportunities after experiencing the challenges of landlord/tenant relationships (note: the 1/3 plan did work out well financially though).

So in 2012 I was actively looking for a stellar investment opportunity. In fact, I purposely left our money in a non-interest savings account. My wife would ask why we’re not earning any interest or putting it in a CD at least in the meantime. I told her that we needed to keep it in non-interest bearing cash account since that would motivate us to find the right investment opportunities (vs if we were earning some interest we might not be as motivated to find a place for the money). Again, I was searching for an investment opportunity of unusual potential/returns and wouldn’t be satisfied until I found it.

When I discovered Tesla in early 2012 I immediately thought this could be a great investment opportunity but I didn’t have confidence. It wasn’t until after several months of research (probably 600+ hours of research and eventually test driving the car) did I have confidence to put the vast majority of our money into TSLA. When I saw Elon Musk’s CEO Incentive Plan of reaching $43 billion in market cap (at that time Tesla was at $3.5 billion market cap), I thought that that was completely doable and even conservative. I invested in TSLA fully expecting a 10x return in several years time.

I think if I didn’t have the goal of searching for unusually large returns then I wouldn’t have actively been searching and when I found Tesla I wouldn’t have put in the research I did.

Over the past year, one of my interests has been to see if a TSLA-type investment (ie., 5-10x over a few years) could be reproduced in a somewhat reliable manner. As I read the biographies/stories of the greatest investors/traders of all time, one of the common qualities they all had was they believed in outsized gains and the power of compound investment. The traders (ie., Jesse Livermore) went for fast gains, the long-term investors went for slower gains but still outsizing index funds.

Anyway, in an attempt to grow my trading skills I opened up a Roth IRA with $5500 last August with the goal of seeing if I could grow the account to $1 million. I didn’t have a time goal. I started to trade and lost IIRC $1500 on my first series of trades. Anyway, over time some trades worked out and the account grew from it’s initial $5500. What I noticed though was in my main investment account (not the Roth IRA), I was becoming more cautious as I decided to hold an oversized position (over 100%) in TSLA using margin when TSLA went under $130 in Nov/Dec. I felt that I was already over-extended with TSLA so I didn’t feel motivated to search out other investment opportunities. However, what did motivate me was that my Roth IRA was just sitting there. I remember several days sitting on the couch and telling my wife that I needed to find some high return investment opportunities for our Roth IRAs (I was coaching her on her Roth IRA as well). So, I read and researched and eventually came across some opportunities. Part of it is luck/timing (since we’re in an epic bull market), but part of it is I took the time to research and keep looking until I found opportunities I felt reasonably confident in. Anyway, in 7 months that $5500 Roth IRA is at $37k (as of today). But of course it could go down to zero, and I’m very aware of those risks (esp. in a large market downturn). But for me, this account isn’t about the money per se, but rather it’s more about the opportunity to learn, grow and become a better trader/investor. It motivates me to keep looking for big opportunities.

So, with this contest I figured that I could receive even more motivation if others shared the same goal (ie., growing $5500 to $1 million in an IRA). I figured that we could share lessons and we could add fun along the way.

However, I’m also aware that it won’t be fun for some participants as their trades won’t work out and they’ll lose their $5500, maybe quite early on. So, actually I’m thinking this contest probably isn’t for everyone. I think it’s more for the person/people that think they have the skills/potential to turn $5500 into $1 million in a relatively short period of time (ie., 5 years) and who also don’t mind losing $5500 if it doesn’t work out. And for those wanting to be part of something like this. But for others, it might be as educational just sitting back and watching probably most everyone crash and burn their accounts (?). Or who knows, maybe there will be some of us that manage to do pretty well. I know I hope to be one of those people but if I lose the $5500, I don’t mind. I’ve got a bigger purpose in mind, and that is to better myself as an investor, researcher, trader.

