secretbonus (< 20)

YES! A CRASH! YES 3x Leverage

August 09, 2011 – Comments (2) | RELATED TICKERS: TNA , SPY , FAS

Although the crash was very harmful to my score, it provided me with an excellent opportunity to load up on value plays.

I personally think situations like this are a gift.

The market does not go in a straight line. Yes this was a deep correction with 2 days that combined to be down worse than the flash crash and the last month has been a large decline. However, the lower the price of a stock, ironically the more it should be worth to you, as in the more willing to buy it you should be. The cheaper the stock, and the lower the price, the better the return over the long run. Remember this. Many people operate in the exact opposite mentality as they would in the regular market place. They buy more when stocks or other investment calsses such as real estate are up, and they sell when it is down. Following the herd is never an effective strategy. There is a bias most people will have towards thinking "the next crash" is around the corner, simply because it occured recently and is in recent memory in the psyce. The tendency to avoid pain often has people miss  out on great opporttunituies. Understand that these people will probably buy in much later when you can sell to them at higher prices, or simply continue to own it and collect higher dividend payments, or increased capital. You don't have to buy a stock to sell it, Buffett doesn't usually intend on selling stocks when he buysthem. And If you are a net buyer of stockks throughout your life time, whey would you want the stock market to do anything but go down so you can buy and own a larger share of the stock market?

I loaded up on 3x ETFs wyesterday before the market closed and as a result, I am down quite significantly.

I realize the ineffeciencies of the market however

1)Even if you consider every single daily fluctuation from 100 years ago until now, you would still have a higher return than if you just held the S&P. If you held TNA for example in 2009 at the bottom, guess where you would be if you got out at the top. 3 times your investment. Yes over time the leverage and costs and such does hurt you, however the daily gains also compound. If you go from $100 to $103 to $105 in 2 days in the normal S&P you will be up 5%. But if you are up 2 days in a row in a daily leveraged ETF, you will be up not 15% but 15.35% Although it's true that the losses hurt you and a 20% loss followed by a 20% gain will result in you being lower and this is leveraged and creates an even larger gap, it's also true that you have gemoetrical returns with these leveraged etfs. I was traditionally against them, but I am convinced otherwise now...

Think about it this way, your returns compound over time, we all know the power of compound interest. But take it on a daily basis in an overall bull market and it's gemoetrical returns.

Take $100 and increase it 10% 10 times... your result is $259.37(4246). Now take $100 and do the same thing with 30% . Well it's 3 times the amount so the result seems rational to be 3*259.374246 or  $778.12. However, it's not, in fact it's actually $1378.59. Compounding leverage has a positive side to it as well. In this case, the downside is partially offset by this effect over time. It in fact is better from an investing perspective than a trading perspective which you are told to believe the exact opposite. This is because traders will not get the money management aspects of it. Investors who hold it long enough will have the gains outweigh any potential for a loss or for an inability for the market to beat inflation, because not only is that low probability event over a real long period of time, but the actual gain if it does perform well is expected and likely to be much higher and will clearly outweigh the losses enough for money management and how much cash you have set aside be nearly a none factor if you hold it for long enough. Additionally, if the stock market appreciates at 7% per year for 10 years, even if your return is less than the actual 3x leverage over time, even if it doesn't return 21% per year and is instead closr to twice the amount, you still have an adequete return in an instrument that is extremely likely to outperform the market.

 3x is a great money management tactic to exploit long term gains without the use of unlimited risk that you would otherwise have wwith a leveraged margin account. Perhaps