September 2018 Report

The Australian Dollar rose from USD  0.7201 to USD 0.7228. The MSCI World Index rose 0.48% and the S&P 500 rose 0.57%. The ASX 200 fell 1.04%. All these are total returns including dividends. We lost 0.63% in Australian Dollar terms and 0.26% in US Dollar terms. So, we  outperformed the Australian market and underperformed international markets.


The best performing investment in dollar terms was NASDAQ futures gaining AUD 2.6k –  and the worst the CFS Geared Share Fund losing AUD 10.7k. The best performing asset class was private equity, gaining 1.28% followed by commodities (this includes trading), gaining 1.22%. The worst performing asset class was Australian large cap, losing 1.57%.


The following is table of investment performance statistics computed over the last 60 months (extended from 36 months previously) of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Based on beta, compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. We have a positive alpha compared to the Australian and a negative alpha compared to world markets. We capture more of the up movements and less of the down movements in the Australian market and the reverse in the international markets. The fall in the Australian Dollar over this period explains the poor performance compared to international benchmarks.


This month I made USD 2.5k trading futures. This is the second best result to date and ocurred as the NDX declined for the month. The table * compares my performance to the market and the model:



This month was the sixth month of the futures trading experiment. The first month was the model development phase, and since then I have been trying to get disciplined at trading and further incrementally improving the model. I didn't trade in the first half of the month as I was traveling to Europe and Singapore and the model was short and based on relatively low volatility I thought the profit potential was low. This was a mistake as the model did very well. Then when I got back into trading we were in a corrective phase with the market trading sideways. I traded long NQ short ES for the last few days of the month. The model outperformed the market this month, though its return was not that high. The model is bearish and under-performs when the market is strong and outperforms when the market is weak. It got stopped out a couple of times, which is unusual. As a result the model made 4 trades in 4 days. The second time the model was stopped out, the market ended up on the day and so the stop was too tight. The first time, the stop reduced losses.

What I want to do next on the trading front is write the model's decision algorithm in computer code. At the moment I estimate the indicators I use with an econometric model but I then make decisions manually and record the details in an Excel spreadsheet. It is quite quick to do to make daily decisions in a single market but it is quite hard to do backtesting of different ideas. This will be much easier once we have the decision algorithm coded in the same program as the estimation model. Also, in the long run I plan to automate trading or at least automate data acquisition and decision making for multiple markets. Coding the model in the language of my econometrics program is a first step towards that. Once the model is written in one computer language, converting it to another shouldn't be hard.

I did our tax returns this month. I should get a big refund and Moominmama had to pay a little under AUD 1,000 in extra tax. Otherwise, I am waiting for the probate process to play out before undergoing a big round of financial restructuring.


We made a little bit of progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.

We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Major moves tbis month:

• I redeemed the Janus-Henderson Global Resources Fund, which reduced exposure to ROW stocks.
• I reduced cash and the margin loan in preparation for investing in the Tribeca IPO. As a result our allocation to hedge funds will increase substantially next month. 
• I added to the Yellow Brick Road position which is now about 1% of net worth.

* The statistics at the bottom of the table are based on only 5 months of data and so are not at all reliable yet.
    

Internal Rate of Return and Private Equity

Private equity funds like to report the returns on their investment using the internal rate of return metric. The IRR is the discount rate which results in the net present value of the stream of cashflows from the investment being zero. This article points out that it is only the true compound rate of return if you can reinvest the payouts that you receive over time at the same rate of return (r.o.r.). This is correct. But it then goes on to say that IRR is meaningless if you can't reinvest the distributions at the same r.o.r. I don't think that is right. If the IRR is higher than the r.o.r. that you can invest the distributions at, then your r.o.r. from investing in the private equity investment and reinvesting your distributions is greater than the r.o.r. you'll receive by just investing in your alternative investment (and vice versa). Your actual r.o.r. won't be as high as the IRR but the IRR is still useful for making decisions. The main issue is that you need to deduct the funds fees to get the true IRR. Often they will report that they made a $1 million investment and sold for $2 million and give the IRR without deducting fees. Probably as a back of the envelope calculation you could deduct 1/4 of the stated IRR in these cases and then compare to your alternative r.o.r.

So, for example, in Aura's latest report to investors they reported IRR's to date on two investments of 59.5% and 29.2%. So, yes, these are very good. Of course, those are the investments whose carrying values they are marking up. They report a 21.3% IRR on an investment they are exiting. But then there are others that are just breaking even.

Firetrail IPO

Another hedge fund IPO in the coming month. This one is also managed by Commonwealth Securities and so I could participate via the broker firm offer. It is a market neutral hedge fund that can lever up to 200% of NAV in both the long and short sides. The investment team used to work at Macquarie where they got decent returns (22.1% p.a. from July 2015 to October 2017). I'm not so impressed by their performance this year since starting up on their own:

This is not the sign of a high Sharpe ratio investment – it seems there is a lot of risk in this investment relative to the returns. I think this is a fund that is worth tracking over time and seeing if it settles down and performs better. Based on the above, I don't think the shares will trade above the offer price immediately after the IPO, though that is just a guess.

2017-18 Taxes

Here are my taxes for another year:

A lot of items are down on last year. Foreign source income and unfranked distributions are up because the Winton Global Alpha Fund did well in this tax year. This also means that a chunk of the margin interest is directed to foreign source income and appears under "other deductions". Another new item this year is the Early Stage Venture Capital Limited Partnership offset due to my invest in the Aura Venture Capital Fund. Work-related travel expenses are up because the grants and other funding I had are winding down and so I need to spend more of my own money on travelling to conferences etc.

Franking credits (from Australian dividends), foreign tax paid, and the ESVCLP offset are all deducted from gross tax to arrive at the tax assessment. I expect to get a large refund.

Gross cash income deducts franking credits as these aren't paid out as cash and adds in net capital gains, which were around $60k to income before deductions. Net after tax cash income then deducts tax and deductions from gross cash income.

Looking forward to next year, net capital gains will likely become positive as I won't have any more past losses to deduct. Foreign source income will likely grow further as futures trading comes in.

Moominmama's (formerly Snork Maiden) taxes follow:

Salary was up as Moominmama came off maternity leave. Work related travel expenses were also up as she also went to one of the conferences in Europe. Still, we expect to pay extra tax. Next year there should be more in the way of investment deductions following our mortgage restructuring. There will also probably be a lot more foreign source income.