One might ask why I’m so interested in turning $5500 into $1 million. Well, I’m not really interested in doing it just once or with just one trade. I’m more interested to seeing if this kind of crazy gain (ie., 200 bagger in several years) is not just achievable (because I know it is and people do it) but if it’s reproducible. Meaning, some of us have experienced 10x+ gains with TSLA but are we going to stop there or are we going to be able to find other investment opportunities that result in 10x gains?

Now, I think I have a pretty decent grasp on long-term investing in high-growth stocks for outsized gains. I understand the concepts and feel relatively confident with the approach. However, I don’t have confidence in short-term trading large amounts. This is a completely different science. Part of me wants to not just understand but to be somewhat competent in this area, so that I can take advantage of not just long-term opportunities but also short-term opportunities.

Although I’m more than thankful for the 10x TSLA gains I’ve seen, I also regret the lack of knowledge I had to not know how to fully take advantage of the 100x short-term opportunities of pre-Q1.

So, personally my $1 million Roth IRA goal is more about getting a grasp of short-term trading and tapping into the potential that it brings of faster gains albeit with more risk. I want to have that skill to spot the big short-term opportunities and play them like a pro, if and when needed. I also think this kind of skill/experience could be very helpful in a recession or market downturn (ie., playing the other side).

It seems like this has become a megapost, unintentionally. So I guess I’ll keep on rambling.

Personally, I think to turn $5500 into $1 million in 5 years there are probably 2 scenarios:
Scenario #1: You make a some crazy bets and with some crazy luck you reach $1 million. The problem with this scenario is that you can’t repeat it since it was almost all luck.

Scenario #2: You have some crazy skills and with a lot of luck you reach $1 million. Now you still had luck, so it might not be reproducible, but since you have crazy skills, it’ll likely that you’ll be able to continue to make outsized gains (probably not to the same extent as this 200-bagger) in some fashion as you continue to trade in the future.

I think the challenge isn’t about reaching $1 million per se, but rather it’s about attaining crazy skills. Since by attaining crazy skills, at least you have a better chance at not only reaching $1 million in 5 years but more importantly you have the skills to make money in the future in your own way.

So, how does one get crazy skills? I think the quickest way is to learn it from someone who has those crazy skills and can teach you. That’s why part of my interest is finding world-class traders/speculators and seeing if I can learn from what they’re doing (note: this is in regards to short-term trading. For long-term investing, I learn a lot from the best long-term investors.). I also think experience is crucial because you might know in theory how to hit a 300-year driver shot but to do it in reality is another story.

I think that’s also why this contest could be appealing, not just because of the challenge of making $1 million but also the challenge could motivate participants to learn and become better short-term traders.

Now there’s always the danger that a 5 year period is too short and restrictive for people to reach $1 million. It’s probably true. I only set that period because it’s going to be really hard to reach. But one idea is we could have the contest be whoever can reach the highest account balance after 5 years (with a $5500 starting balance), so the goal/winner isn’t just about reaching $1 million. But we could have an extra prize if anyone reaches $1 million, since that will be a legendary feat worth recognizing.

Another hope I have with this contest is that it could help us uncover the next TSLA-type investment that some of us can go into with substantial funds from our main accounts. Always got to be skating to where the puck is going to be.

I have many more thoughts but I'll stop here.

 

[InTheShadows]

Thanks for your post Dave. I too am always looking for those types of gains and my guess is that most of us here have a lot more in common than a love for Tesla and renewables.

I agree with your reasons for wanting to do the "game" and I actually think that it can be consistently repeated in less than 5 years (I think it can be repeatable in 2). I too am hoping to master these skills, which is one of the reasons I am now trying to make money in a sideways and bear market.

I agree that starting out is going to be the tough part. That's why I want to make my emergency restart investing fund for a prolonged crash and recovery. Once compounding starts to work in your favor things can grow pretty quickly and you don't have to be as aggressive.

 

[sleepyhead]

Thanks for your post Dave. I too am always looking for those types of gains and my guess is that most of us here have a lot more in common than a love for Tesla and renewables.

I agree with your reasons for wanting to do the "game" and I actually think that it can be consistently repeated in less than 5 years (I think it can be repeatable in 2). I too am hoping to master these skills, which is one of the reasons I am now trying to make money in a sideways and bear market.

