No new trades this week.

music selection:  “Meant To Live” — Switchfoot

weigh-in:  195.6 (2.4)

I’m down over six figures on the year.  Since I’m playing with less than half a million to begin with, this is an enormous decline.  So, is anything wrong?

In a word, yes.  I made a mistake. Namely, I leveraged up into volatility.  I have positions far in excess of my cash (a margin loan).  During good times, that magnifies gains.  During times like today, it magnifies losses.

The core strategy to generate income from my assets in excess of my budget remains intact.  My passive income from dividends, distributions, and interest continues to exceed my budget by 21.20%.  My projected year income from options is tracking about 45% over my budget.  But therein lies the problem.  I should have settled for just a little bit of gravy instead of swinging for the fences.

I will survive this test and remain gainfully unemployed.  But I expect to be forced to lock in some losses as stop losses are triggered.  There is an off chance the market will turn around just in time with a “Santa Claus” rally that bails me out relatively unscathed.  But I expect to feel some pain.

I didn’t practice what I preached.  A major goal here at the raptor is to teach others how to trade for income: safely.  Forrest Gump’s mamma always said, “stupid is as stupid does.”  But Lizard King says, “stupid is as doesn’t learn from its own mistakes.”  Even better is to learn from the mistakes of others.  Has anyone out there learned about excess leverage?

Devour your prey raptors!

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Strategy Review

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10 thoughts on “Strategy Review

  • December 10, 2018 at 10:56 pm
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    Yeah I think I’m done with naked puts after this. Never felt right about borrowing money on margin to begin with. From now on I’m only investing my own money only with no borrowed loan margin money and just sticking to Corporate Bonds, Dividend-paying stocks, and Covered Call Option trades.

    Reply
  • December 11, 2018 at 6:17 pm
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    Thanks for being open about it. I think many of us had a rough year in 2018. The only winners in my portfolio for the year are the income stocks and mREITs.

    Reply
  • December 11, 2018 at 8:21 pm
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    Sorry to hear that Velociraptor. I think a lot of people have gotten into trouble if they had leverage going into Q4. Someone I follow on seekingalpha has had a rough couple of weeks.

    https://seekingalpha.com/user/5088811/instablogs

    For myself, in my taxable account, I am down 7.91% for a little over $32k on paper. I don’t plan on selling any shares. So it will recover eventually. I changed from CEFs to two dividend focused index funds earlier in the year (VHDYX, VIHAX).

    I’m planing on adding back in CEFs and other leveraged assets going forward. There are a lot of bargains out there.

    Reply
  • December 11, 2018 at 8:37 pm
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    Velociraptor, one thing you could do for a rapid recovery is rent your house out and then go live for a year in South East Asia, like Chiang Mai Thailand. You could easily live off $1,000 a month there and your house would probably rent out for close to that amount. You could then take all your CEF income and pile into investments instead of spending on living expenses in the US.

    I always keep in mind that I can do something similar if I had to. I’m still working, but if I lost a job during a nasty recession, and was having trouble finding a job, I’d go spend a few months (maybe a year) as an expat. Then come back once the smoke settles a little bit in the job market.

    Reply
    • December 12, 2018 at 2:18 pm
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      Thanks for the tip but my retirement is not in danger. I can easily liquidate enough positions at a loss to zero my margin loan and still retain 100+% of my budget in passive income with some residual available to trade for bonus income. It is just going to take me a lot longer to cross the million mark now.

      Reply
  • December 11, 2018 at 11:04 pm
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    The markets are a game where the rules randomly change. If you stick with what worked well during time period X, expect a burning during time period Y (unless the rules randomly stay the same, like when going long growth stocks or oil stocks outperforms multiple years in a row). One trick ponies are sent to the glue factory. The hoardes of investors who chase what would’ve won last time contribute both to the underperformance trend of individual investors AND toward arbitraging away the underlying reasons for the better performance. This is why no investor applying a particular set of strategies will outperform long-term.

    There may be some rules of thumb that make sense in a game where the rules are always changing: No more than 2-4% allocation to any particular trade. No margin bullshit. No unlimited loss options positions. Hedge if the cost of protection is less than the historically derived expected value of the protection. Etc.

    I started playing defense in Q2 after Great Orange Leader started his tariff talk and the Fed became nostalgic for higher rates regardless of inflation. I set about 140k of my assets in protected put positions at a cost of about 4%/year in time value. It was agonizing to watch those hedges rot in Q3, until suddenly they became a lifesaver. My total return for the year is about zero, excluding 401k which is down slightly. My IPS calls for me to trade my long puts for long calls if the asset drops 20% from a high. Indexes usually recover quickly from such routine drops. As circumstances change, so will I.

    That said, there’s no need to panic. Your assets’ income producing potential is what you bought them for. Mr. Market’s opinion on their value today (which is way different this month than it was 2 mos ago) is irrelevant in the long run.

    Reply
    • December 12, 2018 at 2:20 pm
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      Exactly, I am going to be fine. That is by design. It hurts emotionally to see more wealth evaporate than I ever made in a year as an employee but I will recover. And I will learn from this.

      Reply
  • December 12, 2018 at 8:21 pm
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    What was it that Warren Buffet said “never use margin accounts”? IDK, but it sounds like something he would say. But it sounds like you have learned your lesson after getting your financial a$$ handed to you- at the measly price of 6 figures. Can you imagine the fund managers that are handling much more than that?! (also, i have realized that I cannot in fact pick stocks, but I do sometimes get lucky). Really liked the
    “stock market wizards” series of books- good advice from professionals that have very very long and impressive track records. I’ve also tried to read the Intelligent investor, but G-damn, it’s boring (working my way through Warren Buffet’s letters to stock holders up until 2014….note to self: don’t get the paperback edition next time. its too floppy for that much paper)

    Reply
  • December 19, 2018 at 5:55 am
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    Thanks for being honest with your investments. It is dangerous to be using margin. Looks like the market peaked or will do so in 2019, but I have been wrong before. One thing different is the Fed is raising rates still.

    Good luck in 2019. Expecting more volatility and that should be good overall for a value investor.

    Reply

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