I get asked a lot of questions about what tools and strategies I use personally. Over many years I worked out that successful investing has two critical pieces:
- Strategies
- Data
Both of these are not mutually exclusive. You cannot have one without the other. As an income trader (through options) I know that there are over 12 ways in which I can create income out of a single stock (that has a liquid options chain).
These knowledge (and by default the strategies) provide me with the tools to derisk my investment (so I don’t lose any capital), make a profit if the position drops in value, retain unlimited upside if the stock shoots through the roof and still get an income every week for holding the stock.
I am laughing in my head because many of you reading this just said “no way, that’s impossible!”.
I can tell you that formal education in options trading is completely disingenuous to the outcome you are supposed to be obtaining (make a profit). The knowledge you gain invariably only tells you half the story. Its this other half of the story that I focus on. Ever wondered how wealthy families get their wealth to grow after they made it? I can say that it would pretty much be based on the 50% of the material that the expensive university course did not show you.
I am often asked to provide an opinion to my clients on various investment theories – asset allocation, dogs of the dow, dividend, you name it.
My issue with these strategies is not that they don’t work – they do. To a point. I have an issue with how they are advertised as silver bullets. And no one talks about how they don’t work and under what scenarios they may have difficulty in performing.
You see, investing is really about mathematics. How many times can you double your assets in your lifetime. Using these strategies does not necessarily guarantee “a double” at all. Dividends can be cut. Assets can suddenly be correlated (never forget 2008…). All strategies have one common problem. You never know what really is going to happen.
I mean – look at the glorified fairy dust peddlars who work in banks and brokerages who peddle the snake oil of valuation prediction. Buy this today! Its going up tomorrow! Sound familiar? Equity research provided by banks is tainted goods.
Don’t believe me?
For more on this read this
http://www.economist.com/news/finance-and-economics/21594358-bear-market-or-bull-analysts-give-bad-advice-consistently-wrong
My problem with a lot of the main stream strategies is they over simplify investing to a series of lucky guesses and, in my opinion, don’t set you up to double your money enough times in your working life. One bad year can really derail your life plan. Two bad years can be catastrophic.
So what?
You need to pick a strategy that provides the following:
- Control of your money – DO NOT GIVE YOUR MONEY TO ANYONE. EVER. PERIOD.
- A certainty of return – Even when its as low as 1% a week compounding over a year and you can easily gain 40-50% a year.
- Regularity of return – I will not wait for a year or two to see a return. I want to see returns either weekly or at worst monthly.
There is only one strategy that has this and that is selling options. Please note that I said selling. Not buying (buying is what the fairy dust peddlars do because they often believe that they are smarter than the market). I don’t subscribe to the trend of binary options trading through an app. In fact, if you see one of those adds with a guy looking flashy, read the small print of the contract. It’s all a scam. But I digress…
I don’t believe that the conventional approach actually works (have you noticed that every mutual fund company is number 1 and the graphs they show you in terms of past performance always seem to have no real dips? I suggest you read the fine print on that too…).
So to close this piece, your strategy is critical. You need to understand what you are doing and why you are doing it. You cannot (should not) rely on someone else to tell you what your strategy should be. It needs to fit your temperament and your result requirement. If you are ok with wasting a year for a negative return then you can continue with that approach. If you are keen to see a result and know that on a regular basis you can see you are moving forward then stick with me and I will show a method that works for me. And it can work for you too.
In the next piece I will detail my data strategy that will give you performance results. Be careful out there.