How to get 1 Million Dollars (or Euros, or British Pounds…)

Introduction

The other day, I had a really interesting conversation with one of my friends. It was the kind of thought that we can have on Sundays. We were wondering how to get one million dollars (or Euros, British Pounds, it's applicable to all currencies)

Discussion

In the beginning, we were saying silly things that come from social media and it's difficult to verify if it's true or not. After that, we briefly talked about real estate. Everything looked great but the high capital required to invest in this kind of asset makes it difficult (without having already saved part of the mortgage)

We follow the main hedge funds, so we started talking about trading legends such as Jim Simons, George Soros, Warren Buffet, Ray Dalio, Steve Cohen, William Ackman and Ken Griffin (The list is really big, they are only a few of the best)

The next table shows the 3-year compound return for some hedge funds:

                 Penta Top 100 Hedge Funds, Source: Barrons

You can find the whole list on the link below:

https://www.barrons.com/articles/penta-top-100-hedge-funds-1497665963?tesla=y&mod=article_inline

This idea was great but considering that some of the strategies used by hedge funds (and asset management, CTAs… ) require big sums of money, it was discarded automatically. In addition, we don´t know wealthy investors and we don’t have any track record.  Another solution is to invest directly in one of these entities, but again, the mínimum investment is pretty high.

At this point, we were aware of the reality but I said that we can get it! The only requirement is commitment and patience (this will be discussed later on)

The model

Before I explain this model I would like to make some assumptions:

• I consider that the money saved every month is the same for the whole life of the individual.
• All the savings are for investment purposes.
• The individual can’t withdraw any money once it´s invested.
• The return is positive for the whole life of the investment (the return is considered as an annual average return of the investment)
• The investment is not defined

So basically there is no secret, the idea is based on saving money every month and invest it in the asset that you consider suitable for you. 

       The table used for the calculation, own elaboration

As you can see the table has different columns, let me explain them. The year and the month are in order for charting purposes. The savings is the amount saved per month (in the example is 500 but I´ve done it for 300, 700 and 1000 units of currency every month) The rest of the columns represent a financial calculation to reflect the effect of investment (in that case, I’ve chosen monthly compounding (Amount saved * (1 + Annual return % ) ^ (1/12)) 

     Example of the first 5 months and the last 5 months, own elaboration

This is the same table as the previous one. I want to show the top and the bottom of the table used for the charts that I’m going to explain now. 

      Total savings after 40 years without investing them, own elaboration

These are the amount we would have after 40 years (or 480 months) without investing. Obviously, if you save more, you will be wealthier in the future.

      Final amount after investing for 40 years, own elaboration

This table is really interesting because shows the capital after investing for 40 years. Here we can see why investing is very important to build wealth. Let's say that we can afford to save 300 units of currency per month. After 40 years, we check the account and we can find 2 outcomes depending on if we decided to invest or not. Without investing the savings, we would have 144000 while if we had invested at 5% per year, we would have made 446569,38. Investing generates 3 times more money than only saving (there is risk in every investment and you should check if it’s suitable with you or not) Returning 10% or more per year is not impossible but doing consistently is very difficult. However, if you get it, you will see your investments grow quickly. 

  Charts about the lifetime investment for the different average returns and savings levels, own elaboration

Here we can see the effect of compound interest over time. As Albert Einstein said once: “the power of compound interest the most powerful force in the universe”

Now coming back to the title of this post, let’s find out how many months of savings we need to reach 1 million:

      Months needed to reach 1000000, own elaboration

Sadly for the lower saving quantities is not possible to reach this figure or a high return is needed. Sadly there is a high risk involved in strategies that return high return.  For the rest is easier but it’s not an overnight process. At this point, we need patience and keep working hard.

Why only a few percentage of people become as wealthy as in the example?

