One Way to Make Money vs. Many Ways to Make Money

One Way to Make Money vs. Many Ways to Make Money
Jun

14

2018

One Way to Make Money vs. Many Ways to Make Money

“Buy and Hope” Can be an Overrated Investment Approach

It was about 8:00 pm a few weeks ago when a frantic pounding at the front door jolted me out of the 1st period of a Tampa Bay Lightning playoff game.

Slightly alarmed, I answered the door. It was my long time neighbor, Shelly.

Shelly has had a rough time of it as of late. Her husband of 41 years passed away last year, leaving her to live in a very large house, alone with her 15 year old St. Bernard, Rosco. While we are not “family” close, my wife and I talk with her ocasionally and check in on her from time to time.

Shelly was beside herself. She had come home from shopping to find Rosco laying on his side, gasping for breath. She was taking him to the veterinary emergency room and needed help lifting him.

We picked up Rosco and got him loaded into her SUV.

S&P 500 1982-Present

GRAPH: S&P 500 1982-Present


“Over the long term:” Despite common financial industry mantra, there are long periods of time where stocks would have been a poor investment.


We heard nothing from her until the next morning when she stopped by to visit.

According to a sullen Shelly, the veterinarian did an initial examination of Roscoe. After a brief medical explanation, he stated “There is nothing we can do.”

He advised putting Roscoe down. After a gut wrenching 10 minute consideration, our shaken neighbor took the vet’s advice.

Parallels to Another Sad Topic

Sorry to start this month’s newsletter with such a sad story. But it’s important because it draws a very close parallel to another serious topic – Your long term financial security.

The “there is nothing we can do” response is NEVER what you want to hear from ANY kind of doctor. You know the outcome of that conversation is not going to be good.

But that phrase is also routinely repeated by financial advisors the world over, every time stocks collapse.

Perhaps you’re old enough to have experienced the1987 market crash. If not, how about the 2000 tech bubble crash. If none of those, you should at least have a painful memory of the 2008 meltdown.

If you had a stock broker or financial advisor at that time, what did they tell you?

Chances are, it was some version of “there is nothing we can do.”


“Stocks always go up” is a much repeated rallying cry (and sales pitch) put forth by the stock brokerage/financial industry. Even gurus like Buffet repeat the oft cited phrase, which is, at its core, factual.
The devil, however, is in the details.

And your gut probably sustained no less of an emotional punch than did Shelly’s.

In both sitations, YOU, the person on the other side of these words, is completely, hopelessly, helpless.

Financial advisors and brokers have a little twist they put on it though. They’ll add a little silver lining they learned in financial advisor school – a line that is their Mantra. You know it, you’ve heard it. It goes some version of this:

“Don’t worry. We’re in this for the long term. Over time, it always goes up.” Then they break out the little chart that (conveniently) starts in 1929 and shows you how, over 90 years, stocks go up.

Serious Doctor

“There is nothing we can do” is typically not a phrase you want to hear from your doctor OR financial advisor.


But these guys SELL stocks and stock funds. This is what they DO. Stocks are their “product.” What else are they going to say? It’s like going to a tire guy and asking him if you need new tires. Or calling an air conditioning guy and asking him if you need service.

“OF COURSE you need to keep your stocks! You can’t bail out of OUR product!”

You’ve gotta hand it to them though. They’ve got a great pitch and an even better visual.

But it’s not that simple. That neat little chart hides some sinister flaws.

The Rub

“Stocks always go up” is a much repeated rallying cry (and sales pitch) put forth by the stock brokerage/financial industry. Even gurus like Buffet repeat the oft cited phrase, which is, at its core, factual.

The devil, however, is in the details.

Stocks may eventually go up over a 90 year period. But there are long, and I mean long periods of time during that stretch where stocks would have been a terrible investment – a virtual wealth destroyer.

For an example, we need take only the past 20 years.

Had you invested your nest egg in the S&P at the height of 2007’s euphoria, 13 months later you would have lost a staggering 58% of your wealth.

“But it came back up,” you may argue.

Sure it did. Five years later, you broke even. This IF you had the intestinal fortitude to hold it that long and withstand that financial and emotional trauma.

But it gets worse.

A Long Wait

Suppose you had invested that same nest egg at the height of the2000 tech boom. You would have had a similar disasterous result 18 months in.

Your financial advisor may have told you to “hang in there for the long term. It will come back.”

And he was right, of course.

13 years later.

In April of 2013, you would have been made whole again. Aside from a few weeks at break even in 2007, it would have taken you 13 years to be profitable on your investment . The rest of that time would have been spent in the red – some of it at painfully losing levels.

13 years is an entire retirement for some people. If your nest egg was invested in 2000, or even 2007, that would have been a long, lean and stressful retirement. Not the nice, comfortable chairs on the beach pictures put forth in all of the “wealth management” industry brochures.

Man being held hostage to price appreciation

Hostage to price appreciation: While “buy and hold” investing has its merits, it means you’re 100% reliant on the price of stocks moving higher – now and forever.


The point is not that you shouldn’t have some assets in stocks. The point is that if you buy a stock, or an index fund, or any countless other equities based “products” put forth by the mainstream financial industry, you are 100% reliant on the price of stocks moving higher – Now and forever. That is the ONE way you can make money.

You are helpless – held hostage to the iron bonds of price appreciation. It has to just keep going up – forever, and you’ll be ok.

What about a bad economy? What about a war (hot, cold, trade or otherwise), political turmoil, accellerating interest rates, deflation. What if a CEO makes a terrible decision, embezzles or alienates the board of directors?

What about another 1999 or 2008?

You could be out of luck.

And what will your advisor tell you?

“There is nothing we can do.”

The Choice

By choosing to become an option seller – you free yourself from these chains . You can make money in rapidly appreciating markets – sure. But that is only ONE way to make money. You can also make money in rapidly falling markets, slowly falling markets, sideways stagnent markets or slowly rising markets. You can make money in slow markets, fast markets, or erratic markets.

Many are greater than one.

For the core truth is this: As a long term “buy and hold” investor in stocks, funds, ETFS, etc, there is only ONE way to make money. Price appreciation. You buy and hope.


As an option seller, there is ALWAYS something you can do. You are never helpless.

As an option seller, there are MANY ways to make money . If you buy a stock, the one way for you to make money is the price of that stock to go up. If you sell an option, a number of things can happen and you will still make money . Suppose you just sell a put instead of buying the underlying asset? Prices can go up and you make money. But they can also become erratic. They can move sideways. You can even be WRONG and they move lower. In many cases, you STILL make money.

Apply that to independent, widely diversified commodities markets, and that equation magnifies exponentially.

As stocks continue to hover near ever more precarious levels remiscent of 1999, you may want to keep this in mind.

As an option seller, there is ALWAYS something you can do. You are never helpless.

Because in the next 1999 or 2008, when it’s YOUR portfolio laying on that exam room table, you want it to leap to its feet and march out – while the mainstream crowd mourns and waits (and waits and waits.)

To that end, have a great month and congratulate yourself. As an option seller, YOU have MANY different ways to generate growth and income in nearly ANY kind market condition. You are empowered.

Enjoy our June newsletter.

Regards,

James

(PS – As for Shelly, she is doing fine. While Roscoe was a difficult loss, she is recovering. She has opened the door to the thought of a new furry friend in the future.)

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