Offer a baseball player an elixir that would ensure he hits the ball for bases every three of four times at bat, I can assure you he would drain the bottle before you finish the proposition. To realize base hits with 75% (to bat 750) of your plate appearances is a quantum leap forward compared to all of baseball history. Riches galore would reign upon the baseball player able to perform at such on extraordinary, lone plane.
How about you, the investor? Would you imbibe an elixir that guaranteed a 75% winning percentage with your investments? That is, 75% of your investments would be guaranteed to generate a return greater than a broad-market index, such as the S&P 500 or NASDAQ Composite.
The answer for the investor involves some situational forethought: time and risk tolerance are factors to consider. Degree of activity is another. Are you mostly passive (buy-and-hold), or mostly active (trading frequently over the course of the year)?
Permit me to lead the witness.
When I am a passive investor (and most of my retirement accounts are managed with little activity), the answer is "no." I would refuse the elixir because I can do better. Investors can beat the broad-based barometers over time with the right investments -- the right mutual funds in particular.
Talk that active mutual fund managers are unable to beat the broader market is mostly blather. Many active mutual fund managers do beat the broader market, perhaps not every year, but over time. Indeed, a plethora of market-beating mutual funds is found after a thorough perusing of Morningstar. If time is on your side, and if you're willing to sit on your hands during that time, you can construct a portfolio of well-managed mutual funds that will generate returns that will exceed the broad-market measures over your holding period (measured in decades).
If you're more active than the typical retirement-account investor, or if you prefer individual securities to mutual funds, you should be inclined to mull the 75% proposition a bit longer and a bit deeper, especially if you are an income-value investor a bit longer in the tooth.
Growth stocks have led the market for the past 10 years. I would aver that at least 50% of income-value investors trail the broad-market barometers. And if your stocks are recent additions, they likely not only trail the broader market they likely trail your cost basis, as well.
Active investors should be more willing to partake of the fantasy elixir than passive investors. The more active you are, the more likely you are to incur losses. The more you trade, the more you will screw up. You'll sell winners too soon; you'll hold losers too long. You'll trade more often after a long advance; you'll sell more often after a market decline.
Most active investors would aspire to succeed with 75% of their trades, but that winning percentage is not guaranteed to generate wealth. I speak anecdotally on my experience employing two strategies sold as active, repetitive, conservative, and low risk. I refer to covered-call option writing and cash-secured put-option writing.
The covered-call option strategy involves buying a stock and then selling a call option (usually out of the money) on that stock. The income received from the option can be perceived as either additional income or as a reduction of the cost basis.
The cash-secured-put strategy involves selling a put option (again, usually out of the money) on a stock you would like to own, but one you are somewhat ambivalent about owning. You collect the income from selling the put option and you hold the cash required to purchase the requisite company\s shares at the stated strike price, should the need arise.
I have employed both strategies with what would appear a high-degree of success -- a winning percentage near 75%.
Appearances are deceiving.
Winning with three of four trades employing a high-volume trading strategy like the aforementioned option strategies at the aforementioned success rate (75%) would appear remunerative. For me, it was not. Yes, I would win with three of the four trades: I would collect the income with the options expiring worthless. I was able to close the option contract without buying an offsetting contract. I did not have to sell a stock I generally wanted to own, nor did I have to buy a stock I was ambivalent about owning.
But then the fourth trade -- the dreaded 25% -- would muck it all up. The income I accumulated with the three previous trades would be offset (and then some) by that fourth trade.
The fourth stock that I would write a call option would be called away.
The price would have appreciated sufficiently above the strike price so that the buyer of the call option I sold would exercise the option. To add insult to injury, the price would continue to rise after the option had been exercised. I had the call-option income; I lost the far greater share-price appreciation. Or the share price would fall during the holding period. Remember that the strategy is covered. I was obligated (for risk reduction) to hold the shares for the duration of the contract. Of course, I could have bought a call option on the same terms to cancel my obligation and sell the stock. The buy price of the call option would be higher than my sell price. How could I possibly know that the share price would not recover. To predict the price direction over a short, finite time is to predict the flight path of a butterfly. It is impossible.
As for the put-option strategy, a fit of market volatility would inevitably arise during that fourth trade. The share price of the stock for which option was written would drop close to being in the money, then drop further to at the money, and then drop further still to in the money, and then continue to drop to well-in the money (for the put buyer). I was contractually obligated to buy a stock that I could have bought far cheaper on the open market. If I wanted to cancel my obligation, the price of the offsetting put option would far exceed the price I received for this contract, and frequently for the previous three "successfully" written contracts.
Perhaps I am an exceptionally poor soothsayer. Options are a poor fit and not my bailiwick. Guilty as charged, but I keep company, and plenty of it. I aver that the majority of investors are as equally inept as yours truly at foretelling the market over the next month or two.
Hitting a baseball for bases three of every four visits to the plate would be a Herculean feat for a baseball player. The the same winning rate is less impressive, or even desirable, for a specific strain of investors: The intelligent buy-and-hold investor would scoff at such a lowly success rate, and rightly so.
