Below is an excerpt from my book titled, " PIVOT - 20 Trends For 2020 That Will Change Your Life Forever...and what you can do about it"
Trend #12
Become the Teapot...Trade Like Water And Beat Wall Street
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Bruce Lee, the famous master martial artist and film star, famously said:
“You must be shapeless, formless, like water. When you pour water in a cup, it becomes the cup. When you pour water in a bottle, it becomes the bottle. When you pour water in a teapot, it becomes the teapot. Water can drip and it can crash. Become like water my friend.”
How does Lee’s advice apply to money management? I would argue the stock market is an endless stream of opportunities that flow by you every day during market hours.
There are billions of shares of stock traded every day on stock exchanges all over the world. Trillions of dollars exchange hands on a daily basis! That is an astounding figure when you stop to think about it.
For a large percentage of those trades, the strategy and the decisions being made are being made by algorithms...or algos for short. Simply, these algos are designed to separate you from your money. They are designed to take advantage of different price trends, technical movements, economic indicators, behavioral scenarios, stop-loss settings and even keyword searches to profit on price changes that humans can’t see or we see too slowly. All of this is highly regulated and legal. While their may be some that try to get away with price manipulation, it is rare and they are often caught and prosecuted. With that said, these algos are certainly trying to WIN. Their sole purpose is to make profit. And that means someone loses on the other side of those trades.
Unfortunately, as equity markets have gotten more complex, with nearly instantaneous reactions to opportunities and risks, the outdated advice you’re getting from your investment advisor can hurt you.
Locking up money for 40 years in a 401k plan is no longer (and maybe never was) a good idea. Blindly investing in growth mutual funds with hidden fees makes other people wealthy. And signing up for expensive stock tip newsletters is the equivalent to giving money to a fortune teller at the county fair.
Certainly there is some foundational knowledge everyone should know and if you need help with the basics, speak to a professional. What is a stock, a bond, a mutual fund? What is a qualified retirement plan? What is an option? But once you have a solid base of understanding, it is important to take control of your investment decisions. Nobody will ever care more about your money than you!
There is one word, that if you listen closely, is used with almost every investment tip you will get. The word is SHOULD. “This company just created a new product, its stock should crush it moving forward.” “Consumer confidence is high and interest rates are low, stocks should move higher from here.” Why is that? Why doesn’t anyone use the word WILL when giving their stock recommendations? First, for professional financial advisors, it is against their rules-of-engagement. They simply aren’t allowed to predict the future value of their investment recommendations. So, they say things like, “over the last 20 years the S&P 500 has had an average annual return of 5%.” Unfortunately, if you adjust that number for inflation over that same time period, the real return drops below 3%. Throw in fees and commissions...well, you get my point.
It is important for investors to know how to make their money work for them in the most efficient and effective way possible, regardless of what is happening in the overall stock market. But, if the past is not a certain indicator of the future and “should is not good” when it comes to making investment decisions, then when does an investor know, for sure, where the best opportunities are in the equity markets? The only answer is... in real-time! What IS happening in the market, with a particular stock, at this very moment!? If it is up or down for the day, why? What opportunities present themselves IN THE MOMENT? You have to be “formless,” you have to shape your decisions based on the reality of the market “container” you’re in. Hope isn’t a plan and “should” isn’t a prediction.
Below are some very basic examples of what you can do on any given day, since the one thing we do know for sure is your favorite stock is going to go up, or it is going to go down...repeatedly, every day the market is open.
If a stock you like is down for no apparent reason other than the overall market is down, what can you do?
Take a new position at a “discount.”
If you have been wanting more shares, add to your existing position to lower your average cost-basis.
Sell-to-Open (STO) a PUT option position at a premium and collect the cash up front regardless of what happens to the share price. If the price drops below the exercise price and the stock is assigned to you, then you got paid to buy a stock you already like at a discount.
Buy-to-Open (BTO) a CALL option position at a discount to control a larger number of shares for less money up-front.
Day-trade an additional position in the stock while keeping your existing position.