I agree that starting out is going to be the tough part. That's why I want to make my emergency restart investing fund for a prolonged crash and recovery. Once compounding starts to work in your favor things can grow pretty quickly and you don't have to be as aggressive.

I hope that you do join us in this competition. I know that you don't like the idea of setting goals, but maybe you can be the "tortoise" with your slow and steady strategy without any dollar or time goal in mind?

Just to see how you perform compared to the rest of the "hare" investors in the competition.

 

[pz1975]

Thanks DaveT for your post. I am looking forward to this competition for the reasons you state near the end - to improve my trading skills. I have learned so much about trading options from this site and TCI over the past 6 months or so it is unbelievable. You guys with your different approaches and philosophies provide a great learning experience for less experienced traders like myself. I feel like a focused 'competition' (even though really we'd all be cheering each other on) would be a great way to improve my own skills further by watching what others do and of course trying out my own strategies. I have 0 expectation that I would even have a chance to win this, but $5,500 to partake in such a great learning experience will be more than worth it over the long run as I apply my (hopefully) improved skills to my investing for the rest of my life. And maybe I'll even do well and make some $ out of it!

 

[haid]

I started this thread a bit dismayed at the glamor around short term trading. I suspect this competition suggestion has the potential to be all too educational, in this regard.

It is true that there (likely) are those who understand and can manage the short term risk/reward. I think far more people are seduced by the siren song of quick multi-bagger profits that are found in options trading. Tesla in last 15 months have made anyone who is a bull, a fricken genius investor. Well timed options buyers have stories for the ages (20X?, 100X?)

But I was into Tesla maybe a month after IPO. And just as the first couple of years were flat, we could go through another such stretch before another meteoric rise. I'm not saying we will be flat, just that the particular timing may be less predictable than the last year would suggest.

A friend of mine wanted to start a similar competition. He had read a few books and was flush with enthusiasm from a few good options trades. He wanted to wager that he would out perform my buy-and-hold despite having an order of magnitude less money to invest. I wouldn't take that bet, as I didn't want him to press beyond his comfort level for some silly competition.

I offer this same advice to those entering this competition. Don't go to Vegas unless you expect to lose your money.

 

[Johann Koeber]

I might consider joining too, but would need to know if I could just open a second investment account. The account is tax deferred so I only need to pay tax for withdrawals that exceed initial pay in. The access would be to options and short selling, but the maintenance margin cannot exceed the available portfolio value (i.e. it's not really a margin account as I cannot buy more than the total worth of the account). I'd have to investigate if I could have a separate account under the same trader platform (anyone using IB got ideas for it?) as that would be easier without having to log in and out of multiple accounts.

Yes, you can have multiple accounts with IB. They are accessed with the same log in. Be careful with order entry. Many times I traded for the 'wrong' account.

Good thing is that the data subscriptions are per customer, not per account.

 

[DaveT]

Don't go to Vegas unless you expect to lose your money.

Since we have a few people sharing words of caution, I’ll go ahead and join in.

1. Options trading is high leverage and high risk.

2. To make money consistently with options, it takes a lot of work. The stakes are higher because you need to have the right timing and the right move (certain increase/decrease in stock price) to make a profitable trade.

3. The $5500 account you open for this competition should be money that you can afford to lose.

4. Market conditions can change at anytime.

5. This competition is in no way meant to imply that making money with options is easy.

6. If you’re just starting out with options, it’s best to go slow and make a lot of small trades to gain experience. You could start in a virtual account first and make a ton of options trades to see how they turn out. It’s also wise to learn from the best traders/teachers (there are a ton of videos, courses, etc out there). Always understand the risks going into all your trades before entering them.

7. This competition is not meant to stress anyone out. You can pull out at any time.

8. The most important thing about this competition is not how much you make but how much you learn. Put the priority on researching, learning, and growing your skills and experience.

