How to Stop Worrying about Stocks for Good

How to Stop Worrying about Stocks for Good
Feb

8

2016

How to Stop Worrying about Stocks for Good

A Frightening Plunge in Stocks Reminds us of the Importance of Non-Directional Strategies

Call it a re-make of Eastwood’s classic The Good, the Bad and the Ugly.

The Good: UBS, for having the guts to call it like they saw it, regardless of potential damage to their earnings.

The Bad: The Chinese Economy and (depending on your economic beliefs) the Federal Reserve

The Ugly: If you own any stocks at all or trade indexes, you know the ugly.

You should know by know that this is not a newsletter that tries to predict the direction of the S&P, let alone tell you what to do with it now. Yet, the question everyone wants answered is, “Is this now a buying opportunity or the beginning of something more ominous?”

stressed stock trader

A tough month on Wall Street reveals, yet again, investor dependence on (and vulnerability to) stocks.

My perspective? Don’t know. Don’t care. Don’t have to. All I can say is that I’m glad I don’t have to invest in or trade the stock market.

But as you probably have at least some of your assets in equities, I’d like to attempt to provide some comfort by helping to put things in perspective. It you’re looking for a professional to tell you everything is going to be OK, I can’t do that – at least as it pertains to stocks. What I can do is provide some prospective in how this all relates to your overall assets and how it is allocated.

But I digress. Lets first address the ugly. At the darkest days of January, the S&P was down 10% on the year 2016. It’s the worst ever yearly start for the stock market. The slide has also been broader than many previous ones, including the early stages of the 2008 meltdown. As a result, much of the stock world is in panic mode. Memories of 2008, still painfully fresh in investor minds, have sent investors into liquidation mode, scrambling for “safe haven” investments.

The bad, of course, can be spread around. Pick your poison: The sharp pullback in the Chinese economy (where some analyst project only 4% to 5% growth this year), the resulting collapse of the Chinese stock market, continuing sluggish global growth, heightened doubts about the willingness of central banks to boost their economies, the rising specter of global deflation, the Fed’s decision to raise rates in December (which some now call premature), the collapse of oil prices, et…There is plenty enough provided on the bad by the media. There is no need to rehash it here.

The good, if you can call it that, comes in the form of an investment bank (where a considerable part of its revenue comes from its customers trading stocks) gave its honest, if not disturbing advice.

“Sell Everything except high quality bonds.” UBS boldy stated last month. They went on to add that 2016 will be a “cataclysmic” year for stocks and that “we think investors should be afraid.” As though that did not drive the point home enough, they threw in that investors should be concerned about “a return of capital, not return on capital.”

Kudos to UBS for scaring the $*%#@ out of everyone. But it’s refreshing to at least see some brutal honesty from those that are typically cheering stocks whether up, down or sideways.

On a brigher note, Alan S. Blinder published a great piece in The Wall Street Journal on January 21 entitled “Markets are Scaring Themselves.” The gist of the piece is that the recent sell off is emotionally driven and not justified in light of the real fundamentals of the global economy (ie: its not as bad as you think.) No small assertion, given that it comes from the former vice chairman of the Federal Reserve. But for those thinking about buying weakness, he concludes with the age old wisdom “The market can stay irrational longer than you can stay solvent.”

A sound observation, especially given the ominous looking monthly chart of the S&P.

S&P 500 (Monthly)


Time to buy? Maybe. But a look at the monthly S&P chart may give some investors pause.


Time to buy? Maybe. But a look at the monthly S&P chart may give some investors pause.

So what is an investor to do?

If you’re part of the “buy the dips” crowd, this is your chance. Stocks have bounced a bit since the January depths. All of the stock brokerages and financial planning crowed will tell you to hold the line because, of course, they forecast “a recovery.” The other establishment wisdom (such as that provided by UBS) is that you buy “haven” assets such as high quality corporate debt or US treasuries. Others advise buying cash investments or buying “defensive” stocks.

Notice that most of this “conventional” wisdom revolves around buying something.

This is herd mentality.

As an intelligent option seller, you know that zigging when the heard zags is often the recipe for not only surviving in the markets, but thriving.

Whether any of these guys is right or wrong is irrelevant – or, at least it should be if you’re a sophisticated investor. Because when everyone else is still looking to buy something, you can still be selling something (option contracts.) and more importantly, getting paid for it. That’s why when everyone else is trying to find something that will just shield them from the storm, you’re looking for ways to profit from the storm. That’s why when everyone else is looking for what can possibly still “go up,” you can be positioning for something to move down, or up or not at all.

I promised you comfort so here it is. The silver lining to the January carnage is this: You can use it as a wake up call to become a better investor – to avoid, or at least cushion, this kind of pain in the future.

See, they’re still thinking old school: diversification of assets. You can jump ahead into 21st century investing: Diversification of assets AND diversification of strategy. More importantly, non-directional strategies that can potentially deliver lofty returns in up, down or sideways markets. Let them worry about “defensive” positions. Option sellers aim to make money every month – regardless of which way markets are moving.

This is as much about protecting and growing wealth as it is about peace of mind. The stock market may shoot straight up and make new highs next week. That doesn’t erase the mental anguish it caused you in the meantime, even if you didn’t unload at the lows. Wouldn’t it make the ride a bit more comfortable to know that a portion of your net worth was working in an asset class uncorrelated to stocks, bonds or interest rates and could potentially deliver, no matter what way those asset prices were moving?

There will always be a case for holding equities over the long term. But this year’s ugly start only illustrates the fact that traditional investing is getting tougher. As a result, traditional investors are left to choose between several potentially bad courses of action when tumultuous times inevitably arrive.

This is the new normal for high net worth investors. And the remedy is diversification into quality alternatives, capable of producing in, and independently of, a rancorous stock market.

That’s the Good to take away from all of this. May you take comfort in it.

To learn more about James Cordier’s managed option selling portfolios, visit www.OptionSellers.com/Discovery to get a Free Investor Discover Pack for high net worth investors.

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