Saturday, May 24, 2008

Random Thoughts for Traders on a Holiday Weekend

As an advocate of discipline in trading, I am a firm believer in having a precise exit strategy in place before I ever enter a trade. I try to do that in my own trading and believe it is important to actually exit according to that plan rather than relying on that little voice in my head that tells me: "Don't worry, hang in there, it'll come back." One of my random thoughts this weekend is whether everyone has that little voice. In talking with traders and students over the years, I suspect almost everyone has heard that voice and maybe even heard the same advice. It can be awfully easy to listen to that voice and stay in a play just a little longer than originally planned. Maybe the voice is right. Maybe it will come back. I'm sure many would argue that you should stay in because the market goes up and the market goes down and, after all, it is best to buy and hold. On the other hand, could it be that it won't come back? If it is coming back, when? Since I have absolutely no ability to predict the future with certainty (and neither does anyone else as far as I know), what effect does my believing that "it'll come back" have on the price movement of the stock? Obviously saying "it'll come back" does not make it so. Trading, quite simply, is done in the present. That, I guess, is one of the main reasons why I set up my exit strategy before I enter a play and exit when it is hit -- almost always, at least.

Another of my random thoughts this weekend is why don't people make the effort to take over the management of their own money? Why, for example, was there such a furor over the idea that as at least a partial replacement for social security, people be in charge of investing their own retirement money? Really, now, how has the government done investing the social security trust monies? If we are going to have retirements, who is going to provide the money? Social Security? Corporate pensions -- how many people coming to retirement thought they would have a pension and now don't? My thought, and you certainly may disagree, is that everyone should be in charge of their own investments. That means that they may need to invest some time first in educating themselves and it could take time away from watching the "Bachelorette" or some other reality TV show. Is it worth the effort? It was for me. I had no savings, no pension, no appreciable 401k, but took the time to learn about risk and money management and strategies and it has done me very well. If I didn't do it, who was going to do it for me? So I did it. The apprehension about learning trading and investing is, quite frankly, much worse than the learning itself. We have been led to believe investing, trading, stock and 'oh my gosh,' options are too complex and well beyond our abilities. Frankly, I believe that is nonsense or an excuse not to learn. I wrote "Trade Your Way to Wealth" in an effort to show readers many different strategies that could make them money. None of the strategies is particularly complex and money can be made with any or all of them. I tried to use clear simple language and teach basic strategies using stock, stock and options, and options in order to try to make understanding easy. Building on sound basic foundations, almost anyone can take a book like "Trade Your Way to Wealth" and gain an understanding of how risk can be managed, limited, reduced, or in some cases even eliminated while employing strategies potentially leading to high profits. Almost any of us can learn ways to trade or invest successfully providing we are willing to commit to learning. Why do so many of us simply refuse to do it and expect it to come from somewhere else?

The next random thought for the weekend is why do so many people always go after the home run in trading? I've seen so many over the years who are in a highly profitable position only to see the profits fade and ultimately turn into a loss all the while waiting for the big hit. Though 'ten baggers' do occasionally occur, why not generate profits in smaller increments as well. I've heard it said that no one can get rich selling covered calls, for example. I disagree. As a purely hypothetical example, suppose we could make 2% a month selling covered calls, the compounding effect can lead to some pretty hefty sums over time. Let's say you could net 1.5% per month selling those unexciting covered calls. That would be an 18% gain in a year. Using the rule of 72 and compounding at 18%, it would take about 4 years to double your money. $10,000 could grow to $160,000 in 12 years or $100,000 to $1.6 million in 16 years. As one instructor told me, one of the great ways to make money in the markets is the same way you eat an elephant -- one bite at a time.

My final, though not so random, thought for this weekend is that you have a wonderful one and a great Memorial Day.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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24 comments:

Anonymous said...

The article struck a cord with me. I went thru 2001 and lost 80% of my asset by trusting others. I took over the management in 2005 and has gained 60% in 3 years. It was a lot of hard work and worries when the market was moving up and down. But, we are ultimately rewarded by our own fruits. I appreciate your writing.

Anonymous said...

