Buy and Hold?? more like Buy and Fold…

A recent subscriber asked me for my opinion regarding his overall portfolio of investments. As you all know, I am not in the financial advisory business and so therefore by law I cannot give an opinion as to the make up of the portfolio. What I can talk about is my personal philosophy regarding the markets. 

I have been involved in trading markets for the better part of 25 years in one form or another,  as a broker, branch manager, registered options principal and as a trader/strategist. During the course of my career and due to my actual experience trading markets, I came to the realization that the always touted “Buy and Hold” strategies do not work. Sure you can look at a piece of paper showing a graph of XYZ stock and say “well if I bought here at $1, 15 years from then it would have been worth $20″.  The issue is that the market is not geared for long term investing. A gain achieved from a long term buy and hold strategy is as much a product of luck than anything else. We all can name many supposedly “Blue Chip” companies that were supposed to be “infallible”. Well we know today that no company is infallible… 

Well if long term Buy and Hold strategy is a fallacy then who makes money in the stock market? Traders do. Not all traders, but professional, well trained and talented traders make a lot of money in the stock/options markets. If one agrees with that premise, then it becomes easy to extrapolate that well informed educated short term traders have a better chance at making money in the market. That is the conclusion I came to many years ago. If professional traders are making money, how could I simulate what they do with a limited amount of tradable assets and do it outside of the floor of an exchange. That is when I began dedicating my time to learning as much as I could about options. A fact which takes be back almost 20 years!. I came to the realization that short term options trading was the best way to piggy back upon what professional stock traders were doing.

 The truth is that not until online trading began to explode in the late 90’s that it became possible to even attempt to go up against the pro’s and have a chance at winning. As technology exploded and information became readily accessible to all via the internet, the playing field also began to narrow. Today as you all know, many independent traders make substantial money trading alongside the pro’s from outside the exchanges.    

Like every trader before me, I took many losses and many lessons were learned the “hard way”. These tough lessons taught me to value risk management techniques that have enabled me to continue trading for all these years. hedging strategies, and capital allocation discipline is key to surviving as a trader. 

Because of my professional trading activity, I am a big believer in maintaining the overwhelming majority of my assets in semi- liquid short term guaranteed instruments like FDIC insured CDs and T-Bills. Many who hear that find it hard to believe that an options strategist/trader would keep such high percentages of his investable assets in cash equivalents. Obviously these days with interest rates at these extremely depressed levels it is not an attractive proposition but not too long ago a 4% to 5% or higher coupon was not impossible to achieve in these types of instruments. Long term, the average return on these instruments is very comparable to the long term average return on equity investments! 

The portion dedicated to options trading I view as my “business”. That capital is dedicated to risk taking and is where I really look for extraordinary returns. As a matter of fact, I have made the argument to many investors with “diversified portfolios” invested for the long haul that my overall risk profile is lower than theirs! Less of my capital is at risk at any one time and the relatively small portion that is dedicated to trading is traded aggressively in options. I don’t go through steep ups and downs in the value of my overall assets (a big reason why long term investing doesn’t work) and I generally can sleep better at night. 

Many arguments can be made for and against my philosophy (and believe me they have been made! ) but this recent debacle in the markets has once again reinforced my faith in that what I am doing is the best course of action for me and my family. I speak to many folks who were close to retirement last year. I say “were” because many will not be able to retire as planned. With 401Ks chopped in half and property values crushed, many are facing several more working years than they anticipated as recently as a few years ago….