Taxes Deferred

Growing up in a family where both parents earned a living, and there was no spare cash for ‘investments’ (other than our home). Taxes were simply the cut the government took out of every paycheck. Sure, there was sales tax, but it was just part of every thing’s purchase price. My first experience with ‘tax avoidance’ was when I arrived in Massachusetts for college and I found out that there was no sales tax on clothing. It was a revelation. I bought for all my family. States had different tax policies? What else was hiding in the tax codes I didn’t know about?

Fast forward to my working years, I was quick to grasp the concept of employer sponsored, tax deferred retirement accounts. By moving money into my 401k, I could defer paying tax on the money and let it grow and compound yearly. I scrimped to put as much money as I was allowed into it. Of course there were other tax deferred accounts I could have contributed to (IRAs), but I was young and didn’t see the need - I just assumed the 401k would take care of everything.

Of course, life happens. I quit work to help raise our family and left the 401k contributions to my husband. I ran my own company and began, haphazardly to contribute to an IRA, but it seemed like too little too late. One thing led to another and suddenly I was in my late 40s. And I was learning to manage our savings.

We had finally had accumulated enough cash to invest. Almost immediately, I was frustrated to realize that our investment returns were going to be taxed, again. We had already paid tax on the money prior to investing it - having to pay again was simply double taxation. All short term trading profits (capital gains), particularly the option trading I taught myself and is taxed as if it is regular income. What is frustrating it that the state of Massachusetts piles on an additional surcharge of 12% on short term capital gains. It makes no sense for traders like me to live in Massachusetts.

What I now appreciate is that trading in my and my spouse’s smaller IRA accounts is done tax free. We will only have to pay tax when I take the money out. Every quarter, when I write checks to the Federal and state government to pay the tax due on my investment accounts I regret not having built up my tax free accounts when I was younger. If I had, I would have lots of capital to trade and could avoid the quarterly depletion the capital every month to pay the tax man.

While the current $6000 dollar annual limit on a self directed IRAs may seem like a lot when you are starting out, the benefit of building your IRA up as quickly as possible is huge. Time is your friend here. Simply putting the money into an index fund, assuming the the stock market averages a minimal annual return of 6%, that will give you about one million dollars in 40 years time - better still it will give you at least $60,000 a year in tax free income. An 8% return could mean that you get to that million dollar mark in about 35 years. The beauty is, you can open a Roth IRA as soon as you start to earn income, even if you are a teenager. Baby sitting or helping someone clean out a garage, that money can go in. Imagine, you would be 50, with a tax free income of $60,000. Putting money into tax free accounts is critical if you plan making your money work for you at any time in your life. Otherwise, you will alway be giving up a large chunk of what you earn to the tax man.

Remember: Taxes eat into your returns on any regular investment account. My advice is to start as young as possible and build your self-directed IRA. Better still, make it a ROTH IRA and you will not have to pay any tax on withdrawals when you are over 59 1/2. This is a huge benefit. Do it for yourself and then help any young people in your life start their accounts as soon as possible. Their future selves will thank you.

Market Today: Some days the market soars and you have to sit it out, or worse, watch in dismay as a single stock pulls you down. Every year, it seems like one stock hurts bad. It happens. Just have to remember the objective is the portfolio’s return and know when cut losses. Not sure if it is that time yet. Today it was mostly calls being closed, particularly ones that softened the blow for a major slump in a favorite. Glad I write covered calls. 41.3

Don’t fight the Fed

The expression ‘Don’t fight the Fed” means that your investment choices should be aligned with the Fed’s policy. When rates are low or being lowered, invest aggressively. When rates are high or going higher, select more conservative investments. Today the Fed announced it would be easing its bond buying, This is a first step in pulling back its support of the economy. It means it is likely there will be one, or perhaps two, interest rate increases next year. The market was relieved, it slid up to record closes and everyone just moved on to the next shiny object.

Do we have to worry about interest rates then? Not yet. The Fed usually increases interest rates at a rate of .25%. This means that if we have two increases next year, we will still be below 1%. This means stocks will continue to be an attractive investment into next year, and probably beyond. Like they say, There is No Alternative (TINA).

That said, it is not the time to go all in to the market. Prices are very high, particularly on tech and other perceived growth stocks. Traders like to say, “Its a stock picker’s market,” but that is not true. Index funds are still beating stock pickers by a solid margin, and mostly because the stock selector’s fees eat into returns. Paying someone to manage your money when the stock market is returning 8% is fine, they can have their 1-2% and you still have 6-7%. But if returns are closer to 4%, you lose half your returns to fees. Since investing well relies on compounding, you also have less capital to compound so you lose twice over. So it is time to be smart about what to invest in.

Stocks with high P/Es tend to be stocks that are assumed to have great growth prospects. This could be because they have been growing well in the past, and/or promise to do well in the future. Be careful of these stocks. When the market is at a high like it is, and the Fed has given the ‘all clear’ for the foreseeable future, it is tempting to look to the stocks that have performed well to hope to ride that momentum higher. This is a sound strategy and it has worked for many years now in our low interest environment. But as interest rates begin to rise next year, there will be a market re-set and these high growth, popular stocks may be in for some flat years ahead. Better to look for stocks that may have been overlooked in the growth frenzy of the last few years. Lower P/E stocks, with strong financials and cash flow, and better still with solid dividends, may offer better returns as the market climate begins to chill.

Market Today: Market was up with the Fed treading the needle perfectly. Closed mostly puts. Wrote mostly calls. Four ‘day trades’ - that is opened and closed the contract today. United Rentals (URI) continues to work, as does Shopify (SHOP) and Upstart (UPST). Although the latter should be handled carefully and you need to pay attention - it is risky. It is not a set and forget like Crowdstrike (CRWD) which paid again today. 10.4

Short Sale versus Fed Policy

So today, while the market closed at record highs, most of the talk was all about Avis (CAR). It had fabulous earnings but that alone did not explain it soaring from $173 at the open to $545 only to fall back to a mere $357 at the close, a 108% gain. It was probably a short squeeze, that is some professional investors had borrowed the stock expecting to return it to the owners at lower price (pocketing the difference). If there is a sudden rise in the price, they will have to hurriedly buy the stock to limit their losses. If the people who own the stock, do not sell, (HODL or Hold on for Dear Life) then the price gets driven up in a frenzy as professionals try and but enough stock to meet their obligations. We saw it with GameStop and now with Avis and after hours today with Bed Bath and Beyond (BBBY).

