Duration risk

There has been much made over the years about the magic of “Rip Van Winkle investing”. We are told that the greatest of investors buy and hold long term and forget about it. From my experience if an investment goes south quickly if I do not immediately take a small loss I end up holding for a larger loss. With fixed investments where the dividend is the key, it does little good to get the dividend and pay taxes on the income and then take a loss on the investment. In cases of high yield oil stocks or REIT stocks this is commonplace. So. Duration has risk. If you could hold a stock for 15 days rather Han 90 days between dividends and got the dividend and then exited flat or with no gain it would appear that the actual yield would be 6 times the displayed yield. By cutting the duration the effective return improves vastly. The trick is to sell the position at no loss.

Nobody ever calls to tell you when to sell: When a market tops:

In a market where there are buyers and sellers, it is pretty amazing that no investment firm ever calls investors and tells them to sell...Maybe an investment firm might be so bold as to change their "allocation" from very aggressive buy to neutral. That would be a disguise for an outright sell recommendation. But they would not want to offend any of their institutional clients....after all, they are in bed with all concerned. Thus...it is up to the individual investor to use some technical tools to decide for onself when there is a market high or when the market is turning...and avoid losses.. Some years ago, in 2007, my youngest daughter was in high school. I had a project for her each week, for pay, to graph and post the advance/decline line, the High/Low line and the the S and P. Every Saturday, when Barrons arrived at the door, I gave it to her and she did the posting. I think I paid her $5 a week. My only instructions were to tell me when the charts were all turning over and falling. When she first approached me with the news that the charts had turned down, I was a disbeliever..."Lets just wait a week" I said.. Anyway, the next week, when the trend continued, we exited all equity positons....and you all know the rest of the story. We avoided the plunge in the stock market. In reviewing my investment in the technical posting....those three indicators were worth their weight in gold. And today, in 2017...it is deja vu all over again...Stay tuned..

The "Failure to Supervise" Con:

Well audit time is here again...somewhere...and whether it is the securities business, or virtually any audit of a commercial enterprise, it is important that young employees understand the "failure to supervise" con, or maybe it is a movement or mode of business.... As a young man I worked in a public accounting firm...I well remember the young students that were attending a private two year accounting school that was attended by many young men who had returned from the Vietnam War and were going to school in the morning and working in the accounting practice in the afternoon...no blue bloods here...and many days they were at the clients offices doing their work... Some of these students, who were in introductory classes, were asked to participate in "audits", that were to my view of it, very underbid...in fact, I felt that the fees charged were pretty amusing considering the amount of work that was expected...and yes the students were rushed, and rushed to get the audit done... Whether it is on Wall Street, or Main Street. the strategy of business done at the top of organizations is many times organized so that problems are not found....and senior staff of these corporations just smile... On Wall Street, there are strict rules for senior "principals" who are charged with supervising the actions of brokers...and I remember during the 1980's my boss reviewing my trades with me to understand what the trade was and why it was appropriate for my clients.... Several months ago a major Wall Street firm was fined 5,000,000 for failure to supervise its staff in a whole multitude of initial public offerings...and indeed if one just looks over the press for the past 10 years there is just one fine after another...seems like nobody has learned, or maybe nobody wants to change....or nobody has any intention of changing, and that this is the nature of the game...intentional "Failure to supervise." This is not "Hogan's Heroes" and these are not "Sargent Schultz" who always seemed so funny when he kept saying..."I know NOTHING,,,I see NOTHING"...What every investor needs to know is that this failure to supervise is a critical orange alert matter....and it is important to take action...

The Olympic Spirit...Focus on the Gold

A lifetime of investing will give each individual a hint of what the best investments were..in the past tense...think back to 1900 or so...and what were the companies that were in existence that are still around and prospering...ok..just start in 1930....Maybe of all the 30000 companies that one can see in the newspapers today, maybe GE, F, GM, come to mind....in as far as indexes go, maybe the SPY, the standard and Poor Index comes to mind.... I have put a few ideas on a 3in by 5 in. card....and when it comes to high quality stocks with high quality dividends or an index that can survive over the next 30 years after I retire....the ideas that are available neatly fit into the 3x5 card...no rocket science...no long Harvard lawyer stuff...pretty simple...the real effort in focusing on quality, is beating off the riff raff slop that comes to you with exciting opportunities....turn off the tv...keep it simple....enjoy.

Never Trust an investment that has the word "Trust" or "Royalty" in it.:

Ever since the American people faced the crash of 2007, by the way which Bernanke recently bragged was even bigger than the crash of 1929...a fact that he was a little late in recognizing since every man, woman and child in America knew this...anyway...investors after the crash of 2007 faced the 1% interest rate on their savings were lured into investments that promised 10,12,13,14% interest through the magic of "fracking"....or something like that...maybe it was mispelled: anyway....those investors have suffered terrible losses since these "Royalty Trusts" were really "wasting" assets, and the investors found that their investment got "wasted." So the rule..."If the investment seems too good to be true...it probably is."...or "If they smile and promise you the moon, they are lying."