Longer Term Planning

I was rejected for the two jobs I recent applied for. One in Australia after interview and one in the UK pre-interview. So, it looks like we stay in Australia in this city for the moment. It also looks like I will continue in my job next year, but I am seriously thinking about "retiring" at the end of 2019 when I will be 55.

Hopefully, the probate situation is finalized before the end of this year and we can start to restructure our finances. This is what I am thinking to do:

1. We will need to set up a trust account or something less formal for little Moomin for the relatively small amount of money he will inherit. Need to wait to hear what we need to do. According to the will, he won't get the money till he's 23 years old...

2. Almost pay off our mortgage and then redraw it and use it to pay off margin debt and add to a trading account. We can then deduct the mortgage interest from our taxes and it is a lower interest rate than the current margin loan.

3. Set up a self-managed superannuation fund (SMSF) and roll my existing Colonial First State superannuation fund into it as well as contributing AUD 300k for each of me and Moominmama. This would then have about AUD 900k to start with. The reason to go down the road of self-managed super is to be able to invest in managed futures, which are a tax ineffective investment outside super. We would put all our high tax investments into the fund as well as some Australian shares with franking credits to reduce the tax.

4. Scale trading up to full size. At the moment, I am thinking we will need to set up a company for trading. Corporation tax on small businesses is 27.5% vs. top personal marginal rates of 47% +.* My understanding is that you don't need to pay out all profits as dividends and so retained earnings are more lightly taxed. But I will need advice on this. It would also protect the rest of our assets against something catastrophic happening. The company could also be the trustee for the superannuation fund, which would allow us to maintain the SMSF if we left Australia.** These are just my current understandings – obviously I am going to need to get professional advice on all of this.

5. Estate planning. Currently we don't even have wills. This is an area I know little about but will need to deal with. What I want to avoid is the situation we faced with my mother where the government dictated investment policy to us after she wasn't capable of making decisions - despite giving us power of attorney.

* The downside of companies is that they don't get a capital gains tax discount. Individual investors in Australia only pay half the marginal rate on capital gains on investments held for more than a year. But the advantage of only paying 27.5 or 30% tax on trading income rather than 47% tax before investing it in other investments outweighs the discount. If Labor reduce the discount, this will be even more the case.

** You can't be the trustee of an SMSF if you aren't resident in Australia. Using a corporate trustee gets around that. There is a problem in leaving Australia and receiving income through an Australian company as it means we would suffer from double taxation. In Australia, dividends from the company would have attached franking credits so that we would only need to pay the difference between 27.5% and 47% on dividends. But if you live outside Australia in a location where you need to pay tax on foreign income (obviously one reason to move might be to reduce tax...) then we would need to pay the foreign tax on top of the Australian company tax. Investments already inside the company are invested in Australian stocks that pay franked dividends, then the franking credits on the dividends received would mean that the company wouldn't pay net tax on its investment income, so that won't be double taxed if we moved overseas. But trading income would be taxed at 27.5% and then again if paid out as dividends. So, we would need to do a restructure in the most tax-effective way at that point. In an earlier version of this post, I did think about having the company being the beneficiary of a discretionary trust that actually did the trading and then just changing the flow of income. But the trustee of the fund has to pay tax for offshore beneficiaries. So, that doesn't help.

Mean Reversion vs. Momentum Strategies

This is an interesting interview. About half way through he makes a deep point that if you use an oscillator type indicator and sell it when it is overbought and buy when it is oversold that is a mean reversion strategy. If you do the opposite - buying when overbought and selling when oversold then it is a momentum strategy. And those are really the only two options for directional trading using such indicators. Well, he also says that 95% of assets follow a random walk and can't be predicted. My system basically tells me when to switch between momentum and mean reversion. For me there isn't really something that is not predictable though when volatility is low predictability goes down.

How Many Households in Australia are Rich?

Every couple of years the Australian Bureau of Statistics surveys the distribution of household wealth in Australia. The most recent data is from the 2015-16 survey. It doesn't provide a lot of detail though. The downloadable data provides the averages for quintiles and the level at the top of each decile. They report that net worth at the 90th percentile is $1.979 million.

We can get more information by using the reported mean and the Gini coefficients and assuming that the data follow a log-normal distribution. You can get details of the necessary calculation here - use Wolfram Alpha to get the inverse of the erf function.

The distribution fits well for the 30th (ABS: $232k, lognormal: $240k) to 90th percentiles (ABS: $1.979 mil, lognormal: $2.1 mil). Below the 30th percentile the lognormal predicts too much wealth, while right at the top it would predict at most one billionaire in Australia. But I think we could use it up to the 99th percentile without too much error. The top 5% starts at $3.26 million, 4% at $3.7 mil, 3% at $4.3 mil, 2% at $5.3 mil, and 1% at $7.4 mil. All these numbers will be a bit higher now, of course. The most recent figure for mean household net worth is over $1 million rather than $929k here.

The ATO regards anyone controlling more than $5 million as wealthy, so that is the top 2 to 2.5% (with current mean net worth). To be a wholesale investor you need individually $2.5 million of net assets. So assuming a couple have $5 million, that also is the top 2.5%. So, the top 2.5% in Australia are considered "rich". That is roughly 250,000 households.

P.S.
In 2015-16 we were at the 16th percentile.

If You Follow This Advice You Won't Be Able to Buy a House

If you follow this advice from Ramit Sethi, you won't have any money to buy a house or start a business, unless you have a lot left over after doing all these things. The image that accompanies the article is very apt:

If you follow this advice you will be locking all your time away in the piggy bank until you are 59 1/2 (or 60 in Australia). I think I should start writing my own financial advice:

The first step is the same - if your employer requires you to match to their retirement contributions in order to receive it, do it. In Australia that isn't normal, but in some jobs in the public sector there can be additional tax advantaged employee contributions on top of the employer contributions. I would suggest skipping those until you do my step two unless it really reduces the retirement benefits you will get.

Step two is also paying down debt, but only on high interest loans like credit cards. If you have debt where the after tax interest rate is lower than the after tax expected return on investment, pay those off as slowly as you can. So yes, get rid of credit card debt ASAP, but student loans and home mortgages are usually debt you don't want to get rid of in a hurry. Taking on a moderate about of extra debt if the rate is good (as in leveraged managed funds or even margin loans) can be good, but don't overdo it.