Mr. Kraft, God bless you for your wisdom and willingness to share it with others. Bought your book and have read it . Has inspired a few ideas of my own. Have to re-read it several times.I am told that all educators know that, in order to really learn something, one must see, hear, or read it six times. You, Ollie Velez, and Chuck Hughes, are all inspirations. As to the question of why the masses don't take over the effort to manage their own money? Could be several reasons rooted in one. As a student of the Bible, and especially of The Book Of Proverbs, one has long noted the "sheep" factor in human nature. Given the above, it has also, long been easy for Wall Street to couch it's terms in such esoterica as to cause Joe and Judy Sixpack's eyes to glaze over. It has long amazed me that God made wisdom available to everyone, but it seems reserved for the (very) few. The subject of getting Wisdom has to be one of the most ignored in today's churches. But then, there is hope. Authors like yourself are helping to change things. Then there is our good buddy, The Internet. I can't help but believe that the combination of the two will catalyze positive change. So keep up the good work.

Anonymous said...

Bill,

You are dead on!

Most people are discipled in their job, but when it comes to managing the money they worked so hard for--they loose all their self confidence, create the "fear block" & act like managing their money is like rocket science.
This is truly the most important "take control" part of one's life.

The amazing thing is that the foreigners newest to capitalism seem to be way ahead of the curve

Larry Campbell, Sacramento said...

I liked every random thought until I read the benefits of selling covered calls. What is usually overlooked is that you bought your various stocks because you believed they would increase in value. When you sell a covered call, the buyer of the call is saying he likes the prospects of your stock rising in price even more than you do. You are betting it will go up very little, while he is betting it will go up enough more for him to exercise his call and take your most profitable rising stocks away from you. Then the small option premium is not worth losing your winners and keeping your non-performing stocks. Larry Campbell, Sacramento

Anonymous said...

Excellent article. I have been reading these for some time and believe that you got a handle on this investing,

Bill Kraft, MarketFN.com said...

Thanks, Anonymous. It's great to hear from someone who has taken the yoke of managing his or her finances and succeeded! Congratulations to you for all your efforts. Trading may be simple, but it certainly isn't easy.
Bill Kraft

Anonymous said...

Read and question your verbiage about having people handle their own social security funds. I say this cause you do NoT comment on the companies portion of the % the person would be able to save on thier own. "Nobody" comments on this. WHY?? I believe it should NoT be taken for granted. Thanks for reading
W.K.Anderson

jim rae said...

Bill, I loved your book. I am inspired by it to continue my interest in developing my own trading goals. I went out this week and purchased another book by Tim Knight on Charting. I believe you are correct in finding that charting is often more accurate in predicting a stocks move although I still keep an ear to the news, especially earnings! I plan to reference your book for analyzing my trading goals and strategies for many years to come.

Jim Rae Murrieta,CA.

Anonymous said...

I agree that all should learn and manage their own money. However, I also know most are not interested and many don't have the intelligence to learn. I was the 401(k) administrator for a food processor. Most of the office personnel understood the difference between investment vehicles but had no desire to learn more. The statement heard the most was "You tell me what to do." Many floor personnel didn't know what a stock, mutual fund, or money market was. Out of the hundreds I worked with I saw one who taught himself and went on to invest outside of the 401(k). A manager told me she had a Roth IRA. I asked her how it was invested. Her reply was it's a Roth. I said, that is the type of IRA but how is it invested. Her reply, I went to the bank and told them to take care of it. Yup, sounds like an American. Don't ask me to do anything for myself. Take care of everything for me and let me bitch when things don't end up the way I want.

Bill Kraft, MarketFN.com said...

To Anonymous on wisdom. Thank you for the kind words. I truly believe we each need to take more responsibility for our own finances. It is so easy to let someone else do it, but many times the results show it.
Bill Kraft

Bill Kraft, MarketFN.com said...

To Anonymous on "discipline at their job." I think some folks have lost their self-confidence about managing their own money for at least two reasons. Schools have never really taught money management; they have taught how to get jobs. Also as Anonymous on wisdom wrote, the brokerages in the past tried (mostly successfully) to scare people into believing that only they the broker were competent and bright enough to make investment decisions. Their marvelous success in the sub-prime market shows the other side.
Bill Kraft

Bill Kraft, MarketFN.com said...

