The Role of Luck in Investing

In Slavic languages spoken by 360 million people today, the word for “luck” and “happiness” is the same.

In our posts, we have frequently stated: “With the Habits of Monday Morning Millionaires, luck hardly matters. Good luck!”

Michael McCloskey is the founder and president of Greenskeeper. We highly recommend his services to members and subscribers who want to  outsource some or all of their money management to experts.

We asked him to write about the role of luck in investing. This is what he has to say.

The Role of Luck in Investing

Michael McCloskey

Have you ever experienced a close call that could have been life changing had it turned out a different way? Perhaps a narrowly-avoided accident that left you breathless.

A global pandemic suddenly emerges and a restauranteur is faced with an existential business challenge whereas a grocery store owner receives an unexpected windfall. Shareholders of these companies are in fact (partial) owners of these businesses. Like it or not, luck – both good and bad – plays a larger role in life than most of us care to admit.

The reality of the world is that the future is unknowable with absolute certainty. Strange and unexpected things happen from time to time. As famed value investor Howard Marks likes to say, “Risk means more things can happen then will happen.”

But just because the future is far from certain, does not mean that it is entirely unpredictable. Lessons gathered across wide-ranging disciplines – from quantum mechanics to professional poker – teach that the way to deal with the inherent uncertainties of life is to think in probabilities. Investing is no different.

In her book Thinking in Bets,(1) world champion professional poker player Annie Duke provides several useful principles that we can apply to investing. Make large bets when the odds are in your favour. Good decisions can result in bad outcomes on occasion due to chance so it is important not to conflate the two (a mistake poker players term “resulting”). But over hundreds of hands, good decisions will more often lead to good outcomes.

At GreensKeeper, we apply the same principles to investing through our value investing approach. Done properly over long periods of time, it minimizes the impact of luck and improves the odds of attractive investment returns. More specifically:

  1. We stick to investing in high-quality companies with economic moats whose futures are reasonably predictable.
  2. We purchase shares in these businesses when they are materially undervalued.
  3. We avoid using financial leverage so we are never forced to sell.
  4. We assemble a diverse portfolio of 15-20 of such businesses in order to mitigate bad outcomes due to errors of judgment and low-probability negative outcomes (bad luck).
  5. We think long-term and avoid trying to predict short-term market moves which we believe are essentially random.

Even the greatest of investors like Warren Buffett will make mistakes of judgment and experience instances of bad luck. But by constructing a resilient portfolio with individual stocks purchased at prices offering favourable odds, over the long term your overall outcome is likely to be a good one.

As the Stoic philosopher Seneca so aptly put it, “Luck is what happens when preparation meets opportunity.”

Michael is the Founder and President of GreensKeeper Asset Management. He founded the firm in 2010 after successful careers in law and investment banking, and is a regular contributor to the Globe and Mail.

 

 

  • Annie Duke, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts (New York: Penguin, 2018)

The Monday Morning Millionaire Program was designed to offer compressed investment convictions. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 700 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

 

 

A tested way to earn amazing income; followup

Yesterday’s (September 28) post talked about the difficulty of generating income in today’s low-interest environment. We stated that some of our members and subscribers are generating income by selling puts and calls.

Based on Friday’s closing premium bid/ask spread on Novavax (symbol NVAX) puts and calls ($5.25/$6.25), we estimated that investors could (likely) earn $600 per $11,400 safely this week. (About $60,000 per million)

When the market opened yesterday, the actual premium received writing just out-of-the-money covered calls on NVAX, expiry date this coming Friday, was $5.24 per share. (C 02OCT20 115.00)

That produced an income of $524.00 per contract which was priced at $11,500.00. ($52,400.00 per million)

However, the stock closed at $111.18, down $3.82 per share. Overall, investors are ahead $142.00 per contract ($14,200.00 per million) for the day.

Here is how we calculate that.

  • The drop of $3.82 per share = $382.00 per contract.
  • Per contract income received = $524.00 minus $382.00 = $142.00

There is no way of knowing where the stock will be at expiry date this coming Friday. Investors could easily have a loss on the overall transaction. However, we need to look at this approach as a money tree that grows and withers alternatively. The loss is something that we can ignore. It will recur regularly.

Investors can bank the income received.

Note that the  Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. Selling puts and calls is NOT passive investing. However, our members with a moderate risk tolerance level have been doing it, often safely and successfully.

What is the worst that can happen from now until expiration date?

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A tested way to earn amazing income

On Friday, September 25, we wrote about the challenge of generating income in today’s low-interest environment. We stated that some of our members and subscribers are generating income by selling puts and calls.

Investors can (likely) earn $600 per $11,400 safely this week. (About $60,000 per million)

Note that the  Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. Selling puts and calls is NOT passive investing. However, our members with a moderate risk tolerance level have been doing it, often safely and successfully.

When the market opens at 9:30 AM today, September 28, following what they do, anybody should be able to earn about $US600 for every $US11,400.00 invested. How? What is the worst that can happen?

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Announcing options for income; fundamental, reliable, easy

 

The Federal Reserve shows the lowest interest rates in history. They will likely stay low through 2023. Generating income in this economic environment is a challenge.

