Year 2007 was as good as I could have realistically hoped for.
Assuming a $10,000 beginning value, the 2007 ended with $22,789. A solid +127.8% annualized returns (or 7.1% monthly) ! This includes light trading months of Nov’07 and Dec’07. I also injected capital to my trading account two times during the year thus results reflects consistency for even a growing capital base account. Don’t confuse this with the OPN results. OPN results are far superior vs these results which includes my fair share of “fear” and “greed”.
Here are the Seven factors that helped me delivering these sound results.
Vision, Objectives & Goals: I started my goal with 5-7% monthly returns. Achieving 5-7% per month is not difficult when the capital size is smaller. The real challenge is controlling “greed”. I have had tasted success where I generated 1200% in a day, time and time again, so 5-7% per month sounded very kiddish. But the question that clarified the vision was “Will I deploy the same operating strategy if I had a $10million portfolio?” A clear conscience answer was “NO”. So why to fool myself? Why not prepare for the long haul now? Based on consistency of results, I changed it to “Double capital every year” and that translates to 5.99% per month compounded.
Trading Plan: Failing to plan is a planning to fail. A trading plan is beyond a “Trade Plan”. This is about “how do I plan to make money from investment revenue stream”? At what point I would prefer stocks to options” (Like I did for VIP recently)? Generally speaking, there are two type of trading systems- a) Mechanical and b) Judgmental. A typical option trader will suggest you to use mechanical systems (sounds familiar, 10mins/month and 20% returns kinda pitch). You may define your entry and exit points for a strategy to make it mechanical, but I strongly recommend to add judgement to that mechanical system. How much judgment and how much mechanics, it all depends on individual’s “Greed” and “Fear” meters and understanding of the markets. I followed a combi approach and OPN subscribers know, I have hardly repeated the same underlying.
Money Management: This is the bottomline for if you are wrong, you may still survive if proper money management is in place. But if money is managed poorly, you may lose the edge even if you are smart. What % I shall focus on Income trade and how much I am willing to spend on “speculative trade”? What % I shall withdraw and how much I shall reinvest, etc. Here is my article on how to allocate portfolio capital. Managing Money is a process and one gradually learns how to manage large capital through a process. Ask yourself- If you manage 50K today can you manage $100millions tomorrow? It’s a process of learning from 10K –> 50K–>100K–>1millions–>50millions and so on.
The Big Picture: A lot of success I shall attribute to “being in the right sectors” and right sectors couldn’t have been assessed without looking at “Big Picture”. I started mentioning sub-prime back in Jan/Feb’07 when folks were still “enjoying” sub-prime. I benefited from Bankruptcy of New Century, American Home Mortgage and almost collapse of Accrued Home Lenders (LEND). I challenged prominent analysts and reports on Oil, developed scenarios for Fed’s outcome, shared rise of gold in advance and also estimated bearishness for a period that is hardly heard of being bearish. Symptoms are all there, we need to accept the facts. I didn’ rely solely on what “they” say or what is “conventional wisdom”. “They” are paid to “say”. Average Joe is actually smart enough to make good investment decisions, but loss starts when he starts to buy in on what “they” say without using his intellect. There are so many excellent bloggers. I read more and more of their views as many of them have their own money on stake. In fact you shall be able to find good stocks and commentary. Not to “buy” what they say, but to narrow your search:
Trading Less but Trading smarter: Overtrading is the biggest enemy and couple this with the desire to make all the money back quickly and you have a perfect recipe for disaster. Point 1 and 3 were the key in setting the expectations more clearly and being rationale about trading. There are several indirect consequences of over-trading- a) Desperation and that results in not making sound decisions, b) Unnecessary commissions to your broker and c) Stress if failure persists then underestimation of your true potential. I traded a lot less in 2007 than in 2006 and I significantly cut down my number of hours while improving returns. In facts, at times I didn’t even look at my portfolio for few days.
Don’t stop Sharpening the Saw: I didn’t stop learning. Even if I knew Iron condor and knew it well, I still checked out articles that talks about Iron Condor. Every time I read it or watch a video, something new strikes. FYI My biggest winner was RUT iron condor. 12 successive wins without loss! However beginning Aug, Sept I stopped Iron condor completely and that was due to my anticipation of large moves in either direction. One may argue, you can always widen the range as the IV is higher, but why to take such risks when plenty of opportunities are available.
Give and give freely: This is natural law that took me sometime to digest. But since I started giving back to Society, my returns have also improved. I have sponsored a kid in India, via worldvision, for her lifetime education and I shall sponsor more this year. I never felt that good, despite making huge returns, as I do when I receive a letter from her. She sends me her picture and writes me what did she study and also what she ate. Thank you god for making me capable to make a difference in someone’s life.
Hope you liked it. Here are my original trading resolutions that I decided at the beginning of last year. Do share your comments and if you liked it, share it with those who may benefit from this.