A magic 75% investing elixir is a fantasy, but it doesn't matter, if you are the right strain of intelligent investor. You can do better imbibing reality.
How about you, the investor? Would you imbibe an elixir that guaranteed a 75% winning percentage with your investments? That is, 75% of your investments would be guaranteed to generate a return greater than a broad-market index, such as the S&P 500 or NASDAQ Composite.
The answer for the investor involves some situational forethought: time and risk tolerance are factors to consider. Degree of activity is another. Are you mostly passive (buy-and-hold), or mostly active (trading frequently over the course of the year)?
Permit me to lead the witness.
When I am a passive investor (and most of my retirement accounts are managed with little activity), the answer is "no." I would refuse the elixir because I can do better. Investors can beat the broad-based barometers over time with the right investments -- the right mutual funds in particular.
Talk that active mutual fund managers are unable to beat the broader market is mostly blather. Many active mutual fund managers do beat the broader market, perhaps not every year, but over time. Indeed, a plethora of market-beating mutual funds is found after a thorough perusing of Morningstar. If time is on your side, and if you're willing to sit on your hands during that time, you can construct a portfolio of well-managed mutual funds that will generate returns that will exceed the broad-market measures over your holding period (measured in decades).
If you're more active than the typical retirement-account investor, or if you prefer individual securities to mutual funds, you should be inclined to mull the 75% proposition a bit longer and a bit deeper, especially if you are an income-value investor a bit longer in the tooth.
Growth stocks have led the market for the past 10 years. I would aver that at least 50% of income-value investors trail the broad-market barometers. And if your stocks are recent additions, they likely not only trail the broader market they likely trail your cost basis, as well.
Active investors should be more willing to partake of the fantasy elixir than passive investors. The more active you are, the more likely you are to incur losses. The more you trade, the more you will screw up. You'll sell winners too soon; you'll hold losers too long. You'll trade more often after a long advance; you'll sell more often after a market decline.
Most active investors would aspire to succeed with 75% of their trades, but that winning percentage is not guaranteed to generate wealth. I speak anecdotally on my experience employing two strategies sold as active, repetitive, conservative, and low risk. I refer to covered-call option writing and cash-secured put-option writing.
The covered-call option strategy involves buying a stock and then selling a call option (usually out of the money) on that stock. The income received from the option can be perceived as either additional income or as a reduction of the cost basis.
The cash-secured-put strategy involves selling a put option (again, usually out of the money) on a stock you would like to own, but one you are somewhat ambivalent about owning. You collect the income from selling the put option and you hold the cash required to purchase the requisite company\s shares at the stated strike price, should the need arise.
I have employed both strategies with what would appear a high-degree of success -- a winning percentage near 75%.
Appearances are deceiving.
Winning with three of four trades employing a high-volume trading strategy like the aforementioned option strategies at the aforementioned success rate (75%) would appear remunerative. For me, it was not. Yes, I would win with three of the four trades: I would collect the income with the options expiring worthless. I was able to close the option contract without buying an offsetting contract. I did not have to sell a stock I generally wanted to own, nor did I have to buy a stock I was ambivalent about owning.
But then the fourth trade -- the dreaded 25% -- would muck it all up. The income I accumulated with the three previous trades would be offset (and then some) by that fourth trade.
The fourth stock that I would write a call option would be called away.
The price would have appreciated sufficiently above the strike price so that the buyer of the call option I sold would exercise the option. To add insult to injury, the price would continue to rise after the option had been exercised. I had the call-option income; I lost the far greater share-price appreciation. Or the share price would fall during the holding period. Remember that the strategy is covered. I was obligated (for risk reduction) to hold the shares for the duration of the contract. Of course, I could have bought a call option on the same terms to cancel my obligation and sell the stock. The buy price of the call option would be higher than my sell price. How could I possibly know that the share price would not recover. To predict the price direction over a short, finite time is to predict the flight path of a butterfly. It is impossible.
As for the put-option strategy, a fit of market volatility would inevitably arise during that fourth trade. The share price of the stock for which option was written would drop close to being in the money, then drop further to at the money, and then drop further still to in the money, and then continue to drop to well-in the money (for the put buyer). I was contractually obligated to buy a stock that I could have bought far cheaper on the open market. If I wanted to cancel my obligation, the price of the offsetting put option would far exceed the price I received for this contract, and frequently for the previous three "successfully" written contracts.
Perhaps I am an exceptionally poor soothsayer. Options are a poor fit and not my bailiwick. Guilty as charged, but I keep company, and plenty of it. I aver that the majority of investors are as equally inept as yours truly at foretelling the market over the next month or two.
Hitting a baseball for bases three of every four visits to the plate would be a Herculean feat for a baseball player. The the same winning rate is less impressive, or even desirable, for a specific strain of investors: The intelligent buy-and-hold investor would scoff at such a lowly success rate, and rightly so.
A magic 75% investing elixir is a fantasy, but it doesn't matter, if you are the right strain of intelligent investor. You can do better imbibing reality.
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