Replies to post #749 on Berkshire Hathaway Inc (BRK.B)

[bar1080]

3X, or even 2X "products" are for short term use, a day or two, maybe a week. They have enormous friction. That is, if you buy the long versions AND the short (inverse) ones, you'll lose tons of money for sure.

Very, very dangerous stuff. BRK is leveraged but it's run by the world's smartest investor. And BRK's leverage is dirt cheap. BRK should be safer by a mile.

BTW, did you know that Buffett's sister nearly went broke playing with derivatives. She begged Warren to help her and he refused.

[Duma]

It is a myth that holding a 2x or 3x fund long term will not perform as well as a 1x fund. It all depends on what the prices are doing. If they are increasing as they have been doing for the last 5 years except for 2015, it is much to your advantage to hold 2x or 3x funds.

When I calculate gains with 2x or 3x fund I always divide by 2 or 3, so that I can compare with 1x funds. From the table below, here are the 5 year gains.

 
  
 SPY	99.4%	SSO	118.4% 
 IWM	99.2%	TNA	124.8% 
 QQQ	125.4%	TQQQ	216.2%

The math is a little tricky, so I also showed how $3000 invested in IWM would have gained $2976; while only $1000 invested in TNA would gain $3744.

In my case I hold TNA a large part of the time, so I can leverage my money, not because I want to be 300% invested. I like to be invested near 150% for IWM. If I use TNA, I only need to use half of my cash to do that. This leaves me with the other half to invest in other things.

The way I trade however even enhances the use of 3x funds even more. I actively trade a daily chart, so I am only in the market when it is generally going up. This makes the 3x gain vs 1x even greater. For 2016, IWM yielded 38.8% while TNA gained 48.9%. Just buying and holding IWM gained only 21.6%, so a big improvement.

It takes a bit to wrap your head around these numbers, but they are real. But for sure holding 2x or 3x funds in a down turn is going to amplify the losses.