
Individual Investors Get Burned by Collapse of Complex Securities - JumpCrisscross
https://www.wsj.com/articles/bankrupt-in-just-two-weeksindividual-investors-get-burned-by-collapse-of-complex-securities-11591020059
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haltingproblem
"Let me help an individual investor grow their portfolio" \- said no
investment banker ever. Most leveraged ETF (ETN) are designed by investment
banks, this one was designed by UBS. They are designed for the benefit of one
party - the designer of the ETF - the investment bank. The design has one goal
- to transfer your investment to them, slowly over time.

A vanilla bond or stock ETF is an extremely useful (and beautiful) financial
instrument that has democratized investing similar to its older cousin the
mutual fund. Almost every ETF other than a vanilla bond/stock ETF is
unadulterated toxic waste that has oozed out from the sewers of finance and
will wipe out your capital.

A simple yardstick to demarcate toxic waste for the good ole fashioned
bond/stock ETFs - if you cannot redeem/create it then don't touch it.
Leveraged ETFs (and commodity ETFs) cannot be redeemed/created.

Guide to ETF redemption/creation - [https://www.etf.com/etf-education-
center/etf-basics/what-is-...](https://www.etf.com/etf-education-center/etf-
basics/what-is-the-creationredemption-mechanism?nopaging=1)

~~~
Enginerrrd
I learned this the hard way during the 2008(ish) crisis when oil dropped from
$150/barrel to ~$30/barrel and I sold other assets at a loss to buy USO (an
ETF that was ostensibly supposed to track the price of oil). Instead, when oil
went up to $80/barrel in a few months, USO increased by ~3% while the other
stuff I'd sold at a loss had rebounded (though to a lessor extent than the
price of a barrel of oil).

SOMEbody made a multigenerational fortune off of that price discrepancy. The
SEC was briefly investigating that episode, but the investigation went away
after a while.

As a little guy, you can make a brilliant play by correctly predicting the
future and still get totally screwed.

~~~
toomuchtodo
Why did you use USO instead of trading oil futures contracts?

~~~
chadash
Same here with USO. I didn't fully understand it at the time, so I used USO
because you can buy and sell like a stock. I _thought_ that it would just be a
proxy for investing in oil futures contracts, similar to how buying SPY is
basically a proxy for buying a weighted basket of stocks in the S&P. I learned
that I was wrong the hard way (luckily didn't wager anything I couldn't afford
to lose).

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WalterBright
When I was a teenager, I joined a poker game with some of the local sharps.
They cleaned me out. I knew enough about poker to know they were cheating, but
not enough to know how they did it.

I decided after that to stay away from investing in games I didn't understand
well.

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rcar
> “We’re too old to play those games,” Mr. Zhu said. “It’s too difficult for
> us. We were just looking for basic income.”

While I feel bad for the outcome these people have found themselves in, who
looks at any sort of derivative as a source of "basic income"? There are very
well established investment vehicles for generating safe returns, so why would
someone expect that something returning some huge multiple on top of that to
be a safe bet? I don't think that the ideal solution to this is to restrict
access to certain investments behind something like the "accredited investor"
designation, but that situations like this occur and the fact that Mr. Zhu is
suing his broker over it make me understand why that designation exists.

~~~
perl4ever
'who looks at any sort of derivative as a source of "basic income"'

Covered calls?

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bob1029
If you have the risk tolerance for it, I would strongly advocate for using a
margin account and purchasing stock in companies you trust and understand
instead of holding onto someone else's interpretation of the same idea (i.e.
ETNs and other higher-order derivatives). Put another way, if you don't have
the stomach for a margin account, you absolutely should not be putting any
substantial amount of money into these kinds of derivatives either. It's
arguably even more risky.

Sure, 5%+ APY interest sucks, but so does being completely wiped-out over
something you have zero visibility into. At least with a margin account you
can look into your assets and control your risk in a very direct and immediate
way.

I personally run a 50/50 leverage ratio with my margin account (i.e. 2x). I
review this status on a weekly basis and will make decisions based on high/low
water marks (45/55%). I've previously held ETNs and other derivatives when I
was still learning the ropes... Margin accounts are 10x less stressful for me
by comparison. It's literally just a normal portfolio that I would otherwise
be perfectly comfortable with, but tuned slightly for a longer-term investment
horizon. The fees are negligible to me with dividend income and the bigger
strategic picture at play.

~~~
siberianbear
If you do this yourself and feel comfortable, good for you.

But I wouldn't widely suggest people lever up 2x using margin. It's dangerous
advice. In a severe down market you can be wiped out with a margin call and
forced to sell at a low point in the market.

~~~
bob1029
I strongly disagree with the notion of "dangerous" advice, especially when
given in good faith. I even prefaced my post with a disclaimer regarding this
practice.

I could pose a counterargument that not investing aggressively in finance from
a young age is the most dangerous thing you could do to your future self if
you hope to maintain an equal or superior standard of living.

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code4tee
Never sure what to think when reading these articles. Sad story but what he
did is tantamount to taking your whole net worth and betting in black in
roulette. Do you feel bad if the person loses?

