In this blog category I will post short updates of recent trades in my Isonomy, Isonomy Plus and Isonomy Turbo trading strategies. These will be notes briefly explaining the rationale behind some trades, but delayed by a few weeks. Trades are made in real time via Collective2 and subscribers get them via Collective2 in real time.

A quick reminder: The Isonomy series of investing strategies are intended for long term capital appreciation.

Isonomy is the simplest of them all with an expected long term average return of 8 -10% per annum, compounded. The principle behind it is balanced diversification between different asset classes, akin to the Cautious Balanced managed fund model.
Volatility is expected to be low; much lower than investing in any particular asset class (e.g. broad based stock market index) on its own.

Isonomy Plus is an enhanced version of plain Isonomy with expected return of about 15% per annum compounded and low volatility.
It uses a small amount of leverage (typically about 1.5x) as well as some options. The options component enhances returns in times of flat markets and reduces risk in the case of a market crash.

Isonomy Turbo is a more speculative approach based loosely on the basic Isonomy principle but implemented entirely using options. Returns are expected to average 25% per annum with moderate to high volatility. Although this is expected to do best over the long term, it is intended for people who can stomach an occasional sharp drawdown without panic.

Dean.

I am going to let you into a secret here which will transform your trading and investing.

It’s simple: all you have to do is find a good trading system that returns 20% or 30% or even 40% per month and start trading it. Imagine, even at only 20% per month, £1,000 invested would be worth £80,000 in two years’ time, and a whopping £1,000,000 in just 3 years and 2 months!!

Looks far fetched? Well, no it isn’t, due to the power of compounding… if you can actually get 20% per month.

See, £1,000 will be worth 20% more in one month = £1,200. That will in turn rise another 20% the next month to £1,440 which then rises 20% again to £1,728 then £2,073 in month four and £2,488 in month five, not £1,000 + 5 x 20% = £2,000. That’s the power of compounding.

20% per month

You can’t get that sort of return with a savings account. Nor with property. You’ll be lucky if mainstream investment funds return you 10% per year. But if you trade a system yourself you can buy and sell shares daily; you can buy futures worth 20 times your capital and you can trade foreign exchange worth 50 times your capital.

Here are some examples of trading systems that have returned well over 20% per month.

Would you like to see your money rise like this:

Trading system 1

Or like this:

Trading system 2

WOW! The first one achieved 350% growth in just under 4 months and the second one made 250% in under 2 months. Spectacular, by any measure.

These examples are all real systems that were trading last year. You could have traded them yourself and seen your account EXPLODE!

JUST IMAGINE – if you could invest just £100 in a system like one of the above, your account would grow to a cool million in under 2 years!!

So now I will tell you the main secret that eludes many people:
Cue dramatic music raising to a climax…

Now click HERE for the secret!

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The secret: That’s all RUBBISH!

Well, not all of it:

Yes, the power of compounding is indeed very effective over a long time.

Yes, a 20% per month return would really grow £1,000 into £1million in just over 3 years.

Yes, those really are examples of real trading systems which were running last year and attracting a following of amateur traders.

Yes, those trading systems were really returning way over 20% per month.

The catch is, you cannot get 20% per month. “But,” I hear some of you say, “you just told us that the trading systems above really did return more than 20% per month?“

Only by luck, for a short time

I deliberately cut the charts above short after the initial few spectacular months. At the points where those charts end, there were a lot of people piling into those trading systems with dollar signs bulging out of their eyes. And this is what happened next:

(The vertical red lines are where the charts above were truncated)

Trading system 1, full view

A brief post-mortem

System 1 will have lost you most of your capital within a few days. If you have an iron stomach and held on nevertheless (99.9% of people will have bailed, probably at the worst possible moment) then a month and a half later you will have lost your entire capital. That’s significant – even though it seems like the trading system recovered nicely in the end (as of this writing) in fact it is an illusion. Since you will have been kicked out of the market automatically by your broker when your account reached zero, your real account will not have recovered at all, ever again.

System 2 will have lost you almost all your money gradually. At what point will you have bailed? Maybe once you had lost 50% within a couple of months? But it looked so promising… 1 million in a year or two… maybe it will recover, so jump back in? Or maybe put the 50% remaining into another high-flyer… maybe this time it’ll work…

And I was being generous – the charts show returns without taking any trading costs into account. In reality the losses would have been even greater.

