Why The Transparent Investment Management (TIM) Portfolio Has Failed

What is the Transparent Investment Management (TIM) portfolio? Timothy Sykes, an investor and former hedge fund manager at the tender age of 26, essentially turned $12,000 into over $1 million. You can read more about his accomplishments, his book, and his trading DVD on his website. Recently in an attempt I think to quiet his critics about getting lucky during the dot-com era, and his disgust for the secrecy in the markets, he’s decided to recreate his previous feat with complete transparency. Enter the TIM portfolio.

Meet TIM, or Transparent Investment Management. TIM is a new kind of fund that takes the best characteristics of the most evolved investment funds—that being hedge funds—and their ability to pursue all investment strategies, no matter how speculative, while at the same time, improving upon their many shortcomings, namely their inability to detail their businesses and strategies to the general public. Unlike other investment funds, profits are not TIM’s sole concern. Instead, TIM’s goal is to profit while also detailing all investment activity on TimothySykes.com, allowing the general public never-before-seen access to the investment process behind financial speculation. Due to the duality of TIM’s mission, the fund’s success will not be judged on performance alone, but on the educational and entertainment value of the commentary and investor community that it will nurture.

In terms of education and entertainment value, I believe the TIM portfolio hits the mark. Timothy is well versed in the child to teenager priced stocks and has a knack for identifying patterns in their charts. And of course there’s always some sort of entertainment when you see someone constantly beat themselves up (enter Jim Cramer). However, even with a 50+% return according to Covestor (which I believe is completely inaccurate since the TIM portfolio is currently valued at $14,404, or a 16% increase in value), the TIM portfolio has violated the one rule that, in my opinion, hurts the smaller trading accounts.

Enter Exchange Rule 431.

Exchange rule 431, also known as the margin requirement rule, includes something known as the pattern day trader rule (PDT).

An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

An individual deemed a pattern day trader must hold a minimum of US$25,000 in equity in his or her account before being allowed to day trade. This $25,000 equity amount must be maintained in the account at all times because it addresses the additional risks inherent in leveraged day-trading activities and ensures that customers, before continuing to day trade, cover any losses incurred in their accounts from the previous day.

If you take a look at the TIM summaries in the past week, you’ll notice the portfolio hasn’t held a position overnight in the last 5 trading days. Since the pattern day trading rules takes place over the last 5 trading days, if the TIM portfolio has had more than 3 day trades in the past 5 trading days, it should be flagged and hit with the $25,000 margin call that the smaller traders fear.

9. 9 day trades in the past 5 trading days. How is the TIM portfolio allowed to trade where the rest of us would have been restricted, locked out, or hit with a margin call? My guess is either the TIM portfolio has a higher value than what’s being reported or the TIM portfolio has a link to a much larger account which allows it to bypass the rule that most of us in the same position would face.

While I’m not criticizing Timothy for his hard work (it really does take hard work to turn such a small amount of money into a tidy sum), I do criticize his attempt at making his portfolio as transparent as possible. Something is going on behind the scenes that we don’t know about. Not to mention that the Covestor badge is showing an over 50% gain for the TIM portfolio really leaves me scratching my head. Something just isn’t adding up. I brought the issue up on his blog a few days ago. Here’s the exchange:

As much as I enjoy following your attempt at recreating your initial success, I really think you should be playing by the rules. Granted, if thinkorswim hasn’t said anything, then you’ve lucked out. But folks that aren’t as lucky would have been nailed with margin calls with the heavy amount of day trading your TIM portfolio’s been executing. I don’t care for the PDT rule either, believe me, but if you’re going to execute the TIM portfolio properly, you should do it with the current rules in place, even if, for whatever reason, your TIM account doesn’t seem to be affected by it.

Rules–sure, I make a few day trades, but it’s not nearly as many as i would like, this is like telling a painter he can only use a few brushstrokes, this is an art not a science. I’ll trade as closely to my norm as anyone will allow.