9. Don’t feel too much pressure, especially in the beginning, to make overly risky trades. $5500 is a small amount and can take a while to grow. 5 years is also a long time.

10. This competition is meant to be fun and not overly serious.

I'm interested in participating in this challenge. Do you have more information, e.g. When will you start this (I assume everyone needs to start at the same time in order to make it fair competition, and competition is one of the elements of this challenge). What do you want participants to publish and how often. It would be interesting to include the amount of research in the tracking of success, since not everyone has the same amount of spare time available, especially those of us who have day jobs and travel). And I'm sure it will be a direct correlation.

I got this PM earlier today, so I figure I’ll answer it here.

The tentative start date is June 1, 2014. But don’t open your RothIRA/IRA accounts yet for the competition as things are still being discussed and plans can change.

The current rules are:
- start with $5500 in a tax-deferred account
- trading starts on June 1, 2014
- participants must share a screenshot of their account balance at least once a quarter
- participants must make at least one TSLA trade a year
- participants can trade whatever their tax-deferred account allows them (ie., equities, options, futures, etc)
- no further contributions can be added to the account during the contest period. But participants can create a new account with up to $5500 and have multiple accounts submitted in the competition. Limit is one new account per year.

There will be a prize for the person with the most amount in their account after 5 years.
There will be a prize for the person(s), if any, who reaches $1 million within 5 years,
*before awarding winners we will verify all trade orders and make sure only $5500 was ever added to the account.

In regards to documenting research hours, I’m not sure if we should make this a requirement. We could just ask participants informally how many hours they are researching and that could be used to see if it correlates with results.

 

[Norse]

Why does it need to be in a tax-deffered account? I am not sure if I can join if it is.

 

[Johann Koeber]

Why does it need to be in a tax-deffered account? I am not sure if I can join if it is.

In Germany we do not have tax deferred accounts. I guess I will pay the yearly taxes (25 %) from other sources, just to keep it a level playing field.

 

[DaveT]

There probably wouldn't be much rules on what you could trade, except you would have to make at least one TSLA trade a year... since this originated here. Hopefully by requiring at least one TSLA trade a year, we can keep this a part of the investors thread and this can be a learning experience for all those involved, both participating and observing.

We would have some other rules as well. Here's some off the top of my head brainstorming:

- Trading would not commence until June 1, 2014. Participants would need to open up their IRAs before that and post a screenshot with the account balance at $5500 or less.

- No other money can be added to the IRA account at any time, unless the participant withdraws from the contest.

- Each participant should post an account summary balance screenshot at the end of every month (this wouldn't show all the trades, just the amount in the account)

- Participants would be free to share trades or not, it's up to them. But for whoever reaches $1 million, we would need to verify every trade to make sure everything was done with just the starting $5500 balance and no other money was added.

- Participants are able to start over by creating a new IRA account with $5500 the following year. So, in theory one participant could have multiple entry accounts (ie., Account #1 created with $5500 in 2014, Account #2 created with $5500 in 2015, etc). The rule is though you can only set up one new IRA account every year with a $5500 max and to enter that account in the contest you need to post an account balance screenshot of the account before starting to trade. I'm not sure if we would have an enrollment period in the future or if it'll be just open enrollment based on a few rules (ie., $5500, screenshot of account, monthly screenshots, etc).

- There would be some kind of prize for the person who reaches $1 million. It might not be monetary.

- One of the purposes of the contest is to motivate and encourage participants to get better at trading/investing. It's also a learning experience for everyone involved.

Here's some additional background.

I think it's possible to take $5500 and make it into $1 million in a reasonable amount of time (within a few years). I know people have done it. But I haven't seen it done in a public, real-time and accountable fashion. For example, a person can make a blog and say that they started with $5500 in an IRA several years ago and now have $1 million. That's great. But were people really following that person in their journey and was that person held accountable (ie., monthly account screenshots)? Probably not.