Step three is the "emergency fund" or equivalent. Get some cash together to cover emergencies and opportunities. Having the ability to borrow more is good too of course, but don't just rely on that. I had about $20k in cash before I started to invest. As that is 20 years ago, you probably should double that number now.

Step four is probably investing outside of retirement accounts. This means your money isn't locked up till you retire. The supposedly lower tax of retirement accounts comes at a heavy price. With low long-term capital gains tax and reduced rates on dividends (especially in Australia) the tax on non-retirement accounts may be not much higher than on retirement accounts in Aus (and you can make bigger contributions later in Aus as I am now contemplating when you have plenty of money). US 401ks are taxed heavily on withdrawal in retirement though they have no tax during accumulation. The US Roth IRA though is an attractive investment as it leaves options more open.

Step five - if house prices are reasonable relative to rents in your area and you aren't planning on moving a lot, once you have more than enough for a downpayment, buying a house is probably a good move. But do a proper cost benefit analysis of this.

Step six - once you have done these and if you aren't thinking of getting into business, now you can look at maxing out retirement accounts.

I didn't mention trading - unless you have a proven model and want to pursue this as a real business you can do this as a hobby alongside Step 6. Most traders lose money though, so it is definitely an expensive hobby for them.

Mercantile's Bidder Statement Provides No Rationale for 9 Cent Offer Price

Mercantile (MVT.AX) released a bidder statement for Yellow Brick Road (YBR.AX) which provides no justification whatsoever for the 9 cent per share offer price. I think that is quite remarkable. Normally, such statements provide a detailed justification from "independent experts" for the price. Mercantile's bidder's statement for IPE did. YBR shares are currently trading at 10.5 to 11 cents.

August 2018 Report

The Australian Dollar fell from USD 0.7432 to USD 0.7201. The MSCI World Index rose 0.83% and the S&P 500 rose 3.26%. The ASX 200 rose 1.76%. All these are total returns including dividends. We gained 2.04% in Australian Dollar terms and -1.13% in US Dollar terms. So, we  outperformed the Australian market and underperformed international markets.

The best performing investment in dollar terms was CFS Geared Share Fund gaining AUD 9.2k  followed by Unisuper (CDM.AX) gaining AUD 6.9k and Bluesky Alternatives (BAF.AX), gaining AUD 4.5k. The best performing asset class was "real estate", gaining 2.45% followed by US stocks, gaining 2.28%. The worst performing asset class was hedge funds, gaining 0.26%.

The following is table of investment performance statistics computed over the last 60 months (extended from 36 months previously) of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Based on beta, compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. We have a slightly positive alpha compared to the Australian and a negative beta compared to world markets. Finally, we now capture more of the up movements and less of the down movements in the Australian market and the reverse in the international markets. The fall in the Australian Dollar over this period explains the poor performance compared to international benchmarks.

This month I only made a relatively small amount of money trading futures – USD 1.8k – though this is the second best performance so far in dollar terms. The table * compares my performance to the market and the model:

This month was the fifth month of the futures trading experiment. The first month was the model development phase, and since then I have been trying to get disciplined at trading and further incrementally improve the model. August was rather erratic. At one point I was up AUD 11k over the amount originally put into this trading account and then blew almost all of it in a mixture of bad model trades and bad trading in and out of positions. One of the bad model trades would now not happen, due to improvement of the model, so I have learned something from this experience. In the early part of the month I was trading two NQ contracts. After the bad trading I cut it back down to one contract again. So we are back in Stage 2 of the trading experiment, which is learning to consistently trade one contract. I am only doing long trades for the moment, due to the reduced volatility at the moment. Still, I unnecessarily sacrificed about USD 1,500 by closing a long position early. The model slightly underperformed the market this month. The same thing happened in May when the market had a very strong result. The model is bearish and under-performs when the market is strong and outperforms when the market is weak.

We reversed progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.

The deterioration in allocation, came mostly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• I added another AUD 10k to the Winton Global Alpha fund, but withdrew AUD 50k from the trading account, for a net reduction in the allocation to commodities.
• I received the payment for the takeover of IPE but bought some more shares in OCP.AX, overall reducing the allocation to private equity.
• Added to positions in PMC.AX and CDM.AX, increasing the allocation to hedge funds. 
• I added a small position in Yellow Brick Road (YBR.AX), increasing the allocation to Australian small cap stocks.

* The statistics at the bottom of the table are based on only 5 months of data and so are not at all reliable yet.

Yellowbrickroad and Tribeca Natural Resources

Yellow Brick Road (YBR.AX) is an Australian mortgage broker and financial planning company. Mercantile Investment Company (MVT.AX), who took over IPE has made an offer to take over the company at 9 cents per share. However, the company has rejected the offer and the market is trading higher than 9 cents under the assumption that Mercantile will have to increase the offer. The company has net tangible assets of 13.4 cents per share, though much of that is future expected trail commissions. Regulators are clamping down on trail commissions and these might go away in the future, but I doubt that existing deals would be cancelled. The company just announced it made a small loss this year after a small profit last year. So, net tangible assets would seem to be the minimum reasonable price for the business.

I have started to make a small investment in the company. As it is risky to buy above the announced takeover price, this won't be a big position. The CEO and his brother own 19% of the company as does Nine Network. So, these big shareholders would have to get a price they are willing to accept for the takeover to actually proceed. MVT owns about 20% too, so smaller shareholders have 40% of the company.

Commsec announced the IPO of a listed investment company (closed end fund) managed by Tribeca. This will be a listed hedge fund. The managers have an extremely strong track record, though returns have fallen from the very high returns they made in 2015. I suspect that as money under management increased, returns fell. Still, they show the potential to perform very well going forward and I think this LIC should trade above net asset value. So, I plan to participate in the IPO. I also plan to redeem my units in the Colonial First State Janus Henderson Global Resources Fund, which has not performed that well in recent years.

Just Follow the Model

Yesterday, based on looking at the candlestick patterns and Oscar Carboni's caution about a possible "holiday reversal", I decided to close my long position. I missed a big rally today as a result. At least I didn't lose money. But I shouldn't doubt the model. Now the model is signalling short. However, due to low volatility, I won't take this short signal. There was a similar signal on 9 January that made small gains for a couple of days and then lost big. Another similar signal on 11 May also lost money. So, seems a good point now to just step out of the way, especially as on Tuesday I am traveling to Europe.