The difference between a painter and a trader is that the painter doesn’t have the American Artist’s Guild limiting his or her work.

While the TIM portfolio has good intentions, the fact that it isn’t following the same rules that other traders follow, for whatever reasons, in my eyes is a failure. Please understand that I’m not taking anything away from Timothy or his accomplishments. In fact, I wish I could replicate his achievements, break the bonds of the daily grind, and do something I enjoy. But trying to replicate your results and not following the rules set forth since your initial successful run undermines the educational value of what the TIM portfolio is trying to accomplish. If our smaller accounts have to live by those guidelines then so should the TIM account. And if there’s something going on behind the scenes to circumvent those rules (legally, of course) then that should be made public in order to keep the T in TIM valid.

Jorge 17 January 2008 Miscellaneous
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Viewing 11 Comments

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    I don't think your research is entirely correct here. Take COIN for example. Timothy shorted the stock twice in one day and couldn't short the following day because there were no shares to borrow. That doesn't violate the pattern day trading rule.

    He also discloses when he owns and doesn't own a stock, as all bloggers/journalists should when writing about stocks.

    He's also telling us when he loses money, not just when he makes a trade. I think you are missing the point of his posts here. I also see no reason why he would be allowed to skirt the rules where others cannot, he's just a trader like the rest of us.

    One last thing. His portfolio when he started his hedge fund was worth over $2 million and it took him 4 years to get there.
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    I have high regards for him and his achievements. If I could only be so lucky turning such a small amount into $2 million.

    I'm not arguing his disclosures, or his past performance, or his daily recaps. In fact, that's awesome that he divulges so much information.

    You said it yourself though. COIN shorted it twice in one day. At the end of the day, he claims he has no positions open, which leads me to believe he closed out the position, resulting in a day trade. Because he didn't locate shares to short the following day is irrelevant. In the past 5 trading days, he's gone above and beyond the normal limits set by the SEC for pattern day trading. How he's getting around that is beyond me. I don't think thinkorswim, or any other brokerage, would give preferential treatment and skirt SEC rules. That's my argument as to why his portfolio has failed in terms of transparency unless TOS really is allowing him to skirt SEC rules, which in that case they could get into serious trouble I'd assume. But everything else you've said is correct and I completely agree with. I only have an issue with the day trading aspect when the rest of us with smaller accounts can't.
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    Interesting take, but totally incorrect. Nothing's going on behind the scenes, Covestor's numbers are wrong because since I'm only taking 1-2 positions at a time, their software mistakes that for me putting 50-100% of my assets to work, when in reality it's only 20-50%. As for the pattern day trading rule, I will trade as long as my broker allows me to. I suggest you open a Thinkorswim account too, as long as you don't abuse margin requirements, I feel like anyone can do this. Also, this stupid rule wasn't in place the first time around (it was only instituted in 2001).

    Perhaps most importantly, while it'll be nice for me to repeat my feat, it'll be even nicer if my blog's readers achieve it quicker than I do. As everyone's learning, I'm really not that great a trader, but since I learn from my mistakes and put rules in place to do better in the future, I'm constantly improving, even if the returns don't reflect that yet.
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    Calling the $25,000 that Timothy Sykes should have in his account if he is hit with the pattern day trader rule a margin call is not really correct. Your broker should suspend trading in your account from trading until you raise your account balance but they wouldn't sell your positions until you raised your account value to $25,000.

    Yet, that is besides the point. I do agree with you when you say that Timothy should play by the rules that all small investors must follow. If ThinkorSwim is not enforcing the law that doesn't give Timothy a free pass. I'm not sure where fault lies for non-enforcement of the rule but if Timothy really wants to reprove his feat he should do it according to the existing securities laws. Calling the rule a stupid rule doesn't give Timothy a pass either.

