Portfolio Principles

Portfolio Principles – Risk Management

Risk management is arguably more important than any actual trading strategy. Multiple traders can run the same strategy, but could get widely different results because of their risk management rules and whether or not they actually apply their rules properly under market stress.

Take risky positions with small amounts of capital that limit downside on trade entry

Use capital efficiently – for example use ETF option spreads or deep ITM ETF call options instead of buying ETFs outright.
Where possible with exchange listed products use option spreads on trade entry to limit downside risk.

For risky positions in small cap or alternative investments the stop loss is zero, so only enter with what can afford to lose (e.g. use maximum $10k per idea).
Visualise what to do if that $10k position is down 90% – should be nothing because the risk was sized on trade entry.

Risk is always sized on trade entry and never increased through the lifetime of the trade

Don’t reestablish the same trade immediately after exiting for a loss. That is effectively the same not having any stop loss risk management.

Everyone has their maximum risk limit tolerance, except for some very rare investors like some institutional traders who don’t feel emotion or pain on losses.

Investment Themes

Cash is a really bad long term investment, and should be thought of as a constantly decreasing asset due to inflation. However cash is very useful to have for short or medium term opportunity. 100% invested is likely missed opportunity cost for an investment theme not thought of yet. 100% invested all the time is only suggested by the fee based investment management so they can get paid.

Recognise the difference between “themed generation investments” and just a trade. Long SPY call spread $250/$255 for next month, is just a trade (so don’t leave one leg on and treat it like an investment). Long bitcoin or 3D printing stocks can be a multi year trade.

Trading and long term holding are both ok in a portfolio – just be clear which positions fit each category.

In volatile markets like crypto currency a month can feel like a year. Global stock markets are not truly as volatile because they are very mature market – the perceived volatility is often due to investors position sizing traditionally makes it a large part of their net worth.

Don’t attempt to follow investment theme advice from too many sources because it clouds your vision. but read as much as you can on different investment opinions and perspective. If you read something you don’t agree with – decide why you don’t agree with it and see if there is any thing it could add to your own rules. Always stay with your own rules. Importantly investment is about what you believe other market participants will do, not your personal opinion. Your personal opinion on market direction isn’t worth that much. e.g. if you think S & P 500 is on the biggest bubble since Dutch tulips, but you have noticed that many other people are comfortable with it – might be getting limited long exposure.

House Money

“A stock operator has to fight a lot of expensive enemies within himself.” Reminiscences of a Stock Operator by Edwin Lefèvre

After a large profit take the original risk out of the position, then let the rest run as “house money”. Always try and play long term with “house money” if you can because it removes some of the original fear of loss from the trade.

You are probably limited by what you believe is a lot of money. This type of scenario is directly applicable to the crypto market for the last year. Assume you invested $10k, then exited original $10k from position – so still have a position but no risk – and over time the “house money” position goes to $100k. If ultimately lose $100k of “house money” from the peak valuation of that investment – is that an acceptable risk ? If you make have unrealised gains of $100k do you want to exit immeadiately because you cant stand to give it back ? What if the unrealised $100k profit goes to $50k but they goes to $200k afterwards ? Can you handle the swings – even with house money ?

Do you assess the trade based on how much money you have in it ? Or it is based on the investment idea still being valid ?

If you lose on the trade do you anchor to that loss ? Or do you believe that opportunity always come along ?

There are never optimal trades in financial markets, only “good enough”. You will always leave something on the table. Does this achieve initial trade targets ? Whether is was a winner or a loser – was it a well managed trade ? Loser management is as important as winners.

The legendary investor Bernard Baruch who came through the 1929 crash mostly in tact was asked what made him such a successful investor. He replied: “I always buy ‘too late,’ and sell ‘too early.’”

Managing position trades through big swings

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Old man Partridge’s insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in. I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing, initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends upon basic conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.” Reminiscences of a Stock Operator by Edwin Lefèvre

“Bill Gates got his money because he owned a stock, Microsoft, and it went up eight hundred times, and he stayed with the trend. He sat through one of the greatest bull runs in the history of civilization. He understood the pain of gain.
Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game”

Personally I believe it is physiologically easier for me to trade a limited risk option spread strategy because I know how much I can lose every month – but the expected return is only 5% to 10% a year. However handling huge swings in a wild crypto bull market is much harder – yet infinitely more profitable – and after taking out the original stake to play with house money there is no money at risk. It is way more profitable to simply hold positions in a bull market, than trade around them.

