That's Not Possible

This morning, after playing squash, my business partner and I were discussing recent equity and options markets performances.

My website, linked to this blog, provides weekly performance information on the equity portfolio strategy which I run. A chart of monthly gross returns for this year, to date, appears nearby.

As of last Friday, 21 December, the portfolio has realized a 35% return, versus the S&P500's 4.7%, yielding a performance margin for my portfolio of 30.3 percentage points.

When my partner's son related this to some clients of his in one of Deutsche Bank's trading operations, I am told they simply refused to believe this.

Maybe they viewed the rest of the performance information, including the prior year performances of the portfolio's approach, dating back to 1990. Maybe not.

I'm not totally surprised at their reaction, though. I've heard it so often before.

Those who can't do, evidently, simply deny. Especially when the approach differs so radically from that of the critic.

In contrast to institutional traders, we invest in equities for six-month durations. Our options positions are bought and held up to a six-month duration, with sales occurring at return levels established via proprietary options performance research.

It must be difficult, indeed, for institutional equities and derivatives traders to imagine making our returns on simple, unhedged equity and options positions over such timeframes.

If the equity portfolio performance was unbelievable, imagine how my partner's son's clients would have reacted, had they seen our performance data on our options implementation of the same equity strategy. The nearby table is taken from last Friday's closing performance, covering the six active portfolios.

Prior to these six, our May options portfolio had a 41.5% gross return, and June's was 77.6%.

While there are a variety of methods for weighting and annualizing the various monthly portfolio returns, the overall return for this year, to date, for uniform monthly investments, is in the neighborhood of 70%.

Since call options have downside loss protection, relative to holding equities, and allow for inherent leverage of as much as 20x, they provide much higher returns than the equity approach, while using the same selection process and weightings.

Three of the current options portfolios' daily performance charts are included nearby- December, November and September.

The blue curves represent the performance of the options as purchased, without any management. The red curve depicts the performance of a similarly dated and priced, relative to the money, S&P500 call option. No value exists past November, since Yahoo discontinued free index options tracking near the end of that month. The green curve represents the actual performance of our portfolios resulting from sales of call options at pre-determined points throughout the portfolios' durations.

As good as our equity returns have been this year, our options returns have been even better.

By applying the results of proprietary research into the performance of large-cap equities over time, our portfolios, both equities and options, tend to consistently produce superior returns, relative to the S&P500 and its related options instruments.

Not every month's portfolio achieves the same high returns. But, on balance, already, they've delivered stunningly good performances in one of the most challenging and volatile seven month periods in the equity markets in the last five years.

It's been an above-average year for our equity portfolio in terms of the level of outperformance of the S&P500, though not in the mere occurrence of this outperformance.

Our options portfolios, which have been live since May of this year, have met our expectations, considering market conditions.

Are these levels of performance possible? We believe so, because we have experienced them in live investing, including equity portfolios as far back as 1997.

Originally, I began this blog as a way of expressing opinions and analysis about current business topics from the viewpoint of our equity strategy. My partner felt that having a body of written observations and analysis which reflected my proprietary research findings would make it easier to attract equity investments to our portfolio management efforts.

As such, the success of our equity strategy gives us cause to feel that our perspectives on investing and business management are validated.

Others may not believe our live investment results, because they simply cannot imagine strategies which, while simple, rest on quantitative expressions of powerful insights into equity and options performances. More often than not, I think, criticism stems from envy, lack of comprehension, and lack of creativity on the part of the critics. It's easier to simply dismiss what you can't understand, or didn't think of first, than to accept it.

Fortunately, though, in the institutional investment field, most managers will stick with their own underperforming approaches, rather than accept that another approach yields superior returns. And, since our options approach provides return levels which reduce our need for other customers, we don't need to waste a lot of time convincing people that what we do works.

Instead, we now simply treat it as a proprietary approach for proprietary capital.