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Back in 2020, Jim mentioned in the link below about an "esoteric trade opportunity" in European STOXX dividends 2025 futures contract. I bought it back then through Interactive Brokers. It expires next week at a 135% gain.

http://www.datahelper.com/mi/search.phtml?nofool=y...

Thank you!

Back in 2020, Jim mentioned in the link below about an "esoteric trade opportunity" in European STOXX dividends 2025 futures contract. ... It expires next week at a 135% gain.

Um, simply buying and holding SPY since that date in 2020 would have resulted in a 154% gain.

Mechinv
Getting rich isn't complicated

Um, simply buying and holding SPY since that date in 2020 would have resulted in a 154% gain.

I don't doubt your figure. But you would have had to put up the cash to buy SPY. The futures contracts have a lot of built in leverage, and have been in a profitable situation almost since the post, so one's account cash balance would have been rising along the way. That cash in turn could have been earning money in other ways during the interval.

Not to mention that current S&P valuation levels would not have been predicted by any sane person. Outliers are not the norm : ) In the last few years almost any investment strategy looked dumb compared to holding the S&P. Sadly that wasn't knowable in advance.

Speaking of knowable in advance, here's a fun observation:
Imagine a die-hard old-skool MI fan restarted YLDEARNYEAR 1-10 monthly in April 2020 after the pandemic dip.
First year: beat the S&P by 28.5%
Second year: beat the S&P by 18.6%
Third year: beat the S&P by 32.6%
Fourth year: beat the S&P by 8.1% *

Overall four-year CAGR for the strategy: 42.6% versus S&P 20.1%.
Presumably with a lot less risk of permanent capital loss: all the firms purchased have high earnings and high dividends.

Jim

* (one month of data missing, I used the S&P return that month as a proxy)

you would have had to put up the cash to buy SPY. The futures contracts have a lot of built in leverage...

So you're seriously suggesting that people should have used leverage and made a risky bet buying a futures contract? Where that futures contract could have easily become a ticking time bomb and expired worthless? And you would recommend buying that contract (which could easily have gone to zero dollars) over simply buying and holding an S&P 500 index ETF?

There's a reason why Warren Buffett called futures and derivatives "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal".

https://www.investopedia.com/terms/d/derivativesti...

Not to mention that current S&P valuation levels would not have been predicted by any sane person. In the last few years almost any investment strategy looked dumb compared to holding the S&P. Sadly that wasn't knowable in advance.

Why do you constantly need to predict where the market will be next year or two years from now? Why not, instead, just dollar cost average into into it during your wealth building years? And then when you hit your retirement number, split up your portfolio to a 60:40 allocation, adjusting that ratio as the years progress? Hundreds of thousands of people have become wealthy and stayed wealthy this simple way.

A couple more quotes from Warren:

"I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month, or a year, from now."

"In my view, for most people, the best thing to do is own the S&P 500 index fund," Buffett had once said. "The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way," he further added.

https://finance.yahoo.com/news/warren-buffett-beli...

Overall four-year CAGR for the [YIELDEARNYEAR] strategy: 42.6% versus S&P 20.1%. Presumably with a lot less risk of permanent capital loss..

I can't duplicate your results. I used gtr1 to backtest YieldEarnYear using SI Pro data during 4/1/2020 through today (top 10, rebalanced monthly). I found that its CAGR during this period slightly underperformed the S&P 500.

Statistics are calculated from 20200401 to 20241218 over daily closing portfolio values for all 21 trading cycles of Variant 0.

        YEY_SI_Pro    S&P 500
        ==========    ========
CAGR:       21.6%       22.2%
SAWR:        15.9        15.8
Ulcer:        7.9         8.3
MDD:        -26.7       -24.4
Sharpe:      0.91         1.2
Total ret:  152.5       156.7


2020        31.4         54.2
2021        38.1         28.3
2022         1.3        -18.1
2023         8.3         26.4
2024        27.5         25.2

http://gtr1.net/2013/?!!QlpoMTFBWSZTWR5fJ3gAAV!2Ff...

you would have had to put up the cash to buy SPY. The futures contracts have a lot of built in leverage...

So you're seriously suggesting that people should have used leverage and made a risky bet buying a futures contract? Where that futures contract could have easily become a ticking time bomb and expired worthless? And you would recommend buying that contract (which could easily have gone to zero dollars) over simply buying and holding an S&P 500 index ETF?

Yup!

The thing about leverage is that it *really* depends what you're wagering on. Is the S&P 500 index going to be zero five years from now? Nope, except in scenarios so dire that no investment is safe (extinction level asteroid hit, for example). As a result, holding a futures contract with face value of $1000 does NOT require you to have $1000 to start with in order to have an essentially zero risk of wipeout.