• Investing is not as linear as I showed. There are years in which you make a profit and years in which you may lose money or even you can be breakeven.
• Saving money sometimes depends on a personal situation (There are so many things in life more important than saving a fixed amount every month)
• At the beginning of your professional career the salary is low and after that, it should adjust according to the experience.
• After saving “X” amount of money, you can think of relocating to a better property, getting a car or something that won't allow you save as you have been doing until now (maybe your salary has increased enough to cover this expenditure via personal loan but it’s difficult and it doesn’t apply to everyone)
• The example shown doesn’t apply to everyone because you need to work for the next 40 years.

Conclusion

Even if getting a million is difficult, it’s not impossible. If your personal situation allows you to save and invest every month, the only secret is Commitment and Patience. You need to understand the investments and the risk involved.

All the best!!

#investing #savings #CompoundInterest #HedgeFunds #USD #EUR #GBP #BuildWealth #HowTo #Get1Million

SP500 vs Gold, using their correlation to make a trading strategy (Part 1)

This post is part of a new series in which I will show how to figure out if we can build a strategy using some assets’ correlation. Let me introduce the assets:

S&P500

    Mini S&P500 future (continuous contract), daily, Source: TradingView

The Standard & Poor's 500 is one of the main American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. As you can see, this index hasn´t stopped raising since 2011. 

Gold

    Comex Gold future (continuous contract), daily, Source: TradingView

The Comex Gold is one of the most important futures. You can trade it directly or you can use it to hedge your stock portfolio. Historically this hedge has been successful and has protected the portfolios versus big drawdowns. It´s recommended to have at least a small part of your investments in gold (even if it´s in an exchange-traded fund that tracks this metal)

I reviewed Gold futures and ETF´s last year: Gold Analysis

 

Spread between SP500 and Gold

    Spread between SP500 and Gold futures, daily, Source: TradingView

To simplify the calculation, I decided to make the spread as 1 E-mini S&P500 future minus 1 Comex Gold future. As you can see, the relationship was negative before 2013 because the gold price was higher than the S&P. Since then, this spread has raised almost like the US index. This explains that the different QE programs calmed down the uncertainty (so the investors started buying the S&P and started selling or reducing their gold portfolio)

Introduction to the study

Correlation series

For this part, I chose 4 correlation series (20, 60, 120 and 250 days) that represent different time frames. 

      Correlation time frames table, own elaboration

The main reason for choosing this time frames is to make comparisons and to see if I can work out a strategy in the following posts. 

     S&P500 and Gold correlation series, own elaboration

We can’t get any conclusion from this chart apart that the long-term correlation between S&P500 and gold is negative (the most part of the time).  One of the things I would like to study in the following days is if I can build a profitable system based on the correlation series divergences. For now, I can show the different charts with the asset prices and the correlation (The Y left axis represents the price of the assets and the Y right axis represents the correlation coefficient):

     S&P500, Gold, and  20 days correlation serie, own elaboration

This chart doesn’t show any clear relationship. Another problem is that is a short-term correlation that generates a lot of noise in the signals and it´s difficult to know if it´s worth to check this correlation to trade the spread.

    S&P500, Gold, and  60 days correlation serie, own elaboration

The 60-day correlation is smoother than the previous one. I think that we can take advantage of the correlation every time that is above 0, however, a statistical study is required. 

  S&P500, Gold, and  120 and 250 days correlation series, own elaboration

As I said before, we can see that the most part of the time these correlations are below 0. Like in the previous chart we can take advantage of the correlation above 0. In addition, I would be interesting to study a trading system based on the 120 days correlations that trigger a trade every time is under -0.2. In terms of correlation’s divergence, we need to backtest it properly.

Sum up

I’ve chosen these assets because they are really important. The S&P500 reflects the US economy and the Comex Gold can be used as an investment or as a hedge vs the main index in a recession. Sadly this post is an introduction. I will analyze the systems proposed using advanced statistics and some backtests. As a reminder, the systems will be based on the correlation and its divergences. 

#trading #investing #correlation #ES #GC #SP500 #Gold #statistics

Why I took a 5-day Moving Average instead of the 9-day Moving Average?

As I promised in the last post, I will review my decision of taking a smaller moving average. My purpose wasn’t to overfit the model, I was looking for a drawdown in which I feel comfortable. 

