For the month of January, the benchmark S&P 500 started 2012 with a big bang, up 4.48% for the month. This is a phenomenal one-month return considering that the average yearly return for the past ten years has been just 3.52%.
Compared to the benchmark, Pilot portfolios underperformed for the month. Our broad market Portfolio was up only 0.51%. Long-term and short-term positions in Gold were our best performers in this category, while short-term trading in S&P and Crude Oil futures were our worst performers for the month.
Our individual stock portfolio fared better with a gain of 2.05%. Holdings in Apple (AAPL) brought the greatest returns, while a monthly drawdown in open profits on short positions in Netflix (NFLX) was our worst performer.
We have highlighted our mark-to-market results for Netflix so that we might illuminate what such drawdowns might imply. Although our mark-to-market monthly drawdown in Netflix is a sizable one, our long-term short position in the issue remains open, and as of the close on February 2, sports a 21.62% 4-month gain since we put this short on from $156.69.
Maintaining a Marking to Market discipline is essential however; sometimes it renders performance as appearing much worse than it truly is. Yes, the monthly drawdown is a real loss however; taken from unrealized profits, the core position is still in the black by over 20%.
Take note that per the open positions displayed above, we have to a large extent mitigated the drawdown on core short positions held in Long-Term investment accounts and have taken full advantage of the bullish surge in Netflix via Mid-Level and Short-Term trading operations.
Click here for further insight as to our method of strategic diversification relative to positions in Netflix (NFLX).
Mark-to-Market Period Analysis
Mark-to-Market is another term for closing the books at certain time intervals for accurately reporting profit, loss, and performance. When we perform Mark-to-Market on a monthly basis, it means that though various positions may remain open, for periodical reporting purposes, we close the accounting books at the end of each month and thereby mark those positions to market.
Without a Mark-to-Market, it would be impossible to know where to allocate profit or losses within a given period.
For example, say that a trade that begins November 1 and closes January 31 makes 30%. The Mark-to-Market allocates the proper percentages to each month as opposed to the entire amount at the end of the three-month holding period.
History and development
The practice of mark-to-market as an accounting device first developed among traders on futures exchanges in the 20th century. It was not until the 1980’s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990’s, mark-to-market accounting began to give rise to scandals.
To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin.” This intends to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value.
If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if the market price of his contract has declined, the exchange charges his account that holds the deposited margin.
If the balance of these accounts falls below the deposit required to maintain the position, the trader must immediately pay additional margin into the account to maintain his position (a "margin call"). As an example, the Chicago Mercantile Exchange, taking the process one-step further, marks positions to market twice a day, at 10:00 am and 2:00 pm.
Until next time,
Trade Better / Invest Smarter