Champions Manage Their "Losers"

If you follow the Wall Street pundits, you know that every authoritative pundit will say that the trick is to "Manage Your Winners." Any person who has actually traded or invested knows that this is bull. Any two year old can take gains...that is the easy part...What is left after the gains have been gotten, is the losing positions...And the solution to those losing positions is the difference that makes one a champion... Directly facing the losing position, and taking additional options positions or stock positions to mitigate the potential loss is what distinguishes rookies from successful investors. The worst of all worlds is to DENY or COVERUP the losing position...Ah the memories of the famous "London Whale" saga....Those who cover up or deny when working for a trading firm end up in shame or jail or both. Champions manage their losers.

A bit on "Hedging" and "Trading":

Most all products produced for international destination points are hedged for price and or currency risk....Hedging is done as a Insurance risk matter, and a routine matter, and can be found in many sourcing chains of command.... For example, the notional value of one (1) contract of coffee is about $60,000 and a futures call placed daily would over a month would create futures hedging of the amount shipped of 1.200,000....When a 90 day period ends and the futures are rolled to the next period, the value could reach 3,600,000 as far as notional value...the purpose of the future premium is to hedge the risk of coffee price rising, and this is hedged since if coffee price rises, the future rises with it.. Coffee futures trading is the most volatile of all futures....The risk of trading these actively and intraday is enormous, and the risk is bourne by the firm's capital...traders earn 200K plus percents of profit....They are trained and may have extensive registrations as brokers etc ...In short---trading is not hedging...Different risks...different temperament....

So you want your own capital back and pay taxes on it?

It has been pretty sad over the past 5 years or so as high dividend stocks have preyed on the desire of senior citizens to get a fair return on their hard earned savings...it used to be that a bond book, and a cd card...ya kind of like a holy card, were kept at the bedside of seniors nationwide....Every since the crash, and the easing of the money supply, and the 1% yield found at banks....seniors have been scrambling to find decent yields...and if they went to attractive stocks, they might find stocks that had yields as high as even 12%....but if seniors and investors had looked closely they would have noted that in the statistics of the company profile, the earnings of the company could not cover the dividends disbursed, and eventually when the company cut the dividend, the stock plunged....but no worry, the investor still had to pay taxes on the dividends paid....so all in all...a lose-lose deal...A word to the wise...if it looks too good to be true...it probably is...and as a p.s.....never purchase any investment with the word "trust" in it...as in "royalty trust."

Postscript: The Wolf of Wall Street

The other night my wife and I watched the movie "The Wolf of Wall Street." I had worked on Wall Street back in the 1980's with E.F. Hutton, and just wondered how accurate it all would be.. After the movie was over, my wife just asked me quietly: "So was that the way it was?" "Yup" I replied...that was exactly the way it was....but I do recall I had a little problem driving the Lamborginis.... That's my story...and I am sticking to it.

"The One trick Pony"----

Years ago when I worked for E.F. Hutton, and we all know that when E.F.Hutton speaks, people listen...there was a technical guru that everyone listened to and he did predict one crash...and was famous....and after he left the firm, there were two additional women who were the prophets that hoped that they would be the next profits of doom...but never were...and after them...came all the rest.... Tons of prophets of doom, that have wonderful daily ideas for profit, but really they hope...hope...and hope squared that they might be able to look foreward to predict the next really big crash...but alas...

"When things go Up, Up, Up"----a true story

Back in 1986, I worked for E.F. Hutton....and was just getting comfortable in the job, when I added a client who wanted some growth for his portfolio...and I was grateful to have his business...and so I made a recommendation for a stock for investment, and he invested a couple thousand dollars... About a week went by, and I noticed that due to some unusual news story, the stock had doubled...I was just stunned...and I called the client and he said to sell and take the profit...so I did... Between calls, I asked a senior broker about what to do if the very first trade a client makes doubles...what to do next... She replied that this was a very bad way to begin a financial relationship...because the client thinks that this is the "norm." The problem is what is the next idea that will in any way follow the first idea.... "Things go up and down" she said...."When things go up to the moon, usually they come down just as fast...." I think a lot of her words lately...as markets go up, up, up, and where main street since 2007 has not seemed to make much progress....and thus I just remember her words...and plan accordingly....

"Who Cares?"

Recently, a financial pundit, when asked about the fragility of the computer systems on Wall Street, and the disturbing pattern of the option exchanges being unable to execute trades in a timely manner, and in fact closing down at key moments of high volume...said that in effect "Who Cares?"...."Stuff Happens"...and that basically the systems are so old on Wall Street that a breakdown is to be expected as "Normal." When one considers that probably 90% of all the volume on Wall Street is computer driven trading by institutions, it is quite reasonable to assume that the failure of these systems could trigger a collapse that could not be controlled by the "august authorities" that would respond with their mantra: "Who Cares?" As an investor---make a note of it.