How did I start?

I had an idea about a day trading system. My objective was a good performance with adjusted risk. I’m a big fan of the stop loss. If you, as a trader or an investor, can avoid drawdowns bigger than 20-25%, you will be successful over the time.

Our example

The good point about the way I run the backtestings is that it’s easy to change some parameters and adapt to different indicators. Obviously, I ran the strategy with different moving averages in order to know what parameters generated a smooth performance curve avoiding big drawdowns. 

       Max drawdown and final balance from the different MA, own elaboration

As you can see the best profit to drawdown ratio was the system based on the 5-day Moving Average. This seems logical as it’s a daily trading system. The reason behind the bigger drawdown, in the MA3 system, is that the there is more noise in the entry signals and it´s not accurate enough with the tight stop loss. In the case of the MA9, MA15, and MA50, the signals are more accurate but the retracements and the close stop loss don´t allow the systems to perform as well as the ones with lower moving average. If you see the MA9 system's figures, you will understand that the profit is exactly the same as the MA5 but the drawdown is worse. 

        Max drawdown  from the different MA systems tested, own elaboration

This chart is complementary to the table and the explanation above. Surprisingly, at least for me, the MA50 has a lower drawdown than the MA15. If we think about it, probably the best system would be between the 3 and the 9-day moving average. As I said before, I didn’t optimize the system. 

         Performance of the different systems tested, own elaboration

This chart is more important than the ones shown above. Here you can see how the MA5 system has barely stayed under the initial balance invested. Even after its worst drawdown the system was up more than 5% while the other ones went under 10K (and the worst one, under 9K) The main reason is that a “small drawdown” is not as painful as a big one, in simple terms, capital preservation will assure you better financial future. Imagine that you could have avoided all mistakes in the stock market (or futures) or at least you could have limited your loses. I’m sure that today, you will be better off. The reason is the asymmetrical leverage.

(second part of this post: First lesson for an investor )

 Having said that, I would like to add that I´m not questioning your investments decisions. I´ve made so many mistakes in the past and some of the trades were good considering the expected value of the trade. 

          Final balance of the systems tested, own elaboration

To finish, I wanted to show you the chart of the final balance after 3.56 years. The best system has returned 56.6% which is a little bit more than 18% per year.

Final thoughts

I hope that you like this post. The main purpose was to show you how to analyze the systems and even extrapolate the basis and test different indicators or the same indicator at a different level. The stop loss can be painful but I wouldn’t place an order without knowing my stop and target. As I said the asymmetrical leverage is very important because recovering small losses is easy while recovering big drawdowns can be really difficult. You have seen this concept with the system reviewed. Thanks.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#trading #MovingAverage #Backtesting #Drawdown #Analysis #QuantitativeAnalysis

Momentum system

Sometimes we look for a clear trend in the different markets. This can be difficult these days because the volatility is back. I believe that there are many opportunities but you need to adjust the strategy’s timeframe. Obviously, when we see the chart at the final of the day,  it´s easy to see the levels where we should have bought or sold. I would be happy as far as you do this in order to learn the order flow and how the news affected the security. However, you shouldn’t take seriously the important levels of the day (if you are only checking the day instead of a longer timeframe) because anyone knows what is going to happen tomorrow. I wouldn´t like to discourage you if it works for you but in my opinion is like singing “if I were a rich man” without trying to make money.

Why is the data important? Introduction to the system

As I said indirectly in the first paragraph, I don’t know what the asset prices are going to do tomorrow. The most important for me, leaving my thoughts apart, is the historical data. Here is where statistics takes importance. Let’s get biased for a minute thinking that every time that the price is above an indicator (or another variable) we should buy and every time is below the chosen variable we should sell.

Let´s take the Moving Average 9 as this variable and check the probabilities.

                                               Probability table, example own elaboration

Only to sum up, we have a buy signal every time that the opening is above the MA9 and a sell-side every time the opening is below this indicator. This example is not the best one. I wouldn’t publish this screenshot in a book. Apart from this joke, we had 426 buy signals but only 203 days that the future closes above the opening. Investing in a strategy that has 47.7% success ratio doesn´t seem the smartest thing to do but this is where the money management comes! In the case of the sell signals, it's slightly better showing 52.4%.

