Friday, December 5, 2008

Leveraged ETF's: "Short 'em all"

I've referred to one of my mentors in earlier posts:

Sep. 11, 2008
One of my mentors* used to say "Stocks are smarter than Analysts". He also said (in no particular order):
Stocks are smarter than Investment Bankers
Stocks are smarter than Fund Managers
Stocks are smarter than Brokers
He was skeptical of human nature and cynical about human arrogance. He was very rich.
Had he lived to see my cyber-punditry I am sure he would have added "Stocks are smarter than bloggers"....
March 12, 2008

I've mentioned* that one of my mentors was the best trader I've ever met. Creative, intelligent, disciplined (and bankrolled).
From time to time though, he would lose his mind and run around the floor screaming

"Sell 'em all, they aren't worth the paper they're printed on".
Jan. 9, 2008
Can you trust the First Bank of Nigeria?
...*One of my mentors, and one of the sharpest traders I ever met, had the most common flaw of students of markets, hubris. In his case it was non-fatal, more of a cost of doing business:...
...2) He got into a rigged blackjack game in Yugoslavia. Lost half-a-mil. Said he started to think it was was fixed when he was down a couple hundred.
Wife: "Then why the hell did you keep playing?"
Him: "I thought I could beat it".
I bring this up because he would have loved this analysis of leveraged ETF's from The Big Picture:
Are You getting ETF’d?

Objective: UltraShort Blah-Blah ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Blah-Blah Index.

Remember when you first heard about these leveraged ETF’s? That little part of your brain that actually wants you to survive started flailing its’ arms saying, Hold on there, Chief…. Double the gains?…How does this work?…How much fees and expenses?…Can this possibly work?…Remember? And you said, “Shut-up brain, I know what I’m doing.” Double your pleasure, double your fun, double your risk of cardiac arrest while just sitting in front of a computer. Now look at you, after a handful of “Plaxico” incidents, trying to externalize the whole thing.

Real men don’t read prospectuses, I always say. So when the eggheads at ProShares (and others) offered to warp time and space just for me, I was excited. Now, thanks to the recent performance of the SRS (ProShares Ultra-short Real Estate) and URE (ultra-long), I believe I’ve discovered a wormhole to a whole new dimension of excitement....

... It certainly seems that shorting them is far safer than buying them....

The whole thing is worth a read.