Doing this as a side bet with some extra money is one thing but putting your
entire life savings into a highly speculative investment is not smart. Save
your nest egg for “boring” stuff like broad index funds.

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throwaway6000
Warren Buffett: For most people, the best thing is to do is owning the S&P 500
index fund

[https://www.cnbc.com/video/2020/05/04/warren-buffett-
investi...](https://www.cnbc.com/video/2020/05/04/warren-buffett-investing-
advice.html)

~~~
ttul
And if you want some leverage, borrow against your stock with a credit line.

~~~
boromi
Can you explain what this means? What does borrow against your stock mean

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yCombLinks
At most brokerages, etrade for example, you can take out a loan with what you
own as collateral. [https://us.etrade.com/bank/line-of-
credit](https://us.etrade.com/bank/line-of-credit)

~~~
boromi
Got it, but I still don't understand what "And if you want some leverage,
borrow against your stock with a credit line." means. How does this increase
leverage?

~~~
kradroy
By borrowing against your securities you have more cash to invest. You've put
a multiplier on the amount you can invest. That's leverage. However, you have
to pay back the loan with fees and interest. This increases risk because you
could end up owing money rather than just having none if the securities crash.

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womitt
Higher return, higher risk. Nothing to see here...

~~~
jgalt212
Except, except I'm not sure how these vehicles are allow for general investors
at the same time that Reg T bars most/all investors from too much leverage.

[https://en.wikipedia.org/wiki/Regulation_T](https://en.wikipedia.org/wiki/Regulation_T)

~~~
derision
The investors themselves aren't overleveraged, but the ETFs they're purchasing
are. Your link specifically refers to the amount of leverage offered to
individual investors

So, for example, that regulation does not prevent me from buying an
overleveraged ETF, but only from overleveraged my own account (whether it be
buying these ETFs or a share of coca-cola)

~~~
jgalt212
Yes, but a directly levered position and an indirectly levered position, for
all but Talebian wet dream scenarios, have the same exact risk profile.

Levered notes are regulatory arbitrage and are not materially safer
investments levering up on one's own. In fact, the investor is probably better
served by the latter due to lower fees.

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NicoJuicy
I will never trust banks since they are for-profit companies, eg. I went out
of Bitcoin as soon as big banks could short it. I appreciate small banks a lot
more, but they don't have that much influence.

But, I trade stocks and I recently traded etf's.

It's high risk, high reward opportunity. But as all things, do not invest
money you can't lose.

Also, turbo's or multiplied etf's are dangerous for long term. Since a 3% rise
is not the same as a 3% down in value ( you lose more) and a multiplier makes
it worse.

I don't know everything about etf's, I only joined shortly because the
opportunity seemed there and I had some risk money. I do admit going in head
over heels at the time, I've never held it for too long.

None the less, would appreciate any insight any can have. It takes a long term
to find actual valuable advice on etf's.

A book recommendation would be good also.

~~~
airstrike
> I will never trust banks since they are for-profit companies

Banks don't have to be betting against you to make money. They can simply
charge a markup or profit from the bid-ask spread if they're making a market.

~~~
NicoJuicy
I know. But when you are betting on btc to rise and banks can short BTC, i
went out of there.

I was right, BTC had the first major decline arround that time. My guess now
and then is that banks were buying BTC to make it drop when they want.

PS. I went out BTC 3 times and started all over with the initial starting
amount, so saying "betting on BTC to rise" is a bit exaggerated though.

PS2. I'm talking about very big "banks" mostly, eg. JP Morgan or Goldman
Sachs. When they give a public statement, i'm always inclined to think the
opposite.

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hangphyr
I've always been puzzled by accredited investor regulations. For an over-
simplified explanation for most countries such as the US and Canada it means
one has at least $1,000,000 of investable assets. Accredited investors can
invest in things that governments prohibit non-accredited investors from
touching, such as most forms of private equity. The rules are there to protect
amateur investors, however governments still allow anyone to participate in
shockingly risky investment vehicles.

Our regulations are not built for purpose, and I don't think it's possible for
there to be an effective way for governments to tell individual investors what
is "too risky" for them.

A lot of it just comes down to individuals being responsible for educating
themselves or preferably hiring a financial advisor.

~~~
nickff
The cynical view is that the government just wants to tax you more if you're
making bets; 15% on capital gains is nothing compared to the taxes on
lotteries and gambling.

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alecco
> It worked so well—earning him 18% a year in dividends, on average—that he
> eventually poured $800,000 into the investments, called leveraged exchange-
> traded notes, or ETNs. When the coronavirus pandemic hit, he lost almost
> every penny.

Plain gambling.

~~~
thoraway1010
Who thinks they are getting a magic 18% year in risk free return?

~~~
perl4ever
Everybody; since the phrase "picking up pennies in front of a bulldozer"
exists, you know it must be common.

~~~
thoraway1010
18% is not pennies. That beats every low risk asset by a mile. 0.25% is
pennies. And yes, all the market data fees, liquidity maker / taker fees - I
get those pennies getting picked up.

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neonate
[https://archive.md/XpWY0](https://archive.md/XpWY0)

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erikig
Obligatory Archive Link: [http://archive.is/XpWY0](http://archive.is/XpWY0)

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whiddershins
Every. Time.

