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I FOUND THE BEST INVESTING STRATEGY - YouTube
Channel: Max Maher
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buried in a remote corner of the
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internet is a little-known investment
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forum called bogleheads.org these guys
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were fanatical about regular old index
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fund investing that is until a new
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member joint a member whose ideas would
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shake the core of the community and
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change it forever this member goes by
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the name hedgefundy some thought he was
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an investment banker or in tech others
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thought he was just an investment whack
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job living in his mom's basement no
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matter who he is his ideas really stood
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out with regular old index fund
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investing instead of buying individual
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stocks you buy something like the s p
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500 index fund this fund gives you a
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small slice of the top 500 stocks all in
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one ticker john bogle who created
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vanguard actually pioneered this idea
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hence the cult of the bogle heads the
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index fund idea is that by buying the
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entire market you essentially buy the
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haystack instead of searching for the
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needle and then you simply hold that
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haystack forever and it turns out over
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the long run this actually is a better
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strategy than picking individual stocks
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for just about everyone but what if
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those returns could be amplified what if
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you could take the index that beats even
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the best hedge fund managers and make it
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even better that's exactly what hedge
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funding aimed to find out see there's
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two ways to increase your gains in the
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stock market first is less
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diversification picking fewer assets in
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attempt to find that needle in the
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haystack or second you can apply
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leverage amplifying your returns now
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most investors will choose concentration
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over leverage because it feels more
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familiar and less risky but not hedge
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fundy hedge fundy was a loyal to the
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john bogle style of indexing but he
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believed he could increase returns and
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minimize downside risk all at the same
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time his idea was groundbreaking for the
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bogle heads within his community now
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let's say you had one thousand dollars
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to invest first you'd buy 550
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of the three times leveraged s p 500
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index this one gives you a 300
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daily return of the s p 500 if the index
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goes up one percent you make three
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percent but this also means if it goes
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down one percent you lose three percent
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but that in itself doesn't offer a ton
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of safety so next you would buy 450. of
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the tmf 3x 20-year treasury bond etf
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then every quarter you rebalance the
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portfolio to remain a consistent 55-45
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split and the results of this strategy
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are absolutely fascinating when stock
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market is doing well you make at least
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three times more money than if you just
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held an index outright blowing the
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average boglehead's return completely
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out of the water but leveraged etfs are
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nothing new a group of bogel heads
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fought against hedge fundee's post
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demanding more data and bringing up
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issues like volatility drag where in a
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bad day the market could wipe out months
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of gains but this is where the 45 bond
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portion of the portfolio comes in
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whenever the stock market goes down your
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leveraged index fund loses three times
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more than the market does which is bad
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but this isn't the end of the world
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because stocks are inversely correlated
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with bonds meaning at the same time
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you're down on your stock position
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you're up on your bond position the
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profit in bonds would then be rebalanced
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to buy more etf shares the bogle head
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slowly began to embrace hedge funds
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ideas as he made post after post
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uncovering research and defending his
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strategy he was winning members over one
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by one but the little by little approach
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wasn't enough his ideas made sense but
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not everyone was totally behind him
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hedge funding needed data that would
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prove once and for all that his strategy
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was better than a regular leveraged etf
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and better than holding an index fund
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outright and this is what led hedge
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funded to build a back test the idea was
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to test his strategy versus the market
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all the way back to 1955. if his method
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was proven to be superior he would
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finally have the full respect of the
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community and his ideas would be set in
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stone so he built the model plugged in
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the data and allowed the simulation to
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run until finally it spit out conclusive
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data his strategy beat the s p 500 by a
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lot the simulations showed that
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investing ten thousand dollars in the
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regular s p 500 netted five million
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dollars by 2019. in the same time period
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hedge fundies method return a 7.4
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million a 48 higher return holding near
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identical assets the bogleheads had no
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option but to celebrate hedge fundy who
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essentially grabbed their hands and led
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them to gold an investment strategy that
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could beat the total market with nearly
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zero effort now this led some of the
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bogle heads excited about the data to
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question why not just invest in the 3x
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index and just forget about the bonds
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the bonds after all make up a small
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majority of the total returns and
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looking at the data leverage funds have
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had an amazing run for the past 10 years
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in fact if you invested just 10 000
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in a leveraged nasdaq for the last 10
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years you'd actually have over 1 million
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dollars but it's not always that way
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going back historically you'd have some
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major drawbacks because when the markets
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do crash significantly your leverage
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fund can take many many years to get
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back on track he regularly points out
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that this is a higher risk strategy and
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offers suggestions to help limit risk a
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couple of these methods included
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increasing your bond allocations as you
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grow older and dollar cost averaging
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over time into the strategy this reduces
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the risk of buying heavily all at once
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and the market dipping quickly but all
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of this begs the question if it's such a
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good strategy why doesn't everyone do it
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and this comes down to a few factors the
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first is our impression of leverage when
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we think of taking on debt we see
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flashes of hedge funds like archigos
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getting liquidated or evergrand missing
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multi-billion dollar payments businesses
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and people who took on way too much risk
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and it ended very very poorly but the
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truth is leverage in and of itself isn't
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good or evil it's simply a force
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multiplier you wouldn't say this lever
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is good because the weights are equal or
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this one is bad because one side has a
