"Don't let your mouth write a check your ass can't cash", is an old Flip Wilson line that has crept into our modern lexicon almost half a century later. Because renegade computer scientists, mathematical prodigies, and degenerate gamblers have hijacked the market through quant funds and High Frequency Trading, I wanted to update you on the yearly performance of the Ithaca Experiment Portfolio. Since investing is all about the smell of money, I think it's only fitting that I keep you abreast of what I'm doing.
It should be noted, I'm trying to beat the house just like all of these hyper-connected computer networks but take more of a laid back approach to my investing style. I still believe in a fundamental, buy-and-hold investing strategy, but have increased the table stakes by continuing to own inverse and leveraged ETFs. The major holding in the portfolio is the ProShares UltraShort S&P 500 (NYSEARCA:SDS), with a small percentage allocated to the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA).
Because the S&P 500 ended the year exactly where it started, you would think that I broke even for 2011. That's not the way these leveraged ETFs work. I was slightly down for the year. If you are buying and holding leveraged ETFs for a sustained period of time, volatility does not work in your favor. That is an issue I was well aware of from researching my initial purchase, but am still letting the money ride because if the market cascades downward again, I will make supersized gains.
Is this an ill-fated experiment? There is no way of knowing because I haven't sold anything. Whether I fell for the doom and gloom scenario hook, line and sinker, time will be the judge. I still believe that we haven't gotten past the 2008 financial crisis on a worldwide basis, and that there is still more reckoning to come. I'm not smart enough to time the market short-term, so for the mean time, I continue to wait for more opportune moments to place my wagers except for my short positions.
With the exceptions of Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX), I've taken a neutral stance on the stocks I've covered, although I like a lot of the companies I've been writing about. Most are down significantly and that's what I've been looking for - excellent companies with reasonable P/E Ratios. I thought that Apple had too big of a market cap and did not want to own it because of the law of large numbers. I still feel this way although I do enjoy their products. With Netflix, I thought it was just hype. The stock is down almost $200 since I panned it and still would not want to own it.
However, for the most part, I would like to take positions in a majority of the equities I've covered over the past year when conditions are more favorable. My playbook is to continue following the approximately thirty companies I've been blogging about. What am I looking for? Single digit P/E ratios in the stocks that comprise the S&P 500. That's where the market stood in both the 1930's and the 1970's. As an economy, that's where I think we are now although the market doesn't reflect that - yet.
On a final note, I read a considerable amount of investing books and, without question, the best of the bunch this past year was Crapshoot Investing by Jim McTague. It's all about High Frequency Trading and its proliferation into the market since 2007. Like shady sports book operations, this is high-stakes gambling. No matter what size your bankroll is and if you want to maximize your gains, you should buy this book before you let the stock market take your action. It's the rise of the machines, and McTague's publication let's you know how dangerous and fragile this electronic ecosystem really is.