The model gained 3.19% on this long trade.

That Worked Pretty Well

The model passed the test. We are now back to a positive return from trading for the month.

Started Trading Again on the Long Side

Following up on this post, I took the next long signal from the model, which was yesterday. I got in at NQ=7418.75, which was almost the low for the day. The market ran up sharply at the beginning of the cash session and then corrected sharply, ending down, but still above my entry point. Today's forecast is long again using the latest version of the model, which smooths one of the signals but using the old version with an unsmoothed signal, it might be short, or maybe I'd invoke the "close to zero rule", which said to ignore a change in direction of the indicator if the indicator was close to zero. Now, we have a clear objective rule. Let's see what happens.

But until volatility shows some sign of increasing, I won't take the next short signal.

NetWorthShare

NetWorthIQ seems to have died. So, following up on EnoughWealth's blogpost, I have opened an account with NetWorthShare. It's surprising that NetWorthIQ didn't make more of their website. I would have thought they could have got a lot of advertising from the financial industry.

Does it Ever Pay to Go Short?

I did some tinkering with the model to avoid the kind of false buy signal that resulted in the stop out last week. I applied Hodrick-Prescott filtering to one of my indicators. This eliminates these kind of false turning points but also eliminates a fairly subjective rule in my decision tree. So, overall that improves the model. This is one step further to a fully objective system that can be automated.

You need to be careful with HP filtering as it uses all the data in computing the smoothed estimate. So in back testing you have to run the filter repeatedly using just the data that was known up to that point.

The model is currently short. But I don't have a trade on. I am thinking to put a trade on when it switches back to long.

In a recent post, I showed that a hedged portfolio levered 1.5 times would track the market when the market does well and track the model when the model does well. Instead of thinking of this as trading plus investment we can examine it as a pure trading strategy. That suggests that it doesn't pay to go short. Just stay out of the market when the model is short and only take the long trades and lever up the returns. In 2018 so far, going short would add to returns though. But in 2017 going short detracted from returns. The model only won 45% of trades in 2017. The average win (1.57%) was almost double the average loss (-0.9%) though so, the expected value of a trade was still 0.2%. When we split trades into long (22) and short trades (24) instead the average long trade made 0.83% and the average short trade lost 0.39%. So, avoiding short trades would have doubled returns, returning 20% instead of 10% for the year. Of course, just going long for the whole year would have returned 32%. But we don't know that will happen ex ante. Levering the 19% by 1.5 times or so reproduces the long-only result.

The question now is whether you can win by going long only in a year like 2008. My intuition is that trading would result in a positive return for the year but that this would be insufficient to hedge the losses in an investment portfolio. It would moderate the downside though.

Testing that hypothesis will have to wait a little while.

But for the moment, volatility is low and so going long only might pay off.

Stopped Out...

My long position was stopped out on Wednesday. Now back to more or less zero profit on this account - still have a positive overall result from the trading experiment. Also, I realised that I still can't really psychologically handle trading overnight futures positions at the moment even at the smallest trade size. I am losing sleep because of it. So, I am going to stop trading for the moment. I need to get a lot of academic work done in the next two weeks before going on another overseas trip. At some point after I am back I will do some further research on trading models. My thinking is I could design a model that would only make trades when the odds were most in favor of winning. The current model trades all the time regardless. The ultimate long-run goal is automation of trading or taking it out of my hands in some other way. To achieve these goals I don't need to be trading continuously at the moment if I'm not making good money at it and  it's having negative effects instead.

I am also at the moment on a trip for a job interview. As I am learning more about the position it seems more challenging and to need leadership skills beyond what I have. I would be shocked at this point, though, if they offered me the position.

Losing Model Trade and Trading Badly

The downside didn't last long... Model switches back to long this morning. The short trade lost the model 0.4%. Due to bad timing - closing my long at pretty much the low point of the down move and going short, I gave back almost all the profits I'd made for the month so far. As a result, I have gone back to trading just one contract until I can get my act together properly.  So, back to Stage 2 of the process, after attempting Stage 3...

The NQ equity curve so far this year (starts at net profits from previous years):

The problem with tactical trades is that I then need to follow the market to see whether to open or close a tactical trade. But they're not necessary for getting a good long term return from the model. It probably would be better to diversify to trade more than one market first instead, as that will result in fewer losing days if the correlation between the markets is low. So, I did recently start to build a model for oil again, though I was a bit stuck in coming up with good decision rules so far.

Turkey Turns the Outlook Bearish

The down day on Friday in response the Turkish crisis switched the model to short going forward. Based on the 3 hour stochastics, there could be a bounce on Sunday evening (US time) continuing the bounce into the close on Friday. This could be a good opportunity to go short.

Looking Bullish

The model state is almost identical with that on 10 January this year. That's presumably pretty bullish for the next week or so... Of course, anything could happen.

Backtesting and Hedged Portfolios

So, I backtested for all of 2017 using the latest model rules. The model makes money for the year, but there are several losing months, and the model underperforms the market. I could quite easily predict which months would be more profitable and which were more likely to be money losing by looking at their volatility. So, that idea works out of sample.

 

The graph shows the NASDAQ 100 index (close) for 2017 and the model return. The interesting thing is that a hedged portfolio of the market and the model, tracks the market quite closely. The hedging strategy would invest 75% of net worth in the QQQ ETF and use 25% of net worth to trade NQ futures with 3 times leverage according to the model. So it is 1.5 times leveraged with 50% of the total exposure long and 50% traded. Of course, you wouldn't really want all your portfolio into the the QQQ ETF. At least I wouldn't. But this is a step towards seeing what a realistic strategy with investment and trading would look like. Now if we look at 2018:

The hedged portfolio tracks the model, which vastly outperformed the market, closely instead now. It seems that you can get the best of both worlds with this strategy.

Soybeans

To try something different I tried a soybean daytrade. Made $107 in 17 minutes, so not bad :) But I only got the beginning of a much bigger move, so I need to be more patient in future trades i this commodity.

Volatility and Return

The graph shows the average true range (ATR) divided by the closing NQ futures price for all 14 day periods in 2018 so far and the average daily NDX model return over the same period. The correlation is very strong. The model tends to make lots of money when the market is volatile and potentially lose money when the markets are not volatile. This is why the model would have lost money in early 2017 for example and probably why the NASDAQ index produces better results than the S&P 500. Clearly, noise dominates signal when volatility is low. However, the correlation between recent volatility and future returns is quite weak. So, this isn't yet a useful tool for deciding when to trade and when not to trade on a daily or weekly basis. But if you were losing money for a while and volatility was low it would make sense to get out of that market and trade something else until volatility appeared to return.

