Trading the Model: First Annual Report

It's been one year now since I started trying to trade the model - time for an assessment. I didn't trade much this month but did pretty well - a profit of $2691 or 11.95% on capital deployed. When I first started trading the model I had two good months followed by four losing months and now six winning months. The model itself only had one losing month in this past year (May):



The model and the market have similar standard deviations but the model returns far more - a sign of a very high alpha. My returns have been similar to the model but my volatility far higher. After the losing streak I cut back on the amount of capital I was using resulting in lower profits for given rates of return in the second half of the year. Obviously, I am very far from faithfully replicating the model, but as I'll show in the following, I think my performance is improving.



As this chart shows the model returned 102% for the year vs.23% for NDX and my performance of 76%. The model's return is entirely unlevered. Looking at a daily chart:



we can see that some short periods when the model got short correctly added a lot to returns. The only ways the model can add value is by shorting when the market goes down and by stopping out of long positions when the market goes down more than 1.25% in a day. Obviously the model makes mistakes too, but over time they are less important than its correct moves. I don't have daily data for my account, but I can show you trade by trade results for NQ futures contracts since November:



This shows clearly how my trading has been far more erratic than either the market or the model. The following chart compares my monthly returns to the model:



Months below the line show poor performance relative to the model and points above the line relatively good performance. The last three months have been three of the best by this measure. My performance has a beta of 1.67 to the model with a monthly alpha of -4.9%. This means that when the model returns zero I lose nearly 5%. But looking at the very small sample of just the last six months I have a monthly alpha of 5.3%. Relative to the market the results are clearer - I have a beta of -0.97 and a monthly alpha of 7%. This alpha is significantly greater than zero with a probability of 97%. So I do particularly well when the market declines. The model's beta in the last year is around -0.16 with a monthly alpha of 6.4%. So it too has a short bias.

In conclusion, I think I am gradually learning to trade with this model - my results are beginning to be statistically significantly positive and nonrandom.

Flight Booked

First day back home a lot got done, culminating in booking our flights to Australia for mid-September. We got a very good price via a website Snork Maiden told me about: kayak.com which searches over other travel websites and directed us to a deal at airfare.com. We'll fly out of our respective locations in the NorthEast and meet up in Chicago. Long wait in Chicago and then fly together to San Francisco, a plane change, and then to Sydney. All on United Airlines. From Sydney we fly on Qantas to Canberra. The price: $1146.

I'm still waiting to hear from my employer about whether I can officially quit in September or must officially quit June 30! HR is consulting their lawyer. This is typical. Didn't sleep much last night. I know intellectually that this is the right move for us (just need to think of being here on my own for another winter), but emotionally it still feels pretty scary.

How Big a Tip Did the Personal Finance Bloggers Leave?

That will remain a secret (the bill was about $81) but there was no disagreement on that or how to split the bill :) Last night I met up with Frugal Zeitgeist, Madame X, and Millionaire Artist for the inaugural NYC PF Blogger Meetup at a bar near Union Square in Manhattan. All very nice and interesting people. We mainly talked about life plans, history, and experience as they relate to personal finance issues and the mechanics of blogging, the internet, how we got into blogging etc. It's always interesting to meet people you know a lot about but have never met or even seen (in pre-web days I often experienced this with academics whose work I had read but who I didn't even know what they looked like). No big surprises here but a little adjustment in how I'll picture my fellow bloggers reading them going forward. Hopefully, this first meetup will be the beginning of many future ones!

Wall Street

I wanted to post a blogpost from Wall Street, but Starbucks was too busy. I am at least writing this one at the intersecton of Wall and Broad in front of Federal Hall and the NYSE (It was posted from a Starbucks by City Hall). I could find any password free network in the area. The NYSE has a really lame ticker in one corner with share prices going by, but no indices and no changes in share prices, so I couldn't even tell you whether the market was up or down (IYR is at 77.89 and BRK/B also looks down - so I guess the market is down - which is what the model was forecasting). The limits to technology even now are interesting. Main impression this morning coming into the WTC PATH station from NJ was the international mix of the crowds streaming off the trains. - mostly South and East Asia and all very young. Noticed a couple of Halal food carts on Wall Street. Anyway, to add some fun, I snapped some random snapshots on my laptop (it's a MacBook Pro with a built in camera), which is a little tricky. In the first one you can see the ticker I was talking about - the blue letters in a narrow ticker thingy.