Squeezes are interesting to watch and temp a lot of traders. It is like a game of musical chairs and it is great to play until you are left without a seat (or your cash). Credit to the Reddit traders that seem to be cracking this nut, but something about it feels off. Maybe its just jealousy on my part but I tend ignore the hoopla and look instead to the real world. For example, Avis had a great quarter because there are no cars to buy (chip shortage as you may have heard). People that have left the city need to get around and Uber Black is a tough ask in the suburbs. So there is a lot of demand, few cars and any rental car agency is going to do exceedingly well - something that will not last. Avis will fall back to earth. Will I short it then? No. I don’t play high risk games.

What I do pay attention to is that tomorrow the Fed will discuss the outcome of their meeting and the market seems to be holding its breath. Conventional wisdom says the market has already discounted the Fed’s likely announcement that it will be decreasing its bond purchases. This represents a reduction in the historic levels of support the Fed has given the economy. This planned reduction has been very well telegraphed to the market. If things go well, the market will simply accept the change as a positive indication that the economy is strong enough shape to handle the reduction. If not, today could mark the highs for the year.

Mind you, the Fed is only going to be reducing the bond purchases. One tool in their toolbox. The real issue is interest rates, specifically the Federal funds rate, and they are unlikely to announce any changes there for months, if not years. These macro trends are not as exciting as short squeezes but will probably have more of an impact on your portfolio than the latest meme stock. Keep the big picture in mind when investing, and don’t get caught up in a fad.

Market Today: So today, while the market closed at record highs. It was driven by materials, real estate and IT. Healthcare struggled as did energy (do not give up on these) There were less trades than yesterday, did not close many of the calls I wrote yesterday as the market was up. Should be able to close some tomorrow as the market usually takes a breather after a record high. My Roku (ROKU) call worked as did my Moderna (MRNA) but otherwise a dull day. Did add Enphase (ENPH) to my trading option list and wrote energy puts (CVX and FSLR). 8.1

Choppy Markets

Some days the market can’t seem to make up its mind. Unusually, the market has one or two segments that are strong during the day, others that are weak, and that trend stays pretty constant throughout the day. Choppy days are when the same market segments are up and down throughout the day, but the overall market does not really change that much. There is no clear direction or trend. This kind of chop can generate some nice trades but you have to pay attention and trade fast.

When you have had a long upward trend like we have had, expect chop. Markets can not go up forever and when the market chops around it is actually a good sign. It means there is hesitation by market participants, not brainless euphoria. Euphoria should worry anyone.

How do you use chop? Assuming you have a list of stocks you want to own (or own already) use the direction to sell options: when there is an upswing, sell calls. Use the downward swings to sell puts. When the stocks reverse reverses during the day, buy back your calls and puts. Do not be greedy on choppy days. You will be better off, selling and then re-selling rather than waiting for a big score. I sold three ROKU calls today, bought back two of them and left the third for tomorrow as I assume ROKU will sell off (it generally has large swings. alternating days up then down).

I generally do not buy stocks for investment purposes on choppy days. I always prefer my investment purchases to be on big down days or when a stock sells off on temporary bad news. Buying on choppy days will almost always make you grumpy as you are likely to see the price fall below what you paid at some point in the day. If you must buy, use a limit order and put it at the very bottom of the bid/ask range, or even below. That way if you are filled, you will feel lucky.

Chop lets me sell some additional calls and puts which, with luck, will reverse tomorrow. It is a good day to set yourself up for the next day. Since we closed at a record high today, it is very likely we will start the day down tomorrow and I will quickly close whatever contracts I can.

Market Today: Record highs to start November. Energy was at the top of market segments that up (only IT and Healthcare were down). Lots of potential market catalysts this week. Over 964 potential catalysts, mostly company earnings reports. But we also have a big report on Oct job numbers on Friday and of course the Fed meeting on Wednesday. Could shake things up. Stay sharp. 11.7

Why are some stocks so expensive?

A common complaint newcomers have to the stock market is that the stocks they know best and want to buy are hundreds, even thousands, of dollars per share. It makes them appear out of reach for most investors because who wants to own only one share of Amazon? (About $1350 per share at this writing). Once upon a time, as stocks became more expensive, companies would ‘split’ their stocks, that turn a single share trading at say $100 into 10 shares worth $10 each. They would split shares in half, into fifths or whatever else made sense for them. This made shares accessible to everyday people. It was accepted that a company that regularly split it’s stock was confident that it would continue growing, and most firms avoided their shares going over $100 per share (ok, I am showing my age here).

Somewhere along the way, companies began to equate a having a high stock price as a measure of prestige. Some people attribute this world view to Warren Buffet, who suggested that by keeping his share price high, he attracted a ‘better’ class of investor (i.e. a wealthy one who would not trade in and out of his stock at a whim).

Today, with fractional shares so accessible, keeping a share price high is less of an issue. You can buy a fraction of an Amazon share. Or you can buy a mutual fund or ETF which has Amazon in it, effectively buying a fractional share. But humans are human and it is gratifying to say you own 100 shares of something. So most people would rather buy 100 shares of a stock that trades at $20 rather than buy a single share of some company that trades at $2000 . Either one can go up 10%, and you will make $200 either way, but most people would prefer to own 100 or something rather than one, math be damned.

This explains why companies that do split their stocks tend to see their share price rise, regardless of the fact it effectively changes nothing mathematically. More people look to buy the shares when they are cheaper, thus sending up the price. I like to see stock splits because it opens up safer option trading to more people. It takes a 100 shares to write a single covered call contract and covered calls are the safest way to begin learning about options. Options on shares that trade in the $1000s involves more risk, not something a beginner should not be playing around with. So Amazon, do everyone a favor and split already.