Position Entry

This quote is from Paul Tudor Jones (Tudor Investment Corporation) in Tony Robbins “Money: Master the Game” – after showing a picture of rapidly sloping up chart with a “You are here” arrow at the top of it, this is the quote:

“How many people want to be long and stay long this chart?” And about 60% will raise their hands. And how many want to get off this investment and sell it ? Then 40% or so will say get out. And I say “You 40% should never ever invest your own money in your entire life! Because you’ve got this contrarian bug, and this the greatest way to ruin that there possibly is. It means you’re going to buy every brand – you’re going to buy things that go to zero and sell things that go to infinity.”

Do you have a temptation to buy cheap on the way down? Buying cheaper is good, but better done when potential is not yet released in new issues that have no overhead supply. Will make more money buying into a market rising off a low base, than trying to pick a bottom in a “race to the bottom”in multi month decline.

Which of these are you tempted to buy ?

Option 1 – uptrending market that is already 20% for the year moving to recent multi year highs, off a 1 year flat base
Option 2 – downtrending market that is already down 60%, and heading steadily lower over a number of months with some -10% months along the way

Its really hard for me to do 1 & very easy for me to 2, because of personality type. Don’t like to overpay for anything & like the idea of getting a “bargain” (cheapskate). Plus the implication that you are smarter than the market because you picked close to the bottom (ego).

Final quote from Paul Tudor Jones “Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”

Download Portfolio Principles eBook for Kindle

Travel Hacking

Travel Hacking is defined as using credit card deals and loyalty points from various airlines or hotels to book highly discount flights or stays. This is also a great way to cut your expenses without comprising your ability to travel, and effectively save money so you make your money work harder for you. This is an overview of how our family went on many holidays and on average paid about one third of the full “cash” list price. This was the usual holiday stuff of flying, hiring cars and staying in hotels. The experience was also typically better than full price, due to hotel upgrades due to loyalty point membership.

Travel Hacking is not a secret as there are many active internet communities that can show you how use airlines and hotels points. There are many websites that will give you up to the minute offers and tips that change month to month.

This book is not trying to compete with these websites, it is simply one consolidated guide to glue it all together. This book outlines a high level overview and practical experience into a simple “how to” process guide. Importantly we explain what to think about first, and then where to start. This is simply an overview guide on how to begin getting good results.
The book has an accompanying Summary Spreadsheet that shares our real travel saving results from 2012 to 2014 – redeeming approximately 1.2 million loyalty points for total travel savings of more than $13,000. The Summary Spreadsheet can be downloaded and used to track your own annual travel summary, total travel savings, credit cards and fees.

If you do a few techniques in this book, you will save hundreds of dollars on travel (not an exaggeration). If you want one way to save $400 per adult right now, buy the eBook and skip to section on Spending. Also this not about attending time shares or shady 5 hour long presentations to get these prices – just a guide on learning how to travel hack. Just make sure that you are prepared to do the extra work up front, so you can simply check in, go on holiday and come back again – but for a lot less money!

Personally we find it very satisfying to be able to let our family have a great holiday without bankrupting our finances. We also enjoy “beating the system” to see how inexpensively we can do family holidays. Hopefully this is also inspiring that it can be done – even when you have kids ;-)

As always – your mileage may vary.

You can read all about it in the Amazon Kindle Ebook on Travel Hacking: How I saved $13k in 3 years on travel (with my wife and baby!)

Quick note on clarifying our ebook compensation : Some sites in the travel hacking area have a lot of credit card kick backs and affiliate links. To be clear, there are a lot of online resources referenced in the eBook, but importantly we do not get an affiliate kick backs or financial compensation if you click them (you can examine all the URLs yourself in the eBook to confirm this if you like ;-). We are only suggesting one simple ebook purchase (!) that you will easily back your money back on with material inside – we are not looking to use you indefinitely for marketing kick backs!

Investing in Monero Crypto Currency

Alternative currencies known as “coins” have received a lot of attention in the last few years, with the most well-known being Bitcoin. In the last 2 years there have been many such coins created for a diversity of purposes. Usability as a medium of exchange is one of the distinctive characteristics they have in common. These new coins are the brave new world for cryptographic currency (“cryptocurrency”, or even “crypto”), but are still in the early adoption phase.

Adoption is both a critical measure and a crucial means of success for a medium of exchange. Confidence in the liquidity and fungibility of a currency is a crucial factor enabling adoption. The US dollar, for example, has wide spread adoption. Many worldwide markets transact with it. Consequently, governments and banks around the world keep US dollar reserves. Since World War II it has taken the place of the dominant global reserve currency. The US dollar has popular confidence, because the US government promises never to default on their debts. This promise is respected in part because it is easy to keep, as the US government can always issue more currency to pay those debts, since the dollar has not been backed by gold (a commodity with stable and finite supply) since 1971. The US Dollar is also seen as a store of value, and typically maintains relative price stability compared to other currencies.