I'm visiting Canada at the moment. The temperature here two weeks from now might be -45C or +25C. I wouldn't use leverage on a bet about that. But it's (to me) certain that the temperature will not be -200C. A wager like that with leverage isn't particularly risky, as it can't really go that low.

Similarly, this wager was about the likely total dividends paid by a bunch of European blue chips in a given calendar year. It might be a good year for dividends, or it might be a bad year, but the ending number certainly wasn't ever going to be zero in my view. Thus the nominal value of the contract (being the amount that you lose if it goes to zero) isn't really a very good yardstick of the size of the wager. If, for example, you consider a drop by half to be the absolute wildest worst case, then 2:1 leverage is perfectly reasonable. i.e., take a position on €1000 worth of dividends backed up by only €500 starting cash balance. Though it's not a precise comparison, the largest calendar-year to calendar-year drawdown of S&P Composite dividends since 1950 was -23% in the credit crunch.

Practically speaking, the more likely risk is that the future contract trades at a super low level for a few days during some kind of panic. Price can do *anything* in the short term. This is a very good reason NOT to hold a contract to expiry. Pick any calm day in the last several months, and close it early, or roll it out if you want the position longer. A "flash crash" kind of pricing situation can certainly happen on a given day, but it won't happen on every day for a year, so just pick a non-panic day to close or roll.


Not to mention that current S&P valuation levels would not have been predicted by any sane person. In the last few years almost any investment strategy looked dumb compared to holding the S&P. Sadly that wasn't knowable in advance.
...
Why do you constantly need to predict where the market will be next year or two years from now? Why not, instead, just dollar cost average into into it during your wealth building years?

That's a pretty wild change of subject.
A specific one-time investment was proposed a few years back, due to an apparently blatant market failure / mispricing. You proposed a hypothetical alternative one-time investment that would have been entered, fair enough. Neither of those alternatives has any applicability to the issue of continuous saving for retirement, nor does either of them assume that you are pre-retirement. (I'm not).

More specifically, the original wager was NOT trying to predict where the market would be in two years as a one time trade, it was placing a wager on where the level of *dividends* would be in two years as a one time trade, a wildly different thing. Your proposed alternative *would* have been a wager on where the market was in a couple of years, a very much more dangerous thing with or without leverage.


"I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month, or a year, from now."

Similarly, this quote is wildly off subject. Your suggestion of a one-time fixed-term investment in SPY instead of these future contracts would have been such a wager, but the bet on the dividends wasn't.

A much better example is the index put options that Mr Buffett wrote for Berkshire. They had a nominal value of about $37 billion, but that number was never particularly meaningful. His quote at the time:
"One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion we have at risk, all stocks in all four indices would have to go to zero on their various termination dates."
A wager on the level of dividends in some future date is extremely similar, in that a "zero" is wildly improbable. By extension, the nominal value is not the right way to measure the size of the position, and the ratio of that nominal contract value to the cash you start with is not a measure of the leverage in the deal in the sense of its real world risk. Unless you think dividends across all those companies will hit zero for a full year, of course.

But, to your first question, yes, leverage on this position would have been sensible. i.e., having cash backing it up which was much smaller than the nominal contract value.

Jim

To Mechinv:

You know a lot about investing. My question is you always recommend just dollar cost averaging into spy, but you are actually a very active investor, picking stocks, and using screens, etc. Why do you preach simple dollar cost averaging, while in practice, you use very sophisticated techniques?

Most people do not want to invest using sophisticated techniques. They just don't want to do the work and will NOT do the work. Only a small percentage of people invest like we do here.

Thus, for most people the best way to invest is dollar cost averaging into spy.

Now let's see what Mechinv says.

Only a small percentage of people invest like we do here.

And truth be told, it may work for 50% of the people. Look how many have dropped of of this site.

For me, closed end bond funds, and preferred stocks, worked perfectly.

Thus, for most people the best way to invest is dollar cost averaging into spy.

Yep. I'm educating one of my daughters and some other folks about investing, or at least trying to.
It's a hard thing. Is it worth being exposed to mechanical investing? I don't think so.
Stock market stuff is such a distraction that usually it seems better to not be bothered by it.

On the other hand, a great many folks just index and dollar cost average into SPY.
I'm curious what percentage of overall assets is invested this way.
The forward longer-term expectation for SPY return is somewhat bleak, given the current high valuation and concentration in a few companies.
So, personally, I find it hard to recommend it as a strategy. RSP or broader indices make more sense, on paper anyway.

On the third hand, we are entering an age where the large companies have the inside track.
Things like AI and quantum computing are likely going to be the domain of those huge companies like GOOG, AAPL, MSFT, META, AMZN, etc.
Maybe their valuations and multiples (and SPY) can continue to grow unabated for another decade or two.
And other strategies will continue to pale in comparison.


Mark

I guess some people really want to talk about investing on Christmas Day :)

Mark19 asked:
Why do you preach simple dollar cost averaging, while in practice, you use very sophisticated techniques?

