Monthly Archives: November 2016

Beating the market, generating alpha

My goal is to beat the market risk-adjusted and generate alpha. The market I compare myself to is the S&P 500. The S&P 500 averages 9% annualized with 65% drawdowns within a given generation. Beating the market is also generating alpha and I believe I can generate more alpha than anyone else. Right now with my models, I am confident I can generate 200%+ a year with 40% drawdowns on 5:1 leverage on amounts up to $500M. After that it gets a little tricky. I’m confident I should be able to generate 50% returns with 50% drawdowns on up to $10B easily. But I should be able to beat the market risk adjusted and generate alpha up to $500B easily. The thing is, the wealth of the richest people in the World on average have been going up about 8% a year for the past 30 years. If you look back 100 years it is about 5% a year though. The key to being the richest bloodline on the planet is to be able to generate alpha for as long as possible on as large as possible amounts.

Generating alpha at larger amounts is a bit complex and much harder. To generate $25M/year in alpha, I could easily do that on less than 5% drawdowns. But to generate $25B/year in alpha I would need 50% drawdowns. (For the record, Warren Buffet generates less than $2B/year in alpha on 50%+ drawdown.) The problem is that when you increase the executable size you have to spread out positions over a longer period of time and hold for longer periods. This exposes you to much more drawdown. On another note, I believe that traders that can’t handle more than 10% drawdown on their personal accounts as “pussy traders”. For christ sakes, we expect 401K holders to easily absorb 50% drawdowns on most of their assets. Certainly professional traders should be able to handle these drawdowns. I personally am not that turned off by a 50% drawdown. It is actually good if a system has rapid drawdowns because that scares away and discourages people from using the system.

Election is a shake out

I see conditions for the markets to rocket over the coming weeks. My bearish outlook is gone after seeing how well markets have held up since the Trump vote. But also from seeing the enormous volume on DOW and S&P futures. There is a chance that the sideways movement over the past 4 months can be reaccumulation with the election being a false break below. Anyways, I should note the best trade this year so far on the indexes was buying FTSE at market open after Brexit.

Trump is going to win the election

I’m looking for stocks to crash. Dollar/yen should collapse also. But this crash will be a buying opportunity. We should get to 2000 on the S&P. On another note, this rangebound movement over the last 3 months is distribution. Volatility has been very low. Anyways, still in drawdown.