What you DON’T want to do is panic and sell a position you like that will most likely recover in the near future, if not the same day.
Likewise, what opportunities present themselves if a stock you like is up on the day?
If you have hit your target price, you can take profit (don’t get greedy).
If you want to take some profit but keep a position in-play, sell half your shares.
If you feel like the price won’t go much higher in the short-term, you can sell covered CALL options against your position to generate cash. In other words, get paid to hold your position.
If you feel like the stock will go higher, but you’re planning on taking a profit at a certain price above the current share price, you can sell covered CALL options with an exercise price equal to your target price and get paid to wait for it to hit that number (one of my favorite strategies).
If you feel like the price increase is due to a new growth factor, you can add more to your position.
If you feel like the price will continue to rise, you can sell PUT options with a higher exercise price than you would have prior to the move upward.
In an up-tick scenario, what you don’t want to do is sit and HOPE the price just keeps going up. Don’t get greedy, have a plan!
So, back to Bruce Lee. His famous quote about how water takes the shape of its container...it is a perfect metaphor for how you need to react when investing in the stock market. If the market is down, it presents opportunities. When the market goes up, it presents opportunities. There is a constant stream of opportunities...you just need to adapt to the moment and go with the flow!
2020 Pivot - Trade Like Water - Personal, Career and Investment Opportunities
We are currently experiencing a massive change in how we discuss our personal finances and our strategic investments. In 2020, investment strategies and philosophies that were considered “fact” just 10 years ago will be considered quaint at best. Below are 10 things you can do to take advantage of this trend and/or protect yourself:
Know your investments! Simply knowing you have money in your 401(k) and it is invested in an S&P 500 index fund is not good enough any longer. You need to understand what the fees are, how your performance compares to alternative investments etc. For example, if you had simply invested in the top 10 stocks in the S&P, what would your return on investment be compared to being invested in all 500.
Understand the concept that if you simply buy and hold a stock from January 1 to December 31, it may end-up the year at the exact same price (with zero profit to you), but may have moved up and down in a 20% range all year giving you daily opportunities to move in and out and make significant profit. I can’t stress this enough, price movement is GOOD. It creates opportunity.
Educate yourself on the basics. That is what the internet is for! If you don’t know the difference between technical analysis and fundamental analysis or the difference between a PUT and a CALL, you need to. Being a member of the herd doesn’t help you.
Evaluate how much money you are putting into your 401(k) and what your investment options are. Discerning the correct amount to contribute without locking-up too much of your available cash for what could amount to decades and understanding what your options are is one of the most important financial decisions you’ll make.
Look around your house and make a list of the top 10 products you just can’t live without and then evaluate the stocks of the companies that make those products. If you love them, so do millions of other people. Maybe consider investing in your passion!
Find a stock Watchlist tool online. They’re free. Make a list of 20 stocks you think you might want to invest in and just watch them for a month or two. Get a feel for their price movement. See how they’re covered in the news. Review the press releases for the company. Also review the companies’ social media accounts and read the feedback they get from their clients and the public. You have more tools available to you today to evaluate stocks than ever before...essentially the same tools as professional analysts on Wall St.
Create a new revenue stream by learning how to use options to create cash flow.
Understand the concept of dead money. A simple evaluation to determine if an asset is dead, is to ask yourself if you can go buy a cup of coffee with it. If you can’t, and it is only “alive” on paper, consider reanimating it! Refinance your mortgage and take out some of your equity to put that cash into motion.
Credit is not bad. Money has been cheap for a long time and in my estimation, will be for the foreseeable future. Consider not making such a big down payment on your house. Borrow a little more and use that money to invest. The old saying was, “never finance a car, because why would you finance a depreciating asset?” Well, cars are REALLY expensive. Even used cars. Do you really want to take $10,000 - $50,000 of cash out of your portfolio to buy a car when you can borrow the money at 3% and keep investing your cash?
And I can’t give you advice on this topic without reminding you to protect your family. If you don’t have a basic life insurance policy, you are putting your family’s financial future at risk.