December 7, 2022– The number one story in the crypto world this year (or decade? or century?) must be the FTX crypto platform collapse. It’s mindblowing how quickly FTX went from one of the largest crypto exchanges with a 150-second Superbowl commercial in February 2022, naming rights to sports arenas, numerous A-list celebrity endorsements, etc., to becoming the pariah of the financial world in just one short week in November 2022.
Likewise, FTX’s founder, Sam Prohibitkman Fried (SBF), went from a modern-day J.P. Morgan to Bernie Madoff 2.0. Is it even appropriate to compare SBF with Bernie Madoff? Isn’t that a bit of an insult? You bet! It’s an insult to the late Bernie Madoff! Along several dimensions, the FTX collapse is actually more outrageous than Bernie’s decadelong Ponzi Scheme. Let’s take a look at why…
My little blog here may be mostly known for the Safe Withdrawal Rate Series. But I’m surprised how many people share my other passion: options trading. Both here on the blog and at FinCon last weekend lots of fans of the blog asked me when I’m going to write something about derivatives again. Wait no more! I have been thinking about this one for a while; it’s another cautionary tale about markets going haywire and unsuspecting and unsophisticated investors are caught in between.?And then they realize the “safe” and “conservative” strategy marketed by their financial adviser can blow up in their face!
The Wall Street Journal came out with a pretty detailed article?(subscribers only) a few weeks ago, but the story has been around for a while. See, for example, on WealthManagement.com or SeekingAlpha.com. And this time it’s not some obscure small shop in Florida that got into trouble. No, it’s one of the big fish: UBS! ?Their so-called “Yield Improvement Strategy (YES),” marketed as a conservative and low-risk strategy to risk-averse investors with mostly bonds in their portfolio, racked up heavy losses late last year. Well, at least people weren’t completely wiped out like the poor sobs in the OptionSellers mess. But a purported 20% loss (about $1b) is still a hard pill to swallow for investors that were told that this is completely safe. Sure, if you were 100% invested in the S&P500 last year and lost 20%, then yeah at least you knew what you’re getting into. But for the average mom-and-pop muni bond investor, a 20% loss is pretty epic. And not in a good way!
Of course, looking at the low-yield environment right now – in some places we even have a negative-yield environment – I don’t blame investors for shopping around for higher yields. But be aware of the charlatans. If they tell you that higher yields come with no side effects run away! There is always a catch with a higher yield! Even if it’s your trusted personal wealth advisor at a shop as famous as UBS!!! This yield enhancement strategy involved a risky options trading strategy. With 5x leverage! And most of the investors didn’t even know what they were getting into unless they had read the pages with the fine print! So, let’s do a post-mortem for this strategy. What were they doing and how and why did this go so horribly wrong?
Right around the time when I wrote my options selling update a few weeks ago was when everyone in the option seller circles talked about the blowup of OptionSellers.com. Option Sellers, LLC was a Tampa, Florida based Registered Investment Adviser and CTA (Commodity Trading Adviser). They managed money for 290 clients. Considering the minimum investment was $250,000 and most investors likely had more money with them, I’d surmise that they were managing around $150m. On November 15, 2018, they informed their investors that not only was all their money lost but that clients would likely owe more money. Wow, let that sink in: they had a loss of more than 100% and clients are left with debts they have to cover now! Bad news for the clients who invested all their money with OptionSellers!
A failure of a small obscure adviser probably would have stayed under the radar but the co-founder published a tearful apology video, confessing that all customer accounts were wiped out “by a rogue wave.” The movie was since taken down – probably the lawyers didn’t like the idea of this kind of mea culpa so much – but it’s still available on YouTube. The story went viral (or at least as viral as something as obscure as options trading can go) and was then picked up even by the national news media, including the Wall Street Journal, CNBC and many others.
Quite intriguingly, their strategy imploded over the span of just a few trading days. And just to be sure, this wasn’t fraud a la Bernie Madoff but investors actually lost their money “fair and square” if there is such a thing. Is this something all option sellers should worry about? Yes, if you are as reckless as Option Sellers. If you had bothered to check what these clowns were doing it was clear that this debacle was all but unavoidable. Let’s take a look at what they did and the five obvious mistakes that lead to the meltdown…
Halloween is around the corner, as evidenced by the annual return of the “Pumpkin Spice Latte” at Starbucks and 5-pound bags of sweet stuff at the grocery store! That’s also a good time to stab through the heart and kill with a silver bullet all those scary senseless finance myths, truisms, and falsehoods. Every time I hear one of the phrases below I suffer a mini heart attack. I hope people would stop saying those. Continue reading “Five Fishy Finance Phrases Deserving Diabolical Deaths”→
“Governments are trillions of dollars in debt and are?printing paper money at record pace. So, don’t invest your retirement in paper money. Transfer your?IRA to a Gold?IRA at XYZ Capital. Call now for your free IRA transfer kit.”
I have to cringe every time I see or?hear that. What deceptive marketing! Our financial assets (equity ETFs and Mutual Funds mostly) are not invested in paper money, they are merely denominated in paper money. In fact, if people are so troubled by measuring their equity portfolio in USD paper money, they are free to measure it any way they want: ounces of gold, metric tons of copper, bushels of wheat, gummy bears, the choices are endless. And by the way, don’t forget that gold is denominated in paper money USD as well! Continue reading “Gold vs. Paper Money: a rant”→
When we meet new people and Papa ERN explains what he does and where he works (asset management for a large financial institution), people often want to chat about investing and show off their own investing prowess, here some actual quotes:
I made lots of money with a short silver ETF
I put a lot of money in oil ETFs
I use a VIX ETF to protect against the downside
Papa ERN has heard it all and would usually respond that at work?he’s discouraged from actively trading in personal accounts and thus resorts to investing in index funds exclusively.?Papa ERN is trying to enjoy a happy hour or cocktail party, and so?he doesn’t want to get into arguments or talk people out of bad investment decisions. Most of the recent so-called financial innovations only make the issuers rich, not the retail investor. Of course, occasionally one could win and win big, just like in the casino, but over time the?house wins.
Financial innovations play with the same emotions as all the other gimmicks, whether it’s cars that exude the feeling of a race car, downhill skis that make you go down the slopes like a?gold medalist?or designer clothes that make you look?like a Hollywood celebrity. By trading this ETF or switching to that platform, or studying this chart pattern, ostensibly, you too can become a trader.?Or at least feel like one. Intriguingly, the same people who now laugh about their?parents and grandparents falling for the Marlboro Man many decades ago, now get suckered into an equally damaging scheme targeting their financial health. Here are some of the worst ideas: Continue reading “Never, ever invest in this”→