Daily Investment Interpretations

February 17, 2011

2011-2-17 (Thursday): The markets did their daily dip dance. falling in the morning and then rising to new heights at the close. The NASDAQ Composite rose 6.02 points (0.76%21%) to 2,831.58. The Dow advanced 29.97 points (0.24%) to 12,288.17, while the S&P 500 added 4.11 points (0.63%31%) to close at: 1,340.43. Oil closed up at $86.47 a barrel , while Gold ended at $1,384. The VIX dropped 0.13 points to 16.59.

Back to the Daily Decision Stock Trader: Retirement Accounts
 
   To repeat and expand upon Tuesday's last paragraph: (see below)
    "How fast will it grow? The Daily Stock Trader shows a gain as of today's close of 27.7% in two months, from the inception of the service on December 10, 2010, through February 11, 2011 (last Friday). At that rate, our investment pool would double every six months.
    My calculations, based upon treating all the gains and losses as sequential, would lead to a doubling every two months."
    The difference between my two-month doubling time and Mr. Meiers' six-month doubling time (my interpretation of his 27.7% in two months) might be, I think, a consequence of the fact that his 27.7% return may be based upon the total size of his portfolio whereas I'm assuming that every dime of my investment capital is invested at all times. I mentioned earlier that there might be a way to manage an investment pool such that all of it is fully invested at all times, except for those uncommon days when Mr. Meiers is completely in cash. The scheme I had in mind doesn't look too bad. It would work like this.
    Suppose that on Monday, Mr. Meiers specifies a "first investment". We'd invest all of our capital (which we'll suppose to be $50,000) in that first investment. Let's suppose that this stock is priced at $50, so we'd be able to buy 1,000 shares of it with our $50,000. And let's suppose that we're using Interactive Brokers as for our brokerage service. Their commission on this 1,000-share purchase would be $5.00 (half a cent a share). 
    On Tuesday morning, Mr. Meiers recommends a second stock  We would sell half of our first investment... 500 shares (which we'd have to do sooner or later, anyway)... and invest the resulting ~$25,000 in the second stock. We'd pay a $2.50 commission to sell 500 shares of the first stock. To keep things simple, we'll suppose that the second stock also costs $50, so we'll be buying 500 shares of it for an additional $2.50 in commissions. So our total commission cost on the second day is also $5.00.
    On Wednesday morning, Mr. Meiers provides a third stock selection. We would sell 167 shares of each of our first two stocks and buy 334 shares of the third stock. Our total commission cost on Wednesday would be $3.34. 
    On Thursday morning, Mr. Meiers endorses a fourth stock. We'd sell 83 shares of our Monday and Tuesday stocks and 84 shares of our Wednesday stock to buy 250 shares of Thursday's stock. Our total commission on Thursday would be $2.50.
    Now suppose that on Friday, Mr.Meiers recommends selling all four stocks... 1,000 shares of stock in all. Our total commission expense on Friday would be $5.00. So our total commission cost for the week would be $20.83.
    How would this compare with the profits we might expect for the week? Using Mr. Meiers' conservative value of 27.7% for 44 days of trading (after subtracting Christmas and New Year's days), we arrive at a an average daily return on investment of about 0.63% a day. 63% of $50,000 is $315 a day, or $1,575 a week, so an overhead cost of $20.83 a week would be a very small fraction of our expected weekly gains.
    A worst-case scenario might be that all the recommended stocks cost $10 a share, quintupling the trading costs to $104.15.  The average price for Mr. Meiers' stock picks is about $37, so the weekly tab with a $50,000 account in the scenario I'm describing would be about $28 a week. This would be a very small tax on the $1,500 or so that we'd expect this service to earn. 
    Suppose we used a "retail" trading service that charges $8 ($7.95) for trading any number of stocks. Then we'd have one trade on Monday, two trades on Tuesday, three trades on Wednesday, four trades on Thursday, and four trades on Friday, for a weekly total of 14 trades at $8 a trade, or a weekly total of $112.... exactly four times the cost at Interactive Brokers.
    From this, I conclude that the crossover point at which conventional online brokerage services would become cheaper than Interactive Brokers services would be when the amount to be invested exceeds about $200,000.
    If TopStock Portfolios' Daily Decision Stock Trade service works as well I'm hoping it will, our accounts might exceed $200,000 sooner, rather than later.
The Bottom Line: TopStock Portfolios' Daily Decision Stock trade service should quadruple your money every year, thousand-folding it in five years.
    It's my hope that the modified funding arrangement I'm describing here might cut the doubling time to four, three, or even two months, 8-folding, 16-folding, or even 64-folding our annual gains, reducing the 1,000-folding times to 3, 2, or even 1⅔ years. 

