Discussion in 'Outfield' started by Larry, Nov 18, 2013.
Who invests in the market? Anyone here?
Yup. Since 1966.
After talking my parents into a Wall Street Journal subscription (it was $11 for 6 months) I formed a little family fund. 5K. That would be about 40K today. I was only 14 and therefore legally unable to instruct a broker to do anything. The Merrill Lynch broker got tired of me having to put my mother on the phone to confirm what I'd told him to do, so he decided to just take my instructions. Good thing I made money, 'cause I could have repudiated any transactions done only on my word. I would never have done such a thing, but that was the risk he exposed himself to.
Since then I've been a regular trader of and investor in securities, options on securities, futures, options on futures, single stock futures and all sorts of other esoterica.
My funniest memory is of being on a pay phone to the M-L broker in my high school hallway, with a flood of oblivious students going by on their way to their next class. I was busy exercising a call option and selling the called shares at the market. Happened to be 100 shares of International Industries (this was the outfit that owned IHOP at the time, and franchising was hot.)
Called away from the seller of the call option at the option strike price, 33 5/8. Then, simultaneously sold at 53 3/4, confirmed to me while I was on the phone. 2K gross profit less the 900 bucks I paid for the call option. When I bought it about 60 days prior, it was about 800 bucks in-the-money as INT was at ~42. I risked the entire 900 bucks I paid, but only about 100 dollars of the 900 was for the 60 days of time. In the then-roaring bull market for franchisers like INT, time was everything.
1100 bucks was a pretty nifty short-term profit for a 16 year-old kid in 1968. This was before the CBOE and other options exchanges even existed, over-the-counter dealer option inventory was advertised in tiny little ads in the WSJ. Thomas, Haabt and Botts was the dealer in this case. I'll never forget that name.
Along the way, in one of my business incarnations, I was a registered Commodity Trading Advisor. Had about 25 mill under management subject to performance fees of 25%, traded according to my proprietary trading system. 20 mill of the 25 mill was profit that I generated in less than a year, which explains why I've been retired for a long time.
I'll also say that my success speculating on a large scale (mostly with other people's money -- it doesn't get any better than that -- unlimited upside, zero downside other than your reputation) was mostly a matter of good luck. I constructed and sold a system for trading (metals -- gold and silver) that worked absolutely perfectly for a while. It was incredible.
And not likely to be repeated. Which is why most speculators die broke. In fact, when I looked at the succeeding 5 years, my system was a total failure.
Not that someone can't come up with more than one good idea. Years later, I identified a situation in wheat that was good for a quarter-mill to me over about 6 months. The reason for that trade had nothing to do with the previous metals trading system.
In any case, killer trades or systems are rare, and you shouldn't believe anyone who says otherwise. If you do, you are likely to be fleeced. And die broke.
I still trade commodity futures (pure speculation) with a relatively small amount of capital, but mostly what I do is buy Dow Industrial or S&P 500-type stocks that pay a dividend of 3% or more. Maybe 30% of the portfolio is a bit more speculative, but I won't buy anything that doesn't pay a significant dividend.
I write (sell) call options against those positions on an ongoing basis whenever an opportunity presents itself. This is known as writing "covered calls" -- you own it outright, no margin, and you don't care if it's called away, that is, if it goes up more than you expected and the option is exercised. My experience has been that about 90% of those call options expire worthless (worthless to the unfortunate buyer, who is usually a speculator who mistakenly thought the stock would go up sufficiently to make his call purchase profitable.) Even if the option is exercised, I pocket the option premium paid by the buyer. All of those option premiums, mostly from options that expire worthless, can bump the portfolio return up by 3-4% per year.
That takes the portfolio return up to 6-7-8%/year. When a position gets called away, I buy it back on a dip if I still want to own the security or buy something else and write calls against it as appropriate. On the less-than-blue-chip stuff, I also earn interest from people who want to borrow those shares to sell them short. Can add a tenth or two of a percent to total return.
My general suggestion to anyone would be to buy quality securities that pay a decent dividend and forget about them. Get paid a good return just for owning them. Consider writing covered calls (on anything you own at least 100 shares of) if you have the time (and knowledge) to devote to decision making.
While a return comprised of dividends and covered call-writing can be significant, the return on quality securities from capital appreciation over time, and by time I mean 10-20-30-40 years likely will dwarf everything. My holdings are designed to throw off a decent current return (6-8%) while waiting for and expecting much more significant capital appreciation over time.
I should probably repeat that. Holding quality dividend-paying securities over decades can (but won't necessarily) make you wealthy. Capital appreciation over time is the name of the game. Meanwhile, collect your dividends (and write calls against your positions if you wish to) and worry about more important stuff.
Like who the Marlins will acquire in the off-season.
Oh, and none of the above should be construed to be investment advice of any kind. Past performance is no guarantee of future performance, etc., blah, blah, blah. Do your own due diligence or suffer the consequences.
I'm new to it, but I've watched it for years and used to play with it as a kid. I'd follow a few companies and "invest" fake money. Now I'm in with some real money.
There are hundreds of index funds of all types around, not to mention hundreds of sector ETFs and closed-end exchange-traded mutual funds. The proliferation of liquid investment vehicles spanning the entire gamut of risk and ways to undertake that risk over the last 30 years is really quite amazing.
A triumph of the private sector -- evil Wall Street has provided the average investor a stunning cornucopia of choices. The first trades I made back in the '60s were under an essentially monopoly-imposed commission structure that whacked you for an ungodly amount. Today, if I want to buy 100 Google for $100,000, the broker's commission will cost me the whopping sum of $1. Sell that 100K of GOOG? Another dollar. Instantaneously. Click. Done. Try that with a piece of real estate. Anyway, I digress. I'm just glad that the government isn't in charge of financial products, Dodd-Frankenstein notwithstanding.
It's a matter of whether you want to devote the time and energy to running your own portfolio. If not, mutual funds and/or ETFs will be happy to do it for a fee, whether up-front or otherwise buried in the fine print.
I've been immersed in this stuff for 50 years, so it's second nature to me and I would never delegate the management to anyone else. You have to decide what's right for you.
fannie mae FTW