How Even A 'Dummy' Can Earn Much Better Returns
A week of Digests that can lower your risk and boost your returns... Why you won't take the time to read this series... What nearly every investor gets wrong about options... How even a 'dummy' can earn much better returns...
Doc is taking over the Digest...
I (Retirement Trader editor Doc Eifrig) have asked Porter and Justin Brill to turn over the reins for a few days.
This is usually the place where you read Justin's market updates or Porter's Friday lessons and diatribes about whatever has him the most worked up that day.
But I have something important that I need to share with Digest readers...
For the next week, I'm going to share details of the strategy I learned 25 years ago at Goldman Sachs. It's the strategy I've used my entire career – decades long, now – to earn safe, steady income for myself and my readers.
But I know without a doubt that the bulk of you won't read past the next sentence... it's simply the way the world works.
That's because this entire series will focus on options.
If you have a well-allocated portfolio and you're happy with your investment returns, learning how to use options may not be a priority for you. That's OK. I get it, I do. But... you'll miss out on an easy investing lesson.
Other folks will want to read on. Because if you'd like to earn higher returns in the years ahead, options will help you do that. More important, options will actually help you reduce the risks of investing in the stock market.
In fact, I'm confident that options are the only strategy that regular investors can use to both reduce risk and boost returns by making a small change to the way they trade and invest.
If you don't like letting your wealth rise and fall with the whims of the market, I hope you'll pay close attention to the next five essays, because I can help you do much better and avoid the frustrations.
I'm going to share the three reasons investing in options can be safer and more profitable than the market as a whole... especially over the next five to 10 years.
I learned the world of derivatives when I was recruited by Goldman Sachs out of business school...
At that time, it was the most exciting place to be on Wall Street. The market for derivatives (a more wide-ranging term that includes options) had been around for a while, but it was just then maturing into a monster.
We'd march into the offices of CEOs and CFOs and show them how they could reduce their risk while still earning great returns. And we were paid crazy amounts of money to do it.
I thought we were playing the short game. Surely, once people found out how easy options were, the jig would be up. Our options techniques were too easy to keep secret. Soon, everyone would know about them.
Twenty-five years later and that never happened...
People still don't take the time to learn how to build wealth with options. Big corporations still go to Goldman and JPMorgan and pay millions to have someone else put these strategies to work.
And the way the markets look today, I think options will serve you richly in the years ahead. Because returns may be especially hard to come by.
Overall, I'm a market optimist...
Staying invested in stocks over the long haul is the best way to build wealth.
From 1950 to the end of 2016, stocks have returned 7.7% per year, according to data from Nobel Prize winner Robert Shiller. So when folks plan their financial future, that's roughly the return they expect to get over the next 10 or 20 years.
But I've always been skeptical that even 60-plus years of data are enough to really understand the markets.
And between the economy, technology, and politics, things are drastically different than they were in the past. What do stock market returns from the 1950s tell us about returns today? Or in the 2020s?
Again, I'm a bull. But the conventional wisdom that stocks will return 7% or 8% a year has big flaws.
For one, that average doesn't hold up over the very long term or over every period...
Take a wider look from 1871 to 2016, and stocks return just 4% a year (again, using Shiller's data). And we've seen long stretches where stocks have returned nothing...
From 1929 to 1954, stocks returned nothing. From 1973 to 1985, stocks returned nothing. From 2000 to 2013, stocks returned – you guessed it – nothing.
If you started saving for retirement in 1973 to retire in 1985, you were out of luck. Sorry, you were just born in the wrong decade for getting wealthy.
What if one day we look back and say the same thing about the coming decade?
What's more, folks certainly think stocks are expensive today...
The cyclically adjusted price-to-earnings ratio (or "CAPE" ratio) measures the valuation of stocks with a long-term view that spans the business cycle. It doesn't help predict the market in the short term, but does give a good idea of what may happen in the long term.
Today, it says stocks are expensive...
Depending on how you measure, historically, buying at a CAPE ratio of 28 means you can expect returns as low as 1.9% a year for the next five years.
Meanwhile, interest rates are rising off historic lows. That could spell the end of the 30-year bull market in bonds.
And we haven't even talked about the inevitable market pullbacks and corrections along the way... or the potential for bigger crashes.
In total, it's entirely possible that any investment assets just won't deliver returns to anyone for years.
Except for options, that is...
When used correctly, options reduce the risk of holding stocks...
That's right. Most folks think of options as a type of leverage or a way to make wild bets. But we love to use them to do the exact opposite.
Essentially I see options as this sort of mathematical guarantee. And you can learn to understand why with just the most basic understanding of options.
Our strategy is simple...