Taxable Investment Accounts
    If the money we plan to invest is taxable money, we can deposit it in a margin account and approximately double our rate of return, halving the doubling times and the 1,000-folding times. This means that if Mr. Meiers had used maximum margin, his portfolio would have doubled in three months instead of six months, generating a 16-fold rate of rise each year, and 1,000-folding every 2 years, Of course, taxable accounts are taxable. It might be feasible to pay the Internal Revenue Service interest on the outstanding tax bill until the end of the year, giving the money more time to compound, but in the end, ⅓rd of all your gains would go to the U. S. government.
    Wouldn't it be dangerous to invest using margin? Not if you're satisfied that your stock selections will, on average, rise.

    If my adjustments to Mr. Meiers' basic strategy* work in practice the way they do on paper, the 1,000-folding times, using 100% margin, may be
1⅔ years (20 months), 1 years (15 months), or 5/6ths years (10 months).
* - "my adjustments" refers to selling portions of existing stock positions to raise cash to add new stock positions, as directed by TopStock Portfolios Daily Decision Stock Trade service.
    Is this for real? Or is this just a crazy fantasy?
    I've been using the Daily Decision Stock Trade for a few weeks now, and so far, it seems to work as advertised. My biggest problem has resided in the fact that I've been reluctant to trust this system, and have tried to second-guess it. But I'm sold now on following the rules.
    One of the great things about this is that, since it multiplies your money so rapidly,  you can start without risking much money. Or you could run paper trades for a few weeks to check it out. 

Using Call Options to Generate Leverage in Retirement Accounts
    If we're only going to be holding a stock for a few days, then we could generate immense leverage by buying short-expiration, near-the-money call options rather than spending the money on the stocks themselves. And we're allowed to buy and sell calls and puts in retirement accounts. To illustrate the effectiveness of this approach, I bought 70 March 19 calls on the stock that Mr. Miers recommended yesterday (Wednesday, February 16th) for $149 a call, for a total investment of $10,497.47, including the trading commission. At tonight's close those 70 options are worth $12,670, for a two-day gain of about $2,170, or about 20% of my original $10,497.47. But there are problems with this approach. Most of the stocks that the Daily Decision Stock Trader selects aren't for all practical purposes "optionable". Most of them are too thinly traded for even our meager investments. For example, today's stock-of-the-day saw a grand total of 36 calls traded in the most popular March Call option, for a total trading dollar volume of about $4,800.with a total ownership of that call of about $55,000. The only other active March call involved about $1,500 worth of trades. And because of the thin trading in options on this stock, the spread between what you have to pay to buy the option and what you'll be paid when you want to sell the option on the most popular call on today's stock is 20 a share. That amounts to about 13% of the $1.33 price of the call. Considering the fact that the 70 calls that I used to generate my $2,170 in profits only had a spread of 32, 20 a share is pretty steep. Twenty cents a share is how much the price of the call option has to rise before you reach the break-even point.
    There's another problem with using calls having to do with trading volume. Investing $100,000 in $100 calls would require buying and selling 1,000 calls. Investing $100,000 in $200 calls would require the purchase of 500 calls. For all but the most heavily traded stocks, that's a significant fraction of the total daily volume in a given put or call option. If more than a few people tried to trade the same call option at the 500-to-1,000-contract level at the same time, I suspect that for most stocks, the system wouldn't be able to handle the load. So that's a major limitation with options.
    Beyond that, trading options is a bit tricky. And of course, the use of options will hugely amplify your losses as well as your gains. But for better or for worse, they can put the Daily Decision Stock Trade on steroids.
To sum it up: Following the Daily Decision Stock Trade program meticulously should quadruple our money annually.
    Using my scheme of remaining fully invested at all times, we might 8-fold-to-16-fold our money in a year.
    In a margin account (minimum balance: $25,000), the Daily Decision Stock Trade service should 16-fold our money annually before paying income taxes, and should 11-fold our money annually after we pay income tax on our gains.
    Using my scheme of remaining fully invested, we might 32-fold to 64-fold our money in a year before taxes, and might 22-fold to 42-fold our money after paying income tax on our earnings. Thousand-folding in two years looks possible.
    Of course, the proof of this pudding will come in the eating, and that will take additional time. But this is how it looks to me on paper.
    At the very least, it looks to me like a worthy investment gambit.