PS there are a couple of police with machine guns stationed a few feet to my right. Tourist are taking photos of their kids with them...

Back in New York

I'm back in New York (actually right now I'm in Jersey City which is a much cheaper place to stay but only two stops on the PATH train from WTC) for a kind of economics conference and the NY Blogger Meetup. This particular economics group is a tight knit community (e.g. Snork Maiden's PhD adviser is the big star here) and the news that I'm quitting and moving to Australia is circulating fast. People seem confused when they find out I don't have a job lined up in Aus and I haven't been looking for one and don't really want any help in finding one. I make some noises about networking on the ground there and having various ideas. Only a couple of my students know what the real plan is. It's interesting that two of the people I know here at the meeting have never been to New York City before- one lives in Washington State and one in Alaska. But the Alaskan was a fellow student with Snork Maiden back in Maryland... still all the time I lived in Boston (7 years) I never went to NYC either. It's always shocking again how expensive it is here e.g. $6 for a bottle of beer in the bar we went to this evening.

International Moves and Frugality

I rarely post about the spending side of the equation but after spending yesterday working with Snork Maiden on move preparations I thought a bit about the connections between all the moving I've done and frugality. At first sight international moving is very expensive. Last time I moved I spent $A5,500 on freight and more on accommodation, rentng a new apartment, flying, and buying new stuff. Quite a bit of that was reimbursed by my employer. However, I liken the international move to being reborn. You have to give up a lot of links and ties in one country, get rid of a lot of stuff, squeeze yourself into a plane and your stuff into some boxes etc. and then you pop out in another country and start to expand all over again. I have done this many times. If you are like me you then tend not to accumulate a lot of expensive stuff or property because you know you are going to have to get rid of a lot of it probably in the future. Maybe a metaphor for life generally.

My former PhD advisor once said: "You have a PhD in international relocation" and it's true I'm very familiar with this process. So the familiar plan is swinging into action. Only difference is this time Snork Maiden is coming with me. She moved here from China and interstate but in both cases little stuff was involved. Most international grad students only arrive in the country with a couple of suitcases. I on the other hand was already shipping six tea-chest from London to Boston when I came here to do my PhD. That was already more than my previous international move - I've been moving since I was 18.

Avoiding an Immigration Pitfall

I suddenly realized today that if my employment terminates on June 30th my H1B status does too. There is no grace period to leave the country for H1Bs though apparently they allow "reasonable time" to allow people to find another H1B sponsor if they are fired. I should be OK statuswise as I have been approved for a green card. The only problem is I want to terminate that process and my lawyer thinks I should do that soon. The last resort would be to travel to Canada and re-enter as a tourist (using my British passport to avoid any border hassle). But I have come up with a creative solution - if my university terminates me at the end of September instead and puts me on unpaid leave from June 30 then there will be no visa issue at all and I won't even have to bother my long-suffering lawyer again. I floated this in an e-mail late today. We will see what the response is tomorrow. Been drafting up my moving plan and resignation letter. The latter will have to wait on a resolution of the timing issue. Snork Maiden finally sent in her formal acceptance to the Australian employer yesterday. It was held up by a slow HR department rewriting the offer letter to change the start date from September 1st to October 1st. She also asked her boss to suggest temporary accommodation - he stayed at the University across the street when he arrived in the city - exactly where I stayed 11 years ago in early October when I first moved to Australia to work at that university. So if we end up staying there at first this time it will be a case of deja vu.

Yesterday I started trading again after getting back from the trip to Massachusetts. I started by just buying 5 QQQQ puts in my Roth IRA account. Then I shorted some NQ contracts and my first trade netted $600 or so. But later today I reshorted after the market had risen a bit. But too early. The market rose a lot more from there. I also shorted too many contracts in total. The Kelly criterion says that I should trade 3 contracts in my IB account but I was short 5. I covered 2 at a 9 point loss after hours. This is my real job now as far as making money goes so I need to be more careful and consistent. Everything else I'm doing will either be career development or for "fun".