Market Today: The market finished off the month today making record highs, making October the best month since November of 2020. This is despite poor earnings from Apple and Amazon. In general, everyone is citing supply and inflation issues but still 80% of the companies that have reported so far (about half) have beat Wall Street estimates and cited strong demand. I closed a lot of tech puts.

When good stocks go bad

Both Amazon and Apple reported today after market close and both, surprisingly, disappointed. They both dropped about 3-4% in after-hours trade and will probably take the market down tomorrow, just on the math alone a they represent a huge hunk of indices. A single quarter’s bad results should not unduly alarm anyone. Particularly as these behemoths are getting so large that it is virtually impossible for them to continue to put up growth numbers like they historically have just because they are so large now. The law of large numbers tells any sensible person that.

Generally, a drop in price in blue chip stocks like these can be a good buying opportunity. Or at least an opportunity to sell a put, with the hope of getting in at an even better price if it drops more. A 3-4% drop generally does not interest me in terms of stock purchase, I prefer a sell-off of 5-10% for that, but I will probably write puts for them as I do not own either currently and would like to get back in.

If a stock has a poor earnings quarter it is useful to listen to the earnings call. You can do this by going to the investor relations section on company’s website. A lot of the trading platforms let you listen in on the actual call (public access is mandatory for publicly traded companies) which can be interesting and at time amusing (Tesla calls anyone?). These calls will let you know why the earnings disappointed; was it a one-off or a major problem that the company has to deal with longer term. This can help you decide if you still want to own the company. (Apple and Amazon both had labor and supply issues that should resolve soon - not a long term issue)

If you do want to own a stock with a poor quarter, wait a bit. It sometimes takes up to three days for a stock to settle after a bad quarter. If you feel like you have to get in, buy a little and wait to buy more. Do not be surprised if the drop in the after-hours is not carried through the following day. The market can be fickle, good reports and the stock sells off the next day (Thus the term “Sell the news”). Bad reports and people that have missed out on owning the stock may rush in to buy. There is frequently an over reaction on either side and then, throughout the day, a reversal. This is why it is important to have a discipline: Before earnings determine a price you are willing to pay, and then act accordingly. Do not get swept up in the emotion of the earnings move. Buy a little if it reaches your price, but hold off it doesn’t. You generally always get another chance to get in.

Market Today: Positive day. Tech stocks did well based on tech earnings from the after-hours report of the day before. The rest of the market moved up on solid earnings, hopes of finalizing the infrastructure deal (still being held up by people who are holding the rest of us hostage to their ideology), some positive economic indicators and moderating interest rates. Made money on Service Now (NOW), Shopify (SHOP), Albemarle (ALB) and Roblox (RBLX). Made a quick unexpected profit on put on Facebook’s due to its name change to Meta, although how that benefits the company is not clear to me.

Stacking returns

A Random Walk Down Wall Street is a classic investment book written by Burton Gordon Malkiel. It was first written in 1973, but been updated over the last 12 editions. It is a good background book, but probably a bit academic for most beginners. His basic thesis though is one I share: most investment advisors are no better than a monkey at a dart board when it comes to picking stocks. Most of us can do better managing our own money, with a little bit of work. He is a huge fan of index funds and has the stats to support his view.

In his latest addition, he acknowledges that investment returns in the current environment of low interest rates leaves investors with little choice but to look at the stock market as the only game in town (i.e. TINA - there is no alternative). In his more recent editions, he suggests that using leverage is one one way to increase risk, and thus returns, to a portfolio. He suggests that this leverage should be in bond futures - not options which he seems to dismiss as beyond the capability of the average investor. He suggests that investors instead buy futures contracts on U.S. Treasurys - which is a low risk form of leverage. This option is not something most investors have direct access to, although there are funds that mix equities with these futures, like the WisdomTree US Efficient Core Fund (NTSX), and its returns seem to have beaten the market in the three years since it was started. The stacked return principle is sound but for most investors the thought of buying future contracts on U.S. Treasurys probably makes one’s head spin.

I ‘stack’ returns using options directly, either writing calls on stocks already owned or by writing puts on stocks you would like to own. Adding option premiums to the dividends you earn is the best way to earn money to re-invest in the market and compound your returns. Options are, however, risky. You may be called out on a stock that appreciates well beyond your call strike price (which is why you should not write calls too far out into the future). Or you may be put a stock that suddenly falls out of bed because of a bad earnings report, an analyst downgrade or Chinese government intervention. But if you set your call premium at at price that was more than 10% of what you paid for the stock you still make a gain. If you set a put on a solid stock you want to own well below (10-20%) where the stock is currently trading, you get the stock on sale and can start writing calls to recoup the drop. I think adding this type of risk to a portfolio is a sensible way to improve your overall returns. It takes practice to get comfortable with it, start slow and build up your experience base, but you will be pretty happy with the additional cash you can earn.

WARNING: I do not trade options (except a few covered calls) in our retirement accounts. I have a core of assets that have been put aside for retirement and these are kept separate from my trading account. The only time I used put options in a retirement account was when I converted a 401k into an IRA, and had a lump of cash I was looking to put to work. Now that I have a portfolio of stocks and bonds in the retirement accounts - I do not write puts there, unless a bond is called and I find myself with a hunk of cash. Make sure that you wall off your core retirement account from your trading activities. It is depressing to watch the boring, bond equivalent stocks, in your retirement accounts lag behind the overall market returns but very satisfying to see green in those accounts on days when the market is all red. Trading is to earn money, investing is part of saving regime. Remember this.

Market Today: Market was down today due to rising interest rates and poor earnings from tech firms. I closed equal amounts of both calls and puts. I wrote puts on Facebook (FB) which was down again today. It is not a company I really want to own but all the traders on CNBC grudgingly admit they are looking to buy it here, which suggests a trading opportunity. I sold one put in the morning that went quickly very negative, another one later in the day when the stock seemed to have bottomed. I got out of the second put before the market closed. If we are up Monday, I will probably be able to get out of the first one I wrote. Also wrote on Shopify (SHOP) and Square (SQ), but need interest rates to fall back to get out of these quickly. Trades.

