How to improve my investing results
Yet again I did my research to find companies firing on all cylinders. I favor undervalued growth companies with improving fundamentals and excellent balance sheets.
And again, I see the same bag of companies pop up that I have invested in – mostly energy companies.
Yet these companies have been – and continue to be –spanked hard. So it begs the question: is my investing strategy wrong for current market conditions? Broadly speaking, I detect a flight to consistency – companies that have a history of delivering steady sales and growth.
Energy companies are delivering the only exciting growth around but their stocks are in the doldrums because they face an uphill battle convincing funds that this commodity run will continue. After all, it is axiomatic that you disinvest in commodities at the end of the business cycle. Staying in energy is doubly risky: time based risk (MUR aside, we bought calls) and country dependent (very dependent on Chinese oil/coal demand).
If I am correct – that the market will pay a premium for consistency – then I have the wrong strategy. I have worsened this situation by trying to be opportunistic and not executing well. For example, I bought the calls on the premise of a dead-cat bounce and I didn’t sell when I could. Same with the puts – we had an amazing opportunity in July before the rally started.
So this is what I am going to do
Assume the rally is ending and the market will crash before January –
Ultrashorts – hold them. They are mostly ~10% below our purchase price and breakeven just means a 5% drop in the markets (i.e. Dow <11,000).
Puts – Hold them. We have 2 more quarterly earnings seasons before they expire. We are mostly in consumer retail (AN, HOG, NKE, ZLC) and construction (VMC). Some of the most hurting sectors out there. And we have stocks that are clearly overpriced with problem balance sheets (NKE excepted). The risk here is time – it’s not if but when will these stocks head down.
Assume an oil rally by November (election time). This is risky. But I’m noticing a floor in oil and Natural gas, and that’s where we are concentrating. A cold winter can only help. Also, Chinese oil and coal imports should pick up now that the Olympics are over.
A lot is being written about oil prices going forward. The price is tied to the dollar, obviously. Also, fears of demand erosion are strong. Normally, oil prices would shoot up on a war fought near major oil terminals. And there are technicals – last week saw an expiration of future contracts. Interestingly enough, oil has stabilized since then, suggesting a stabilizing direction.
Calls – hold them for now.
DUG – This has done well but I think we need to leave. I put in a price of $39.50.
Inject trading but in a managed way
I don’t like trading and being opportunistic. Unless I can watch the market every day, all day, it’s easy to miss the opportunities. So here’s what I want to do.
I want to buy a lot of ETFC and sell the covered calls each month. Here’s my thinking
* ETFC has bottomed imho. It could still slip a bit, but the story has shifted dramatically. It is no longer a question of if they will recover but when.
* ETFC Covered calls yield ~2% per month for a strike price 33% away (the Oct $4 are ~3.4%). If not exercised, that is a solid yield of 20% over the year
* Manages downside risk. Over time, this creates a cushion of flexibility. If ETFC does not recover or even drops, I can hopefully have built a 20%+ cushion such that I am profitable even at $2.35.
* Adds to upside return.
More specifically, let’s say I buy ETFC today at $2.94. I sell the Sept $3 covered calls for $0.15.
* If ETFC >$3, I get $0.06 for the stock plus $0.15 for the calls. That’s 7%+ return for 1 month investment. I’ll do that as frequently as possible.
* If ETFC <$3, my cost basis is $2.79. Hopefully, I can write another batch of calls and get ~$0.15 again.
I do think that we are heading for a major financial meltdown which will reflect back on ETFC. So I am waiting to pull the trigger – I’d love to do this closer to $2.60.
The trick is to pick a stock that has minimal downside.
Essentially, we continue to be trading sideways with down movements. The best way that I know of to trade in a sideways market is to sell covered calls and lock in a few percent each month. And if it turns down, the accumulated call revenue cushions the downside and – even better – potentially the stock is chosen such that it has little or no downside. I see ETFC as having much more positives than negatives.