Well, Larry, I am afraid I have to disagree a bit. First, I personally use a strategy of writing covered calls where I specifically want to be called out each month. That has generated 3%, 5% and even more per month. Second, all stock buyers don't buy stock just to see an increase in value; in a part of my own covered call strategy, for example, I will sometime buy stocks that look like they may be ready to dip a little and I sell in the money calls where I take in more than enough premium to cover the loss on the stock so that I wind up with an overall profit even if the stock drops. Finally, your conclusion that the "small option premium is not worth losing your winners ..." That statement was shown to be incorrect in Richard Lehman and Lawrence McMillan's book "New Insights on Covered Call Writing" (Bloomberg Press, 2003).
Bill Kraft

Bill Kraft, MarketFN.com said...

Mr. Anderson, you make a GREAT point in your discussion of the company contribution to Social Security. Do you have any thoughts on what or how it should be done? Should some portion be given to the government for their private management or should it be paid to the employee's retirement account which could be limited to certain investment parameters? I guess the one thing we know is that the system as constructed, managed, and operated is destined to be an abject failure. Should there even be universal Social Security? Thanks for writing and pointing out something that, in my view, should be pointed out.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Jim. I'm really glad you enjoyed "Trade Your Way to Wealth". Thanks for letting me know and good trading!
Bill Kraft

Anonymous said...

Bill, I agree your thought. However, about cover call-you formular 2% per month return is just sometime, if stock drop,
not only no 2%, also could lose 20%
for the principle.What should we do?
Yang

Bill Kraft, MarketFN.com said...

Thanks for writing Mr. Anonymous 401(k) administrator. You are on the mark. My guess is that including money management and investment concepts and vehicles in the public school system might help people, but, of course, then we have the problem of who will teach the teachers. I don't think it would be an easy road to have people manage and invest their own money, but it certainly may become (if it isn't already) a necessity.
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi Yang. 1. Even if a stock drops, there is less risk selling a covered call than there is just buying the stock since the call premium helps pay for the stock so the basis is less; 2. If you sell a call and don't get called out because the stock price dropped, you can usually sell another call at a lower stock price and still get the same 2% on your initial investment while reducing overall risk; 3. depending upon your personal risk tolerance, you could buy a protective put and set up a collar as I discuss in my book "Trade Your Way to Wealth". Collars can be structured to greatly reduce risk, even eliminate risk or create a guaranteed small profit depending upon the strikes and premiums of the option legs. Hope that is helpful and thank you for writing.
Bill Kraft

Anonymous said...

SOCIAL SECURITY IS WALKIN AROUND MONEY FOR ME. I STARTED WORKING ON WALL STREET WHEN I WAS 21 YEARS OLD AND BOUGHT BLUE CHIPS ALL ALONG. I AM NOW 71 AND HAVE 5.7 MILLION AND AN INCOME OF APROXIMATELY 200K PER YEAR. GO WITH THE BLUE CHIPS

Anonymous said...

I did a study about 15 years ago about the SS System. What I discovered really burned my #%@&*.

I compared the SS payout given the amount paid in with the same money as if it were put in an annuity from the time you first start paying into the SS System.

What I discovered is that for the same monies in SS the recipient would get back $3.45 for every dollar paid in as compared to the $28.90 return if put into a private annuity.

This is a very telling point about why the SS System should be privatized. Having said that, it will never happen, because the Congress wants that money to spend and maintain their power.

Chile privatized their SS System and when they did their economy grew by 15% for the next 5 years, and the recipients have received more monies upon retirement than had it stayed with the government

joeserra1 said...

The only investment I would put my SS money in is QQQX. It has a good yield.

egrimes said...

There is an "easy" solution to both social security and medicare. Simply put, the age of eligibility needs to be advanced until actuarial studies show that payouts will balance with forecast deposits and earnings. Since lifespan has increased by 10 to 15 years in the last 50 years, so should eligible ages. Otherwise we are paying for a 35 year period of retirement instead of the 15 to 20 years of yesteryear. One method would advance the age 1 year every 3 years, until we reach the balance point. So after 15 years it would advance 5 years. Benefits would not have to be changed, but something must be done right away. Most politicians do not have the nerve to suggest such solutions, but this way everyone is treated the same, and people who are very close to retirement will not be outrun by the changes.

whs806 said...