Backtesting

Before I show the results I would like to confirm that I´ve used the 5-day moving average instead of the MA9.  The main reason is that the performance was better and the drawdown was lower. This test has been done with the FESB historical data (Eurostoxx Banks). The reason why I chose this product is because I thought that it was directional enough to apply the strategy.

                                                  Backtesting statistics, own elaboration using R programming

As you can see the backtesting results are not bad. Each trade generated 6.42 EUR on average. The biggest win was 740 euros which is great considering that we started with 10000 EUR. I used a tight stop loss, only 2 ticks. Even with that, we can see that the FESB is very directional and the stop was hit only on 53% of the trades. The return has been 56.60% in almost 3 years and a half.

      PnL curve, own elaboration using R programming

The most interesting thing is that after the max drawdown (1570 between the 98th day to the 270th day) it has been rising. Obviously, when your portfolio has grown and you are using the same money management and risk management, the drawdowns are smaller than at the beginning. 

                                                      Max drawdown, own elaboration using R programming

Each trade was simulated with 2 lots and the maximum daily loss was 20 EUR (2% of the initial capital)

Sum up

I like analyzing trading systems and I´ve been working on this strategy for a while. I´m surprised about its performance because I expected worse statistics. Surprisingly, the % of successful trades were almost the same as the previous example shown above. This post doesn´t show the real performance because the commisions are not included. I will write a post in the future explaining why the short-term moving averages fit better than the long term in this kind of system. I hope you like it.

Have a good trading!! 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Recommended article

Hi. I have been reading a lot these days. One of the best articles I´ve read lately is the following:

http://www.zerohedge.com/news/2018-06-16/global-bond-curve-just-inverted-why-jpm-thinks-market-crash-may-be-imminent

It doesn't matter if it comes from JP Morgan (like this case) or from a top Hedge Fund. The analysis is excellent. I'm a big fan of the interest rate curve. Its movements are only monitored by top traders and portfolio managers but you can extrapolate a lot of investment ideas. The main problem, as always, is getting the data. I would like to congratulate ZeroHedge for bringing this kind of content. Thanks.


Have a good trading!!

Italy, new political uncertainty

This is a brief article about the positions we can take if one country has political problems or its economy is weakening versus other countries or economic areas.

Italy

The president denied a group that was elected because he thought that having a eurosceptic finance minister wouldn´t be right for Italy. This generated a big sell-off on the Italian bonds due to the political uncertainty. After two days Giuseppe Conte was presented as a prime minister. There are a lot of doubts about the future because the new government rejects austerity. In addition, one of the measures is reducing the tax to 15-20% for individuals and corporates. Probably this is good in order to expand the economy or promote new investments. On the other side, this will generate larger déficit. 

    FBTP Jun18,  daily, Source: TradingView

The volatility has increased in the last five days. The FBTP Jun18 was in free falling the last Monday and Tuesday. After that, it has recovered.

FGBL-FBTP Spread

     FGBL vs FBTP Jun18, daily, Source: TradingView

The spread vs the Bund and the FBTP has increased dramatically. In the best scenario, a trader would have bought the FGBL Jun18 and would have sold the FBTP Jun18 at the beginning of the week or even when it broke the 26 level. The reason behind this is covering and hedging in some way because the bund is more stable So basically, we are reducing volatility. The Italian Bonds yield’s jumped due to the political uncertainty and the possibility of breaking the relationships with Europe.

Sum up

We have seen how volatile the markets can be in these situations. One of the best ideas is spreading versus a safer bond as I showed above. In my opinion, Italy won’t leave Europe. I will talk about Spain in the following post. Thanks.

Have a good trading!!!

