Infamous Ponzi-scheme swindler Bernie Madoff died in prison at the age of 82 yesterday… Good riddance.
In case you’re not familiar, he was the epicenter of an epic embezzlement that filched fortunes from the ultra-wealthy… totaling possibly as much as $36 billion.
Like many who broke bad, he started off legitimately. In the 1960s and ‘70s, he and his brother’s firm served as a market maker for the National Quotation Bureau’s over-the-counter securities — the OTC market, or “Pink Sheets,” in trader parlance.
To keep up with larger firms in the 1980’s, they were forced to automate their operation and began using computer software to disseminate quotes. That technology they helped develop was eventually adopted by the National Association of Securities Dealers — now known as FINRA — to distribute automated bid-ask spreads to brokers.
Eventually, that system became the world’s first electronic stock market, which you will probably know by its acronym.
It’s the National Association of Securities Dealers Automated Quotes… now known as the Nasdaq.
As you could imagine, raising money became easy for Madoff after that.
His sales pitch was simple… He guaranteed returns of 18-20% per year for his clients.
The supposed investment strategy was to buy 30-35 blue-chip stocks in the S&P 500, then sell short-dated out-of-the-money calls on the index, using the proceeds to buy long-dated out-of-the-money puts on the index.
That strategy, called a collar, can serve to limit downside to a portfolio.
However, you’ve got to have a portfolio first.
As it turned out, Madoff never invested the money he raised. Instead, he chucked it in his business account at Chase Bank (now JP Morgan Chase) and withdrew money from the account when clients requested redemptions.
At his trial, he testified that he hadn’t actively traded since 1991. And the “returns” he was showing to his investors were completely fabricated — cranked out on an old IBM computer.
How was he able to pull it off?
Well for starters, his firm was still one of the biggest broker-dealers in the market. And most people assumed that his steady 10% annual returns on average were achievable because he was front running all those clients.
But closer examination would later prove that for the sheer amount of trading Madoff was purported to do, he would have had to buy more options on the Chicago Board Options Exchange than actually existed.
Famed hedge fund Renaissance Technologies got suspicious on that matter back in 2003 and pulled money out.
But others weren’t so lucky.
In total, about 50% of the fund has been returned to investors to date. But the real moral of the story here is that nobody can guarantee investment success.
There isn’t a stock picker out there who has a perfect record. And if they happen to tell you they do… That’s when you can stop listening.
I typically think of a “good” track record as one that has a win rate of over 60-65% and generates returns consistent with or above current markets.
And in the spirit of accountability — not to mention that I just passed my one-year anniversary here at Venture Society — I felt it was a good time to review how good my judgment was over the past year.
There were some hits, most notably taser competitor WRAP Technologies Inc. (Nasdaq: WRAP) and rare earth miner MP Materials Corp. (NYSE: MP), which posted gains of 72% and 90%, respectively, during coverage, each in under a month.
There were lots of misses too. I got emerging markets and oil consistently wrong in the middle half of last year. And 10% trailing stops bailed me out way too many times.
Source: Venture Society, Seawolf Research
Apologies for the black line — there were a lot of trades, so I had to stretch this out over two screens to capture it.
But in general, a roughly 70% win rate is pretty decent, I managed to outpace the market on an annualized basis, and my process improved over time.
This also gives me a chance to address some older recommendations that either haven’t stopped out or I never officially closed — the list of which is below.
Source: Venture Society, Seawolf Research (Red denotes short position)
The win rate has definitely improved this year…
At first glance, I can say that the U.S. Dollar just isn’t ready to rip yet, and tanker rates are falling off their recent peak.
So, the first things I would take out of the recs here are Proshares UltraShort Euro (NYSEArca: EUO) and the oil/refined product tanker stocks Scorpio Tankers Inc. (NYSE: STNG) and DHT Holdings Inc. (NYSE: DHT).
I think I’ll also take out ProShares Ultra Silver (NYSEArca: AGQ) as well, as precious metals just aren’t performing of late.
But the rest can stay as they either pay nice dividends or have yet to hit their highs.
And while I’m at it, I would even say that picking up new 0.25 stakes in both Spirit Airlines Inc. (NYSE: SAVE) and AdvisorShares Pure US Cannabis ETF (NYSEArca: MSOS) looks pretty good here.
Both have fundamental reasons to go up for at least the next couple of months, if not longer.
In the meantime, it’s back to the grind for me… After all, markets never sleep.
All the best,