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ProShares

Ever heard of them? By now, most people understand how mutual funds work. How about ETFs, or exchange traded funds? ETFs differ from mutual funds in that they can be traded throughout the day, and at least most of them are are index tracking, which is to say that shares of the underlying index (like the DOW, NASDAQ, S&P 500, etc.) are automatically traded in proportional lots to those buying and selling the fund itself, and so it matches the real-time action going on in the market for those same securities. There’s no load, as with some mutual funds, and expenses are nil. Some of them have options contracts associated with them, such as SPY. Seeing that very few mutual funds (I think none) beat the S&P 500 over a 10-year span, a good buy & hold strategy is just to open an account and buy Spiders (SPY) regularly, and maybe even the Qs (QQQQ). Your performance will exactly match the S&P 500 or the NASDAQ 100, respectively. Now that tech stocks are showing signs of greater strength than the market at large, it might be a good idea to have some percentage in the Qs.

ProShares is now up to 58 ETFs, but they present some very interesting
deals. If you can reasonably time the market on a long-term basis, then
rather than move to cash or money markets (or maybe choice bond funds)
when the market goes through a cyclical bear, such as 2000 – 2002, you
can actually short the market by purchasing an inverse ETF. That is,
the ETF moves precisely inverse to the S&P 500, or NASDAQ, or
whichever index you’re interested in. For even more fun, they offer x2
integrated leverage both on the long and short (inverse — since you’re
not really shorting, you’re purchasing an asset that moves opposite the
asset it’s inversely tied to) side. If you have a standard — non IRA
— brokerage account, you’ll normally be granted a 50% margin account (if not, go to OptionsXpress or Thinkorswim — the later being the best),
which means you can own stock worth twice the money you have available.
Therefore, using 2x ProShares, you could achieve 4x leverage, long or
short, without messing with options that change in value due to both
volatility and time to expiration.

I’m giving it a great deal of consideration going forward. After more than two years trading options day-in, day-out, I’m just not at all satisfied, considering time and effort compared to what I could do with a more hands-off approach.

But how about long-term market timing? How do you have any idea of when to move to cash, or go inverse with one of these clever ETFs, and then how do you know when to go back in the market?

Nothing is a sure thing, but the very best I know at this game is Bob Brinker. Have you heard him on the radio, Money Talk? Well, I’ve listed to him on and off since at least the mid 90s. During the dotcom run up of the latter 90s, he was 100% invested, never wavering in the slightest, even for the quick 20% correction in ’98. On his very first radio program of 2000, he advised going to 65% cash and outlined a safe bond-based portfolio for the 35% still invested. I believe he saw this coming for some months, but waited until after the first of the year in order to defer enormous capital gains for those with taxable accounts for an additional year.

I didn’t follow much during 2000-2002. I was in bond funds and averaged 16% per year during the bear. So guess when he sent the signal to go long 100%? How about March 11, 2003. That day, the S&P closed at 800.73, and that happens to be the absolute lowest close of the 2000-2002 decline from the S&P highs in the 1500s. March 12, the index traded intra day down as low as 788.90, but it closed up, 804.19 and has never looked back.

I’d advise listening to him. It’s a real dose of reality; completely pragmatic as to monetary policy, politics, taxation, and so on, but pragmatism is the reality of our life in the "land of the free." Since I can’t always catch his programs on Saturday and Sunday on the radio, I subscribe to his On Demand service for $5 per month and just download the commercial-free shows each week for later listening on my iPod, which I can also play through my car stereo.

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More

2 Comments

  1. Richard Nikoley on November 28, 2007 at 17:36

    I heard about that, but didn't hear it directly. It would be good to hear an actual audio clip, or a quote from his newsletter, which I subscribe to, to judge the exact nature of this recommendation.

    The reason is that I have rarely heard him make a specific recommendation for a specific security. He's much more general, and he usually just suggests.

    I note in the link you provide that his recommendation for TEFQX is for up to 5% of investment capital. That's a far cry from 50%, or 33% and to me falls in the category of "shit happens." But he should come clean, that's for sure. I listen to him for one thing, and one thing only, and that's macro market timing. As far as individual investments, I always make my own calls, within that macro framework, which, in any case, can be short-term long or short.

    Nonetheless, it's always good to filter everything through one's own judgment.

  2. Honey's Bob Brinker Beehive Buzz on November 28, 2007 at 16:48

    In October 2000 Bob Brinker told his paying subscribers to put up to half their cash reserves, or one third of their portfolios, into the NASDAQ100 via the QQQ ETF. He doesn't talk about this on the radio.

    Details at Bob Brinker's "Off the Books" Advice

    Bzzzzzzzzz

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