To start with the bottom line, we can generate income selling puts and calls. However….

….please note that the  Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. Selling puts and calls is NOT passive investing. Our members with a high risk tolerance have been doing it, often successfully.

Warren Buffett stated that options are financial weapons of mass destruction. Nevertheless, the Monday Morning way of generating income using options is so safe that most brokerage firms allow anybody to start with that approach.

Here we will look at a portfolio of one of our members who sells options every Monday, expiry dates Friday of the same week. The portfolio is entirely in US dollars and US securities — historically the investing method with the best results.

  • Portfolio size: $826,250.71
  • Period: from January 1, 2020, to today
  • Securities held (symbols): SPY, KO, ABBV, NVAX, APD, TDB166
  • Total losses: $288,955.99
  • Number of derivatives sold: 44 (Occasionally, this investor sold options on several securities.)
  • Total gains: $368,163.66
  • Net balance: $79,207.67
  • Year to date growth: 10%
  • Year to date S&P 500 growth: 0.16%

This investor spends less than one hour a week managing the portfolio. The total gains of $368,163.66 divided by 44 hours works out to $8,367.34 per hour. Some Wall Street bankers do make this kind of money. This investor is a retired dentist.

Four years ago, Barron’s had an excellent article on this subject, entirely in keeping with the Monday Morning method.


The Monday Morning Millionaire Program was designed to offer compressed investment convictions. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 350 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.l

All the news that is fit to print. Yeah, is it?

What will be the impact of the upcoming presidential election on the stock market?

Check out the headlines in the newspapers below, each dealing with the Trump versus Biden election outcome impact on the stock market — if you have the time.

The flawless articles are great examples of English usage at its best. None of the articles are actionable. None will help you improve your investment performance or make a decision.

I subscribe to all these papers so that you don’t need to.

  1. N.Y. Times
  2. Wall Street Journal
  3. The Economist
  4. The Globe and Mail
  5. Manchester Guardian

The authors of these articles are required to produce something on a regular basis even when there is nothing useful to say.

By way of contrast, go to the Monday Morning website and do a search for any investment term. For example:

  1. Saving
  2. Parking money
  3. Money managers
  4. Derivatives
  5. Wills

Any investment term, make it any investment term.

Each search will produce information that investors can do something with. Develop the six habits of Monday Morning Millionaires and grow rich.

As we have repeatedly stated in our posts, with the Habits of Monday Morning Millionaires, luck hardly matters. Good luck!


The Monday Morning Millionaire Program was designed to offer compressed investment convictions. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 300 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

Daring member’s portfolio adventure. Good or bad? Followup 2 update

We began this series of posts by describing an aggressive member‘s Novavax (NVAX) derivatives adventure with $500,000 worth of the stock.  Our  September 1 post stated: “She lost about $170,000 on the NVAX stock. Writing covered calls for five weeks in a row, she earned about $100,000 in premiums bringing her loss is down to about $70,000. She plans to continue writing covered calls every Monday with expiry date of Friday of the same week, hoping ultimately, to come out ahead.

“I will keep you posted.”

It would be useful to review yesterday’s post.

Several of our members are now writing covered calls and cash-secured puts on NVAX.  From here on, we will keep our comments general rather than specific to make them useful for everybody.

Our aggressive member initially sold 30 just out-of-the-money  contracts of NVAX on Monday with expiry date Friday of the same week.

She kept selling just out-of-the-money covered calls on NVAX every Monday until the underlying security was called away from her. At that point, she is sold just in-the-money cash-covered puts on it.

Yesterday, Monday, September 21, members who sold 30 just out-of-the-money contracts of covered calls or just in-the-money cash-secured puts received a premium of some $US15,500.00.

That brings the original loss of just over $200,000 down to about $39,500.

Our members feel that the balance between the risk of holding NVAX and the derivatives premium returns is acceptable.

We will keep you posted.


The Monday Morning Millionaire Program was designed to offer compressed investment convictions. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 350 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

 

Daring member’s portfolio adventure. Good or bad? Followup 2

 

The Monday Morning Program recommends passive investing — watching grass grow, watching paint dry. What follows is decidedly NOT passive investing. It is an aggressive member‘s Novavax (NVAX) derivatives adventure with $500,000 worth of the stock. She started out with a loss of just over $200,000 as NVAX dropped from her acquisition price of $174.39 to $92.90 at the beginning of September. At that point, she bought more NVAX lowering her per share cost.

Writing covered calls on Mondays with expiry dates Fridays of the same week since the beginning of her NVAX derivatives adventure, she earned about $130,000, bringing her loss down to about $55,000.

You can see the entire story up to last Friday, September 18.

Based on this story, American investors can sell just in-the-money, cash-secured puts again.

Last Friday’s bid/ask range for just out-of-the-money covered call premiums or just in-the-money, cash-secured premiums were $5.25/$6.25. So, investors can expect to earn about $600.00 per contract. Our daring member will earn about $18,000, bringing her losses down to $37,000.