To the point

There are fine lines between investing, speculating and simply gambling. It is debatable exactly how we define where those lines lie but chasing huge returns as described above is most definitely on the wild gambling side.

If you get tempted by systems like those above, don’t do it!

If you do do it, you will lose your entire trading capital.

Well, maybe you will be lucky and get out before the inevitable crash. Yeah, maybe you will be lucky and get your number 7 on the roulette table twice in a row netting you your early retirement. By chasing 20% per month that is in effect precisely what you are doing.

So what to do?

Short simple answer: chase 10%, 20% or even up to 50% per year, not 800% (20% per month compounded is almost 800% per year). That equates to about 1.5% to 3.5% per month on average. Those kinds of levels are much more likely to be sustainable over the long term and will make you rich in 10, 20 or 30 years’ time, just not tomorrow!

In future posts I will expand on why this simple answer is actually very important and I will explain the rationale behind it.

I chose the two trading systems above because they illustrate the point so nicely. I could have included many more – there are hundreds, if not thousands, of such examples on Collective2. The sad thing is that a lot of people do get seduced by the promise of quick easy riches and they waste their money on these sure losers again and again. The happy thing is that when they lose money they lose it to someone else… to
patient reasonable investors for instance.

Matthew Klein (the founder of Collective2) wrote an excellent article back in October 2010 about this same subject. You can read it by clicking HERE. I don’t want to brag… well actually I do: note that my Isonomy Plus system appears in his list

Right, enough for now. There is a lot more to be said… later.

Dean.

Hello, Dean here again.

Let me give you a summary of my background before I launch into making comments, so you can perhaps put my opinions into context.

I am a scientist at heart, that having been my calling since early childhood. I studied undergraduate physics at Imperial College and postgraduate at King’s college, both part of the University of London. After working as a Research Associate at the university for a year, I moved into commercial computer programming in the mid-90′s because that’s where the well paid jobs were.

So if you want labels: I am a “scientist and a techy geek”

But I have also bee in the finance industry. Until 2006 I was earning very good money as a senior software engineer and I was a client of Glyn’s at Build Your Wealth. I had already been doing favours for him with bits of Excel number crunching so when I went self-employed in 2006, BYW became one of my main clients. After seeing how the investment world works, and having met and analysed a lot of “products” coming out of the alternative investment sector, you can add another label:

I am a “scientist, techy geek, financial type“.

Parallel with the programming and analysing and financial number-crunching, I also learned about trading options. It started as a hobby in 2004 and as of January 2010 has become a serious long-term project to not only grow my own nest-egg, but to also gather enough subscribers to give me a passable income to live from. I am referring to my three Isonomy trading systems hosted on Collective2.

After a lot of reading and experimenting and gains & losses, my trading is now at a point where I consider myself at least as good at it as the average City trader/analyst. I say this as a result of having also seen and analysed many different offerings from many professional people in the finance industry.

And let me tell you: being registered and approved by the financial regulators and being “professional” is no guarantee that you are not giving your money to a bunch of people with, in reality, no clue about how close to the wind they are sailing! Well… just witness the Credit Crunch for the mother of all examples. But individual funds and investments underperforming or even going bust happens all the time.

There – my first (rather strong) opinion has managed to sneak its way in, including a “let me tell you”… oh dear!

Conversely, trusting your money to the trading tips of a largely anonymous trading system vendor on Collective2 is also not necessarily the road to ruin. Although the vast majority of systems on C2 are rubbish, there are a few good ones. Of course I believe my three Isonomy systems to be amongst those.

More on all that later…

Dean.

Hello, Dean here. I’d like to welcome you to my blog here on the DIY Investments page! I will be writing new entries from time to time, probably weekly or so. Please note that I am a private individual and not a licensed IFA. Any opinions or statements expressed here are my own and not those of BYW.

In the following weeks I will write what I hope will be interesting and informative notes derived from my personal experience and analysis about investing in general, trading the markets and the Isonomy systems in particular. My expertise, if one would call it that, is derived to a large extent from having learned lessons the hard way, investing and trading the markets myself over the past seven years or so. There is a lot of theory about which is useful, but only with practice does it sink in properly!

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