End of Negotiations

My negotiations with my university didn't last long. They didn't budge at all and so I'm not going to budge either. I plan to resign effective June 30th. We plan to travel to Australia around September 20th. I'm going to agree to continue to advise my 2 PhD students who are already working on their dissertation research. A couple of my students seem surprised or shocked. I've been keeping my colleagues informed so they aren't surprised though they would have liked me to stay on to teach in the Fall as we are very short of teaching capacity already. It is a strange feeling that I may never be an employee again unless I choose to do so (assuming things work out). But now everything is my choice. Having that power is scary.

I'm not going to revise my net worth goal for the year. My projections show we can still meet it despite me not earning any salary from May 31st. This will partly be due to merging my finances with Snork Maiden. So far we are in agreement and things should go smoothly. I am including Snork Maiden's superannuation (retirement fund) that she will start contributing to in Australia to my projection spreadsheet as well as her salary. I am assuming that her other savings will be used up in the move - if they're not this will be a bonus. I am budgeting an additional $US6000 for my move. On a day to day basis we plan to have a joint checking account in Australia which her salary will be paid into. This will either be a new account or if possible my existing account with Commonwealth Bank if we can add her to it. I will add money to it if and when neccessary. We will both have ATM cards to withdraw money from the account (I even need to get a new one). For larger expenses we will use credit cards which I'll payoff from the joint account or other accounts. For the moment she'll keep her US bank accounts and credit cards until we have an Australian credit card for her and the joint account in operation. Then we'll probably close her US accounts. I'm not going to consolidate any of her US accounts or the Australian credit card into my net worth reports which will continue to be primarily reported in US Dollars. I'll be in charge of managing all finances. All Snork Maiden will have to do is earn and spend money using the cards.

Back from the Trip, Meeting with Dean

Yesterday afternoon we drove back from Boston after dropping my brother off at the airport. I think for all of us the visit to Gloucester was the highlight of the trip. From our rooms we saw the swimming pool, then the road and then the sea. We stayed at a hotel called Bass Rocks Inn. Well worth the extra cost of a more run of the mill location. Met with my Dean this morning for an "exit interview". Mainly he wanted to ask me about what I thought about the future of our department and what can be done about it. But we also talked about my options. A terminal sabbatical is unprecedented and seems that the chances of getting the university to give it are low. They won't care if I publish some stuff in their name based on that period according to him. We might try to sell it on the basis of student advising. They don't pay out the unused sabbatical as a termination payment either. So I had offered to teach in the Fall based on receiving the sabbatical in the Spring. The Dean started the interview by congratulating me! And he certainly didn't seem desperate to get me to stay to teach the classes. So I think we are deciding that I quit as soon as possible and Snork Maiden and I move together to Canberra in late September. I will offer to continue advising grad students long-distance. Seems she will get a 457 visa which is similar to the US H1-B - a long-stay temporary business visa. We have been scouring the web for info. It clearly does not preclude applying for permanent residence/citizenship so that's good. May take around 6 weeks for the process to complete. In the worst case scenario I could travel to Canberra first and start preparing things for her arrival. Anyway, she won't be covered by public healthcare (Medicare) so we'll need private health insurance for her - relative to the US it's cheap. Her foreign source income isn't taxed by the Australian government. So am thinking about opening a trading account in her name in the US.

I have often said that I would feel happier quitting my job than the day I got tenure when I didn't feel happy at all (relieved that I wasn't fired). Now I still feel somewhat apprehensive of all the work and changes ahead. Maybe when we are finally settled in Canberra will be the time to celebrate?