Canadian investors who are involved in this adventure were assigned again and find themselves in cash. In their tax-advantaged portfolios they will need to buy NVAX again at a higher price.

Is buying NVAX again at a higher price a problem?

Then, investors might ask why NVAX? Why not one of the ten most actively traded securities on the New York stock exchange? Here they are in order of volume:

1 Eastman Kodak Co.
2 General Electric Co.
3 Wells Fargo & Co.
4 PG&E Corp.
5 SPDR S&P 500 ETF Trust
6 Transocean Ltd.
7 Bank of America Corp.
8 Coty Inc. Cl A
9 Ford Motor Co.
10 Uber Technologies Inc.

All of  them have derivatives that trade weekly.

What are the premiums available to investors writing covered calls or cash-secured puts on these stocks?

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A question about asset alloction

On September 19, 2020 27, from P. T….DMD, F.R.C.D., Vancouver

Question:

What percentage of your portfolios is in cash?

Not necessarily by design….I  have got into some position that have not exited yet….

Also, would you consider cash committed to a cash-covered put that has not expired as “cash”?

Monday Morning Millionaire Program Answer:

For years, I had nothing but Berkshire Hathaway B. (Symbol BRK.B) — a hundred percent! Berkshire has always had a high percentage of holdings in cash and still does. Shareholders did not and do not need to think about asset allocation.

About a decade ago, I got interested in derivatives. Since BRK has monthly expiry dates and I wanted weekly expiry dates, I got out of it and into 50% SPY, the largest exchange-traded fund which tracks the S&P 500, and 50% in a money market fund (TDB166).

As I got older, I became more conservative and adjusted my portfolios to 40% SPY and 60% TDB166.

As the market kept going up, the cash drag of TDB166 began to bother me and I got back into a 50/50 asset allocation.

And yes, not necessarily by design, investors’ asset allocation will be thrown off by market fluctuations. That is why we need to rebalance when that occurs. Investors who write covered calls with expiry dates one week out, find that they are assigned about half the time. That will overweigh their cash position and throw off their asset allocation — another time to rebalance.

Concerning cash committed to a cash-covered put that has not expired, it is not the same as the cash aspect of your personal asset allocation. Investors can use the cash aspect of their personal asset allocation to buy groceries and pay the rent. They cannot do so using the cash committed to a cash-covered put that has not expired except in a margin account.

Don’t even think of going there.

That is one (of many) reasons why Warren Buffet called derivatives financial weapons of mass destruction. Charlie Munger, Buffett’s partner, stated: “To say that accounting for derivatives in America is a sewer, is an insult to sewage.”

Our posts have frequently stated: “With the Habits of Monday Morning Millionaires, luck hardly matters.”

Good luck!

 

 

Greatest safety – put all your eggs in one basket.

“If someone puts all their eggs in one basket, they put all their effort or resources into doing one thing so that, if it fails, they have no alternatives left.” (Collins dictionary)

Frightening for investors, isn’t it?

But then, from Gerald Loeb, the most quoted man of Wall Street before Warren Buffet:

“The greatest safety for the capable I might say lies in putting all one’s eggs in one basket and watching the basket.”

Loeb’s book The Battle for Investment Survival was published when Buffett was three years old. It has been reprinted countless times; its many pearls I have stood the test of time.

These are arguments for and against diversification.

I once bought a stock the price of which doubled in one day! However, it was such a small percentage of my overall portfolio that the price increase was meaningless. A large price decrease would have been equally meaningless.

Several of our members had more than a hundred different securities in their portfolios when they joined. Many were acquired when commissions were significant. (They no longer are.) Their brokers loved it. To the investor, what possible difference could any security price movement in any direction make to the portfolio, overall?

The Monday Morning program manages this issue in an evidence-based, effective manner.

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Results of members’ asset allocation survey

On Wednesday, September 16, we surveyed our members and subscribers with the following question:

What percentage of your portfolio is in cash or cash-equivalent (money market, bank account, certificate of deposit, credit union account, etc.)?

  1. Less than 50%
  2. 50%
  3. More than 50%

Yesterday, September 17, we tabulated the results as you can see below:

  1. 56.7% have less than 50% in cash or cash-equivalent
  2. 16.7% have 50% in cash
  3. 26.7% have more than 50% in cash or cash equivalent

It is interesting to note that at the end of June, Warren Buffett’s Berkshire Hathaway (symbol BRK) was 60% in cash. It is now 20% in cash. Much of Buffett’s buying was re-purchasing BRK shares. That means that he couldn’t find a better place for the money.

By comparison, note:

  • Apple cash as a percentage of market capitalization is about 30%.
  • Google cash as a percentage of market capitalization is about 14%.
  • Microsoft cash as a percentage of market capitalization is about 25%.

Buffett is an investor like all Monday Morning members. The extent of investments differs but the objectives are similar.

Apple, Google and Microsoft are companies with objectives to build and grow.


The Monday Morning Millionaire Program was designed to offer compressed investment convictions. Over the last two decades, the program has outperformed over 90% of portfolios, including professionally managed ones.

The program does not provide any investment advice or endorsements.

With fewer than 300 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.