I have yet to see a real-time, public contest where people start with $5500 with the express goal of trying to reach $1 million in the account without adding any additional funds. I think this would be quite fascinating. We could see how different people approach this with different trading and investing strategies. And we can see how taking big risks can pay off or give lots of pain. I think it's highly unlikely for a person to just have "luck" with no skill and reach the $1 million goal first. A person with just luck might be lucky for one or two or several trades but that's probably not going to be enough to take the account 200x. The winner will need a strategy and some real skills, along with some luck.

If/when a winner arises in this contest, it will be legendary. We will have documented, real-time, public proof that this happened and it will be a truly fascinating thread to read for a lot of people.

We might cap the contest time period to 5 years. So after 5 years, the contest is over and if no one has reached $1 million, then we'll call it quits. But if someone reaches $1 million early, then we'll still leave the contest open to see if others can reach the $1 million mark as well before the 5 year deadline.

Another reason why I like this idea is because it can be motivating to those involved. $5500 is not a huge sum of money for most people, so it's really money that can be lost. But since there's a $1 million goal, participants don't want to lose the money or else they'll have to start over the following year. Yet they need to take big trades in order to make the gains needed to reach $1 million within 5 years. This gives a concrete goal for the participants. It's kind of like how a marathon can motivate people to train for it. This contest can motivate people to get better at trading, not just by trying it out but also by investing time and resources to seek out knowledge and skills.

I also think it's possible to take $5500 to $1 million within 5 years because many of us have experienced 10x+ gains in our portfolios over the past year. If you are able to find another 10x gain with your portfolio over the next 3 years, then that would be 100x gain. Then, in the following 2 years, if you could 2x your portfolio then you would have a 200x over 5 years. A 200x gain is possible and that's what would be needed to take $5500 to $1 million.

One of the issues though with most of us is that as our portfolios increase we tend to take less risky bets. And that's probably wise and understandable since capital preservation becomes an increasingly important value as you want to preserve some of our gains. However, as we become more risk-averse this could steer us away from the looking into more speculative investments/trades. By having a separate (sandboxed) account of $5500, it allows us to seek out the big trades and to really go for it.

Some of us already might have recently started IRAs with the goal of reaching $1 million. As as side experiment, my wife and I created Roth IRAs several months ago by putting in $5500 each. My goal was to see if I could grow it to $1 million. I didn't have clear timeframe, nor did I have any accountability or outside motivation. However, both of our accounts currently are at $33k each (a 6x gain for each account). $100k is in reaching distance. And then after that $1 million is not too far away. The problem though with my personal Roth IRA I recently set up is that it's more of a sole exercise. And I think it would be a lot more fun with others involved trying to reach that $1 million goal. So, rather than each of us using IRAs that we already have $25k, $50k, $100k in, I think it's better if we all just created new IRAs from scratch and we all did it at the same time and took screenshots of the balance before we all started trading. This would make the contest fair, in the sense that everybody is starting from the same place $5500, and at the same time.

So that nobody goes out and jumps the gun, we probably need some time to finalize the rules and such. That's why trading won't start until June 1, 2014.

Anyway, discuss away.

There’s been a few people asking about the $1 Million IRA Challenge. It’s a risky proposal where most people will probably lose the entire amount and I don’t think it necessarily fits the discussion here at TMC (which is more TSLA related). So, I’ve asked Sleephead to take over the contest organization and to host the discussion over at his site, see details at Million Dollar Investment Competition | The Contrarian Investor Discussion Board .

Best of luck.

 

[sleepyhead]

There’s been a few people asking about the $1 Million IRA Challenge. It’s a risky proposal where most people will probably lose the entire amount and I don’t think it necessarily fits the discussion here at TMC (which is more TSLA related). So, I’ve asked Sleephead to take over the contest organization and to host the discussion over at his site, see details at Million Dollar Investment Competition | The Contrarian Investor Discussion Board .

Best of luck.

Trading begins today, and it will be an ongoing competition. Hopefully it becomes an educational experience for everyone, and we ultimately uncover some successful trading strategies based on our experience from the competition.

Everyone is eligible and you can join at any time. Good luck and hopefully we see someone hit the million dollar mark within a decade.