I'm still holding the strategic long contract. It's up around $4k at the moment. I did a couple of tactical trades netting $215 and $980.

Trading on 2nd August

The market came with 4 points of stopping out the long position but then took off to the upside as soon as the New York market opened. Gain for the day was almost USD 3k. Today, I have added a second contract (@ 7391). Stop remains the same.

July 2018 Report

This month was the fourth month of the futures trading experiment. The first month was the model development phase, while May and June were about ironing out the glitches and training myself to trade the model properly (and not give in to gut instinct etc). In the first half of July I only traded one day and lost but model returns were good in the beginning of the month. Then in the second half of the month I got back into regular trading. Initially the model wasn't doing well but then things improved again as a short trade worked out.

The Australian Dollar fell from USD 0.7571 to USD 0.7432. The MSCI World Index rose 3.05% and the S&P 500 rose 3.72%. The ASX 200 rose 1.39%. All these are total returns including dividends. We gained 1.56% in Australian Dollar terms and 2.12% in US Dollar terms. So, we  outperformed the Australian market and underperformed international markets.

The best performing investment in dollar terms was Unisuper gaining AUD 4k closely followed by Cadence Capital (CDM.AX) gaining AUD 3.9k. The next best in dollar terms was Bluesky Alternatives (BAF.AX), gaining AUD 2.8k. The best performing asset class was "private equity", gaining 2.66%. The second best performer was US stocks, gaining 2.58%. The worst performing asset class was Australian large cap, gaining 0.41%.

The following is table of investment performance statistics computed over the last 36 months of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Based on beta, compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. We have a slightly positive alpha compared to the Australian and world markets. Finally, we now capture more of the up movements in the international and less in the Australian market and suffer less of the down movements in both the Australian and international markets.

This month I only made a small amount of money trading futures: USD 1.0k. The table compares my performance to the market and the model:

The US markets went up and then down. The model did outperform the market.* In the first week of July I didn't trade as I was in Japan and my phone wouldn't receive the text messages needed to log into the trading account. I actually received all these texts after returning to Australia! Then I traded long on a day when the futures price would suggest to be short and the index values suggest to be long and got stopped out. This made me do some more model research and revise the stops policy, though I found that index values provide better trading signals. After that I got back into regular trading trying to trade double the size but the model was losing at first. Then I started doing strategic and tactical trades, which helped psychologically.

We made more progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds.

The improvement in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• I added another AUD 10k to the Winton Global Alpha fund, increasing the allocation to commodities.
• I added AUD 50k to the trading account and in the end was moderately successful at trading, increasing the allocation to commodities .
• I closed a small account with Colonial First State, which was invested in the CFS Geared Share Fund, reducing the allocation to large cap Australian stocks. 
• I rebalanced my CFS superannuation account, reducing the allocation to large cap Australian stocks and increasing the allocation to other asset classes.
  
• I bought 75,000 shares of BAF.AX increasing the allocation to private equity and real estate.
• I sold my position in PIXX.AX and bought a smaller amount of Platinum Capital (PMC.AX) and bought more as PMC fell further in price. This reduced the allocation to hedge funds.

* The statistics at the bottom of the table are based on only 4 months of data and so are not at all reliable yet.

Back to the Long Side

Closed short and opened long @ 7261.5. Stop is @ 7211.

The model switched to long today but the signal is close to remaining short and the intraday indicators are signalled short for the first part of the day. So, I kept the short position until now almost 7 hours into the trading day from 6pm New York time (8am Eastern Australian time). I put on a ten point trailing stop for two contracts, so it closed the short and opened a long simultaneously. Gained about 25 points on the short side compared to the market open.

Profit from the closed short was USD 3,000.90. The model gained 1.73% for the trade starting on 25 July and ending 1 August.

Monthly report coming soon.

Friday 27th July Trading

Finally we had some good downside on Friday with the NQ futures falling 126 points to 7299.75 – each point is $20 per contract. I had a strategic short from 7411.75 and a tactical short put on in the morning at 7429.5. My only regret is that I closed the tactical short at 7380 for only a $986 profit rather than setting a wider stop and letting it ride down for another $1600 in profit :) The strategic short is of course still in place as the model remains short. I am now up $885 for the month. Hopefully, I will stay up for the last couple of days of the month. I expect the market will go down further, both the model signals and looking at previous declines this year suggest that there is a lot further to go down before bottoming. All the previous declines went below the 34 day moving average and two went to the lower 34 day Bollinger Band:

If the latter happens, we would be at 6950 or so, $7,000 a contract from where we are now. Of course, given the strong trend it is more likely to be like the declines in April and June, which didn't reach the lower Bollinger Band.

Indications at the moment are that we don't want to do a tactical short during the US overnight on Sunday-Monday. A short near the US market open looks more likely to pay off.

Trading in 2018 is Objectively Better

I computed my average gain per NQ contract traded in 2006-2008 compared to in 2018. In 2006-08, on average I gained 0.46 points per contract traded or $9.31. Commissions on a roundtrip were $4.80 then. In 2018 so far, I made 3.69 points per contract or $73.74. Commissions are now $4.10 on a roundtrip. So, my trading now is almost an order of magnitude better. The average is brought down by lots of small daytrades I've done. As I plan to do fewer of those, the average should improve, I hope. On the other hand, the level of the index is now nearly 4 times higher than it was in 2006-8 and so a given percentage price move translates to more points.

This graph shows the equity curve on NQ trades - the actual number of trades is half this as there is one data point for each opening or closing of a position. Initially in 2006-7 I had a reasonably good increase in profits, peaking around $10k cumulative profit. Then there was a long slow decline into 2008 of a series of small wins, punctuated with larger losses. The big jump is the start of trading in 2018,  when I had a series of big wins. Since then, things have gone sideways, with losses equal to gains.

