hi folks, maybe this topic has been covered before. the performance of S&P500 is on average 10.8% per year. es sept 07 $ 1,459.75 - es sept 08 $ 1503.75, so interest minus dividend around 3%. so you invest $ 100,000 - buy contracts valued at $ 909,000 return on investment on average 10.8% - 3% (interest minus dividend) = 7.8% over $ 909,000 = $ 70,902 per year. loss of interest over deposit $ 100,000 @ 5% = $ 5,000 nett return is $ 70,902 - $ 5,000 = $ 65,902 = 65.9% per year. so just wait till the blood is flowing in the street and buy, buy, buy.
Lack of patience has been a problem since the beginning of time. I see your point, however, the question is, can one stomach the drawdown?
I was expecting somebody to shoot a hole in my reasoning. yes, must say I`m a bit of a gambler and if I know that eventually I would get out on top, I wouldn`t mind. would have another 100k in reserve though.
I have wondered the same, and decided to do the calculations for the ten year period Dec 1995 to Dec 1996. Attached is an excel sheet showing the results at different leverage. In your calculation you assumed a 9:1 leverage. That would be a disaster. Even though the average percentage per year increases dramatically the result is woeful if you are compounding with no spare cash to meet margin calls. Yes if you have an endless stream of $100K to meet all your margin calls over the period, I would say go for it, and increase your leverage to even 20:1, but as you know nobody has that. It is pitiful to see that on a compounded basis, no leverage (not even 1:1 or a modest 2:1) could do as well as just buying the stock and holding (you probably would do better with simple stock margins, not futures!).
This high leverage approach may be a theoretical exercise, as actual results would be/ could be much worse or much better. I am surprised how poorly the covered call writes do in real life. CANSLIM method is supposed to be so great, but, a mutual fund started by William O'Neill Company did not do so well in the go go years. I am surprised how poorly all the market timers do. I am surprised how poorly some of the best timers do over a period of time. But, I am humbled by the greatness of records by Ken heebner of CGM funds and Peter Lynch's Magellan Fund. I understand that every good trader has an edge of some sort. But, I feel we should stop looking for a particular thing that will work for ever. MARKETS like WOMEN keep changing and you must change, or reduce your exposure to the risk. At the end of the day, RISK CONTROL is what separates good results from bad or poor results...
hi folks, thanks for your contributions. sofar nobody has said that the whole exercise is flawed and the only thing people are doubtful about is the leverage. but are people not buying futures everyday? I think if the basics hold, then the return is actually understated. you buy after a couple of down years like 2001/2002 and the next 5 years will be more than the average of 10.8% a year. so your return might be at least 100% per year. so buy not now, but after a heavy correction. once a turn around is in place, then buy your futures with the majority of your funds and sit back and relax.
I've just shown that over time it returns less than just buying and holding the stock index if all you have is what you put in at the start of each year. The average person does not invest 100K with the intention of holding another 300K in cash just to meet margin calls.
sorry neke, just couldnt download your stuff. after a big correction you wouldnt need another 300k in cash for margin calls. would buy after a big fall of 25-30% or whatever and would wait for a slow/steady recovery of about 5% before buying those futures. its unlikely that the futures @ $ 909,000 in my example would lose another 30% for me to need $ 300k. probably have a stop loss in place @ 5-6% under my purchase price. would still have funds available for short term trading, which could be used for margin calls. like I said before I am a bit of a gambler: would probably buy 2-3 mil in futures when the time comes around. the odds are very much in my favour.