We own a stock and we sell an option contract against it. When we sell that contract, we receive cash up front. (There's more to it, but that's all you need to know to understand how options reduce risk.)
For example, if we buy a stock for $20 and sell a $1 option against it, we've collected $1. The stock is still trading at $20, but our "cost basis" is now $19.
Of course, the risk when you hold a stock is always the same. In theory, any stock can go to zero, but let's assume you're using a stop loss and you'll sell if it falls to $15.
Without the option, you hold a $20 stock that cost you $20... and you can lose up to $5 per share if it falls to $15. With the option, you still own a $20 stock, but it only cost you $19. You only have $4 at risk if it falls to $15. In this example, by taking the extra $1 in as income, you just cut your risk by 20%.
Earning option income lowers your cost basis, making it less risky than holding the exact same stock.
There is no other way to reduce your downside in the market like my simple option strategy – one where you get paid up front.
If you hated watching your stocks drop in 2001 or 2008 (I know I did), options make those times much less painful.
While the best investors obsess over risk, we know that most investors tend to focus on returns...
Options can satisfy that desire as well...
Simply put, options provide the same – or better – returns, with less risk.
Everybody wants better returns. Options deliver them when markets are down or anemic. At times when markets rise quickly, my favorite options strategy can lag on total returns – but still provide better risk-adjusted returns.
We can prove this unequivocally...
Like I said, the basic idea of my options strategy isn't a secret. I learned it on Wall Street more than two decades ago. As such, finance guys and academics have studied it in all sorts of ways. I even hired a guy whose specialty is econometrics.
My research team and I spent weeks putting together research to find the most promising opportunities. That strategy has rewarded our readers handsomely.
But you can make a "For Dummies" version of the strategy. You don't have to think about the economy, or the businesses behind the stocks you own, or the value they possess.
You just take the "market return" and use a few simple rules to set up the options strategy. This isolates the pure returns that the options themselves generate.
From 1988 through 2016, the options strategy has returned 9% a year, while the S&P 500 (with dividends reinvested) has returned 10%. Most of that extra percentage point comes from the fast gains in the last year.
Meanwhile, the standard deviation on the options strategy was 12%. The same number for the market is 17%. In other words, this strategy requires roughly one-third less risk.
Put another way, when the tech bubble burst in 2002, stocks fell 22%. This options strategy portfolio fell only 7%.
During the financial crisis of 2008, stocks fell 37%. The options strategy just 28%. Again, a 25% reduction in volatility and angst.
In short, this strategy performs better in down or flat markets, and it performs just about as well when the market rises. It can protect you during the scary times, while providing good returns during all others.
Again, these quoted returns assume no thought, no research, no insight. These are just the returns that a pure, dumb, option-trading robot could create out of thin air. I call this "income from nowhere"... And I'll explain more about how I use options to create them later.
In the meantime, it's important to realize we can do much better than this "For Dummies" version. In fact, our option trades regularly target gains greater than 20% per year. And it's far simpler than you might expect.
Unfortunately, most investors won't take the time to figure this stuff out...
I can't think of a bigger missed opportunity.
Investors don't want to learn about options because it requires learning some new terms and using some basic math. Busy folks just aren't willing to sit down and learn something new.
To me, that's a boring and poor way to live.
But more important, what if I told you that you can learn the basics of options in an afternoon? Then you can make a trade or two and you'll completely understand this simple strategy.
Considering that these few hours of work will earn you tens of thousands of dollars over the years to come, it has to be the highest "hourly rate" you can make.
Others learn the basics but still get overwhelmed. For example, you log into your broker's platform and open an "option chain" that displays all the available options on a stock, you suddenly see hundreds of choices.
But once you've learned our strategy, you can narrow that down to only a few potential choices, and you can decide which one works best for your personal strategy in less than two minutes.
Most "traders" jump into options and do it wrong, lose money, and never try it again. Don't be like them.
My strategy fixes every one of those problems...
It's simple, quick, and has an extraordinarily high win rate. (For the record, since we launched Retirement Trader in 2010, we've earned and published the profits on 329 of 350 positions, a win rate of 94%.)
If you need to keep earning returns to secure your financial future, this strategy is for you.
If you prefer less risk and smaller drawdowns, this strategy is for you.
And if you like higher returns – and who doesn't? – this strategy is for you.
As I'll show you over the next few days, options can improve your financial future with little fuss...
I've been helping thousands of readers do just that for more than six years... And now, I'd like to share the method with you.
I can't wait to show you more of our work. I think you'll be delighted by what options can do... and how simple it can be.
I'll show you how options generate "income from nowhere," how to make a trade, and what kind of results you can expect. I'll even give you an example of our research so you can see how to fit it into your own financial plan.
