Saturday, December 31, 2011

Lessons learned in 2011, trading summary

Results for my margin account only (excludes my smaller IRA and other people's accounts I manage):
2009: SPY+23% Me+68% 
2010: SPY+12% Me+8%
2011: SPY+1% Me+47% (see below)

Forget the new year, Happy Current Year!! I've always believed that success is not an excuse to stop learning. There will always be a part of me which questions whether I'm just lucky or if I really know what I'm doing. I trade based on a set of ideas, ideas that are very hard to prove true. Poker has taught me that success is not determined by a small number of positive outcomes.  Someone with a string of wins might not be a winner in the long run.

With that said, I believe I have been pretty lucky this year. The trades that I post here are only of my margin account, which is my largest account. I have a small IRA which I cannot trade as freely. My margin account is +47% for the year. I've deposited and removed money throughout the year so the returns are calculated against the weighted average of my deposits. My IRA, which I generally pay little attention to, is down a lot. I don't even know how much because I don't keep track of its balance at the beginning of each year. This will change. But to give you an idea, I bought FAS at 27 and sold it at 13. Fortunately, my IRA is significantly smaller than my margin account. I have to estimate a -25% for my IRA. You'll notice a bad FAS trade in my margin account as well, which took a significant loss. If the assets of both accounts were combined, I estimate that I would be up only around +30% to +35%.

I am human and I am imperfect. I choose to gamble in my IRA. The idea that it is a smaller account and the fact that I can't take money out till 65 caused me to be careless. I bought FAS because it "looked cheap" at 27. My margin account shows FAS trades at around 20 as "revenge" trades. I'm just glad that my idea of revenge were brisk girly slaps instead of bringing out the bat. I had my ass handed to me in my revenge attempt. The barely redeeming thing that I did was finally sell FAS and put the proceeds into AAPL at 373. I can only imagine how badly I would be hurt if my poor risk management had been on a larger position in my margin account.

I need to use less margin. By shorting puts, I at times have a maximum loss over two times my account size if everything goes to 0. Not that everything will go to 0, but my risk of ruin increases dramatically. I've had to live many days in fear during the year, when the market continues to drop day after day. Combined with the fact that I was already regretting my FAS position made it that much worse.

My goal has been, and still is, to run my own fund. Working a day job as a programmer does not get me any closer, aside from my paychecks piling into my account. I've spent a lot of time in purgatory contemplating quitting my job to try to get some type of equity analyst position. My biggest deterrents are restrictive trading policies. I'm a senior developer getting a cushy paycheck, meaning I'd have to take a significant paycut to start from the bottom as a financial analyst. I want to be in finance, but I need a job where I can continue trading. It could take me maybe 7 years before I can officially work my way up the ladder to manage portfolios. My account should be big enough to live off of in 7 years if I continue as a programmer.

So I finally decided to do it my own way. It's not money that I love, although I like money. I make more money as a programmer than I ever had playing poker. But never has any dollar earned as a programmer been more satisfying than a dollar won from poker. If you're like me, then you know what I'm talking about. There's just no comparison to the feeling you get when you win something from someone in fair competition. I make more money than I spend. Having more money isn't as interesting to me as winning more money. Over the past few months, I've started managing the money of some friends and family. While I'm willing to make some gambles with my own money, I simply can't do that with money of others. It is a moral hazard and I surprise myself when this makes me realize that I have morals. I do not charge a fee. It doesn't even make sense to since the accounts are small. I just want my friends and family to grow their wealth, and hopefully become rich together with me one day. I do it because I enjoy it, and I never feel like I'm getting screwed by giving out research for free.

To entice more people to care about my trades, I've created a twitter account. It takes a lot of time and work to update the trades page on this site. My twitter account will make it easy for me to broadcast my trades in real time. You should follow me on twitter here at http://twitter.com/#!/ritrading.

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