Speculation

The jobs number today left the market range bound, slipping between slightly positive and negative. The only real movers were the current favorites in the market, financials and energy stocks. Tech stalled and the market was generally dull. It is pretty clear we will be in this range until earnings start coming in. If earnings are better than expected, we will probably go higher. Lower, and it could be very bumpy. Bitcoin, however, ended the day over $54,000 per coin. It’s gains (and losses) this year have been spectacular. The other big movers were the hard hit Chinese stocks, another speculative area of the market just now. Hard not to be tempted though, particularly in a market where you do not see a potential for any strong positive movement any time soon.

Mark Twain said, “There are two times in a man's life when he should not speculate: when he can't afford it and when he can.” This is good advice. Cramer thinks you need a little speculation to keep you interested in the market, the game of it. I disagree. Money lost is opportunity lost. For every speculative stock you consider, there will be a far less speculative one that will probably get you a good, even great, return without the risk of losing money. Yes, you will not get a huge win, but this is the stock market not a slot machine. To pick a winning biotech, your chances are about 1 in 12. I am not sure about the stats on tech firms, but they are probably about the same. Bitcoin could work out, and it is cool to say you own some, but you could also lose a lot and chances are you will pay pretty high transactions fees just to own it. It may work out, but it is not really investment grade. Yet.

I have not practiced what I preach, but the few speculative stocks I have owned have pretty much all been losers. I simply do not do them anymore. I have a close friend in the biotech industry, very knowledgeable and he told me about a company that I lost half my investment in. I had told myself never again, then took the advice of a young gamer on a sure thing. I lost again. So now I really, really mean it.

If you are young and have been lucky enough to have funded a emergency savings account, are regularly contributing to an employee sponsored retirement plan and have maxed out both your IRA and HSA, then you have permission to invest a small percentage of your extra money into Bitcoin or a ‘sure thing’ someone told you about. Invest, lose money and get it out of your system. Classic case of ‘your first loss is your best loss’. Then save your speculation for that trip to Vegas.

Market Today: Quiet day, only about three trades. Market was range bound and waiting for earnings next week. Jobs number disappointed and confused people. I think part of the low numbers of people filling jobs is: 1) people found they could make do with a lot less during the pandemic (and have savings aside to cushion themselves) 2) women found that being at home helped family life - especially around the issue of childcare 3) there is a lack of immigrants to take the low wage jobs 4) people want jobs that give them flexibility - and not enough jobs do so people are sitting out returning to work.

Market Bottoms

It is frustrating to hear talk of market bottoms. Today that was the topic du jour, as in, “Are we at a market bottom in terms of the September drop?” and “Is it safe to start buying yet? The answer is: In the long run it does not matter. It is great to get a stock on sale, and you should always try to buy stocks you like when the market is down. Just be sensible and don’t buy a full position all at once. Buy a little and see how things go, buy more if it falls more, and then a little more if it falls even more. The market may not be at a bottom, it may go down more, but it is now down enough to be an attractive entry point. Take advantage of it.

In the long run, just be in the market and stay there. If you sell in a down turn, you will never get a perfect signal that you have reached the bottom. Chances are good, you could misread the cues and hesitate getting back in so long that you miss the swing back up (like we have started to have). You will be worse off. Trying to time the market is a fool’s game. The market goes up over time, a nice neat line from left to right trending upward at a rate of 8-10% per year. But if you zoom in on that line you will see that it swings up and down, sometimes a lot, while it is getting there. Statistically, if you miss the upswings from down turns (say the top ten up days of the year) you will gut your overall performance.

We have had a 5-15% pull back in a lot of good stocks. A 15% drop in a solid stock with a sound balance sheet, good earnings, a reasonable growth plan and, ideally, a nice dividend will always attract my interest. And my dollars, regardless of whether it will fall more. Independent of whether we are at a bottom. Sure, I would like to get in at a lower price. But 15% down is generally enough to get me started buying. The drop should be tweaking your interest too if you have cash you can put to work.

Market Today: Up day so mostly selling calls and closing a few puts. Tomorrow we have a jobs report so we could be anywhere - good numbers could spook the market (Fed worries), bad numbers could spook the market (economic slowdown?). No way to know. Given the interest in riskier stocks today, I began some tax loss harvesting in some weaker defensive stocks I own (they were down). I bought stocks that were roughly equivalent to stocks I have losses in (for example, I bought Verizon (VZ) to cover losses in AT&T (T)). If T is up tomorrow I will sell it and take the loss. Since T and VZ trade in tandem, if the telecoms go up, I will have VZ to cover the rise. Meanwhile I can harvest my loss in T. I waited to do this until today as it was the ex-dividend day for T, this way I know I will get my quarterly dividend. T is not my favorite stock for a number of reasons, but I own it for its dividend. It is a bond equivalent for me. Like Chevron (CVX), Kinder Morgan (KMI), and Medical Properties (MPW), etc. There are stocks I own to trade options, and others that quietly sit back and earn dividends. Best to have a mix.

Turnaround Tuesday?

Mondays are often tough days on Wall Street. The weekend may bring bad news and investors panic and exit on Monday. If the market has been weak, and it has, larger investors may have cashed up on Friday (selling into a Friday close is common when the market is misbehaving). These larger investors will hold off buying on Monday, just to see where the market is going. Funds managers may also close out positions on Friday, so they have cash available for investors who decide they want to exit over the weekend. When you have a weak market you do not even need really bad news, just a few weak market indicators. Just an absence of good news, really, and Mondays can continue the slide.

On Tuesdays, however, investors may start to get back in to try and lock in Mondays lower prices. Tuesday is statistically the strongest day of the week. The question is, will we get one tomorrow? And if we do, will it hold? Are we at a bottom yet? No way to tell.