Tactical and Strategic Trading

After seeing a big profit disappear again a few times, I think I am going to adopt a combination of strategic and tactical trades now that I am trying to trade two contracts. One contract is always held in the direction of the model for as long as the model is long or short. This is the strategic trade. The other contract is in the same direction but can be closed out for the day when there is a big profit already. That is the tactical trade. Yes, day trading but the kind of daytrading where you put a trade on at the beginning of the overnight futures session and close it at the market open or vice versa. I had planned to do this but deferred it to stage 4 or 5 of the experiment. But I think I need the psychological boost now. I will make trading decisions using a chart with 2 to 3 hour candles. On a chart at that frequency most days break down into a rising and a falling period or a weak (when the market goes sideways) and strong period. I will close the tactical trade if it has made a profit and the next half of the day looks like being weak or going in the opposite direction to the model. Anyway, let's see if this works.

It probably was necessary to suffer through the pain of seeing a big profit on two contracts disappear a couple of times to be willing to have two contracts on overnight Australian time.... I tried adding one contract tactically before but was too nervous about it to set a wide enough stop.

Today the strong period was during the overnight (the market went down, in the model direction) and the weak period was during the US daytime when the market went up in the opposite direction to the model.

P.S.
I was just stopped out by the Google earnings report... Even more wishing I had closed one contract at the market open... This was a "tactical" rather than model stop. So, I got short again (tactically and strategically) at 7425.5 with the stop at 7441. This is very close, but was the second pivot resistance level when the model originally went short and so with the current model stop rules, that's where the stop stays.

Actually, the model is bit ambiguous today, but following the rules for these situations, we should still be short...

P.P.S.
I was just stopped out at the model stop. That means I'm out for today. Tomorrow morning I will re-evaluate the model direction. This is definitely looking like a losing month, similar to April, which was the initial model development month.

This model trade that was initiated on Friday lost 0.86%.

I researched the previous cases of similar ambiguous model signals so far this year.  There were only two previous cases, which were where the signal said to switch to short but was ignored because the turning point was from a value of the indicator that was close to zero. Both those times, staying long was the right thing to do. Maybe, in the absence of getting stopped out, staying short will turn out to be the right thing to do today. We will see. Either way, it is a very small sample to base any conclusions on.

The Kelly Criterion

There is a lot of incorrect information on the web about applying the Kelly criterion in the stockmarket. It is very different to applying it in a card game where you either win or lose a fixed amount. In that context the Kelly criterion tells you how much to bet on each gamble. But whether you are doing short-term trading or long-term investing that is not the case in the financial markets where there are continuous payoffs. In this paper, Ed Thorp lays out the Kelly criterion for investing in financial markets. It results in a rule of how much leverage to use when investing in a portfolio. That portfolio could be a buy and hold portfolio of stocks, or it could be a high turnover futures trading account. To determine how much of total net worth to allocate to a particular asset class or strategy is a different calculation. I think you should maximize the Sharpe ratio for your total portfolio. Where to set the stop loss in trading is a similar calculation - you want to use stop loss rules that maximize the Sharpe ratio for the strategy. I don't think Kelly tells you how much to risk on each trade in the way it can tell you how much to bet on each gamble.

The Kelly criterion isn't a practical rule in the real world as it requires you to continuously change the size of your position as you win or lose money. The suggested leverage for my trading model – this may be exaggerated because of too short a sample of returns and volatility – is greater than that allowed by the futures exchange. This amount of leverage would immediately blow up in the real world and result in huge amounts of commission and bid-ask spread payments...

Very Good Service from Interactive Brokers

We phoned Interactive Brokers about the login problem. They have a system issue. They set up the account so it can accept a temporary security code which they gave to us. We'll use this until they resolve the issue. The questions they asked to confirm our identity apart from a couple of the typical secret questions were what the net asset value in the account was, what position was in the account (short NASDAQ 100 futures), and what bank we use to transfer money to the account. If we had stolen a password we would have know two of those at least, because you can login into the account on a read-only basis with the password.

I managed to use the temporary security code to set up the mobile app which can produce codes even if it can't receive texts.

Can't Log Into Account

As of Saturday morning I am not receiving the test messages from Interactive Brokers that I need to log into the account. I sent a text to myself using Skype, so it is not the same problem that I had in Japan where I just can't receive texts. If this is still the case on Monday morning we will need to phone the broker to resolve this. They do have a mobile app that can generate the required login numbers even if you don't have phone service, but to set this up you need to get a text from the broker... At the moment this isn't a problem as the model is short for Monday still. In the worst case scenario, I can trade in the opposite direction using my own trading account until the stop is hit at NQ=7441. As my account is much older I have a physical security device - actually a bunch of codes on a card. But I will need to sell stocks/and or transfer money into my account to have enough margin to trade with. And this isn't ideal as profits are taxed higher in my account.

Switching to Short

The model has switched to short as at the open of today's Globex session (8am Eastern Australian Time, 6pm New York Time). I went short 2 contracts in an attempt to move to Stage 3 of the experiment.... The stop is at NQ=7441 and am short from 7383, so risk is relatively low (compared to what it might be), though the nearer the stop the greater the chance of hitting it...

Selling Everything

Well, in my mother's former account. Apparently the main (international) bank doesn't care that we the estate hasn't yet completed probate. Another local bank is, by contrast, very concerned about that. If we sell and go to cash, apparently we avoid paying this investment bank's very high fees. The account has returned practically nothing after fees in the last three years. August and September are historically bad months for equities (though only about 20% of the account is in equities). As we want to sell in the end anyway, it makes sense then to sell now. The plan is to hold everything in US Dollars in the interim.

Stopped Out Again

So, I put on my second trade of the month - long NQ - and was stopped out again, losing $1100 this time. The stop actually saved about $300 this time. But the model is still long for 17 July and so I put on a new long trade at 8:00am Australian time at 7320, which is up $190 at the moment. Stop is 7253 on this trade, currently at 7329.75. Down about $1700 for the month so far. NASDAQ 100 model is up 3.6% and NASDAQ 100 index 4.5% but I'm down 4.5% (due to two bad trades only and leverage). I'm determined to stick to the model now... let's see how I do.

Model Decisions for the Year So Far

The chart shows each short and long decision the model has made in the NASDAQ 100 index since the beginning of the year. The letter S or L is placed on the first day the model was long or short in each trade. So in theory you should get long or short at the previous close. Most trades were winners, though in late February, for example, the model got short on a big up day and then switched back to long the next day, which turned out to be the top. That long trade was also a loser. There were also stop outs along the way, which aren't marked here as new trades. Some times the model picks the exact top or bottom, at other times it misses it by a couple of days.

