3 Winning Trades, and Why Cash Is King

You need the dry powder necessary to take advantage of these extraordinarily profitable trading opportunities in this market.
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You only have to do a very few things right in your life so long as you don't do too many things wrong. -- Warren Buffett

So far 2009 is my best trading year since I started 15 years ago, but I am currently 100% in cash. I am all in cash right now for several reasons. First, I am already up about 10% this year on my trading account in less than three months, even though I have never committed more than 20% of my capital away from cash at any time this year.

That means that my trades have made about a 50% return on the capital that I've committed in just the past few months. I want to protect those gains and not make mistakes that will create losses.

Second, the recent


action of printing $1.2 trillion has dramatically changed the game in ways that are not yet clear at all. I want to see signs of an emerging trend in response to this major shift in the market.

So far all we have seen is the knee-jerk short-covering and commodity rally due to increased inflation expectations and market liquidity. I used that strength to exit my last long position -- at a very substantial profit -- in

ProShares Ultra DJ Crude

(UCO) - Get Report

, which is an exchange-traded fund (ETF) that tracks oil futures.

Third, my trading and investing philosophy for this current treacherous environment is similar to a baseball player who waits for a few fat pitches rather than feel like he has to swing all of the time. So far this year, I have seen three of these fat pitches and was able to make money on all of them.

The first big trade for me this year resulted from the massive bubble in long-dated Treasuries that happened in December 2008. Even if you believe in long-term deflation, which I don't, this market was extremely overbought at the end of 2008, and due for a major technical correction.

I used that opportunity to purchase a substantial position in

UltraShort 20-Plus-Year Treasury ProShares

(TBT) - Get Report

, which is an ETF that provides double the inverse return of

iShares Barclays 20-Plus-Year Treasury Bond

(TLT) - Get Report


This correction in the Treasury market did happen in January 2009, and TBT shares moved from a low of around $36 up to around $48 within one month. I did not catch the entire 33% move in this security, but I did catch most of it and exited the trade at the end of January at a profit of around 25%.

I am currently neutral on Treasuries in the short run, even though in the long run long-dated Treasuries are one of the worst possible investments you can make now because of the money printing we're doing to monetize our debt. That will ultimately lead to investors getting out of Treasuries, and rates will increase substantially from current levels, but that process will take years.

My second big trade this year started last November and December when gold suffered a major correction. I am a long-term gold bull, so I viewed that correction as a good opportunity to build a position in gold. I bought

PowerShares DB Gold Double Long ETN

(DGP) - Get Report

, which is an ETF that tracks twice the performance of

SPDR Gold Shares

(GLD) - Get Report

, an ETF that tracks the spot price of gold. When I bought DGP, I intended to hold it for a couple of years.

However, in this environment, you need to stay flexible and take advantage of opportunities to make a significant profit in a short period of time. In late February, gold moved back to $1,000 per ounce, and people were on


every day talking about how gold would soon hit $1,600 per ounce.

This had all the signs of a short-term top to me, so I sold my DGP position at that time and caught most of the 55% gain in the security from the time I started buying it. Since then, gold has started to correct until the recent inflationary Fed move.

I am currently neutral on gold until I see either lower prices or a clear uptrend develop further. Long term, I am still a gold bull, though. In three to five years, after we experience the full impact of all of this debt monetization and money printing, gold could be as high as $6,000 per ounce.

However, the road to get there could be very bumpy, and the government could always decide to slow down the printing press or even start taking actions to artificially drive down gold prices, like it did during the Great Depression. These are reasons why in today's dangerous investing environment, it is so important to stay nimble and take significant profits when they are handed to you. Now more than ever, too much conviction or greed will lose you money.

That brings me to my third successful trade of the year. In the middle of February, oil prices were crashing to low $30s per barrel. There was talk of oil going into the $20s per barrel and staying there for a while. In addition, there was the worst contango of oil futures that anyone had ever experienced. This combination of factors destroyed the prices of oil futures ETFs such as

Proshares Ultra DJ Crude

(UCO) - Get Report


I used this opportunity to buy a large position in UCO with the expectation that this unprecedented contango could not last forever. Oil prices could not stay this low because it made no sense for producers to keep pumping at these low prices. As of the end of last week, most of the contango had disappeared, and oil prices reached $51 per barrel.

I exited my UCO trade and caught most of this 70% gain in that security's price in about a month. There may be more upside in oil prices right now, but this is a classic situation of taking a big profit that has been handed to me and not being greedy or complacent.

Have I been lucky so far this year? Of course I have, but I also have been following some basic principles. Wait for a market to get very oversold or overbought. Have a clear understanding of why you're buying a security, and have a clear understanding of the reasons, both technical and fundamental, that would cause you to sell the security. Finally, have the discipline to exit and take profits rather than press your bets.

The same principles work if a trade is moving against you. I have had two small losing trades this year in

United States Natural Gas

(UNG) - Get Report

, which is an ETF that tracks natural gas futures, and the

Ultra Basic Materials ProShares

(UYM) - Get Report

, also an an ETF but one that tracks basic materials stocks. (UYM has, among its holdings,

Dow Chemical

(DOW) - Get Report



(AA) - Get Report


Du Pont

(DD) - Get Report




).) In both of these cases, the trade started to move against me for reasons I did not understand, so I quickly exited both positions for a small loss, and those trades did not significantly hurt my performance.

Of course there will be more attractive trading opportunities in the public markets this year. Some people who recently followed the

famous call by Doug Kass

to buy stocks a couple of weeks ago have already made a huge profit.

Doug's call was another case of waiting for a fat pitch caused by some of the same factors that I mentioned in this article. There will be more home run trades like that this year, caused by a market that is as volatile as it is uncertain. Prudent traders and cautious investors should not be concerned about holding a lot of cash in this environment because if you don't have a lot of cash sitting around, then you won't have the dry powder necessary to take advantage of these extraordinarily profitable trading opportunities created by this market. Cash is still king.

Christopher Grey is a managing partner and co-founder of

Third Wave Partners

, a leading restructuring adviser, distressed situations expert and turnaround operating company focused on the real estate industry. Previously, Grey was a managing director in the California office of Emigrant Realty Finance, the real estate group of Emigrant Bank, a New York-based financial institution with $17 billion of assets. Founded in September 2005, the California office of Emigrant Realty Finance completed and managed on balance sheet $2.5 billion of debt investments.

Grey is a founding member of the Capital Markets Forum II of the National Association of Office and Industrial Properties and the Stanford Real Estate Network. He is a graduate of Stanford University with a degree in economics and holds a California real estate broker's license.