The Investor Sentiment Trading Fund

Since January alone, our ISTF – Investor Sentiment Trading Fund – has returned over 100%, bringing our overall return since its inception in January 2007 to a whopping 1050% – a 300% average annual return!

Maybe I should take up trading. (Meanwhile, a friend of mine who himself was as a trader in his early years says I’d be better in Real Estate development – To each his own).

THE ISTF
The intention behind the fund was to emulate what returns were possible when combining a strict value based investing approach – strong, promising and low-downside positions, with that of trading – short term, leveraged and sometimes volatile trades.

Activity
We tried our best to remain as inactive as possible only moving in/out when we felt a particular issue was significantly over/undervalued based on fundamental and sentimental pretense. We also paid attention to Momentum but rarely did we look to any charts for trading advice, but only as further research into trends and statistics. There have so far been only 24 trades over the year-and-a-half long period. This averages out to exactly 3 trades every 2 months.

Leverage
We did use leverage, (1000%! You kidding?), yet the amount of leverage was based on the safety (read: possible downside) of the trade. Anywhere between no leverage and 10 times were applied.

Volatility
Yes! One of our trades was down 82% at one point, but as we properly assumed it came roaring back. Nevertheless this did not have so much an impact on the overall fund since the fund embraces diversification and seldom holds more than 20% in any given position.

Issues
At any point We were invested in many sectors and issues in this duration including: Energies (Natural Gas, Crude Oil), Financials (NASDAQ, DJIA, HUI), Stocks (GSS, SLW, AAPL, BSC, JPM), Currencies (Yen, Euro) and Commodities (Wheat, Soybeans, Sugar, Lumber, Gold, Silver)

Methods
At any point we were either long, short or hedged (selling one position to buy another).

Exposure
The amount of funds specified for each trade had no real science (an art-form, it did have) to it and was based solely on the interests and instinctive application of the fund’s manager.

Relative to a Dollar
Much of these gains may be said to have been from a falling dollar. It is for this reason that the fund is essentially denominated in Silver. The Fund began with a NAV of 82 ounces of Silver and now is worth 592, a real gain of 621%.

Trades
The largest gains, over 800% (that’s right) were made shorting Bear Sterns (BSC) late last year. This so happened to have occupied a large section of the fund and was thus profitable for the fund as a whole. The greatest actual loss, 8%, was shorting AAPL at 100, luckily closing out at 108 before the stock rocketed to close to $200. The shortest play lasted only a few days, while one of the longest lasted from July 2007 and is still being held.

Lessons Learned
Although we made no major blunders in our commissions we did do so with regard to our omissions. While we bought Crude Oil at its major bottom, 53, we sold out early at a petty 63! Oil nbow stands at 140. While we bought SLW at its $9 bottom we sold out at only 10.50 (was as high as 20). We bought Gold at 645 and sold out with a mere 6% gain at 680, before it rocketed eventually to 1,000.

Thus, one of the greatest lessons we have learned through this experience (which is far from over) was Patience. While we had no problem jumping into a new position as the opportunity arose we were just as quick to abandon our play when friction of any kind set in. This was followed by too safe a strategy which resulted in a number of minuscule gains and losses. This lesson was learned well and after applied preceded a resilient streak of trades, none of which earned less than 61%.

It should also be noted that not always is waiting a terribly profiting strategy. There are times when a small window of opportunity is seen and the key is to get in and get out. In such a situation the most important ingredient is to stick to your original observation and predictions.

Current Trades
The above does not count ongoing trades, one of which is 25% negative, with the best trade now, Dow/Silver hedge (to profit from a narrowing of this margin), opened in November 2007, holds a paper gain of 511%. All current trades are using 10 layers of leverage.

The largest portion of the fund, 32% of the fund is in Cash. A 25% position holds a 500% gain, a 21% position is up 34%, and another position of 20% is up over 25%.

My latest bet is that Oil will trade above $150 a barrel in the next two weeks. We’ll see how that goes. It’s in Bubble territory I believe, but then again, one thing I’ve learned over the years is this: Bubbles don’t give way so easily!

Happy Trading!

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