On the Road

I'm in Massachusetts now travelling with Snork Maiden and my brother who is visiting for just over a week. His first time in America (and he's never been in Australia either despite being an Australian citizen - just to confuse things :)). The trip has been a lot of fun. He arrived Sunday night and we did a crazy trip to NYC and back in a day on Tuesday (cost around $500 all in). Today we will be exploring Cambridge and Boston. In between we have visted more natural and rural places done a lot of talking and eating :) and stuff. On Monday I met with my chairman. We discussed the options regarding timing etc. for the move. One is for me to quit right now. The other is to teach in the Fall on condition that they pay me a sabbatical (half pay) in the Spring Semester. I'd still need to take time out in the Fall to travel with SM to Aus. The Dean has now scheduled an "exit interview" with me for Tuesday. So we'll need to travel back to my hometown rather than SM's after Boston as originally was planned. I'm not trading this week apart from buying 4000 shares in PMC.AX @ $A2.02. My model for that stock told me to buy. The model combines time series analysis and a valuation model based on the NAV of the fund.

TD BankNorth Sucks!

Snork Maiden has a savings account with TD BankNorth. Don't worry, she also has one with HSBC but keeps this one because her pay is paid into it directly and rearranging that is a hassle. This savings account pays less interest in a year than HSBC would pay in a month on the same amount. Anyway, she fell afoul of the six withdrawals rule. Not only did TD BankNorth send her a warning letter as expected, but they also charged her $20 per transaction over the limit of six per month! When she phoned up to try to get them to cancel the charges they claimed that the government made them charge. This is incorrect and nonsense. The six withdrawals rule is a government rule but the charges are entirely their own. HSBC made no such charges. The $60 in fees is the equivalent of three years interest! Don't use TD BankNorth if you can avoid them!

Evidence on Overnight Trading

Interesting evidence on why overnight trading and closing the trade within the first hour or so is a good strategy when using directional trading models like mine. In my experience, unexpected changes in direction are more likely to occur intraday so that one can actually take more risk overnight in direct contradiction of received wisdom and futures trading margin rules. I don't think Steenbarger's conclusion that the US follows overseas markets follows from this though. That would need a different kind of analysis, which I might do some time. Looking forward to trading from Australia I won't miss much by being asleep during the main part of the US trading day.

Australia: Part III

Today we got the formal offer letter from the Australian position. It's OK - just need to push the start date off by about a month to 1 October if possible. Also need to find out how fast Snork Maiden can get a visa. I e-mailed my chairman today. We will meet Monday to discuss the options. He seems surprised. I've been signalling for a while that Snork Maiden is looking for jobs and got an offer from Aus and he even made her an offer so he shouldn't be surprised but some people find it hard to think outside the box I guess. SM's salary will be $A65k (c. $US55k). On top of that they will contribute 15.4% to a retirement fund. She can contribute 2-10% from her salary too. After looking through the conditions she said "they don't mention healthcare" and I told her that healthcare had nothing to do with employers in Australia. Either you use the public system or buy private insurance yourself. They are also going to pay her airfare and up to $A5000 in relocation expenses.

Australia: Part II

Some reasons why we've decided to move to Australia:

1. So far it's the only good job offer that Snork Maiden has received. There are a couple of rather inadequate alternatives at her university (she is completing a PhD) and mine which she could do on the OPT status (optional practical training which foreign students can do for one year after completion of their degree while still on their student visa).

2. The other alternative is for me to go through with the final stage of the green card process for us to marry and then for her to apply for a green card on the basis of mine. Perhaps there would be a job for her in my state government or some other opportunity. Here we have a clear option. I think once getting a PhD you need to use it fast before it loses its value. Later you can decide on changing career tracks.

3. We are going to Canberra which is the ideal place almost for her in terms of job opportunities down the road.

4. I have friends and contacts in Canberra which will help both of us.

5. She can become a citizen in three years, vs. a 8 year plus road here. I am already an Australian citizen.

6. No snow :) Well it did snow once in my six years in Canberra but it didn't stick. There is snow on the mountains. IMO an almost perfect climate.

7. The more Snork Maiden hears about Australia the more she likes it.

8. Only 2 hours time difference to eastern China, her home country.

9. This final step of the green card process where I need to get mutliple criminal background checks from all the countries I've lived in feels insulting to me. If I can avoid it I will. Probably, this is irrational. Even after that it will be five years before I can become a citizen. Though I wasn't born in Australia I feel more at home in the country that seems to want me. My mother is Australian and registered me as an Australian citizen when I was born.