    Also, please check out this post by my friend Kevin Kelley writing on blogging stocks about a company that Timothy Sykes recommended. The post is entitled Beware of Bisolar: I Would Never 'Play the Pump' in This Stock. http://www.bloggingstocks.com/2008/01/14/beware...
    The article certainly raises some interesting questions that I think Timothy Sykes should respond to it since Kevin did some outstanding research into the company.
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    I actually have a TOS account as well that's why I was curious as to what's going on. I've already been tagged as a PDT and I can't afford to have a PDT margin call on my account.

    I'm hoping Covestor fixes their issues soon. It's a great site but they don't have the options capabilities yet, and as you pointed out, their percent allocations are definitely off the mark.
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    I can vouch for Tim. It really depends on your broker. Some brokers tend to let it slide sometimes. I know Interactive Broker gives you a nice indicator that tells you how many day trades you have left today, tomorrow, and the next day based on your current trade. Needless to say they are don't let it slide. I did get my account flagged one time. I'm not sure if it is an SEC rule or what, but they allow you to request it be unflagged one time in a year.

    You really have 2 options to avoid PDT restrictions:
    1. Register a trading company.
    2. Put up $25K in your account.
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    You don't understand. Your only flagged if you trade the SAME stock within that period. Everything he trades is different so it doesn't matter.

    I have under 25k and I've been trading every day for about 10 months or so. Why can I do this? Because every stock I trade is different.

    It clear states that in thw quote you used from the SEC.

    An SEC designation for traders who trade the "SAME" security four or more times per day (buys and sells) over a five-day period.
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    Dan,

    If you go 5 days without holding positions overnight, what do you suggest happened during the day? All positions opened during the day must have been closed that same day since there are no positions being held overnight. Therefore, he must be opening and closing more than 4 positions over a period of 5 days which makes him a day trader.

    I see what you're saying about the SEC wording and it can be confusing. Here's the link to the actual amendment to the margin rules from the NYSE's site:

    http://www.nyse.com/pdfs/im01-9Microsoft%20Word...

    4 day trades in a 5 trading day period is classified as a pattern day trader. That's straight from the NYSE's mouth. My guess is TOS is letting it slide but the spirit of the portfolio's been broken in my opinion unless you have everyone switch to TOS (which I'd recommend because they really are that good even though I know Tim's had issues trying to short hard to find stock).
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    Yes, you're right about 4 day trades in a 5 day period but what you are failing to understand is that if you day trade MSFT 4 times within a 5 day period, then yes, you will be flagged. Because you're trading the SAME stock over and over and over. That's a pattern day trader.

    But if you trade a new stock each day of the week, you won't get flagged.
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    Dan,

    I think the problem is a lack of consistent language between different sources. The source I listed says 4 day trades in a 5 day period. Interactive Brokers has a neat little PDT FAQ with examples but doesn't define what a day trade is. I checked E-Trade as well as a couple of other independent sites and those appear to repeat what you're saying. If that's the case, then I stand corrected and to be quite honest, have been completely wrong about the PDT concept. Zecco was never much of help when I first started and that would explain why TOS hasn't flagged my account yet, although I have 2 SPY day trades on the books in the past couple of days.

    Thanks for clearing that up. All in favor for more consistent language say I?
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    The key is that this rule was not in place last time I had under $25k. I never would've been able to go from $12k to $123k in one year--as I did in 1999--with these crap restrictions.

    Take tomorrow for example, there's going to be TONS of opportunities during a panic, a.) I wish I wasn't traveling and b) I wish I could trade freely to capitalize on them all

    As for BSRC, I never recommended it, I never recommend any stock I don't play, all I said is respect the pump. Kevin Kelly, like many of you, is a value investor--just as I never will have the patience nor the trust to put my money in the hands of somebody else for that long, nor will any of you ever be able to understand that aside from hardcore company values, BS runs Wall Street. When a company has no hardcore values, you must rely on that BS to judge a company. BSRC has a lot of BS behind it. Respect it.

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