So, all I need to do is trade exactly like the model :) I put a new long trade on this morning.

New Investment: BlueSky Alternatives Fund

I had read back in April about BlueSky's battle with activist hedge fund Glaucus. As a result, the share price of the management company (BLA.AX) collapsed and they undertook a thorough review and independent valuation of all their investments. Listed investment company (closed-end fund) BAF.AX, is a fund of funds, investing in BLA managed investments in real estate, private equity, agriculture, and water rights. The price of this fund also fell, though not as dramatically. The valuation of all but one of its investments is now complete and the net asset value is AUD 1.13 per share. On Friday the stock was trading around AUD 0.80. The company is buying back a lot of stock which is supporting the price. I made an initial investment today and could add more if my thesis that it should rise, plays out.

Position Size

One of the main ideas in traditional momentum trading wisdom is that as volatility increases your position size should decrease. This is one of the key ideas in the Turtle Trading System, for example. If you have no idea what will happen, then higher volatility likely will result in higher losses as well as higher gains.

But if you do have some ability to predict the future, that trading signal might be stronger when volatility is higher and weaker when volatility is lower. Then you will have more losing trades when volatility is low and a higher proportion of winning trades when volatility is high. This seems to be the case with my system. Higher volatility means higher risk but also a higher probability of being right. In this case, position size maybe should be constant regardless of volatility.

P.S. 22 July

I calculated the Sharpe ratio for constant position size and for strategies that reduce position size as volatility increases and and increase position size as volatility increases. The constant position size strategy has the highest Sharpe ratio confirming my intuition. The strategy with a negative correlation between position size and volatility has the lowest Sharpe ratio. The strategy with a positive correlation is in between. So, for the moment I will stick with constant position sizing.

Turtle Trading

I have been reading the Complete Turtle Trader, trying to get some inspiration. Back in the early 1980s, futures trader Richard Dennis hired a bunch of relative novices (some actually had trading experience) and taught them a trend-following method of trading. He then got them to trade some of his assets using the methods. The idea was to see if trading could be taught. During the next few years, many of them generated extraordinary returns, as documented in the book. Then the experiment ended after Dennis suffered major losses and shut his fund.

Some of the "turtles" went on to run their own investment firms. The star pupil seems to be Jerry Parker who founded Chesapeake Capital. However, subsequent performance has not really been that good.* The fund has underperformed the S&P 500 and has had about twice as much volatility. Taxes would be much higher on Chesapeake's strategy than on buying and holding the index. Why does voltatility matter? Because I could have used leverage to invest in the S&P 500, increasing volatility to the level of the Chesapeake Capital fund, but increasing returns far beyond its returns.

This doesn't encourage me to adopt a long-term trend following strategy. The assumption of this kind of model is that the future is entirely unpredictable... Eckhardt is cited in the book as saying that random entry into a trade is just as good as long as you follow exit rules. That's true about most momentum trading strategies I think.

It's notable that none of these turtle related firms are very big in terms of assets under management.

* The "LV" fund performed better but still underperformed the S&P 500 on a risk adjusted basis. Salem Abraham's – described as a "second-generation turtle" in the book – fund has gone nowhere in the last ten years.

The Index Gives Better Trading Signals than Futures Prices Do

It turns out that the NASDAQ 100 Index gives better trading signals than the NQ futures prices themselves do. I think the reason for this is that most trading takes place when the stock market is open and that is usually when big moves happen. The "out of hours" trading is mostly noise then reflecting what is happening in other stock markets and after hours earnings reports etc. The futures prices still provide signals that "beat the market" but not as well.

I did find again, that stops mostly detract from performance and I am introducing a new stops policy. When we change direction we set the stop loss at the the second pivot support for a long or the second pivot resistance for a short. We then keep that stop until either the direction of trade changes or we are stopped out. This results in far fewer stop outs.

It's likely that in commodity markets such as oil or gold the futures prices do provide good trading signals. Well, there isn't anything else to use anyway.

Futures Prices vs. Index Values

I didn't trade while I was in Japan because my mobile phone wasn't receiving the text messages I needed to log in to my trading account. When I got back to Australia I dithered about getting back in for a couple of days, missing a nice rally. Then this morning I decided to make the plunge (on the long side) and 2 hours later I was stopped out. Apparently there is negative news on US tariffs on trade with China.

After the cash market closes at 4pm New York time, the stock index futures trade for another hour before closing for one hour. The futures closing price can, therefore, be quite different to the index closing price. This was the case today where the futures plunged around 30 points in the last ten minutes of the futures trading session. Using the index data for the 4pm close, my model said to stay long. However, if we had knocked 30 NASDAQ points off to reflect the futures closing price, it would have switched to short. So, I think I need to get historical futures data and re-estimate my model with these. I should be able to get these from Quandl. An additional advantage of using futures prices is that I can do the analysis one hour later -  currently from 7am Australian Eastern time rather than 6am Australian Eastern time. The futures market then shuts for an hour and reopens at 6pm New York time or 8am Australian time.

However, on Saturday morning the futures market closes at Friday 5pm New York time and then doesn't reopen till Monday morning at 8am in Australia. So, I will need to do the analysis with index closing data before 7am on Saturdays unless I want to get stuck in possibly the wrong direction over the weekend.

June 2018 Report

This month was the third month of the futures trading experiment. The first month was the model development phase, while last month was about ironing out the glitches and training myself to trade the model properly (and not give in to gut instinct etc). It turned out that this month was more of the same and I am still on the second stage of the experiment, which is learning to consistently trade the model and iron out the glitches. The third stage is to reach a level of profits equal to my salary, while the fourth stage would be to maximize returns beyond that. I had planned to move to trading two contracts this month, but mostly traded one contract still.

June is the month when our Australian managed funds pay out their main distributions at the end of the Australian financial year. These usually have large tax credits associated with them. In this report, I have estimated the likely tax credits, which won't be known till later in July.

The Australian Dollar fell from USD 0.7571 to USD 0.7391. The MSCI World Index fell 0.50% and the S&P 500 rose 0.62%. The ASX 200 rose 3.63%. All these are total returns including dividends. We gained 3.16% in Australian Dollar terms and 0.71% in US Dollar terms. So, we  underperformed the Australian market and outperformed international markets.

