2021 Performance Review (Part 9)

I left off last time reviewing two of my largest drawdowns to consider whether such big losses might be avoided in the future. Nobody knows, of course, but while I’m at it I will take a look at one more that I completely overlooked.

In Apr 2013, I lost just over 21% when the combo index benchmark was down less than 2%. This is a unique situation because it happened in gold (GC). I was dabbling in some small trades just to get a feel for the market and I committed the fatal sin of doubling down and then basically doubling down again. This was particularly embarrassing because the equity market was doing fine—only a niche market paid attention by a few was getting destroyed, and I was part of the few.

Could a case have been made to exit now?

According to Reuters, this combined with the bloodshed during the next trading session was the worst 2-day gold rout in 30 years. I learned some powerful lessons from this (e.g. quit doubling down and mind stop-losses).

When things get crazy, I need to get out of the way. How to determine the craziness may not matter so much as just steering clear. Many potential indicators could be used with varying degrees of success.

You may have noticed my combo index benchmark (RUT and SPX) is not suitable for GC. I should probably correct this, and any correction will improve my relative performance. If I somehow integrate GC to the benchmark for a period of time, then the benchmark will suffer. Even if I underperform GC, GC significantly underperforms the benchmark portion it replaces.

I say “somehow” because determining how much to allocate to the GC trades is difficult. This is a leveraged, speculative [naked put] play that starts very small and goes horribly awry. The fairest way to proceed seems to be determining the margin requirement at max position size, and calculating the equity portion as a fraction of the total portfolio.

This experience scarred me to a point where I still have occasional trouble to this day. I will trade a new strategy in the smallest of size, which is good. When I take losses, though, then my interest wanes and I wait before trying the new strategy again (if ever). That is bad!

I feel quite confident to say this will not happen again. I no longer fight extra hard to avoid losses, and dramatically increasing trade size would be anathema to me.

As much as I might like to pretend the GC disaster didn’t happen, I certainly cannot justify excluding the trades because I saw them through and suffered heavy losses for which I should be held accountable.

I will continue next time.