Saturday, August 4, 2018

Investing during these noisy times

I have been writing about poor leadership - Justin and Trump being my current whipping boys. I have been writing about media noise and ever-lying politicians not to mention those fanatics blinded by their ideological or religious dogmas. This we are confronted with everyday; it makes us uncertain about our investments and our investment strategies.  It is already hard to hold on to your stocks during the panics of market crashes, now we have to learn to ignore the daily noise when investing as well. In fact, we all have to become little stubborn Dutchmen or maybe closer to home, Canadian Hockey players😊

We should focus on the real facts and not being swayed by those 30-second panic attacks that we are bombarded with every moment of the day. Some experts tell us to just ‘shut it out’!  That is not realistic and, with effort and tolerance, we may actually figure out, well enough, what is going on and what is truly important to US not to the U.S. 😊 (Oh I am soooo funny today). This is easier said than done.  I see myself reacting on the discount brokerage website - sometimes nearly daily. 

The beauty about real investing is that you may have the net worth many times the total value of a decent business but you don’t (or shouldn’t) have the overhead of such a business.  In other words, without to much effort you can all do it yourself and without it taking up the majority of your waking hours. A successful investor can do a lot of business from a small home office and the bulk of the work done there is paying utility bills. 

That is because most of your investments and the staff at your investments do the work for you. Your task is mostly asset allocation, i.e. building a truly diversified portfolio – I don’t mean a fragmented portfolio. A good investor spends more time drinking coffee from his favorite coffee machine than doing trades at his/her discount brokerage. 

I will tell you a secret. I play my investment experiments at the discount brokerage.  Yes, I make money at the discount brokerages too, but the bulk comes from the full service accounts. At the latter doing transactions is too expensive for buying and selling everyday. Also, I don’t buy real estate everyday. In fact, I just have a small number of self-managed properties, the rest is farmed out except from collecting monthly distribution checks.  And the spreadsheets to record the real estate transactions I haven’t touched in many months. Maybe about time I do though.

The full-service brokerage account fees stop me from many trades and my investments because they are not sold off frequently pay very little tax. All capital gains accumulated over the years are basically interest free loans from the government – no matter who is in government they make money for me everyday.  

The full-service accounts, also provide me with the advice from an experienced stock broker whom I know for over 30 years; he is my devils-advocate. I know what I own except for the latest investments because I often don’t bother to download my monthly brokerage statements. In the end, I get basically all the wealth management I need for a fraction of the costs. I calculated that my fees for the full-service is less than 0.5% of assets each year. Compare that to ‘Wealth Management’ rates which are often closer to 1 or even 2% of assets under management. 

The risky stuff is in the discount brokerages.  Part is to earn income on option trading but the option trades that really make money are the routine trades and for that I use cover-call writing ETFs, for example ZWB (writes covered call options on Canadian Banks). 

 If I want to buy a stock, I first start by collecting money selling a put-option with as strike price the price I would like to buy that stock today. Thus, I make money before I even bought the stock! Now this stock fluctuates in price and it may even fall below my intended purchase price. But that is offset by the option premium. If the price falls but not below the strike price, I may even be able to sell another put-option at an even lower put price. If the price of the stock takes off, I may lose out on the deal but I probably would have increased my risk if I chased that price up trying to buy the stock in the first place. Besides, there are always set-backs where I can still buy the stock at the by me desired price. Once I buy the stock (get assigned the stock because it fell below the strike price), I can also make money at the discount brokerage by writing call options but again, the stock can take off on me and I would cap my gains. Overall, you make more money investing this way.  

My discount brokerage strategy is a great way to learn about companies and to hold the riskiest investments. Typically, I outperform the full-service brokerage, but it takes most of my time. Once I am familiar with the companies and they perform, then I transfer them to my full-service brokerage - sell in the discount and buy back in the full service.  The latter is basically, what some may call, my core portfolio. With this method I can panic and get worked up about all that daily noise, and you bet that I do get affected. But my core portfolio provides the long term stuff which I consider buy-and-hold. 

I currently invest in call and put options on a larger scale than before. I have done this  for less than a decade and I think it could provide protection during the next bear market. This is an area of a lot of learning potential for me. The idea is that when the time comes to buy ‘put-options’ offsetting the losses in a falling core portfolio. The theory sounds great but the devil lies in the execution. The good news is that my core portfolio is likely to suffer during down turns, but it will likely recover and go up further in the subsequent bull market. We have calculated and experienced that now many times; so my learnings on buying put-options will only be gravy (hopefully thick not thin). 

There are many ways to make and lose money as an investor. I hope that my way, as I described above (and it is always evolving) is a worthwhile idea for your future strategies as well.

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