An Incredible Way to Use Leverage to Beat the Market

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A while ago, I wrote and talked about a long-term trading system that seemed to be superior to buying-and-holding the market.

At that time, I accidentally found it by studying very long-term charts. I was shocked by the results.

I dubbed it "The Incredible System" and you can get all the details in this video.

What I didn't know was that academicians had already looked into this sort of system. I just discovered this a few days ago.

In a paper titled, "Leverage for the Long Run", Michael Gayed goes into detail about how to beat the market using a very simple system.

And here's what Gayed concluded:

"We find that being exposed to equities with leverage in an uptrend and rotating into risk-free Treasury bills in a downtrend leads to significant outperformance over time. For investors and traders seeking a destination with higher returns who are willing to take more risk at the right time, systematic leverage for the long run is one way of moving there, on average."

Here's his system.

You buy an index ETF when price closes above the 200-day simple moving average (SMA) and sell when price closes below the SMA. When you exit, you move to cash or treasury bills.

That's it.

The downside, according to Gayed, is that any sort of price whipsawing will cause some exiting and you may not make as much as buy-and-hold in roaring bull markets.

However, the drawdowns are dramatically less.

For example the buy-and-hold drawdown between 1929-1932 is 86%. Yikes.

The Gayed system's drawdown during the same period? Only 14.7%. Holy moly.

Further, since the drawdown is so much less, the paper suggests we could use leverage when buying in. That will increase our wins and still keep the max drawdown way less than buy-and-hold.

As you can see by his conclusion, that sort of strategy appears to be very effective.

(And nearly identical to the Incredible System that we've talked about in the Newsletter and on YouTube).

The problem is that Gayed's research stopped around 2021. So, does it still hold up?

Let's take a look.

Using the same rules, we'll use SPXL as our vehicle. We'll enter Long on a close above the 200-day SMA and go to cash when closing below the SMA.

Here's the benchmark.

From December 2007 to June 2025, if we bought $10k of SPY and held on, here's what we would've made:

Not bad. About $30k of profit and a max drawdown of around $8,800.

Now here's SPXL over the same time using Gayed's system:

Interesting. The Gayed system makes more money and has less drawdown (close to close).

Just like his paper predicted.

Now, what if we go back to The Incredible System? How does that stack up?

Using a Monthly chart still makes more money than buying-and-holding a simple index ETF with no leverage. And it also has a lot less close-to-close drawdown.

But keep this in mind.

The Incredible version takes its first trade in 2010 instead of 2007. (That's because of the amount of data and how the strategy needs to calculate the first trade).

So, in fact, the Incredible version would probably make a lot more.

All told, Michael Gayed's paper appears to be completely valid.

And so does The Incredible System.

Talk to you soon.

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