Tomorrow, I'll share more about why options were created, what every investor gets wrong about them, and how they can produce a better return than any other asset offers.
I hope you'll stick around.
In the meantime, I'm also preparing an educational webinar to clear up any lingering questions you might have... Next Wednesday, March 22 at 1 p.m. Eastern time, I'll walk you through a real trade you can make in your own account to collect "income from nowhere" immediately. I'll also show you exactly how much income you could be collecting on some of your favorite stocks.
It's going to be a lot of fun for me (I love teaching)... and profitable for anyone who takes the initiative to join in.
Just click here to reserve your spot, and submit up to 10 of the stocks you're most interested in collecting income on today.
New 52-week highs (as of 3/15/17): Apple (AAPL), Allianz (AZSEY), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), National Beverage (FIZZ), Alphabet (GOOGL), Goodyear Tire & Rubber (GT), Johnson & Johnson (JNJ), Laboratory Corporation of America (LH), Stanley Black & Decker (SWK), Two Harbors Investment (TWO), and W.R. Berkley (WRB).
Do you have a question for Doc about options trading? Drop us a line at feedback@stansberryresearch.com. (Remember, we can't offer individual investment advice.) And read on for the latest essay from famed satirist P.J. O'Rourke, who shares a chapter of his brand-new book.
Regards,
Dr. David Eifrig Jr. MD, MBA
Baltimore, Maryland
March 16, 2017
Editor's note: Stansberry Digest contributing editor P.J. O'Rourke has just published his latest book: How the Hell Did This Happen? The Election of 2016.
He covers the entire election cycle from its 2015 start (when voters were perplexed, confused, and split into angry partisan factions) until its 2017 finish (which left voters perplexed, confused, and split into angry partisan factions).
Along the way, P.J. uses his dark sense of humor and biting satire to offend everybody who ran for president and anybody who voted for them. He even tries to offend himself, as one of the "media elite" political pundits who so miserably failed the American public.
He may make you mad, but he will make you laugh.
Beginning this week, Stansberry Digest is presenting three chapters adapted from How the Hell Did This Happen? (The full book is available for purchase here.)
Another Way to Choose a President, Part I – Road Trip!
You may be happy with the outcome of the 2016 presidential election... You may be unhappy with the outcome... You may be taking a wait-and-see attitude... Or you may not give a flying Wallenda about who's in the Oval Office...
But nobody was happy with the 2016 presidential campaign. It lasted forever. It was over-crowded. It was noisy. It was nasty. And it was trivial. Very few of the candidates had anything important to say about crucial issues such as debt, deficit, and a hopelessly politicized monetary system.
After the campaign was over everybody was left thinking, "There must be another way to choose a president."
Well, I have an idea...
What we could do, every four years, is gather all the people running for president in one place (preferably a place that serves beer). Then voters would ask themselves just one question: "Which candidate would I go on a road trip with?"
I believe even President Trump would be down with this method of picking a chief executive. Trump, of course, would assume that he'd win the "Road Trip Poll" – private jet! golf! luxury resorts! limos!
And he could be right.
Personally, I don't know what it would be like to spend an extended period of time traveling in close quarters with Donald Trump. Maybe we'd have fun...
Or maybe I'd wind up wanting to chip a Titleist into the back of his head while he stood on the green nudging his ball into an "alternative fact" of being closer to the hole...
On the other hand, there's the terrible thought of traveling with Hillary. Boy, can she yackety-yak!
And she'd probably want to stop to eat in all those dumpy little small town diners where she kept showing up during the campaign, instead of the steakhouses Donald prefers.
But let's leave the most recent election out of the equation. Instead, let's apply the "Road Trip Poll" selection criteria to prior elections and see what the results would have been.
I've been researching the matter. I've found that in the 17 presidential elections held between 1948 and 2012, the "Road Trip Poll" selected the better candidate 70.5% of the time. Of course, that's strictly my personal opinion. I'll present the evidence and let the reader come to his or her own conclusions.
I used the period after 1948 as the basis for my study because these are the optimal Road Trip years in American history.
By 1948, gas rationing had ceased, civilian auto production was in full swing, and plans for an "Interregional Highway system" were taking shape.
Before the 1940s, a road trip was something the dust bowl Joad family did in John Steinbeck's The Grapes of Wrath. Before that, America didn't have much in the way of roads. In 1919, the U.S. Army Motor Transport Corps drove a convoy of trucks from Washington, D.C., to San Francisco. It took 56 days. And before that, there were wagon trains.
In the movie Animal House, when the despairing Delta fraternity president Robert Hoover asks, "What are we going to do?" Otter and Boon do not shout, "Westward migration of pioneer settlement!"