Personally, this downturn does not feel done. There is still a lot of overvalued stocks and Washington’s bad behavior is depressing (and confounding) any sane business person. There is no leadership or plan so business is flying blind. The politicians have lost the plot, the fact they are playing chicken with the debt limit just shows they are less concerned about what is good for America than they are with their own petty bickering. Both parties, particularly their extremist wings, are undermining the businesses that have made America what it is.

If we get a Tuesday turnaround, do not rush in. The market just does not feel done yet. It is not scientific, or even logical, but caution in the byword for now.

Market Today: Not selling puts. Closing calls, the few that I have left. I did all of three trades today rather than my normal 10-20. I do write calls whenever there is bump up (if Turnaround Tuesday is true to its name I will be selling calls), Options are especially good to write now as the market’s volatility has pushed the premiums on options higher. I am looking to buy some of the big cap tech stocks, like AAPL and MSFT but want them down at least 15-20%; they are not quite there. Yet. I have a shopping list and once we hit 15% down I will start b.

Is it different this time?

Another tough day for most market participants. September ends as the worst month in the past seven and the indexes have all dropped about 5% in this month alone, although the Nasdaq listed stocks have fared even worse. It is all the same worries, rising interest rates, inflation, China, supply bottlenecks and various economic indicators that came in weaker than expected. This grim litany was made worse by the general perception that the Fed may be less accommodating in the future. The mood is subdued at best.

Since most of the dips in the past few years have been buyable opportunities, many are wondering if this decline should be bought. Others think, the Fed pulling back will make this time different. But then again, “this time it will be different” has been the battle cry thought many other market down turns and yet here we are, higher than we were ten years ago. Yes, it may be different. It may take a little longer to pull out of this malaise, but you should still be thinking about buying the stock of good companies here. My rule of thumb is that if a stock you want is down 10%, buy a little. Buy more if it continues down.

Just make sure the company has a product or service with solid demand. That it makes money and its balance sheet is strong (not highly levered). Preferably stick to a company whose product you use or understand. Ideally one that is growing, either by adding more customers or more locations. If you use the product it makes it easier to keep track of it. Go for the company with the best reputation among its competitors, who has management who are recognized as capable and good leaders. You can’t go wrong buying these types of companies when there is a downturn, even if the downturn is ‘different’. And while all downturns are uniquely different, they all eventually end. Just suck it up and remember you are in it for the long term. Set backs and downturns are a natural part of life.

Market Today: While the market opened up, it gave up the ghost and then it was down, down, down into the close. Nasdaq tried to stay positive but it too fell into the close. Not much to do but sit on the sidelines. Looking at buying tomorrow as Fridays tend to sell off into the weekend. But then again, it is a new month so who knows. We may be surprised with an upturn in the morning. If we do, I may use it to trim some winners.

Buying your first stock

I remember buying my first stock, McDonalds, in 1994. I think I paid about $8 dollars for it, bought about 100 shares, and sold within the year for just over $10. I was using E*Trade to buy stocks then (which was a fairly new company) and paid a large commission when I both bought and sold my shares. Being able to trade shares on-line was new then, most people relied on brokers who they called on the phone to buy and sell stocks on their behalf. I thought I was pretty tech savvy, so I happily opened an on-line account to make my first trade. My parents thought I was nuts, trusting the internet. I sold those shares within a year because I was moving overseas and did not think I would have access to it. After that purchase, I did not buy stocks again until almost 20 years later. I married and family commitments and life just got in the way. Now McDonald’s trades at over $230 a share, so I lost a chance to have made $22,000 over those 26 years. I should have just left the stock until I returned to the US and simply let it ride. Better still, I should have bought a lot more than just $800 worth of McDonalds. I was single and had limited expenses. Instead I spent money on a lot of things I can’t even remember now. If I had invested $8000 and kept my shares, I would have had $220,000.

To buy a stock today, you simply have to open a brokerage account. Your best bet will probably be your current bank, most of which will have a brokerage arm. Ask them to help you. Alternatively, go with one of the big, name brand firms like Charles Schwab, Interactive Brokers, or TDAmeritrade. Takes a few minutes to open an account on-line. You can fund it with an on-line transfer or even a send in a check. Most charge little or no fees for stock trades. (Options still carry commissions) These established brokerages have great research and training tools to help you learn how to trade. Avoid the newer apps like Robinhood or other slick new trading platforms. Their customer service is weak (if you have a problem and you almost always will) and their training materials are in their infancy.

Once you have the account, buy yourself your equivalent to the McDonalds I bought in 1995, but hang onto it. That is the crux of investing. Select a sound company, with good growth prospects and even if you only can afford to buy a little, do it and hang on. It will take time but if you do it when you are young, and let the years do the work, you will not have the regrets I have 25 years later.

Market Today: Again another soft day. Opened up and then sold off, as we are all still waiting on Washington to do something. I sold calls on positions I own and bought them back before the end of the day, make some nice money. Did not sell puts, too much chance of a further decline. Heard about a new dividend stock I am researching to maybe add to my IRA account. Going to buy some more Chevron (CVX) or Exxon (XOM) if they fall again. Good dividends.

Things to do while on the sidelines

The market dropped today, about 2% overall which is a large drop. It is part of the slide that started last Monday and it is likely to continue as there are no clear positives coming anytime soon. Earnings season will begin again in two weeks, and if the logistics and inflation issues continue, earnings for most companies will be dampened, which may make the slide continue. The next two weeks is anyone’s guess, unless the government resolves the dept ceiling, government funding and infrastructure issues.

While the market trends down, it is interesting to see that whenever we hit a particular benchmark, say the ten year interest rate rises above 1.5% or we breach the 50 or 200 day moving averages, the market fall seems to accelerates. If there is an announcement about a particular economic indicator, say an increase in inventory levels, there may be a clear positive or negative reaction. Suspicious. This looks like machines may be trading, those which have been programed to look for particular anchor points. Ironically, as long as there is no major benchmark breech, this makes me less worried about market spills. It seems like the machines are doing the damage and when people wake up and see that things are not that bad, there should be a rebound.