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force multiplier now what's strange is
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despite the leverage horror stories that
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we see in the news we actually use
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leverage all the time take purchasing a
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home even your twenties with twenty five
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thousand dollars down you can easily buy
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a two hundred fifty thousand dollar
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house the bank still owns your home but
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you now have 250 000
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in exposure to the market one of the
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best investments i have ever personally
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made was a house that i bought for 365
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000 when i was 21. i'd been running my
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moving and storage business for a few
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years and i managed to save up around
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thirty thousand dollars for a down
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payment i bought the house lived in it
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and rented the additional rooms out i
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still own that house and not even five
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years later it's worth seven hundred
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thousand dollars my equity amazingly is
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around four hundred thousand dollars on
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that thirty thousand dollar down payment
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so the home price about doubled but
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because of leverage my initial
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investment is now up more than 10x in
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less than five years what's a bit
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strange though is you hear that story
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and you probably don't think i took on a
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lot of risk but in any other asset that
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level of leverage would be insane i
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think the difference is with stocks you
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can see the price every day with the
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house you can't there isn't a guy
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outside my house saying hey just want to
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let you know your house is worth ten
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thousand dollars less this month that
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just doesn't happen but it kind of does
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in stocks so this begs the question how
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does a 3x leverage fund work are there
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additional risks that hedge funding
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might be missing he uses the upro 3x etf
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what's important here is funds like upro
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seek investment results of 300
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of the daily performance of the index
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this distinction here is really
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important because it can change the long
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run returns due to something called
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volatility drag basically because
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returns are compounded daily you can be
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left with a long-term return or
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potential loss of far more than 300
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percent
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despite the return daily being just 3x
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again this is a force multiplier neither
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good or bad now another alternative to
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getting leverage is to buy a stock
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through something called a leaps call
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option but with this you need to pay a
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price leverage isn't free no one's going
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to sell you an option if they don't
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believe that they can make a profit
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doing so the money paid for an option is
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a premium not all that different from
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the premium you pay on your insurance
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but the problem with options is you're
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often paying extra because premiums are
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generally overpriced see historically
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the options market overprices volatility
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the vix index is commonly referred to as
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the fear index for wall street and when
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the vix is high it's because people are
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afraid when the vix is high options
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premiums are often overpriced but why is
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that well looking at historical studies
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you can see that implied or forecasted
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volatility often overstates actual
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historic volatility there's a simple
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reason for this fear is overstated yes
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black swan events do exist but by and
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large fear is overpriced in markets and
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who benefits from this overstated
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volatility the one selling the options
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fear is overpriced because pessimism
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sells people have a tendency to get
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drawn in by pessimism we're down by
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between three and four and a half
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percent it's the chinese economy and the
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reasons why it's collapsed that there'll
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be a financial crisis that means the
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crypto and the stock market is crashing
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the s p 500 index fell to 2
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300 points in the book thinking fast and
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slow daniel kahneman says that people
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are more drawn towards fear in panic
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than they are rationality weighted
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against each other losses loom far
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larger than gains in people's mind the
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pain of losing 100 is more intense than
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the joy of making 100 and nor is this
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fear more evident than the inherent fear
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investors seem to have about taking on
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leverage and this isn't me saying that a
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leveraged etf is a risk-free way to
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triple your return no far from it this
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is not for everyone like we mentioned
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earlier if the market dips severely it
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can take many years for a leveraged etf
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just to get back on track on top of this
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there's a non-zero chance of losing it
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all your entire investment let's say
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you're invested in a 3x leverage s p 500
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etf if the s p somehow dropped 34 in a
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single day you would lose 100 of your
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investment now a drop this size has
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never happened it's far larger than the
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largest drop in history but it's still
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important to understand that this is
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possible and even more this highlights
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the importance that hedge fund places on
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having 45 percent of funds in bonds
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which helps you actually make money
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during market downturns after figuring
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all of this out hedgefundi changed the
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bogleheads forum forever tempting many
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users to try out this radically new
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strategy it went from a conservative
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index fund forum to members applying
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massive leverage and experimenting with
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rebalancing strategies for some playing
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around with allocation is like trying to
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bake the perfect recipe you just keep
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tweaking the formula bit by bit in
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search of the perfect balance when in
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reality it's impossible to find the
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perfect balance because we don't know
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what the future holds and we do need to
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remember the survivorship bias because
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as well as hedge funding strategy works
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in back tests we can't be certain it
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will perform the same in the future and
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this leads us to the question of where
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is hedge funding now he's been using
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this strategy for years and i was
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determined to find out how things have
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been going for him but it appears i'm
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not the only one looking for him after
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more than 4 000 posts he has disappeared
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from the bogle heads forum completely i
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tried to reach out to him for an
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interview but i was unable to make
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contact and in a way it feels a bit
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poetic that he came into a community
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aiming to make everyone a little bit
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richer completely altered their way of
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thinking and left without a trace some
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members are glad to see him go but most
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wish that he would come back
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you so much for watching and i hope you
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have a profitable day
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