10. Parrots.

Rick's Cabaret

New investment: 500 shares of Rick's Cabaret. Wallstrip umm "profiled" it and I checked out other blogs and the numbers and it looked good so thought I'd give it a shot.

Australia: Part I

We have pretty much decided to move to Australia though we still need to work out/negotiate all the details. I'll explain in another post the reasons behind our decision. Was wondering how Australian taxes compare to U.S. ones currently and came up with this chart:



I am assuming a single person who is an employee earns no other income and whose only potential deduction is state income tax and who is covered by private health insurance (relevant in Aus). I chose California - one of the highest taxed U.S. states as the point of comparison. Low tax U.S. states will look better. I also include FICA taxes in the U.S. calculation and Medicare in the Australian case. Apart from a blip around $US35k California's taxes are higher until we get to incomes above $125k. I only went as high as $150k because above that level the U.S. system starts to phase out exemptions and deductions. The top Australian tax rate is 46.5%. The U.S. Federal top rate is 35%, California, 10.3%, and FICA is 1.45% at those top rates. So eventually the two lines converge again. From my experience though there are more tax-reducing loopholes in Australia that high income individuals can use as there is no alternative minimum tax.

May Report

All figures are in US Dollars unless otherwise stated. This month saw weaker performance especially when compared to the market, but net worth still increased and investment returns remained positive for the eighth month running.

Income and Expenditure



Expenditure was $2,154 while take home pay of $5,248 reflects receiving two months pay this month - we don't get paid in June - and my income tax payments which I treat as negative income. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were more moderate than in recent months ($3,530). Retirement investment returns were also weaker ($804). The Australian Dollar fell a little deducting $2,120 from returns measured in U.S. Dollars.

Net Worth Performance
Net worth rose by $US9,220 to $US433,011 and in Australian Dollars gained $A14,471 to $A523,530. Non-retirement accounts reached $US239k. Retirement accounts rose slightly to $US194k.

Investment Performance
Investment return in US Dollars was 1.02% vs. a 3.07% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.49% gain in the S&P 500 index. Non-retirement accounts gained 1.52%. Returns in Australian Dollars terms were 1.68% and 2.18% respectively. The markets were again very strong this month but my U.S. Dollar returns are still beating the indices year-to-date:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Stock index trading (NQ/QQQQ and ES/SPY) produced nice results this month while very bad trades in Salesforce.com and Interactive Brokers lost the most.

Progress on Trading Goal
Trading in my US accounts netted $1,567 a 5.6% return on trading capital. The model lost 0.9% while the NDX rose 3.2%. This is the first time the model has had a losing month in more than a year and a half. In the light of that, my positive performance is rather surprising as up till now I have tended to lose in months when the model has even a weak positive performance. Seems my trading is improving at least in the stock index trading area. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts have reached $53,758 with $63k contributed - so I still need to gain just over $9k. Since the beginning of the year the trading capital gained 64%, the NDX has gained 9.7% and the theoretical model gained 35.3%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.48. Allocation was 30% in "passive alpha", 66% in "beta", 6% allocated to trading, 5% to industrial stocks, 4% to liquidity, and I was borrowing 11%. I've brought my Australian Dollar exposure down to 64.5% from 69.5% in January. The goal is to eventually reach 50%.

May Trading Performance

The model had its first losing month in a long time. It ended down -0.87% on the month while NDX gained 3.24%. However, my trading accounts managed to gain 5.60% or $1,567. If it wasn't for horrible trades in Saleforce.com and Interactive Brokers I would have done much better:



Futures trading made near $4000. The first half of the month was a struggle, but then things really started working out. QQQQ and NQ trading alone made around this amount. That kind of performance would be sufficient to make a living at this with a reasonable amount of capital at risk. Currently my z-score for all NQ trades to date is 2.44 which implies that the probablity that the average trade loses money and my success to date is just luck is less than 1%. The average winning trade makes $95 per contract (1 index point is $20). The average losing trade loses $109 per contract. But 62% of trades win. To date I've traded 555 NQ contracts or $21million worth for a total profit of $9386. This seems to be fairly typical of daytrading and why very low commissions are essential. The average contract is making me $17 in profit and costing $4.80 in commissions for the roundtrip.