How To Beat The S&P 500
My Trading vs The S&P 500
Today’s edition is part of My Stories where I share vulnerable thoughts around my opinions in Finance.
Charts & Chit Chat will be the next edition coming out within a few days where I share Financial Data/Charts alongside quick takeaways that get right to the point.
For now, let’s get vulnerable.
"You can’t go back and change the beginning, but you can start where you are and change the ending."
-- C.S. Lewis
This is the 2nd to last newsletter of the year, so it only makes sense to stop and reflect on our 2024 trading a little bit.
We can reflect in a couple different ways.
1. Reflect on our performance.
2. Reflect on our feelings.
This newsletter edition of “My Stories” will be a little bit more about numbers and performance. The next one I anticipate to be more about feelings and emotions.
Below are the annual percentage returns for the S&P 500 vs my trading account since 2018. I refer to my trading strategy as “IVL,” which is what we call the strategy at Sky View Trading where I work.
The IVL Returns are what the majority of our trading community was able to fall around each year.
Also keep in mind this is through December 15th of this year. The S&P’s are actually a little bit lower at the moment and my IVL return is a little bit higher than what is recorded below for 2024.
Our goal is simple: outperform the S&P 500 over time with equal or less risk.
While the S&P 500 has averaged 16% annualized returns over the past seven years, that is certainly the exception rather than the norm.
For context, the last decade saw +13% annualized returns making it one of the best decades in S&P 500 history. The long-term average remains closer to 10% annually, largely because down years like 2022 and 2018 periodically drag the average lower.
Those are the years where the IVL strategy shines though. Just look at the charts above again.
Bear markets like 2022 often come with elevated volatility, which makes selling option premium—our core approach—more profitable.
The beauty of IVL is its versatility:
It holds positive double digit returns in bull markets.
It thrives just as much or more in bear markets, where volatility is high.
This ability to perform well in diverse market conditions is what enables IVL to consistently outperform the S&P 500 over the long run.
To be clear, we won’t outperform every single year, but that’s not the point.
Trading is a long-term game. By staying focused on our mechanics and disciplined execution, we have the opportunity to achieve returns that place us among the top 5% of traders and investors over time.
Generating 20% annual returns consistently, regardless of market condition, is no easy task. It's what the majority of members in our community our able to replicate though.
The biggest fear around our IVL style of trading is that it's a "naked premium portfolio" which involves "undefined risk."
That can be scary because people fear the uncertainty around "black swan events" that can come in the market.
March of 2020 gave us one of the worst black swan events in history. The S&P's declined -35% and the VIX rose 6-8X.
That's not even the worst part. The worst part is this all happened in one month.
For premium sellers, this is even harder to deal with than 2008. In the Great Financial Crisis, the S&P 500 declined -50% but it took 15 months to play out. The worst of it was about -30% in 3 months.
That's tough, but not as tough as -35% in one month.
2008 was slower than 2020. It was something in the middle between 2022 and 2020.
Regardless, "black swan events" like those are the main fear around a trading style like ours (IVL).
We typically talk about how a "worst case scenario" for us or a "loss threshold" that we keep in mind is -25%. If we lose -25% of the account on one trade (or set of trades including adjustments) it is time to take the loss and get back into a new "normal trade" that is delta neutral, rather than continuing to fight the directional trend with more adjustments.
Even with a -25% loss for the year in a year like 2020 though, the IVL returns are still keeping pace with the S&P 500 over the last 7 years as shown below.
Remember, the last 7 years in the S&P 500 are running 16% annualized returns. That's very high. There are many decades throughout the S&P 500 where they averaged 8% or less.
That means the annualized IVL returns, even with a black swan thrown in the mix, are keeping pace with the S&P's, even when the S&P's are running twice as large as average.
In reality though, a scenario where our trading account experiences a -25% loss during such an event does not tell the full story for the year. That's because there will likely be profits earned before and after a “worst-case market event” like that which can help offset the losses.
So maybe instead of finishing the year down -25%, another possibility is we may end up breaking even at 0% for the year.
Below are the results assuming a 0% return in 2020 rather than a full -25% loss. As you can see, IVL continues to outperform.
If you know anything about me you know I am about as big of a permabull in markets as it gets. The reason is simple, I am a numbers guy and buying and holding works most of the time.
It works most of the time for 8-10% per year, but there is a rare chance that a "lost decade" comes along for the S&P 500.
My goal is not to scare you into thinking that's coming. I don't want to make a living or a name for myself by spreading doom and gloom like most people do.
I love the strategy of buying and holding over the long term, but I know there's more to the world of Financial Markets than just that.
Having a trading strategy that can outperform markets, even with some real bad luck thrown your way and some real good luck thrown to the market, is a very powerful and cool thing to have in your back pocket to diversify risk.
Even just a small bump in performance can go a long way.
$100k turns into $672k in 20 years with a 10% return.
$100k turns into $1.6 million in 20 years with a 15% return.
That's almost 3X the money for a 0.50X bump in annual returns.
That's cool.
It's also cool that IVL can continue generating returns in the flat or bear markets we all fear, which is what knocks the long term average annual returns of the S&P 500 down to 8-10%.
Generating positive returns with our IVL trading in those flat/bear years are what give us the opportunity to compound returns larger than the S&P's over time.
Flat and bear markets happen a lot more often than global pandemics do. It's the flat and bear markets we need to learn most about how to navigate.
Flat and bears markets have come in 2022, 2018, 2015, 2011, 2008.. basically 25% of the years.
While the S&P 500 has had one of the best 7-10-15 years in stock market history, the IVL strategy has certainly proved it can outpace even the best of those returns, and it can do so regardless of market environment.
So while I typically use this part of the newsletter to talk about how great it is to be a permabull passive investor, we can see how it's equally as good if not better to be an IVL trader.
Like I said at the end of last week's newsletter... the possibilities are endless.
Heading into 2025 is a heck of a time to be alive.
The numbers don't lie.
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Disclaimer: These are not recommendations and I am not a financial advisor. These are just my two cents, or two satoshis as the kids say. Remember to do your own homework before making any financial decisions. Also, keep in mind I usually have some personal investments in the things I discuss. Some things stated in this article could also be wrong.