Quill,
You’re a good discretionary trader. But you’re also an easy mark for anyone with an investing scam like the supposed “2.5% System”. Yes, theoretically, if 2.5% were made on each trade, and if profits were reinvested, then a huge amount of money might be made. But there’s just one tiny problem, namely, market realities and human psychology say otherwise. So let’s work through an example.
It’s no secret that you love COST, both as a company and as a stock, and you’ve said on occasion that a person could retire early from trading it alone. So let’s put that claim to test. Five years ago, COST was trading at $183. Let’s give our test subject a starting balance of $1,000 and have her trade COST just on the days when a 2.5% gain (or greater) was offered. Given that she’s young and has a day job, she’ll buy at open with a MOO order and sell at close with a MOC.
What would her ending balance be? Given that there were only 38 days in the past five years when COST offered 2.5% (or more) on any given day --Close minus Open-- and given that she has to leave some money in the account for not having enough to buy full shares each time she trades, her ending balance wouldn’t be very big, and certainly not enough to retire on, and this is with the counterfactual assumption that she never guessed wrong about which days to trade and never had a losing trade.
Modeling her trades in a spreadsheet is straight-forward enough, but it’s also tedious and doesn’t need to be done, because some math suggests her ending balance --at best-- is less than $3,000, not the gazillions promised by the scam. (By my estimate, after 38 trades, she’d have around $2,556, or a very, very respectable, average annual gain of 20.6%, handily beating the G BoyZ, plus saving $199/year for not subscribing to their news letter.)
Now, let’s run the backtest again, this time letting her capture intraday profits. Her fairy godmother will --again-- tell her in advance on which days COST will have an intraday move of 2.5% (or greater) and tell her the exact moment when COST makes its intraday low. Now, how many trades can she make, each of which --it will be remembered-- she exits with a 2.5% sell-stop order. She’ll have 240 days to make her trades, and her ending balancing would be around $374,738, not the gazillions promised by the scam. But that’s still very decent money. So all she needs to do to make that kind of money is to find a fairy godmother who’ll tell her which days to make her trades, and as well as grubstake her, given that she’s likely to be part of the majority of Americans who don’t have even $400 in savings they could use to gamble in the equity casinos.
An aside: At what point in this trading campaign, --assuming it does get successfully launched-- does bet size have to be cut back to a more prudent level? It’s entirely one thing to buy 10 shares of COST and entirely another to be buying 1,000 shares, especially if the punter doesn’t have decades of market experience. And let me inject some of my own experience here. The trades I got away with I was breaking into the junk bond market --sometimes, gains of 100%-- simply don’t exist today, and even if they did, I doubt I’d have the nerve to pursue them, which calls to mind the oft-repeated bon mot of Alaskan bush pilots. “There are bold pilots, and there are old pilots. But there are no old, bold pilots.”
Also, if one’s whole account is $1,000, as it would be at the beginning of the campaign, and if on the day that first trade were made the market gaps down, by 22% as if did in '87, then how long will it be before our beginning investor has the nerve to get back into the market? Can’t happen again? Won’t happen again? Don’t bet on markets being as benign going forward as they have been for you and me the past 20 to 30 years, for this simple reason. The Fed/Treasury cartel is running out of money with which to prop up stock prices, never mind that most of the world is doing an end run around the $US dollar.
Quill, what I’d suggest is this. Your own decades of struggle to learn and master the investing/trading game offers proof that there are no easy paths to fabulous wealth and that a huge portion of whatever gains we investors/traders have achieved is partly due to the sheer dumb lucky of having stumbled into our preferred markets at a favorable time. What “Simon” and its variants can do is to help investors make buy/sell decisions when the evidence of the tape is in their favor. On that point, I’ll back you up entirely, because it’s what I can test and show is so. It’s what I have traded and have the trade slips to prove. But scams like “2.5% Systems” and their pot of gold at the end of the rainbow don’t deserve serious consideration, not compared with a close reading and application of Ben Graham’s The Intelligent Investor, which is a time-tested path to wealth. (IMHO, 'natch.)
Arindam
