Published on February 20 2018

How to Lose $4 Million in the Blink of an Eye

By Justin Spittler, editor, Casey Daily Dispatch

“Should I kill myself?”

Someone recently asked this question in a popular online trading blog.

The person wasn’t thinking straight—and why would he?

“I’ve lost $4 million, 3 years’ worth of work, and other people’s money,” he wrote.

You might be wondering how this is even possible.

After all, U.S. stocks are still in a raging bull market. It’s hard to not make money these days.

So what did he do wrong? Simple.

• He placed an all-or-nothing bet…

He did this by loading up on the VelocityShares Daily Inverse VIX Short-Term ETN (XIV).

This exchange-traded note (ETN) basically allows you to short (bet against) the CBOE Volatility Index (VIX), or what most people call the “fear index.”

In short, he bet that the market would stay calm. I’ll tell you why this was a bad idea in a minute. And I’ll show you why many investors make this same kind of mistake.

But let me first tell you why this trader made this aggressive bet.

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• The U.S. stock market has been oddly calm…

Last year was actually the least volatile year on record.

This lulled many investors to sleep. It led others to take risks they normally wouldn’t take.

In this case, that risk was a huge gamble against volatility. And for a while, it worked:

I started with 50k from my time in the army and a small inheritance, grew it to 4 million in 3 years of which 1.5 million was capital I raised from investors who believed in me.

The amount of money I was making was ludicrous, could take out my folks and even extended family to nice dinners and stuff… Was planning to get a nice apartment and car or take my parents on a holiday, but now that’s all gone.

But this trader wasn’t alone.

• Many people bet on the death of volatility…

Maybe you’ve heard the story about the Target manager who turned $500,000 into $12 million.

I know that sounds like the first line of a joke. But it’s a true story.

The man’s name is Seth M. Golden. He lives in a suburb of Ocala, Florida. And like the trader I told you about earlier, he made an absolute killing betting against volatility.

And there are countless other stories like this.

There are two reasons for this. One, the markets have been incredibly calm. Two, it’s never been easier to bet against volatility.

But here’s the thing about markets: Nothing works forever. Eventually, the pendulum swings the other way. Bull markets turn into bear markets, sometimes with little to no warning.

Many people just learned that the hard way…

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• Volatility has come roaring back…

The VIX has surged 104% since the start of the year. Two weeks ago, it hit its highest level since 2016.

And that absolutely crushed people who bet against volatility. Just look at this chart of XIV.

It plummeted 94% in two days.

That’s the kind of crash that wipes out years’ worth of gains in the blink of an eye.

• Fortunately, there are three ways to keep this from ever happening to you…

Don’t get greedy. This sounds cliché, but this is advice that bears repeating. After all, most people think investing is all about the numbers. But our emotions are just as important, if not more.

So, always remember to check your ego at the door. Use proper position sizing… and don’t bet more money than you can afford to lose.

Take profits when they come. In this case, shorting volatility was a trade that worked for a while. People made a fortune doing this. The problem is those same people assumed volatility would never come back.

Think about how ridiculous that is.

Remember, nothing lasts forever. So don’t hesitate to take some chips off the table when you’ve got them. It’s much better to get out of a winning trade a month or two earlier than to try and get out a day late.

Diversify. Again, this is Investing 101. Everyone knows you’re supposed to do this. But a lot of folks don’t practice it. They put all their eggs in one basket. They set themselves up for big losses.

Spread your risk. Own different asset classes. Invest in different sectors. This will help you hedge yourself against unforeseen spikes in volatility or market crashes.

Investors who remember these basic rules will set themselves up for long-term success.

Regards,

Justin Spittler
Tulum, Mexico
February 20, 2018

P.S. For other ways to prepare for the volatile days ahead, I urge you to check out this brand-new report. It’s 109 pages of specific, actionable strategies from the gurus across our business to help you survive and thrive in the months ahead: the Ultimate Crisis Playbook. Click here to download it for free.


Chart of the Day: Did You Heed Our Warning?

By Joe Withrow, analyst, Casey Research

“In short, investors have been lulled to sleep by record-low volatility. It’s gotten so bad, many people are paying sky-high premiums to buy risky stocks… be sure to take precautions if you haven’t already.”

We sent you this warning in our February 2 Dispatch.

Right after we sent that alert, the S&P 500 went on to fall 7% over the next four trading days—the biggest correction in more than two years.

We told you the best way to prepare for the correction was to own physical gold. Since our warning, gold is up 3%. And as Doug said on Friday, the metal could go “hyperbolic” from here.

If you haven’t yet, now is a great time to add gold to your portfolio.

And make sure to follow the three key strategies discussed in today’s essay to prepare for the volatile months ahead.

—Joe Withrow


Reader Mailbag

Today, a flood of comments on Doug’s recent interview: “Why Gold Could Go ‘Hyperbolic’”

An 8% drop is a beating?

– John

Gold is at the same spot over the past three years you've been preaching gold.

– Frank

But, of course, Doug has been saying this for at least 20 years! I know it will be true one day, if only I live that long!

– Charles

Doug stated “I think it’s wiser to buy small gold coins, of a quarter-ounce or less, as opposed to the one-ounce-size coins that are so popular today. Paying the premium is worth it. Incidentally, I also prefer to buy semi-numismatic coins, like British sovereigns, French Louis d’or, Danish crowns, and the like, as opposed to the currently minted ones.”

This is the first time I can remember reading a suggestion that 1/4 oz. or less gold coins are a more favorable buy. I can think of some reasons why, but further insights from Doug on why he thinks this would be interesting.

– Mike

I’m long a variety of gold stocks and ETFs in size and structure and distribution. Small and larger miners and consolidators and middle men and bullion ETF recommended by the sages of Agora and Casey Research. Coins? Maybe later if things start to unravel on dollar I will convert cash to gold coins. But if we get so ugly we are using gold coins, then bullets will be better. Living overseas won’t help. USA drives the world economy and if dollar goes to nothing then our buying power will be nil. Lord help us.

– Patrick

Do you agree with Doug’s take on where gold is headed—and how to take advantage? Let us know here.


In Case You Missed It

On March 2, 2000, our colleague Jeff Clark almost lost his entire life savings…

But instead of panicking, Jeff used a unique technique to save his money and score life-changing gains. Here’s how he did it.