I lost 25% of my savings this week. Here is what I learned.

by Troflecopter

After a long time of very responsibly trading blue chip stocks for modest gains single digit gains, last week I started contriving a plan to get into oil and “hit it big”.

I spent at least 40 hours considering all my possible options. Then on Monday afternoon, it became clear to me – it was time to strike. I put 50% of my money in.

Tuesday morning was not fun.

Here’s what I learned:

  • Don’t ever buy something you don’t FULLY understand. On Monday, I bought into USO as oil prices bottomed, thinking I was buying into a fund that was purchasing up all of the May Futures contracts. I thought USO was rolling out of April and into May, and they were conveniently buying up all the world’s WTI at bottom of the barrel pricing. I saw the warnings all over the place that people didn’t understand that USO was based on futures, not spot prices. I KNEW USO was buying futures, not spot. I thought that meant I understood the warnings. I didn’t know that the real risk was that I didn’t know which months I was buying into. The funny truth is that they weren’t even making most of their moves on Monday. I was WAY off.
  • Don’t trust third party sources on the details – not even your bank. Both Yahoo Finance, and my bank – RBC Direct Investing – have incorrect information on USO and most major ETFs. For as long as I have been looking (2 weeks), they’ve said USO is holding April WTI Futures. This is 100% false: i.imgur.com/bOm0JEQ.png I thought this meant that USO had to sell all those contracts and move into May contracts on Monday. I thought USO was being paid to take a bunch of oil that they would then have all month to get rid of. But that’s not how this works.
  • The word “ETF” is used extremely loosely. An ETF like SPY or ZQQ.to, is absolutely nothing like all the ETFs out there that are “attempting to track daily movements of _______”. An “ETF” is just a fund. Don’t buy into ETFs that you do not FULLY understand. Read the actual prospectus.
  • Do not underestimate the number of stupid investors out there. As I watched WTI plummet in real time, I immediately saw USO skyrocketing, I thought for sure that meant that smart institutional money was piling into USO. I thought there was no way that retail investors could move a $2.5B fund that fast, but they were. That was not smart money causing the pump. It was a million idiots like me.
  • Don’t fuck around with leveraged ETFs. In addition to USO, I purchased into a 2X leveraged WTI tracking ETF “HOU.to” at the very end of the day on Monday. I thought for sure on Tuesday morning the oil prices would bounce back up from negative, and give me a big bump. I figured, even if it didn’t work out, I could hold onto it forever until oil comes back. Wrong. You cannot hold onto these things forever. They trend towards 0 mathematically. If you can’t make gains in your first couple of days or weeks, you are probably stuck with taking a loss. You shouldn’t even hold these things more than a single trading day. ESPECIALLY in this crazy market.
  • Despite your Father’s advice, you can’t just be patient and hold on to everything. HOU.to – which I purchased into – is beyond toast. The company has all but told investors it’s time to cash out. After the fund lost 40% of it’s value on Tuesday, they froze it, and then released an official press release that the ETF was worth about 1/6th of its already obliterated market price. They then said pretty clearly that they no longer expected to be able to achieve the funds objectives. After a few cuss words, I basically kissed my money goodbye. Then much to my pleasant surprise, on Wednesday morning, I saw it was back up for trade. Somehow it was rising. (This goes back to not underestimating the power of stupid money.) I cashed out immediately, and was very pleased to get 2 /3 of my money back. Everyone around me was telling me to be patient and not take a loss. The fund has done nothing but post double digit losses since then, yet millions of people are continuing to trade it, when they should instead be cutting their losses. While June futures are up 70% since Tuesday, this 2x ETF is down like 50% – yet people still cling on.
  • The biggest lesson in these oil ETF’s is that NOTHING is certain in this crazy ass market. A TON of the pain that I felt this week was caused by USO and other funds like them restructuring. USO has been rolling front month futures on a predictable calendar for 12 years. On Tuesday morning they absolutely fucked my investment in USO, and probably contributed to the obliteration of HOU.to by surprising us all with a restructuring announcement. I never in my life thought that USO was going to restructure. I thought the whole point of it was that they were legally obligated to follow a certain predictable futures trading pattern – and that certainty gave people a mechanism to buy and sell. NOPE. They can legally just do whatever the hell they want, costing retail investors like me an arm and a leg, while their fund managers continue to make 7 figure salaries.
  • Last but certainly not least, this week should be a lesson to us all that there are mammoth sized financial incongruities hidden in every corner of the global economy right now. The insanity that has taken place in the oil industry this week should be a warning bell to us all. The 2008 crisis was caused by bad assets in a SINGLE industry. Considering the demand for everything is down by at least 30%, and the governments have propped the world up with free cash equivalent to over 10% of global GDP – it’s quite certain that there are “sub prime mortgage backed security” equivalent death traps forming in every single industry. It’s only a matter of time before more of them pop up. They could appear on Monday. They could appear in August. But anyone who is paying attention is fairly certain they are out there.
  • Be careful.