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
( https://www.tastytrade.com/tt/ ) 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.