Serenity; Delta Neutral; on Choosing a new Target for Education

I woke up this morn totally serene...and it has been a while since this happened, and I wondered what was wrong...seems that whenever I embark on a new learning project, whether in finance or elsewhere, during the learning phase I have lots of stress and anxiety....for a time now I have associated this with excellence..just kidding..but in an effort to get the finest result, I have not been prone to learn too much from the mistakes along the way...anyway, back to this morning...I have been experimenting with the concept of "delta neutral" or hedging and shorting positions so I can win whatever which way the market goes..and the system seems to be affecting my frame of mind....for the better.. but just in case, I have stepped up the game to learn the next level of hedging, or spreads...and just as soon as I picked the new, I felt a need for a stiff cappachino to get a little caffeine buzz...but this time, I know the source of the stress I am creating...and that seems to help...in the past it was just generalized with everything causing stress, but now it is "defined risk"...which seems pretty easy when compared to life....stay tuned.

A classic video from Tastytrade

On Bruce Springsteen, the dark side of town, on how to trade when you are on a downtown train: a true story

One of the lessons I learned early on, as a salesman on the road, returning from a long trip of selling computer software...driving in the winter...in a black hearse...just for the advertising attention...is that one should never listen to Bruce Stringsteen for more than two hours...ya those were the old days when I just placed the boom box on the front seat, with the cassette player positioned just so....and listened to those old mournful songs about the death of his hometown in Pennsylvania... The moral I took from this for stock traders...on Friday...is that on a long downhill train...when all the ticks are down...buy on the close....

The Barbell Strategy of Investment

In the book "The Black Swan" there is a long discussion of the traditional investment theory of "portfolio management"----in a time of crisis, traditional theories of "portfolio management" are not effective because...in a moment of raw panic, such as in 1987 or recently in 2007....everything goes down....and mutual funds provide NO hedge.... The only thing that works was shown pretty dramatically in the Wisconsin Pension Fund during the crisis of 2007-2013...even when participants that 50-50 split between fixed and variable, they took large reductions in pension income reduction.... The "Barbell theory" as described in "The Black Swan" proposes 90% in fixed or very conservative and 10% in very agressive speculation such as options and very high growth stocks. That is the theory...we will see....stay tuned.

Reduce Your Basis---Monetize the Math

For very conservative investors, reducing the basis by covered call writing can be a way to increase profits...So..whether it is by dollar cost averaging, or call writing...getting that basis lower increases the probability of profit.

"The Future is Wide Open" and other funny stories

Whenever my family leaves town, or at least in the old days when the kids were in the back of the Ford Aerostar...we used to insert a cd of Tom Petty's greatest hits, and the first number or so was the song with the line "The Future is wide open." It was kind of a soothing ritual...and during times of stress...like leaving for college...leaving for a job...etc, etc,,,well to summarize...we wore out the cd...I am not sure statistically whether we did indeed reduce the amount of stress...we did not have a proper test group...but still....here is my review of the concept. Whenever we listened to the song, as the older guy in the group, I just wondered whether anyone had really tested just how wide open the future was....and then last week, I heard a presentation in which a guru said that the stock market pundits who say that one should "never limit your upside" are simply full of "xxxt"....The truth that the money pros all know is that one "ALWAYS" limits the upside, and takes the other side of the transaction, making oneself the banker, not the river gambler....writing calls, shorting...anything but gambling on the eternal upside.... So there it is,,,about the "Future is Wide Open"....and now I think of Tom Petty as a financial guru...I do need to get another cd so I can never forget the message....

Charts Describe the Past; Options Speculate on the Future: Do not confuse the two

Whenever one reads a written piece of promotion from a Wall street firm, one usually finds the disclaimer, "Past results to not imply future performance." And one might wonder why this is so...because it is required to tell investors that the past is gone...done...and yesterday does not matter... Someone needs to tell those chart guys the above paragraph....all the chart guys seems to think that they seem to know....trust me..they don't...and legally cannot....make a note of it.

"You Don't Know the Future---Trust me": a classic from www.tastytrade.com:

In a quick overview of financial education by Trader Bob last week on Tasty Trade, which broadcasts at www.tastytrade.com he mentioned that in traditional instruction, as limited as it is for our high school and college graduates...there is the learned behavior of having a "belief" about the future...as in ,,,after analysis I believe that...a) the market is going down, or b) or going up or c) going sidewise.....ditto for individual stocks. In reality, when listening to the pundits on tv, they mostly just recite the data points from the past and point to "interesting" and "foreboding" signs,,,maybe giving them a "double top" or such magical name to impart some meaning to the lines and formations....and in the end, making you believe that because they have shown you this funny little diagram, they know something very deep and profound about the future----and to which, Trader Bob says----"Trust me--you do not know the Future". As a test for me of his instruction, I have begun placing both bullish and bearish option positions on a "paper" trading platform called "Think or Swim". Immediately after placing the positions, I have been carefully noting that one of the positions is profitable, and one unprofitable literally seconds after putting the trade on...and mostly, it does not go as I presume...and I think...and as I believe...merging my belief and my knowledge....and well...it all has added up to squat...and in the end...it is best that I get "agnostic" or "sanguine" or in Trader Bob's favorite term---"Delta Neutral."