Just a few minutes ago I got an email about Collective2.com and its strategy of the week, Better Do Now which is run by user MichaelRenton. The strategy is currently followed by roughly 111 people (some paying subscribers, some not). There is also a total of $561,000 of real money following the strategy.
- Short history: This strategy has only been around for about 5 months. This is very short. It is relatively common for various investment methods to work really well over 5 month periods while still being overly risky approaches for the long-term.
- High Return/Drawdown Ratio: It is great to have a high ratio of return vs max drawdown. However, I think as investors we must be realistic as to what is possible. A ratio of 13 is far above any C2 strategy that has lasted for 3 years or longer. This tells me this likely won’t last. It could. I just don’t think it is likely.
- Peaking Leverage Curve: As the chart shows, the leverage use has a very wide range of use. This isn’t necessarily bad, but when you see the leverage curve spike up like shown in the image below it is often a result of the strategy leveraging down when investments move against them – martingale. This can of course work many times, but if done frequently enough it will eventually backfire. We can see the max leverage use was 18 times! That means it would take only a 5.5% move in the underlying investments to have a 100% drawdown.
- Strategy Description: The strategy has zero description from the creator. I understand that you don’t want to give away your secret sauce. However, I would like to see some sort of description that tries to tell why the creator thinks their strategy is likely to succeed when I have seen so many similar ones fail.
- C2 Star Certified: This strategy is C2 star certified, meaning it has stayed within certain historical risk and drawdown metrics. Personally, I don’t find C2 Star to be helpful in identifying what won’t have a big drawdown in the future.
- No Trades-Own-System: The leader may be trading their own money in the same way, but C2 can’t verify that for me. That is a negative for me.
I think this strategy is far too aggressive for me. It is impossible to say exactly what will happen, but these are my projections.
- I think there is about a 70% chance this strategy suffers a very sudden and massive drawdown and is then abandoned.
- I think there is about a 25% chance this strategy slows down to the point that people don’t follow it.
- I think there is about a 1% chance that is stays with a similar growth patter for 3 years or more.
- I think there is about a 2% chance that it doesn’t maintain such high growth but keeps good growth that is better than an index fund starting now and going for the next 5 years.
- There is probably about a 2% chance of some scenario outside these.
I plan to set a reminder to check in on this strategy later and see how it does. In short, I wish the person well, but I honestly believe this strategy shows all the earmarks of something that will explode. I wish the person and their subscribers well, but I don’t see anything here to make me want to move money from my investment methods to theirs.
See my Brokerage Accounts
In addition to this blog you can follow my live brokerage accounts anytime. The three links below will take you to a third-party website called collective2 where I record and publish my personal trading decisions. If you have questions let me know!
Retirement Account #1:Patience is a Virtue
Retirement Account #2: My Roth IRA
Paper Trading Account #3: Leverage and Patience
This is not investment advice. This website is designed to talk about investments but it is not designed to give you personalized investment advice. This site is generic and should not be used as the basis for any investment decisions. This is for entertainment and educational purposes only.
The owner of PatienceToInvest.com is also a trade leader on Collective2.com. We may receive compensation by promoting some collective2 strategies over others.
Investing is risky and can result in the loss of all your capital and even more than your original capital in some cases.