The example of the US Dollar illustrates what people what to see in a stable currency. This guide looks into one particular new crypto currency from this list of coins, and gives the investment case for investing in Monero (coin ticker symbol: XMR). We will consider how it may gain adoption, widespread confidence and become a store of value, potentially ultimately overtaking Bitcoin.

Please note the terms “Monero” (the coin name) and “XMR” (the coin ticker) are used interchangeably to refer to the coin.

A Brief History of Monero
Monero is one of the foremost alternative crypto currencies that has actually survived long enough to potentially become a replacement for the well known Bitcoin (BTC). Monero has been in continuous operation since 16 April 2014. Initial miners began to offer it for sale on the bitcointalk.org forum directly thereafter. As many as 10000 XMR traded for 1 BTC in those earliest days. Because of the differences between Bitcoin and Monero protocols and programming interfaces, exchange platforms designed for Bitcoin clones would not work for Monero without extensive modification. When poloniex.com offered a market denominated (as is typical) in Bitcoin, it became easy for Bitcoin holders to buy Monero, and that created an initial price bubble.

The following chart shows the price swings for Monero in its first 15 months of trading, from a high of approximately 0.011 BTC to a low of approximately 0.0009 BTC, rebounding to the current price in Aug 2015 of approximately 0.0023 BTC:
Monero Historical Price Chart Since Inception 20150810

One of the main selling points of Monero is that it can mathematically provable truly anonymous, unlike Bitcoin with can be traced via the Block Chain.

If you are interested in learning more we have written an Amazon Kindle eBook Better than Bitcoin – A Beginners Guide to investing in Monero.

Mortgage Acceleration

American consumer finances have got turned on their head in the last few years. High unemployment and falling house prices have all taken their toll on people’s net worth. Some people have underwater mortgages on their house where they owe more than the house is worth. The credit crisis has shown people cant rely on the traditional approaches if they want to be financially free sooner in life. Financial freedom for many people means ultimately paying off their mortgage and being debt free. But after the credit crisis, they now know that the existing financial systems are not going to help.
So what do you need to get financially free from your mortgage? You need some new thinking…

The traditional mortgage advice is to get a 30 year fixed mortgage, paying the fixed month on time every month. However this is exactly what the banks would like you to do. They get there fixed monthly payment every month for 30 years, and you end up paying more interest than principal on the loan. Go to work, pay the bank, work harder, pay the bank, repeat every month! We are not trying to be down on hard working people who can only afford to pay the standard mortgage payment every month – just recognize that the math is working in the bank’s favor not yours!

The traditional mortgage accelerator advice is to do the good old fashioned way of saving extra each month and overpaying on your mortgage. One technique is to overpay principal every year as you can afford it. Another technique suggests adding a small amount every month to your standard mortgage payment. Yet another suggests changing your mortgage payment to be biweekly (every 2 weeks). These are sound techniques as they will reduce principal faster earlier in the life of the loan, and ultimately greatly reduce the amount of interest you pay to the bank. This is great advice and it works well. But the main issue here is that you are always using your own savings! Once you have invested that saved money in the mortgage, you aren’t free to invest it for other things – you have lost opportunity cost.

Overpaying on your mortgage if you can afford to do it is obviously a very good thing over the longer term. However in the short term you still have to shovel your own extra hard earned cash at the mortgage. Once it’s in the mortgage you no longer have any access to it (you have lost the opportunity to invest it elsewhere).

We have developed a technique where you can borrow money incredibly cheaply at 1% to 2%, then use that money to pay your mortgage payments to the bank several months in advance. Effectively you are running your own bank – borrowing money at low rates to pay off your higher rate mortgage much earlier than normal.

This technique combines traditional mortgage over payments ideas with how to get the cheap loan, to save you hundreds of dollars a year and help you pay off your mortgage early.

You need good credit and discipline to execute these techniques successfully. However we have now proven that they work by testing it out for 2 years since 2012, and successfully applied this mortgage acceleration technique to over $30,000 in mortgage payments. We have christened the idea the “Float My Mortgage” method.

The “Float My Mortgage” method has these benefits that will work with your existing mortgage:

Pay less mortgage interest – Save mortgage interest payment by overpaying principal on your mortgage today. However don’t actually pay the principal payment out of your own pocket until many months in the future.

Invest – start making money today on the cash that you would have paid towards your mortgage payments and overpayments.

Beat inflation – postpone mortgage payments and overpayments. Make payments today, but don’t actually pay the mortgage provider until many months in the future. $1000 today is worth more than $1000 next year.

You can purchase the full method in the Amazon Kindle eBook called Float My Mortgage: Pay your mortgage many months in advance – without using your own money