I saw in an article on CNBC that Jim Cramer agreed with me tonight about patience. He says stay on the sidelines. I do too. It is a good time to look instead at your whole financial picture. Where is your 401k upto? Are you happy with the allocations there or should you change them (or the amount you contribute) to take advantage of a stock sale? Have you made your contribution to your Health Savings Account for the year? Better investment than the market at this juncture. How is your spending going? Are you keeping to your budget (assuming you have one). There is plenty to do in terms of keeping your financial house in order while waiting for the market to bottom and strike a direction. Use the market lull to pull back and look at your entire financial picture. Staying too focused on the market alone when it is in a downturn, can lead to panic selling. Find a way to reassure yourself the market alone does not dictate your financial health.

Market Today: Rough for pretty much everyone. Looking to buy some blue chip tech, so wrote puts for Apple, Microsoft and Nvidia, at levels 30% below where they are trading. (I was called out on all three earlier this year so I need to restock.) Unlikely to get in at the prices I set these puts at, but if there was a sale that large, I will be forced to buy even if I feel panicked at that time. Because the VIX jumped up 24% today, the option premiums were high, so much the better.

Practical Money

The market was mixed today, reflecting the action of last week where indecision seemed to be the theme. Today, the focus was on higher interest rates, which is why financial stocks did well today while tech lagged. Mind you, the discussion about higher interest rates have been on and off for years now. And it has been shown that a single day’s rise frequently does not hold up. That does not stop people from offering opinions though, and there were a lot of these today. It is sobering to watch the market react to a what may turn out to be nothing.

There was also talk about the government’s potential shut down, which has the market worried despite the fact that prior shutdowns have had little or no tangible impact on companies. Another miasma that infects the market.

Meanwhile, in the real world companies are dealing with real-time problems. Supply constraints which have been talked about on and off, are now becoming a major topic. It appears small companies are scrambling, particularly worried about the Christmas retail season, while larger companies are finding, sometimes expensive work arounds. And higher energy prices are hitting everywhere, much to everyone’s surprise. It appears all the hype about alternative energy and ESG has not taken into account that, practically, we still need oil and, unhappily, coal. It takes years to supplant energy sources, wishing we were green will not make it so.

It brings back to the purpose of this blog. I know there is a lot of opinion about the market, its direction, the best stocks, what is hot and what is not. But at the end of the day, the best way to invest is to be practical. Do not worry about the possible or the maybes, concentrate on the reality. Interest rates are unlikely to rise above 2% before 2022, even then it unlikely to impact most companies very much. What the government does, short of tax policy, has only selective impacts. But logistic issues and higher energy costs? They will have real impact on next quarter’s earnings and should be factored in when considering which companies to buy stocks in. Actionable reality

If you want to trade, you need to pay attention to the rumors and the headlines. The buzz and the trader talk. It is not for everyone. I think the focus on new investors would always be on the practical.

Market Today: Value stocks, those purchased for long term holding, did well today. Did not trade a lot, closed a couple calls and tech puts lanquished. Letting the market find a direction. Patience.

Uncertainty

The week ended up neutral - the indices gaining back most of what they lost the first two days of the week. Most people are unsure of what that means. No one is sounding the all clear just yet. While some people are buying, others are raising cash. There are very strong conflicting messages coming from both sides. Most market participants are flummoxed, which means there is a strong ‘wait and see’ bias in the market. In general, uncertainty can actually be good for the market, too much euphoria is worrisome.

So why the uncertainty? On the bear side, companies are reporting that labour shortages persist, inflation is a problem and supply shortages are impacting performance. Bulls point out that while that is true, it appears that Covid numbers are coming down, the Fed is in neutral and people are cashed up and ready to spend. In a consumer economy like the US, this is very good news. We also increased productivity over the pandemic so companies are doing more with less. This next earnings season will be very interesting. The better companies will probably do very well, other companies will use supply and labor issues as an excuse to justify weak performance. Some companies have just managed a lot better through Covid.

I tend to lean on the more positive indicators. It feel like the supply constraints are working themselves out, albeit slowly. I would bet more companies are going to manage supply and inflation issues by passing on price increases. Once the supply issues resolve themselves, the higher prices will probably stick, increasing operating margins. While higher prices are not good in terms of inflation, the increases will probably not be widespread or high enough to alarm the Fed longer term.

So the strategy is as it always is, buy if the stock is one you want to own and the price is right. Remember, you buy for the longterm upward trend. Use September’s volatility to rebalance your portfolio. Drops are to be welcome, as it put stocks on sale. And next week we will be doing this all over again.

Market Today: Another up/down day so it was pretty much all options, but equal calls and puts. Took advantage of the downturn in tech to sell some puts there on stocks I want to own, but not to many as I do not want to risk getting put too much in another swish down. I did listen to Nike earnings commentary as it was down over 6% at one point. I think Nike is a good company and I sold a put as I thought it might be time to buy some. With the volatility, the Nike option became less negative at one point so, bird in hand, I bought it back. Look for these kinds of opportunities to get into a stock you want. From what I heard, Nike looks to have simply had a bad quarter due to supply constraints. If it is down again on Monday, I will either re-write a put or buy it outright. 10.4

Buffet wisdom

The market adores Warren Buffet and many of his observations about investing have become almost gospel for Wall Street. But today I heard a new one that I had not heard before. I think it may become my new favorite. Josh Brown paraphrased it on the Halftime Report, so I checked and the quote is, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." (Aug 30,2019) Could not agree more, especially when I find myself having to reassure people not to panic and sell in a downturn. Part of what make Warren Buffet such a great investor is that he has seen it all, and market gyrations just don’t rattle him. He has his views, changes them as situations change and generally is just a steady force for good. He would be the first person to advise you to have a list of what you want to own, at what price you want to pay and just stick to your guns. Do not sell into a sudden downturn, but perhaps look to buy.