What I've said is that I advocate DCA'ing into index ETFs for people in their wealth building years. That means people with jobs and 401K plans who have not yet hit their financial independence number. The typical US 401K plan does not give you the option to invest in individual stocks. But all of them let you allocate a fixed percentage of your paycheck to an S&P 500 fund or ETF.

I always lived below my means, and max'ed out my 401K contributions during my working years. So I have a big chunk of my portfolio in a Vanguard 500 fund and SPY. Best way for the vast majority of people to hit their retirement number is to use that strategy to let their wealth compound tax deferred.

After gaining some years of experience in passive investing, I discovered the world of stock screens and MI in the mid-90s with the advent of Jon Markman's Online Investing book, MSN Money Central, and this board. So I augmented my 401K plan investing with MI investing starting in 1996. I did both types of investing until I retired early in 2020. The portion of my portfolio that I managed myself grew beyond my wildest expectations.

The main ingredient for success in investing is your temperament, not your intellect. You may love investing, but there will be months on end when investing won't love you back. You should have other hobbies during those months. Having a system and plan that you can stick to is much more important than having a prediction about the future direction of the market.

Now, if you'll excuse me, I have a Christmas pajama party to get back to. It was my daughter's idea to have us all dress up in matching plaid pajamas, including the dogs, while opening our presents. I look ridiculous (and so do the dogs), but I'm going along with it.

Mechinv

Got it. That makes sense.

It's a hard thing. Is it worth being exposed to mechanical investing? I don't think so.
Stock market stuff is such a distraction that usually it seems better to not be bothered by it.

I have said this for years. You don't get into mechanical investing to get rich, although like mechinv, he did, you do it, because you enjoy it. If you don't enjoy it, spend your time exercising, getting an MBA, etc.

Thus, for most people the best way to invest is dollar cost averaging into spy.

For a long term "one click" strategy I think one can improve on that while keeping all the simplicity: if one is saving regularly, dollar cost average into a non-cap-weight index fund such as RSP.

It has a tiny fraction of the company specific risk of SPY. Top 3 positions in SPY make up 19.9% of the total portfolio at a weighted average P/E of 42.8, versus 0.6% in RSP which has an overall P/E of 19.0. Those biggies deserve a premium valuation level...but I doubt it's that much.

And equal weight has better returns over the long run and in most (but certainly not all) five year periods. You're never overweight the current big bubble stocks so you'll lag SPY in the occasional gigacap upswings like the last 1990s and lately, but generally do better the rest of the time.

And it's still just one purchase.

That falls into the category of "do what I say, not what I do". I have in effect built my own equal weight index fund, picking ~75 big stocks with what MI tells me have slightly better than average economic characteristics. I've only been running it with real money since March, but it's doing OK. I have a drag from a small cash allocation and from high taxes on dividends, but the net portfolio balance after tax is beating my benchmark (RSP) so far by 1.70%/year rate. The advantage would be 2.10%/year rate without counting the dividend taxes. Very early days, but consistent with the small advantage I'd expect from the backtests.

Perhaps the best argument *against* buying an index fund is rarely mentioned:
If there are any companies at all that you would not invest in because it is against your ethics, or even just a matter of taste, or of risk, then you can't play the index game. There are some firms that I find odious, and I'm not willing to take the risk inherent in companies domiciled in certain jurisdictions, so I have a short black list I use to filter my quant picks before looking at any other criteria.

Jim

There are some firms that I find odious ...

Well it would be very fun to hear which firms those are. And whether, by excluding them, your results improve or not.
And, whether you survived your trip to the frozen north from where you came :)

Mark

For a long term "one click" strategy I think one can improve on that while keeping all the simplicity: if one is saving regularly, dollar cost average into a non-cap-weight index fund such as RSP.


It is hard enough to convince most people -- not people like us, but people who don't want to put any effort into investing -- to invest at all, let alone convince them to invest in an oddball like RSP.

The biggest advance in investing has been the automatic enrolling employees into their company's 401K by default.
401K's generally have an S&P500 index fund, but nothing like RSP.

My wife's company's 401K had 12 options, 8 of which were some sort of fixed income fund.


...
you'll lag SPY in the occasional gigacap upswings like the last 1990s and lately


Which will have them rejecting RSP, if they look at the standard 10 year charts.

"There are some firms that I find odious ..."

Well it would be very fun to hear which firms those are. And whether, by excluding them, your results improve or not.

The first obvious one that comes to mind is MO/PM and other tobacco companies. 2nd would be casino/gambling companies.

PM + MO is currently 0.54% weight in SPY. You could create a portfolio without those by negative weight (i.e., short) them and add that much to SPY weight.

Backtest: https://testfol.io/?s=adcs9RA6k9O

The difference with or without excluding them in SPY is negligible.

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