LGF is another candidate- it also delivers a 3% monthly yield on the call.
And again, I see the same bag of companies pop up that I have invested in – mostly energy companies.
Yet these companies have been – and continue to be –spanked hard. So it begs the question: is my investing strategy wrong for current market conditions? Broadly speaking, I detect a flight to consistency – companies that have a history of delivering steady sales and growth.
Energy companies are delivering the only exciting growth around but their stocks are in the doldrums because they face an uphill battle convincing funds that this commodity run will continue. After all, it is axiomatic that you disinvest in commodities at the end of the business cycle. Staying in energy is doubly risky: time based risk (MUR aside, we bought calls) and country dependent (very dependent on Chinese oil/coal demand).
If I am correct – that the market will pay a premium for consistency – then I have the wrong strategy. I have worsened this situation by trying to be opportunistic and not executing well. For example, I bought the calls on the premise of a dead-cat bounce and I didn’t sell when I could. Same with the puts – we had an amazing opportunity in July before the rally started.
So this is what I am going to do
Assume the rally is ending and the market will crash before January –
Ultrashorts – hold them. They are mostly ~10% below our purchase price and breakeven just means a 5% drop in the markets (i.e. Dow <11,000).
Puts – Hold them. We have 2 more quarterly earnings seasons before they expire. We are mostly in consumer retail (AN, HOG, NKE, ZLC) and construction (VMC). Some of the most hurting sectors out there. And we have stocks that are clearly overpriced with problem balance sheets (NKE excepted). The risk here is time – it’s not if but when will these stocks head down.
Assume an oil rally by November (election time). This is risky. But I’m noticing a floor in oil and Natural gas, and that’s where we are concentrating. A cold winter can only help. Also, Chinese oil and coal imports should pick up now that the Olympics are over.
A lot is being written about oil prices going forward. The price is tied to the dollar, obviously. Also, fears of demand erosion are strong. Normally, oil prices would shoot up on a war fought near major oil terminals. And there are technicals – last week saw an expiration of future contracts. Interestingly enough, oil has stabilized since then, suggesting a stabilizing direction.
Calls – hold them for now.
DUG – This has done well but I think we need to leave. I put in a price of $39.50.
Inject trading but in a managed way
I don’t like trading and being opportunistic. Unless I can watch the market every day, all day, it’s easy to miss the opportunities. So here’s what I want to do.
I want to buy a lot of ETFC and sell the covered calls each month. Here’s my thinking
* ETFC has bottomed imho. It could still slip a bit, but the story has shifted dramatically. It is no longer a question of if they will recover but when.
* ETFC Covered calls yield ~2% per month for a strike price 33% away (the Oct $4 are ~3.4%). If not exercised, that is a solid yield of 20% over the year
* Manages downside risk. Over time, this creates a cushion of flexibility. If ETFC does not recover or even drops, I can hopefully have built a 20%+ cushion such that I am profitable even at $2.35.
* Adds to upside return.
More specifically, let’s say I buy ETFC today at $2.94. I sell the Sept $3 covered calls for $0.15.
* If ETFC >$3, I get $0.06 for the stock plus $0.15 for the calls. That’s 7%+ return for 1 month investment. I’ll do that as frequently as possible.
* If ETFC <$3, my cost basis is $2.79. Hopefully, I can write another batch of calls and get ~$0.15 again.
I do think that we are heading for a major financial meltdown which will reflect back on ETFC. So I am waiting to pull the trigger – I’d love to do this closer to $2.60.
The trick is to pick a stock that has minimal downside.
Essentially, we continue to be trading sideways with down movements. The best way that I know of to trade in a sideways market is to sell covered calls and lock in a few percent each month. And if it turns down, the accumulated call revenue cushions the downside and – even better – potentially the stock is chosen such that it has little or no downside. I see ETFC as having much more positives than negatives.
LGF is another candidate- it also delivers a 3% monthly yield on the call.
posted by Andrew at
9:09 PM
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