If you want spectacular gains, like Buffett used to make back in the day, you may be out of luck using Buffett methods. I believe that back in the day, markets were less efficient and more stocks were incorrectly valued. Finding stocks that catapult 100’s of percent in value in a year or two is very hard to do. It is hard to find stocks that will grow 50% in 3 yrs. And that isn’t even crazy growth. That was normal 20 yrs ago. Maybe it is just the last decade which has me pessimistic? (It’s the only one I’ve invested in though.)
Anyways, if you think you know which way the market is going to move there are ways to boost your returns besides options (and probably less expensive than options). My friend who trades options (his closest friends know him as “The Horse”) told me that “right now options are selling at a very high premium because we are in a market of never before seen levels of volatility.”
There are new funds that are leveraged. They buy/sell futures, swaps and other exotic investments to leverage themselves. The funds are classified as Bull or Bear. They further break into more categories: Domestic Bull, Domestic Bear, International Bull, International Bear, Commodity, Currency Bull, Currency Bear, Fixed Income Bull, Fixed Income Bear, and finally the basic Money Market fund. There are different indices (NASDAQ, Dow, S&P, Russell 2000, etc) and different amounts of leverage (1.25, 2.5, etc). These funds exist for almost any type of investment. If you wanna go 2.5 leveraged and bet that Emerging Markets will go gangbusters in the next few years, bet DXELX.
DXSLX is Direxion’s S&P 500 Bull 2.5x Fund. So for example, if the S&P moves up 1 percent one of these funds will move up some multiple of 1%. DXSLX, which is Direxion’s will move up 2.5%. Today the S&P moved up 3.8% and DXSLX moved up 9.72%. It is not always exactly 2.5 times the S&P, but that is its goal.
A company called Direxion has the largest offering of these leveraged products. You can see all of Direxion’s leveraged funds here.
Let me warn you that these are very dangerous products. Some of the bullish funds are down over 80% this year. There are wild swings in value associated with these funds. They are not for the faint of heart. Make sure you consider the possible results of this type of an investment.
The simplest reason traders would add these products to their portfolio of tools are to magnify gains when speculating in the market. It does make sense that if you believe that the market is going to be positive in the long term, that buying these would leverage you in an advantageous way. If you are leveraged 2.5x the market and the market has positive returns, you will outperform the market significantly. Some of the domestic bear funds are up over 100% this yr. That is pretty spectacular given the S&P has returned – 43% YTD. These investments are growing in popularity. Some of them trade over 10M shares a day.
There are other reasons to trade these funds.
1) Hedging – If you want to hedge yourself against adverse moves by the market, these will allow you to do so for 2.5 less money. If you were spending $250 to leverage yourself before, you can buy the same protection for $100 if you use a 2.5x Direxion fund.
2) Some of these funds have equivalent ETFs that offer options. The most popular are BGZ, BGU, and FAS. Using the options there are many sophisticated trades you can make. If you really want to go long the market, you could buy calls and sell puts. That would amplify the markets gains by some level greater than 500%.
Leveraged funds and ETFs can enhance your portfolio but they can easily destroy it, if used in the wrong way. Everyone considering these funds/ETFs should should consider these investments with caution.
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