Herewith the "Road Trip Poll" data:
Salty, poker-playing Harry Truman beginning each day with a shot of Old Grand-Dad vs. Thomas E. "little man on a wedding cake" Dewey
Yes, Truman was a Democrat, which I am not. But he was honest about it. Dewey was a "progressive Republican." This is a creature something like the pushmi-pullyu in the Dr. Dolittle stories, except with two butt ends. (Nelson Rockefeller would become the next progressive Republican to fall on both of his behinds.)
Jolly golfer Ike vs. po-face Adlai Stevenson
Eisenhower won WWII. Stevenson was a special assistant to the Secretary of the Navy and in 1944 traveled to Italy as a representative of the U.S. Foreign Economic Administration to report on Italy's economy, which, in 1944, did not exist. Later he was the governor of Illinois for one term.
Jolly golfer Ike vs. po-face Adlai Stevenson rematch
Even playing with a large handicap (1955 heart attack), Ike easily broke par. Adlai was in the rough for the rest of his life.
Charming, charismatic JFK vs. Richard – no adjectives needed – Nixon
A cinch for the "R.T.P." Or so you'd think. A road trip with Richard Nixon would seem like gum surgery on wheels. But Hunter S. Thompson actually went on a road trip with Nixon – or, anyway, on a car ride – in New Hampshire during the 1968 presidential campaign. Hunter described it in Fear and Loathing on the Campaign Trail '72:
There were only two of us in the back: just me and Richard Nixon, and we were talking football in a serious way... It was a very weird trip; probably one of the weirdest things I've ever done, and especially weird because both Nixon and I enjoyed it.
What's weirder yet is that Nixon might have had greater success than Kennedy as president. He certainly would have handled the Bay of Pigs and the Cuban Missile Crisis in a more Star Wars "Luke, I am your father" way. But even conservative me (if I'd been old enough at the time) couldn't have resisted a joyride with Handsome Jack.
Bullroaring Longhorn LBJ vs. Barry "Nuke 'Em" Goldwater
Here the "R.T.P." was just plain wrong. Beneath the good ol' boy façade of Lyndon Johnson was Lyndon Johnson. And Goldwater, in retrospect, was a man with incorruptible political principles that leave modern Republicans asking, "How much do those cost?"
Richard Nixon vs. Hubert Humphrey
The problem was all of Lyndon Johnson's luggage that Hubert Humphrey was carrying. There wouldn't have been any room for beer in the car.
Tricky Dick vs. George McGovern
McGovern's first pick for VP, Thomas Eagleton, was a veteran of road trips with George and had to have electroshock therapy.
Jimmy Carter vs. Jerry Ford
The "R.T.P." was wrong again. Really wrong. So wrong that I don't know how to explain it. Jerry Ford was a star football player at the University of Michigan, on a team that was undefeated for two straight seasons. The Wolverines know how to party! Jimmy Carter was a born-again peanut farmer. We wouldn't even get any cashews in the cocktail mix. Or any cocktails either. Maybe we weren't paying attention and got him mixed up with his brother Billy.
Happy-go-lucky Ron vs. Persimmon-Puss Jimmy
Hollywood, here we come!
Reagan vs. Whoever that stiff was
Hollywood, here we come again!
George H. W. Bush vs. "I have to go take a Dukakis"
The phrase in quotations is a word-for-word off-the-record quote from Bush 41 obtained on deep background.
Bill Clinton vs. George Bush
"Toga! Toga!" to quote Bill's Washington colleague and Animal House alumni Sen. John Blutarsky.
The guy in the Viagra ads vs. The guy getting his food laced with saltpeter by Hillary
Maybe Bill Clinton wasn't the sane choice over Bob Dole, but he was the insane choice. Party on, Dude!
The frat boy from Yale's DKE Animal House vs. Al Gore, nickname "Albert"
No need to read the SparkNotes on this one.
W. vs. John Kerry
Kerry would have been ordering Chateauneuf-du-Pape ('90) at the Billy Goat Tavern in Chicago, wondering where the Ritz Carlton was located in Tucumcari, New Mexico, and worrying about getting stone chips on his BMW 7 Series.
Barack Obama vs. John McCain
The "R.T.P." was really, really wrong yet another time. One was a fighter pilot. The other flew an adjunct professor of constitutional law's speaker lectern.
Obama vs. Mitt Romney, a Mormon
With all due respect to members of the Church of the Latter-Day Saints, Romney doesn't drink, doesn't smoke, and doesn't fool around. Maybe Obama doesn't either... these days. But "Barry" was a member of the "Shroom Gang" back at his high school in Hawaii. And I'll bet if he was riding shotgun with '70s disco music blasting on the stereo and you handed him a tall cool one, he'd remember how it's done.
Regards,
P.J. O'Rourke