This week has been a perfect example of that. On Monday, panic was in the air and the selling was significant. “The long awaiting downturn is here! Batten down the hatches!” Tuesday the drop spluttered: Up, but then down and the day ended flat, confusing everyone. All day Tuesday there were both bulls and bears on the airwaves, but both sides were qualifying their predictions. Wednesday, the downturn became a rally, and buyers returned. Then today, Thursday, the rally really told hold, it looks like the week may end up ahead.

If you bought a little on Monday, stocks you like that were on sale, congratulations. You are probably looking at a gain. If you did not panic and sell, congratulations, you are not paying the tax man and having to get back in at higher prices. Your temperament matters. Steady as you go, that’s the way to make money in the market. Be calmly opportunistic when gifts like Monday’s decline are handed to you. Stick to your buying thesis. Find your market Zen.

Market Today: It was a rally day. Not back to where I started on Monday but close. Very few option trades as market was up so selling puts would not give me much premium (plus the VIX is back down) I was able to close three good puts on Salesforce (CRM), Applied Materials (AMAT) and PayPal (PYPL), sold and then bought to close calls on ROKU (ROKU) twice. Only sold two calls, on Abbvie (ABBV) and BioNtech (BNTX) as we are still not at market highs and sold two puts; Nvidia (NVDA) and LiveNation (LYV). Should be quiet tomorrow. 10.3

Headlines and Rumors

When I first learned about valuing companies, that is trying to determine what a particular company is worth, I was told it was all about earnings. In the simplest terms, I was instructed to look at how much a money a company made, extrapolate that into the future (usually about 10 years out) and then discount that earnings flow back to today’s dollars. That was a company’s value. That was my finance training, it was math and it was good.

Then I learned the term market value and the neatness of that cash flow analysis was history. Market value is simply what people are willing to pay to own a company and, sadly, that may have nothing to do with what the company currently earns (or even realistically could earn). Market value is simply the price of the company’s stock times the number of shares of the stock that is outstanding. The price of the stock is dictated by the market, it is what people are willing to pay for the stock. And what they are willing to pay depends on a lot more than just what a company earns. It can be a mish-mash of factors, ranging from the power of a brand, who the CEO is, their projected growth, even the perceived social good the company does, It is also a product of how people feel about the stock and the stock market. Is it logical that all companies drop 10% in a stock market correction? Shouldn’t the better companies not slide as much as the poor ones? Is a slight miss of one quarter’s earnings justify a 5% drop in the company’s value? Probably not. But declines are often driven by emotions not reality.

They talk about animal spirits in the stock market. It’s an odd term but it applies. The mood this September is somber. since the height of the summer, a lot of great companies have come down in value 10-20% off their highs. While it is not clear those companies highs were justified, it is also not clear, looking at their earnings, that a 20% drop makes sense. It’s been what they are calling a rolling correction. The cautious mood has let these stocks slide. People are nibbling at the market but not jumping in with confidence. So we swing up and down, often a lot, each day.

So news and rumors have an outside impact. And if you are willing to do the work, and consider out of fashion concepts like earnings, balance sheet strength and a company’s products and potential you might just find a gem. Then when you have a day like today, when good news out weighs the bad, and rumors seem less likely to become reality, you may find you have made a tidy profit. Take advantage of headlines and rumors, but don’t let them outweigh logic. Cool heads make money.

Market Today: Up day, based rumor that China will not fall apart economically, Fed did as expected and generally things looked better than they did Monday. Calls worked today but puts were better. Closed a lot of older contracts. Old standby puts all worked: United Health (UNH), United Rentals (URI), Shopify (SHOP), Disney (DIS), etc. Another solid day. 13.3

Turn around Tuesday?

There are quite a few idioms used by Wall Street. Today the one everyone’s lips was the term turn around Tuesday. Usually this applies to a strong Tuesday rebound from a deep Monday sell off. This rebound does happen frequently enough to warrant the idiom. But was it a true turn around today? Not really. In fact it was remarkably undecided day. We were up, then down, then up and it looked like it would be positive into the close (which would have been a good signal for the bulls). But in the last ten minutes, there was a sell off and we generally ended up where we started. So was it a good day for the bulls or the bears? The answer is neither.

Tomorrow afternoon around 2pm the Fed will have a press conference. A lot of people are waiting to see 1: if they announce a tapering timeline and then 2: will the market react to it. I believe this is a large part of why the market seems so undecided today, it is more of the ‘just wait and see’ mentality that is defining this September. To make matters more unsettled, tomorrow is the fall equinox. Believe or not, this date has frequently been a pivotal one for markets. Market old timers think this is to due to harvests changing hands around this period, the original markets. Others think it is tied up in the overall seasonality of the market. Not sure about either of those but a lot of market watchers are superstitious, so tomorrow could be interesting. Quad witching last Friday may have contributed to this weeks decline, so who is to say the equinox will not be in play tomorrow? I think the Fed will announce a taper timeline, but pushed into into next year. That will result in a minor market hiccup. And then back to normal.

You may be asking, do you have to know all these market idioms and superstitions, key economic events and history to make money in the market? The quick answer is no. But knowing them helps to inform your view as to possible market direction and overall sentiment. And honestly, sentiment seems to move the market more than reality, especially in times of market stress. Sentiment moves stocks.

So given this uncertainty, how does it effect my trading? Given that there is no way to know what direction we are headed in, I hedge my bets and try and have trades that will work either way the market breaks. I have calls options to close if we drop and puts options to close if we rise. About equal number of each. I avoid buying anything unless it is down more than 10%. I trim stocks to raise money if the shoot up. And I wait. I don’t sell.

