Post of the Day
August 3, 1999
Mechanical Investing Folder
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
"Ahhh but let's not forget stock market math...50% down is equivalent to 200% up. Tho stinketh, it is true."
Mmm, I think what you mean is that gaining 100% then losing 50% brings you back where you started. That's alarmingly true. This is one of the reasons why I think even people who have sworn to invest exclusively in stocks might get something out of studying the options demos. No self-promotion intended--I'm serious.
|"The threats that large losses represent are the nagging mother-in-laws tapping on the back of all investment strategies."|
The threats that large losses represent are the nagging mother-in-laws tapping on the back of all investment strategies. When one ventures into leveraged investing (options, margin), one begins to understand how the investor must brace for the threat of large loss. It is a "put up or shut up" imperative in leveraged investing. I options, money management is your only defense. I saw Ray mention out here that he had an option portfolio that experienced nine losers out of ten this last go-round. I've been there. It stinks, but I also saw Ray get back on the horse, fully aware of the power that these options strategies have in a way-way-gone quarter.
In stocks, most investors are used to the old buy-and-hold saws. "Don't watch 'em." "Buy a great stock and forget about it." "Stocks may be volatile, but you can't lose everything, as you can in options." (That last sentence is false.) Confronting the threat of enormous loss is a pivotal learning point for a good investor. Here is where the stomach churns, those things you wanted to buy are evaraporating visibly, that loan seems a little less easy to pay off, the ephemeral effect of your two-year outperformance of the indexes (which had you pumping your fists at the mutual fund ads) seems fleeting, the Hawaii vacation might be better to take next year, and risk management sits down, tosses back a tequila shooter and stares you square in the retinas.
|"...risk management sits down, tosses back a tequila shooter and stares you square in the retinas."|
I worry sometimes that some people out here chase CAGR and nothing else. You mustn't do that. My portfolio is 40 units value, 50 units growth, and 10 units options. In 15 years, the value part will be significantly bigger. There are several good value screens that will get you in the neighborhood of 22% to 34% CAGRs going back a long way. Why not mix them with your momentum screens to get good returns, balance of styles, and extra diversification?