PERSPIRATION PRINCIPLE 299
EVEN IF YOUR MONEY’S IN YOUR MATTRESS, YOU’RE STILL IN THE MARKET
Sitting on the Sidelines is as Much a Choice as Going All-In
I have spent most of the last year (doing two live morning shows a week) on the web having a couple of actual experts and seasoned veterans, Tom Sosnoff and Tony Battista from tastytrade ( ) trying to teach me how to trade options. We started my adventure with an account of $250,000 and ended the year (spoiler alert) with pretty much the exact same amount – give or take $500 – even after the December debacle.
If the mostly rotten month of December wouldn’t have tossed the markets (and especially the tech stocks) off a cliff and screwed things up, I would have ended the year ahead by about $8000 to $10,000 which – considering that I never really had more than about $50,000 at risk at any given time – would have been a pretty impressive outcome for a complete novice. But it was not to be. Of course, if the Queen has a couple of different chromosomes; she’d be the King. So, who am I to complain?
And let me be clear, my results were just that – mine – because we wanted to see not just what the guys could “teach” me, but what I could actually learn. So, the choices I made, and the stock selections were all based on my preferences, prejudices, urges, guesses and gut feelings. And, notwithstanding their clear advice that, by and large over time, betting on the direction of the market or on the up-or-down movement of a specific stock was a losing proposition, I generally did exactly that – betting based on my ideas and beliefs regarding the merits of the specific underlying businesses and assuming that their stock prices would reflect what I thought was likely to be their actual operating performance. Think of this as the struggle of hope (mine) against history (theirs) and you’ll have a pretty good idea of what went on. And, just to make things worse, I never let my complete lack of actual experience get in the way in the least or reduce the fervent intensity of my opinions. Sometimes wrong, but never in doubt.
But I have to say that overall it was a great experience. Experience – in case you don’t know – is what you get when you don’t get what you want. Or, as they used to say about Wall Street in general, they take your money and their experience and turn it into their money and your experience. So, I’m grateful to have broken even and to have learned a few things that I think are worth sharing.
And, even more importantly, thanks to Tony B, I realized, maybe for the first time, that even if your money’s safely stuffed in your mattress at home, you’re still in the market – whether you like it or not – whether you know it or not – and whether you want to be or not. Because no one really has a choice today including the mattress stuffers. If you’re not playing, you’re paying one way or the other. But I’ll get back to that.
So, what did I learn?
1. If you’re going to play in this pool, you’re can’t be an occasional participant or a part-timer. It’s not a “set it and forget” deal like buying traditional stocks or mutual funds and putting them away for a decade or so in the belief that equities always increase in value over the long run. These markets move rapidly and radically every day and you’ve got to be there to watch and react to the movements pretty much in real time. Thinking that you’ll set aside a couple of hours a week or a morning or two to play these markets like you were going to the race track is about the same as just rolling up your bankroll and setting it on fire.
2. These markets are entirely driven by technology. If you don’t have access to the proper tools and trading platforms, you’re so dramatically disadvantaged that you might just as well give up. It’s like bringing a knife to a gunfight. You can get the tools, you can learn the strategies and the technologies, and eventually you can participate in the process, but the very first investment you need to make isn’t in a particular option or underlying stock, it’s in spending the time to learn how to play the game. If you don’t, the rule’s exactly the same as in any poker session. If you don’t know who the patsy is in the game, you’re the patsy.
3. If you decide (as I did) that you’re going to generally be “directional” which means thinking that you know which way things are gonna move, and which the experts at tastytrade will tell you is a stupid strategy, then at least be prepared to be patient and stay the course. It takes quite a bit longer for systemic operational improvements or deficiencies to be reflected in the prices of these stocks and, in the meantime, between (a) short-term and often misleading media reports which can move prices the wrong way, and (b) your own worst instincts and adrenaline surges driving you to do something, you can overreact and change your positions for no good reason and to no good end. Doing things is not the same as getting things done.
4. On the other hand, there will be times when you’re proven quickly to be dead wrong and then you need to cut your losses and move on. Mistakes are always part of the process and it’s OK to make them, it’s just a really bad idea to stick with them once it’s clear that the baby is ugly. Chasing your losers is a constant temptation, but one that the best and most disciplined traders almost never do.
5. Size matters. Start small. New players need to stay in their own weight class for a long time because they’re not generally prepared either financially or mentally for the kinds of big swings and serious hits that can happen in an instant if you get too far ahead of yourself or to far out over your skis. Remember that there are pros, sharks and smart machines on the other side of every trade and they make their living every day in this business that you’re just beginning to understand.
I had included another “lesson” when I made my first list which was all about the traditional advice that you give every gambler in any sport – don’t bet or invest anything more than you can afford to lose. Be sure you keep some funds put away and on the sidelines for safety and security. You’ll sleep much better at night and all your family members and relatives will also thank you.
Now I know that no one is ever plans to lose anything, just like no one wants to be happy later, but my initial thought was to suggest that this isn’t a game to be playing with your retirement funds or money you need to live on or for emergencies. And then, I had a conversation with Tony B and he suggested something to me that really changed my mind. He said that we’re all always in the market and that whatever choices you make about where to put your money (or if you decide to keep it all in your own little piggybank) are just shades and variations on market decisions in exactly the same way as any stock purchase or sale might be.
But the big difference today – especially for young entrepreneurs – who are already making big bets on their futures and their own businesses is that standing still – not having a strategy to grow your assets – is actually slipping backwards every day – especially in a period when the interest rates being paid on “secure” savings accounts and even CDs are embarrassingly modest and unlikely to remotely keep up with inflation. So, while you may think you’re being cautious and playing it safe with some of your scarce dollars, you’re actually mortgaging your future and digging yourself into a hole.
The trick is to make those precious few assets that you’ve managed to put aside work harder for you and that’s all about using leverage which is precisely what options provide. A side note: even with my $250,000 account, I couldn’t realistically do much of anything with Amazon or Google because the share prices were so high that to actually buy a bunch of the shares of either stock would have consumed big chunks of my funds in a very short time and given me way too much exposure to far too few underlying stocks. But I could simulate and model the interest that I had in these stocks by using options costing only a fraction of the cost of the actual shares. I could play with the big boys without betting the kind of bucks that made no sense and, if I did it right, as noted above I was looking at annual returns approaching 20% on my money rather than 2% from some savings account along with a free toaster.
None of this is easy or straightforward, but it’s important to think about when you’re looking at your own financial future. And no one becomes an expert in a year. But if you take the time, learn to trade for yourself, and start small before you scale, you’ll be doing yourself and your family a big favor.