Market Today: Market opened up which made it easy to offload the Albelmarle (ALB), Chevron (CVX) and Coinstar (COIN) puts I sold yesterday at the close. I quickly wrote calls on (BioNtech) BNTX and Zoom (ZM), which I own, and got to close the calls profitably later in the day when the market slipped and then resold them. I sold three puts into the close, betting on FedEx who reported lousy earnings (which means my put will be very negative tomorrow). I also bought puts on DIS (which dropped today on poor subscriber predictions) and Crowdsource (CRWD). All up, I only did 13 trades, all options. The shares I bought yesterday were positive today. Any day I do less than 20 trades is a slow day, and so it was. Tomorrow may be a make or break day. Good to have money on the side…

And so it begins…

I have been talking about the inevitable downturn in the market and woke up this morning to a pre-market slated to be down 600 points (the Dow index that is). Predictions did not disappoint and we got down as low as 800 at some point, a full 2% drop. This “improved” by the end of the day to 1.8% loss (over 2% for the Nasdaq). The mood was glum.

A 2% pullback in a year when we are up about 20% is nothing. There is likely to be more, maybe a lot more. Let me assure you, if we get a 10% correction it will feel a lot worse than today. For those of you who have not lived through a full correction, just stay calm. It is part of the market cycle. In the last few years, pull backs have been small and rebounded quickly. Mostly because people have bought the dip. This one may be bit different. There are loads of negatives on the horizon and most people seem resigned to a further market drop, which makes people hesitant to step in and buy stocks on sale. (Cramer listed 8 negatives about impacting market mood and we broke the 50 day moving average of the market, a technical warning sign).

I don’t like downturns either but I also tend look at the economy realistically. The world is not ending, but Covid will. Sure, there are international tensions, but no major wars being fought. People have money in their pockets and have demonstrated a willingness to spend. Money is cheap. Inflation is edging up, but not in any alarming fashion. Things are OK. We are not on the brink of another Depression.

It was China spooked the market today. Their real estate companies are in trouble and since they are highly leveraged, the banks in China (owned by the government) could be too. There is concern that Chinese bank failures could impact the worldwide financial system. Doubt it. Risks in China have been known for a while now and the smart money has probably cleared out already. This is not a new risk.

I was looking to buy today, but the stocks on my shopping list only slipped a percentage point or two. I need at least a 5% decline before I even begin to pick. I can wait, as everyone should do, until the down turn begins to show a sign of bottoming. A bottom traditionally occurs after a major ‘washout’, that is a flush of selling that sends the market hurtling downward. Once sellers exhaust themselves, buyers begin to creep in and we have a bottom.

Market Today: Down and out. I did 16 options trades, closed seven calls, three puts (two of which I wrote and closed today - MRNA and NVDA). I also sold six puts all of which were solidly negative by the end of the day. I always have calls on my positions, particularly big boring stocks like Blackstone (BX), PacWest (PACW) and Wells Fargo (WFC). When we have a day like today, I close them. I didn’t want to be called on them, but I sell the calls on the positions anyway just to generate income. It also softens the blow of a down day as I was able to pocket some “free” cash. I did buy a little bit of Cleveland Cliffs (CLF) today as it was down 10%. I just checked, stock futures are up - here’s hoping a least a couple of the six options I sold (CVX, FSLR, COIN, SHOP, CRWD and ALB) will come good when the market opens tomorrow.

The Winner’s Circle

It’s interesting to me to talk to people about their experience with the stock market. I grew up in a household where the stock market was an abstract concept, My parents both planned on their pensions and social security to carry them through retirement. They never owned stocks and their friends didn’t either. We were part of the 45% of Americans who have not stake in the stock market; it meant nothing to us. We believed only rich people owned stocks.

Sadly, it was not until I was in my 40s that I actually began to pay attention to the stock market. By then we had paid off most of our debts and were saving. It came as a bit of a shock to me that I was now among the 55% of Americans who did own stocks. I certainly didn’t feel rich. We relied on an investment advisor to help us and he bought and sold on our behalf. Four times a year he would show us charts that proved what a terrific job he was doing, compared to the benchmarks that he of course selected. Occasionally we broadly compared notes with friends over dinner or drinks, they too were part of the 55%. Usually, we got the uneasy feeling that we were not doing as well as we thought, but we believed we didn’t really have time to pay attention to it. We trusted our untrustworthy advisor.

After our losses in 2008, I began to manage our investments and sought out other investors to help me learn. I found there were excellent books, You Tube videos and of course the business channels. No one suggested that investing was simple, in fact some people and guides made is sound incredibly complex. Everyone suggested, however, that once you got the hang of it, you would be in the winners circle.

As I began to trade, I sought out other people who invested. I would shyly admit I had started to buy a few stocks, and ask if anyone knew of good ones I should consider. I would get eager suggestions, the vast majority of which came from men. Of course, these men were winning in the market. All the time. I was regaled with stories of the killing they had made on company X or Y. I just listened. I was embarrassed that when I had had winners, I had clearly sold them too early. I already knew that I held my losses too long. Everyone seemed to be better at stocks than I was.

What I came to learn years later is that all stock traders love the winner’s circle. They have stories of the doubles or triples they had had. The stock they bought for a dollar that was now worth one hundred times that. On the business channel, it was all about the winners. It was rare anyone admitted to losing money or recommending a stock that lost money. Even when they admitted to a mistake, it was because they had ‘gotten in too early’ or were ‘waiting for a thesis to play out.’ You rarely heard when they gave up on a trade or sold out of a losing position.

I began to wonder. I was handily beating the indexes, despite my sometime painful losses. Just doing the math, knowing many of them did not post annual gains as high as mine, suggested they must have some losers offsetting all those wonderful wins they talked about. They just weren’t getting a mention. Now when I meet a fellow trader, I try and get them alone and then ask, “What was the worst loss you ever had and what did you learn from it?” These stories are the ones I remember, and the ones I learned the most from. Better than any suggested ‘sure winner’ stock tip.

No one wins all the time in the stock market. Don’t be discouraged by the braggart out there. It is not the winner’s circle all the time, but then again it doesn’t have to be. I do very well even with my losses.

Market Today: Another slow day but again surprised myself by ending the week meeting my weekly goal. The market moved up and down, quad witching meant I could open and close favorites options like Shopify (SHOP) and Moderna (MRNA). We are still flagging for the month but commentary is getting bit more positive. Still in wait and see mode through. I set myself up for Monday with equal amount of calls and puts so I should make money on Monday’s open no matter what.