The preferred way to solve the SSI system is to implement the Fair Tax Plan!

The Fair Tax removes the 100K cap on wages and replaces it with a sales tax. People spending over 100K per year continue paying taxes.

More importantly, the Fair Tax expands the tax base to include anyone who makes a retail purchase. Than includes 12 million illegal immigrants and 50 million tourists per year.

Another important factor is that the Fair Tax un taxes every legitimate citizen up to the poverty level with a monthly prebate equal to the taxes paid at the poverty level (about $170/month). That is much more progressive than our current system because we have a 22% hidden tax on all our products we don't even see. Therefore, even the poorest families pay 22% tax without knowing it.

Our current tax system encourages burrowing (via a tax deduction) for homes while penalizing those who save by taxing dividends. We have the system in reverse.

Also, our US Government has the 2nd worst corporate tax policy in the world. That results in exporting jobs and importing almost everything else from food to energy.

The Fair Tax eliminates corporate income taxes and taxes on savings.
Those companies who went overseas due to our lousy tax policy would be coming back home along with the jobs. Just think, no more filing income tax returns!

Also, the 12 trillion dollars (eurodollars) that are offshore will be coming home and can be invested in our economy.

But, those who beleive in Big Brother taking care of them (mostly liberals) will not be in favor of the Fair Tax because it will eliminate politicians manipulaing the tax code.

Over 65,000 pages of tax code will be replaced with 123 pages that everyone can see and print from the internet.

Time for a CHANGE. This will do more to revive our economy than anything. We keep putting lipstick on the pig (our current tax sytem) but we do not fix it.

The Fair Tax will fix the problem!

iamnewatthis said...

While I appreciate the idea that we should have started teaching students back in the 1980's how to invest, so they might have a modicum of investment knowledge, I think we are naive to think that high school and even college students, have a clue about anything. They don't understand polictics, economics, or the global stage.
Our local high school graduated 137 students the other day. Only 16% graduated after passing Algebra, the other 84% slid by using a lesser form of Math.
When "Johnny Can't Read" yet is turned loose on society ill-equipped to handle the regular stresses of living a full life, this does not bode well for Wall Street, or Main Street.
Yes, there are still students of whom, excel - but when Johnny (or Janie) doesn't read a newspaper, watch the news, or join in constructive dialogue to correct deficiencies (with Social Security, or anything else) this is quite a corner our country has painted itself into, and the chickens ; it seems, have come home to roost.

JohnWatson said...

Bill—regarding your column on Social Security. I am a recently retired Senior Executive of the Social Security Administration in its headquarters in Baltimore, MD. I speak for myself, not for them. You say that “All of us are…either receiving the ‘benefits’ or we are paying for them.” That is not exactly accurate. You might be interested in knowing that under the old Civil Service Retirement System, I did not pay Social Security taxes when I worked for SSA and am not eligible to receive benefits. You also say that Social Security “investments have been somewhat less than sterling.” While I don’t disagree with this statement regarding their yield, you should know that Federal law severely restricts what instruments trust funds may be invested in so our hands are really tied. I do not believe that Congress will ever let the program go bankrupt and will take piecemeal actions to shore up the system as needed. Their choices include reducing benefits (including retirement, disability and auxiliary), increasing FICA taxes, increasing retirement age, tightening up eligibility requirements for all the Social Security programs, and perhaps changing the rules so that the taxes received can be invested in a more wider range of (and much higher yielding) instruments than currently allowed. As for privatizing Social Security, I do not support giving unfettered discretion to the populace to do whatever they want with their Social Security taxes—they just generally are not qualified to do this on their own in my opinion. I would favor allowing the populace to invest in any of a number of stock/bond/money market funds managed by the Federal Government, much like Federal employees now do under the new retirement system that replaced the one I am in, the Federal Employees Retirement System. This allows populace choice, but significantly increased safety and professional management of funds. I love to read your column each week and I learn something new every time I do. I hope you continue for a long time to share your thoughts with us! John Watson, ex-Associate General Counsel for SSA, Laurel, MD.