2021 Performance Review (Part 6)

I left off last time with a big question: should I include my pre-2008 [mostly stock] trading as part of the long-term performance record? After sleeping on it, I’ve decided this question has no right answer.

A case can certainly be made to leave it in. It was me who researched and traded [stocks] back then. It’s still me who researches strategies and trades [options] now. I’ve learned things over the years: some for better, maybe some for worse—and who knows which of those things will be helpful or harmful going forward. It’s all the same person, though. It’s me.

As a candidate to manage money in an investment adviser capacity, one would have every right (and perhaps duty!) to look at my entire performance record. I am very proud of my time spent trading equities. That is what grew my account to a size sufficient for launching a full-time trading business.

Having said all this, I need to make a command decision.

Just because so many things are different from my option trading, I am leaving my pre-2008 trading performance out for the rest of this analysis. It was once presented here. I did not normalize for short-term trading (tax penalty), and I did not include benchmark dividends. At some future time, I may revisit and study the entire record again.

Going back to the third paragraph of Part 4, one question not addressed is whether 7% is a sufficient tax penalty in the first place. I definitely erred to the side of conservatism by charging the penalty on too much (see table), but is the penalty itself big enough? Look back at this table. Column 5 shows surplus tax for short-term trading. The actual tax incurred will move through various brackets up to that containing the actual AGI. 7% is higher than most values and sometimes significantly higher. It’s 1.8% lower than the third bracket, which only covers a range of $1,150 (column 6). It’s 1% lower than the seventh bracket, which is the second largest of all (~$250K range).

I think the best way to evaluate the penalty is to calculate a weighted average tax premium for short-term trading. This will be highest at $460,000 AGI where the [column 5] weighted average is 6.33%.

Once again, the penalty is more than sufficient.

The last consideration I want to make before delving deeper into the numbers is determination of the proper benchmark. From 2008 through Dec 2018, the bulk of my trading was done in RUT. I switched to SPX in Dec 2018. I will therefore construct one index benchmark, which will be a combination of these two. As I assume this to be a buy-and-hold benchmark, all considerations regarding the tax penalty remain the same.

I will continue next time.