The best performing investment in dollar terms  was CFS Geared Share Fund gaining AUD 23k. The next best in dollar terms was IPE, gaining AUD 19k. The best performing asset class was "private equity", gaining 7.79%. The second best performer was Australian large cap stocks, gaining 3.21%. The worst performing asset class was hedge funds, losing 0.46%, the only asset class that lost money.

The following is table of investment performance statistics computed over the last 36 months of data:

The first two rows gives the annual rate of return and Sharpe ratio for our investment performance in US dollars and Australian dollars. The other statistics are in comparison to the two indices. Beta expresses the change in investment returns for a 1% change in the market. Compared to the MSCI World Index we seem to be slightly geared, while compared to the Australian index we are less sensitive to market movements. Alpha shows the risk adjusted excess annual return. This is how much we are beating the market (or not) adjusted for risk expressed as beta. We have a slightly positive alpha compared to the Australian and world markets. Finally, up capture and down capture breaks beta into the response to positive and negative months in the stockmarket. A greater up capture than down capture ratio is desirable. We now capture more of the up movements in the international and less in the Australian market and suffer less of the down movements in both the Australian and international markets. A hedge fund like return would show this positive skew and a positive alpha. We show some hedge fund like properties across the markets.

This month I only made a small amount of money trading futures: USD 1.2k. The table compares my performance to the markets and the models:

The US markets went up and then down, ending quite flat. The models did outperform the market.* Through a series of missteps I performed worse than the models given that I was using leverage. This is mostly because I picked the wrong contract to trade with for some of the time. I think one way to trade in strongly trending markets is to act more tactically, trading in the direction of the model when other short term indicators (using a chart with 3 hour candles) show it is advantageous and then closing the position when the odds move the other way. More than once I was up USD 2k and then gave it all back... On 21 June I did exactly the wrong thing, throwing in the towel for the day and closing my short just as the market was about to reverse and go down... Seeing that happen did increase my faith in the model a little bit more. Gut instinct is not as good as the model. But then the same thing, kind of, happened on the last day of the month. The models were short, the market went up, but I capitulated at almost the worst point, because at the market close the indices were way down from the highs.

The best I can say is that I didn't lose money for the month as a whole. So it looks like more of the same for next month. I'll try to trade one contract exactly according to the model and one tactically.

We made a little more progress towards the new long-run asset allocation:

Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged mutual funds.

The improvement in allocation, came partly due to market movements and partly due to investment activity. We invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. During the month, I also:

• I shifted money out of trading when I shifted the account I am trading with. This decreased the allocation to commodities.
• Added another AUD 10k to the Winton Global Alpha fund, increasing the allocation to commodities.
• I sold 500,000 shares in IPE and bought a small amount of OCP.AX, reducing the allocation to private equity.
• I sold some Platinum Capital (PMC.AX) and bought a lot of PIXX.AX, which is the equivalent ETF, because PMC was particularly overvalued. This increased the allocation to hedge funds.

* The statistics at the bottom of the table are based on only 3 months of data and so are not at all reliable yet.

Trading Update: Tokyo Edition

So far it looks like the "old" more systematic model won today. US stocks are down. I'm not trading as I was flying to Japan and now my phone's connectivity is dodgy and I need it as a security device. Anyway, Wednesday is US Independence Day and Tuesday is already a short trading day so, I'll wait till Thursday or when I am back in Australia next week,

My hotel is the blue tower in the background.

P.S.
The stockmarket turned and went up. So, the "new" model was vindicated in the end. Still, I don't like trading rules that don't make logical sense.

Changing the Model Back and Researching the Model

I'm not happy with this model rule that I added on 27th April. It's not very systematic. So, I dropped it, while keeping rules added more recently. The stock market switches between two states - trending and cycling - and the model uses different indicators in each state. Deciding what state we are in is a little problematic. So, I am going to have another look at the rules for that and also possibly smoothing out very small moves, which are noise. The rule I just dropped was ad hoc - it switched to the indicator for the cycling state when we are in a trending state based on one period lagged positive performance.

Monday is a good test of the two algorithms - the simpler model is short and the model with the "ad hoc" rule is long. Let's see which wins.

I also thought of using the volatility indices, VIX and VXN, as indicators. The basic idea is that volatility is highest at bottoms in the market. But I couldn't see a way to do this. This graph shows why:

VXN (and VIX) rose throughout January while the stock market rose too. This was a warning sign that a correction was coming. But a model that shorts the market when VXN is expected to increase would have lost money all January. Also, my existing forecasting model is no good here...

Gold 2048: The Future of Gold

This report seems bullish for the price of gold over the next 30 years. Continued growth in India and limited gold discoveries recently seem bullish. On the other hand, some regions haven't been explored much and technology could enhance extraction, though the latter likely balanced by increased environmental restrictions.

Mercantile Makes Offer to Take Over IPE

Mercantile Capital (MVT.AX) has made an offer to take over IPE.AX at AUD 0.0775 per share. I've discussed Mercantile's interest in IPE before and bought shares as a result. I had 1.5 million shares. My only regret is I didn't buy more. People selling even below 6 cents discouraged me from buying more.

I had 500,000 on offer for sale and they sold just now at 0.075 up from 0.063 yesterday. I will wait and see with the remaining million. I should at least hold it into the next tax year, next month. If I sell now, it will wipe out my existing tax losses and more. So better to defer tax for another year.

Tax Optimization for Trading

I still have some capital losses left over from the financial crisis. I will probably use them up for this tax year ending 30 June. After that, trading profits would be taxed at my marginal rate of 47% (and even higher if Labor get back into power and implement their tax policy). So, I am opening an account at Interactive Brokers for Moominmama (formerly Snork Maiden). Trading in her account will only attract a marginal rate of 34.5% initially and then higher if we make lots of profits. This will reduce our overall tax bill and is totally legitimate in Australia.

Actually, given that franking credits are fully refundable, even if they exceed your tax bill (but Labor wants to change that too), it also would make sense to have other investments in Moominmama's name. The reason we don't, is that up to a couple of years ago, when my income went over AUD 180k per year and she went part-time we were in the same marginal tax bracket. But perhaps I should direct new investments to her account?

In somewhat related news, the minimum wage in Australia has just been raised, so that someone working full time at the minimum wage earns just over AUD 37k a year (about USD 14.25 per hour). This means that the marginal rate for such workers is now also 34.5%! That really seems crazy to me.