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Tuesday, January 3, 2017

Decay and Dance with the Devil

3X funds will underperform if the underlying asset is extremely volatile. It will NOT if the underlying is non-volatile. This was the same reason everyone leveraged 20:1 on mortgage backed securities because they were supposed to be non-volatile and non-volatile assets can be leveraged up a lot more than volatile ones. 

Let's look at our favourite asset class over my chosen time frame. Here is a chart of GDX. In the time frame looked at it is virtually flat. But notice the extreme rallies back and forth. Great for trading. Still it overall went nowhere over 3.5 years. 
So a 3X inverse (bear) or a 3X Bull fund should basically be flat if they did their (presumed) job right.

Here is NUGT, down 90% over that time frame. Wait, WTF?  

I know what you gonna say. GDX had a lot of down days over that time frame....and the bull did not take off till a good 70% of this time frame.....so DUST must have done much better.
Nope. DUST was down 98%. 

So while my figures might not have been perfect in the previous post ( they cannot be as the exact shape of the rally and percentage changes day to day influence the final outcome), these numbers here show you how quickly a 3X fund can get decimated in a FLAT but VOLATILE market. 

And unlike what Gary the Wise says…that volume you see is not the "SmartMoney" accumulating. I consider myself a good trader and I have never had the courage to take these ETFs on from the long side. I only short the opposite side or sell calls against them (Ex If I am bearish GDX, I will sell calls on NUGT). I would NEVER and nobody with half a brain should either, "accumulate" these. There are far more effective ways to attempt to make 10X your money without fighting the decay. 

So the bottom line here, please, please, do not put 20-50% of your money in these funds as Gary suggests.  He seems to have developed some religion due to what were horrendous calls between August and November and what must be total revolt in his subscriber base. But he will make a correct call at some point and then his enthusiasm for blowing up accounts will come rushing right back....like riding a bike...you never really forget it. So please remember this advice then. 

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