Back in July I caught the post linked above on Seeking Alpha, one of those long-shot, inane ideas that somewhat makes sense. To boil down the article, you take a long (very long) position in SVXY in a tax deferred account shorting VIX futures. The ultimate goal, if the author’s assumptions are true is a payoff in 20-30 years will be in the billions of dollars.
Now I don’t have any inkling that an investment in SVXY will really return that much in that long of stretch. But I took up the bet/challenge/opportunity/funny-tasting-kool-aid and bought a single share in a tax deferred acccount. Unfortunately, I came in late to the game and missed the bulk of the gains for the year.
Purchase price: $102.14
Current value: $136.98 (34.11%) – as of 12/27/2013
I hope to update this annually just to give readers an idea of where the idea goes. It was only $100 that I would have wasted buying games on Steam so it won’t be missed if it all goes to hell.
Would I pin my hopes on this strategy? No. Is the long-term notion viable? Potentially – hinging on several factors:
- You have to avoid taking action in the gut-wrenching swings. And SVXY volatility is very high meaning the price swings wildly.
- You will, at some point, have a ginormous draw-down at some point in the future where you will question your sanity. 90% draw down? Can I stomach it?
- If the plan is working, at some point in the future, you will most likely want to get off the vomit comet early to take what gains you have and call it a day. As the original author says: put it in a lockbox, shut the lid, lock it and open it in 20-30 years.
- There may be a chance SVXY won’t even be around in 30 years. I predicate this on the fact that it is the inverse of UVXY. And while SVXY is riding high, UVXY is a sinking ship only occasionally useful as it bobs up in the waves but then immediately dives back down in the water and continues its descent into darkness.
- Other long-term risks include total wipe-out of the account. A huge, sustained volatility spike could push SVXY into no man’s land of negative NAV if ProShares doesn’t pull the plug (which I assume they would do to avoid negative NAV)
It has been fun to watch this for 6 months and I’ve learned quite a few things. Even with all of the drag-show drama that is Washington DC, mean reversion is a bitch. I made it through “tapering”, a government shutdown, and a lot of incessant political whining and crying but SVXY pulled through quite well in the last half of the year. Had I been invested at the beginning of the year, the gains would have been significantly higher (> 100% as of this writing)
I plan to keep SVXY in my IRA for the long haul. I may add to the position over time but in no way am I making it the cornerstone of my retirement plan…
It’s funny as I’ve read many of Macro Investor’s articles and comments along the way and I find much of what he offers as sensible given the circumstances. However I’m politically a polar-opposite. And politics plays a large part in what happens with S&P volatility. It may seem odd that I’m the polar opposite in terms of politics but will still put my money where my mouth is on his idea.
Macro Investor appears to proceed from a position that everything with government is fine, except republicans and tea party people (that’s an extremely brief synopsis). I tend to proceed from the position that regardless of the political party, there will be no end to political patronage for special interests and industry within the next 20-30 years. All of the tactics that were pulled out during the financial crisis are on the table for the next time now and I fully expect them to be used in the future. So even if I lose politically (and retire with a face-palm imprint), I’ll win financially. Then I can check out and not have to think about it any longer. Or maybe I can fund a think tank and become the next Soros/Koch-brother fodder for those who don’t agree with my political ideals.
Given this set of circumstances, the continual distortion of the market by government action will continue to push the value of SVXY higher over time. Think of it like this: if I know a horse is doped to high heaven, you can be sure I will bitch about it, but I know where to put my money. My wager here is that the horse will make it as far as I need it to go before my retirement finish line instead of dropping dead at the next turn or two… if I’m lucky.