Appaloosa 1st quarter changes in its portfolio

The other day  I read an interesting article on ZeroHedge (http://www.zerohedge.com/news/2018-05-18/tepper-trounces-competition-outperforms-peers-600-ytd). It was related to the portfolio changes on the Appaloosa’s portfolio. Appaloosa Asset Management is outperforming its peers, this is why I decided to investigate what they are doing differently from the rest. Reading the 13-F from the biggest hedge funds can help you understand how they take the investment decisions. However, you won't be able to know the price in which they entered or exited the positions.

I´ve only focused on the new positions:

Lam Research Corp (LRCX)

    Lam Research Corp, source: TradingView

The strong fundamentals and the high margins will help the stock to go up.

Lam Research Corp ratios, source: TradingView                               

Wells Fargo (WFC)      

    Wells Fargo, source: TradingView

This company has been punished in the markets due to the regulatory constraints. However, it showed earnings that beat expectations. I think Wells Fargo is capable to provide good returns for investors via earnings growth, dividends. The net margins are good and the P/E ratio is better than its sector peers.

UBS Group AG (UBSG)

    UBS AG Group, source: TradingView

This investment brings geographical diversification. It’s the largest global wealth manager and has a large exposure to Asia.  It offers a 4% dividend plus buybacks. It showed the best quarterly results in 3 years on the 23rd April. The lower revenues and rising cost are one of the main concerns. I think investing long term in this company is not a bad idea. However, I would prefer to buy under 15CHF.

Applied Materials (AMAT)

    Applied Materials, source: TradingView

The strong fundamentals are driving the price of this stock higher. The sound financial situation allows the company to increase the investments. The biggest concern at the moment is that the makers of displays and chips to store data in high-end phones are slowing some projects. (The best example is the disappointing sales from the iPhone X)

SMH semiconductor ETF (SMH)

    SMH semiconductor ETF, source: TradingView

This chart shows the incredible performance of this semiconductor ETF. I would like to remind you that I am not an expert on this sector. I can understand the growth from 2013 until now, basically, it has been driven by a strong demand for this devices. When something becomes popular there is two ways of making money:

                -Mass production with the smallest cost possible

                -Limited production of high performance devices

At this point is up to the clients. Will we see strong demand in the best devices out there? (We have seen disappointing sales in some of them) Will the price of these devices decrease ? If so, the net margins will do as well and their rating will be downgraded. I’m not saying that is a bad investment, I have only expressed my point of view.

ALPS ETF

There are 16 ETFs listed under this asset management. I believe that they use for diversification purposes. 

Knight Swift (KNX)

    Knight Swift, source: TradingView

This company has great fundamentals. The financial leverage is really small. The main concern is to hire and retain truck drivers as the company said when the 1st quarter earnings were released.

Boyd Gaming (BYD)

    Boyd Gaming, source: TradingView

It has good fundamentals for a short-term investment. The resistance is around 40 so it doesn’t have a lot of upside potential (in the short-term). The analysts think that this kind of business has one of the lowest growth prospects.

Platform Speciality Prods Cor (PAH)

    Platform Speciality Prods Corp, source: TradingView

It has an attractive P/E ratio and upside potential. I believe that Appaloosa bought under 10. One of the biggest problems is the financial situation.

United Contl Hldgs Inc (UAL)

    United Continental Holdings, source: TradingView

The enterprise value to sales under 0.80 and the P/E under 10 make it attractive for investors.

Nvidia (NVDA)

    Nvidia, source: TradingView

Nvidia is a successful company that its share price can continue to rise in the following year. The sales growth forecast is positive for the next years and if we consider that the margins are high, we will see this stock higher.

Sum Up

Today’s article has been different from the other ones. I haven’t analyzed all the stocks properly but I’ve given a quick overview. In the case of the stocks above, they have good fundamentals and some of them are down around 20% from the last max. If the market continues rising, Appaloosa will deliver a strong performance.

As I said, we can learn a lot with the 13 F even if we don’t know the prices in which the trades were executed.  Obviously, we should do our own research but we can compare if some of the biggest funds are taking the same positions. Another thing to consider, that I haven´t mentioned, is the type of investor, maybe they are looking for a short-term investment while you can be considering a longer time frame.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved