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Our fearless, intrepid investor was on holiday yesterday, so she did not post anything about her derivatives experience.

Writing just out-of-the-money covered calls on Novavax (NVAX) every Monday, expiry date on Friday of the same week,  she lost $US10,990.00 in her “fun” portfolio over the course of about one year.

Mistakes are practice shots if we learn something from them.

She decided to write (sell) covered calls sufficiently out-of-the-money to earn about 1% per month. Safe, decent and guaranteed with a significantly reduced possibility of being assigned!

She also decided to write (sell) covered calls on a security that she would like to own long-term. After discussing the issue with knowledgable investors, she decided that she likes Intuitive Surgical (ISRG) and she bought 300 shares for a total of $US73,119.00. ISRG will continue to generate premium income even when it declines in the short term. Intelligent investors ignore short-term fluctuations.

Indeed, ISRG dropped by an extent greater than the premium income – a short-term loss.  Morningstar quants and analysts both recommend ISRG as a buy over the long term.  So yes, she earned her one percent a month premium income while waiting for ISRG to rise in price.

What did she do yesterday when the market opened at 9:30 AM?

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1. Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don’t even try.

2. The decline of trading costs is one of the worst things to happen to investors, as it made frequent trading possible. High transaction costs used to cause people to think hard before they acted.

3. Professional investing is one of the hardest careers to succeed at, but it has low barriers to entry and requires no credentials. That creates legions of “experts” who have no idea what they are doing. People forget this because it doesn’t apply to many other fields.

4. Most IPOs will burn you. People with more information than you have want to sell. Think about that.

5. When someone mentions charts, moving averages, head-and-shoulders patterns, or resistance levels, walk away.

Finally, unrelated to the above, please note that we offer a free half-hour discussion with you to allow you to see whether our one-on-one coaching program ($C300.00  including taxes) suits your investing needs. Contact me at milan@drmilan.com.

Like most “fun” portfolios, hers has not been much fun lately. That is true of most core portfolios as well. The majority of investors earn lower returns compared to the market’s average return. The Monday Morning approach to investing equals the market’s average return.

She is smart enough to keep her “fun” portfolio to under 10% of her stock market investments.

Writing covered calls on Novavax (NVAX), she lost $US10,990.00.

Mistakes are practice shots if we learn something from them. What did she learn from her NVAX loss?

She learned not to write (sell) covered calls at a just out-of-the-money strike price. That does produce the greatest premium income but with a 50% chance of being assigned on the Friday of that week.

She decided to write (sell) covered calls sufficiently out-of-the-money to earn about 1% per month. Safe, decent and guaranteed!

She also decided to write (sell) covered calls on a security which she would like to own long-term. After discussing the issue with knowledgable investors she decided that she likes Intuitive Surgical (ISRG).

The selected security will continue to generate premium income even when it declines in the short term. Intelligent investors ignore short-term fluctuations.

On Friday, August 5, she was assigned on her NVAX holdings and received $US83,250.49 in cash.

Using that cash, she bought 300 shares of Intuitive Surgical (ISRG) at an average cost of $243.76 per share for a total cost of $73,128.00 ($243.76 times 300).

She now writes (sells) covered calls on ISRG as you can see below.

What are her plans for today when the market opens at 9:30 AM?

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We are familiar with Mark Twain’s book Adventures of Tom Sawyer, published in 1879. Tom stumbles upon a box of gold which the adults invest for him while giving him an allowance of one dollar a day. One dollar today buys 3.6% of what Tom’s dollar bought in 1876.

The average inflation rate  since that time has been 2.3% a year. We are looking at compounding here, a phenomenon that Albert Einstein called the the world’s eighth wonder.

We first wrote about inflation on May 21, 2018 and showed how best to deal with it. With the average annual inflation rate of 2.3% since 1876, we have prospered more than any comparable period in history.

The current inflation rate is much closer to 8% than to 2.3% per year. At that rate of inflation, money loses half its purchasing power in nine years! Most people will be retired for much longer. The same ways of dealing with inflation continue to apply.

The critical thing to note here is that saving alone will not provide a comfortable retirement. We need to invest.  As we frequently state, historically, 1.) over the long term, 2.) properly selected US market index exchange-traded funds, 3.) held in tax-advantaged accounts, 4.) in an appropriate asset allocation, have been the investors best way for growing savings and are likely to remain so for many years. Warren Buffett wants to have the money he is leaving his wife to be invested that way. If it is good enough for Buffett, it is good enough for us.

Now, decency.

In 1894, Mark Twain declared bankruptcy. Over time, he repaid all his creditors fully. Repaying them was not a legal requirement. It was an issue of moral requirement. Decency!

Do you think that Wall Street bankers understand that?

 

1. Warren Buffett’s best returns were achieved when markets were much less competitive. It’s doubtful anyone will ever match his 50-year record.

2. The majority of market news is not only useless, but also harmful to your financial health.

3. The more someone is on TV, the less likely his or her predictions are to come true. (U.C. Berkeley psychologist Phil Tetlock has data on this).

4. Related: Trust no one who is on CNBC more than twice a week.

5. The market doesn’t care how much you paid for a stock. Or your house. Or what you think is a “fair” price.

Finally, unrelated to the above, please note that we offer a free half-hour discussion with you to allow you to see whether our one-on-one coaching program ($C300.00  including taxes) suits your investing needs. Contact me at milan@drmilan.com.

 

First, a thank you to all who gifted a membership or a one-on-one zoom meeting to friends and relatives. We think that they make ideal gifts. Consider it.

And now, our sincere gratitude to all members who took the time to respond to our Friday, August 12 survey about whether or not Trump should go to jail. Time is an irreplaceable resource. We appreciate your involvement.

Michael Conway, a long-time trial lawyer who started his career as counsel for the House Judiciary Committee during the impeachment inquiry into Richard Nixon in 1974, and who now teaches ethics and the law at Northwestern University, recently stated: “It’s no longer premature to say that Trump could end up in prison. It’s a winnable case.”

You can see our survey results below.

How should the law handle Donald Trump’s case? (Check your choice.)
Tom Ginsburg, a professor of international law and political science at the University of Chicago: “Prosecuting a former president is a highly fraught thing to do, especially when a president retains as much support as [Trump] still does.”	45.8%
Newsweek Magazine reporter David Freedman: “Trump’s contributing in some way to the actions of the mob on January 6, potential charges could include solicitation to commit a crime of violence, incitement of riot and obstruction of Congress (are enough for him to do jail time).”	54.2%)

And below, you can see members’ comments.

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As you all know, I am calendar-challenged. My wife Rosi is our fearless intrepid investor and I place the covered call sell orders on her behalf.

She had yesterday’s request denied because the covered call sales that we placed the previous week had a two-week expiry date and were still in place.

Nevertheless, for those of you who have not bought  Intuitive Surgical (ISRG) shares to allow you to sell covered calls on them, the approach we described yesterday still makes sense and you might want to consider it.

Next Monday, August 22, we will report how she did for the week ending on Friday, August 19, and her plans are for the week of August 22 to August 26.

I apologize.

Milan

Like most “fun” portfolios, hers has not been much fun lately. That is true of most core portfolios as well. The majority of investors earn lower returns compared to the market’s average return.

But she is smart enough to keep it under 10% of her stock market investments.

Writing covered calls on Novavax (NVAX), she lost $US10,990.00.

Mistakes are practice shots if we learn something from them. What did she learn from her NVAX loss?

She was writing (selling) covered calls on NVAX on Mondays of each week with the expiry dates on Fridays of the same week and at a just out-of-the-money strike price.

That does produce the greatest premium income but with a 50% chance of being assigned on the Friday of that week. When assigned, the option seller is required to sell the related security at below market price. In order to stay in the game, the option seller now has to buy that security at an ever higher price.

As the market price of any security rises, intelligent investors are taking profits and selling rather than buying at higher prices.

On Friday, August 5, she was assigned on her NVAX holdings and received $US83,250.49 in cash.

Using that cash, she bought 300 shares of Intuitive Surgical (ISRG) at an average cost of $243.76 per share for a total cost of $73,128.00 ($243.76 times 300).

She then sold three covered call contracts, strike price $250.00, expiry date August 12. (C 12AUG22 250.00)

ISRG declined to $238.36 per share by  Friday, August 12, giving her a loss of $5.40  ($243.76 minus $238.36) per share for a total of $1,620.00 ($5.4o times 300).

She earned  $0.50 per share premium income for a total of $150.00 ($0.50 times 300) and she was not assigned. The percentage return works out to 0.002%($150.00 divided by $73,128.00) per week or 0.82% per month (0.002% times 4).

So, the annualized return is 9.85% (0.82% times 12). Safe, decent and guaranteed!

Yes, she did lose $1,470.00 ($1,620.00  minus the premium income of $150.00) but ISRG is a strong company regardless of the short-term fluctuations which will always be there.

What are her plans for today when the market opens at 9:30 AM?

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1. Not a single person in the world knows what the market will do in the short run. End of story.

2. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn’t — his are much bigger.

3. You don’t understand a big bank’s balance sheet. The people running the place and their accountants don’t, either.

4. There will be seven to 10 recessions over the next 50 years. Don’t act surprised when they come.

5. Thirty years ago, there was one hour of market TV per day. Today there’s upwards of 18 hours. What changed isn’t the volume of news, but the volume of drivel.

Finally, unrelated to the above, please note that we offer a free half-hour discussion with you to allow you to see whether our one-on-one coaching program ($C300.00  including taxes) suits your investing needs. Contact me at milan@drmilan.com.

Some investors whom we call “legendary” have barely, if at all, beaten an index fund over their careers. On Wall Street, big wealth isn’t indicative of big returns.

How well do you understand one billion?

If you had one billion dollars and you spent $1,000 each day ($1,000 is a figure that most people understand), how many years would it take you to go through the billion?

The answer: a little over 2,700 years!

Chase Coleman and Chamath Palihapitiya are billionaires. Smart guys, right?

Three of the funds that they run, lost hundreds of millions of dollars since the beginning of this year. Expressed as percentages, the figures are 50%, 63% and 84% respectively.

During that time, the market dropped 20%. Losing more than twice as much, more than three times as much and more than four times as much as the market, takes special talent.

My 8-year old grandson could learn how to equal the market. (Buy and hold an exchange-traded fund which tracks S&P 500. SPY is a good example.)

Chase Coleman and Chamath Palihapitiya remain billionaires. Their clients lost the money, not them. In fact, they got paid for running these funds. Smart guys, alright.

How much education, training, access to tools and to company executives do Coleman and Palihapitiya have? More than my grandson or you and me.

Can you think of a greater example of irony?

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