How to profit maximally with derivatives. The Monday Morning Method

In 2020, there has been a 50  percent rise over 2019 in trading derivatives. Much of this is buying insurance by the big boys. Much of it is outright gambling which gives speculators huge leverage. Financial weapons of mass destruction, Warren Buffett called this.

After selling (writing) covered calls and cash-secured puts for a while (the Monday Morning program recommends only selling and never buying puts and calls), several of our members noted that they would have been better off simply holding an exchange-traded fund (ETF) that tracks the S&P 500 within their personal asset allocation regime — the Monday Morning approach to investing. This approach is as boring as it is effective. Investing this way needs very little management time.

Is it possible to improve on holding an ETF fund that tracks the S&P 500?

Looking for an answer to the question, we recently posted an article drawing attention to a dozen scholarly, peer-reviewed papers on the subject of puts and calls.

Several of these papers offer actionable ideas, however, what we discuss here is unique. Let us call it the Monday Morning Method of selling covered calls.

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Smart money companies executives’ earnings. Survey results

On Saturday, January 9, 2021, we stated that some of the executives of  smart money companies that sell mutual funds earn in one week what Monday Morning members earn in five years! We surveyed our members and subscribers about their view on this. You can see the results below.

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Alert! Promising professional predictions plus the latest on the Novavax adventure

At the beginning of a new year, we see a large number of market “experts” predicting the stock market rest of the year. At best, they make for amusing reading. To quote Niels Bohr, it is dangerous to prophesy, especially about the future.

We previously wrote about forecasting and predicting here, here and here.

In March 2015, renowned market theorist and neurologist William Bernstein stated: “I would say that the expected return of a balanced portfolio is the lowest it’s been in financial history. We’re looking at 3 or 4 percent on stocks….

If there are degrees of wrong, Bernstein could not have been more wrong. Investors acting on his comments missed out; the expected return of a balanced portfolio turned out to be among the BEST it’s been in financial history.

Looking at “degrees of wrong”, here is the other end of the scale.

Irving Fisher, seen as “the greatest economist the United States has ever produced” by respected, Nobel Prize-winning colleagues, is largely remembered today for saying just before the Wall Street Crash of 1929,  that the stock market had reached “a permanently high plateau”.

Some predictions are highly reliable. For example, market experts will continue to make predictions that will be unreliable much of the time.

Why do they keep doing it?

What has been the best way to invest?

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Informative focus on tested covered calls strategies

Recently, we posted comments from one of our members stating: “I think your blog is paying way too much attention to her (covered call) ups and downs.” Another member stated that he wants to keep it that way.

We can keep everybody happy. Below, you can see a list of academic, evidence-based papers on this subject which we selected for serious students of the matter.

The bottom line is that the covered calls can improve portfolio performance if managed correctly.

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Will the S&P 500 continue to rise? Should we look elsewhere?

On December  20, 2020, from T. V……DDS, San Mateo, CA

Question:

Do you see a continuation in the next decade of a rising S&P or should we look at emerging markets, international and small caps over the next decade?

Monday Morning Millionaire Program Answer:

On 4/04/2018, we published an answer to a similar question. Below, you can see an updated version.

To a significant extent, investing in the S&P 500 involves investing globally since most of the 500 companies operate in foreign markets as well as the US.

If we invest in foreign markets directly, we add many avoidable layers of risk such as sovereign risk, currency risk, regulatory risk, property rights risk and more. Many autocratic countries have shown total disregard for property rights, historically.

Concerning emerging and foreign markets, the chart below says it all.

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Chess and investing; about interesting similarities, about one interesting difference

Chess and investing have interesting similarities and differences.

In chess, each player has 16 pieces. Each player has 20 possible first moves, 400 possible second moves, 197,742 third, and after three moves, 121 million. After seven moves, the number of possibilities is in the billions.

After that, the number soon increases to surpass the number of all the stars and planets and grains of sand on earth combined!

Well, guess what? The number of market choices is greater. Stock market, bond market, money market, foreign exchange market, options market, futures market, multiplied by the number of securities in each, multiplied by what investors can do with each — staggering! Incomprehensible!

In chess, a human player would ignore the vast majority of possibilities and focus only on the few that make sense. A chess-playing computer would assess all of them and play the single most promising one.

Investors similarly ignore most securities and select only a small number to study for buy/sell possibilities. Like in chess, a robo-adviser would assess a huge number of possibilities to make one buy/sell decision.

There is one important, major difference between chess and investing.

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A member’s comments on the Novavax adventure

J.B.P., Ph.D., one of our members, recently made some excellent points about our intrepid, adventuresome member’s Novavax NVAX adventure. We show his comments below.

“First of all, I think your blog is paying way too much attention to her Novavax ups and downs. Your book Monday Morning Millionaire stresses the correct principles of investing and says that no more than 10% of a person’s portfolio should be used in such adventures.

“Since her Novavax investment was $500,000, her portfolio must be worth $5,000,000.  So, since August, when she bought the Novavax shares, I hope she let the grass grow & the paint dry on the other $4,500,000 she had invested. If she followed your advice, she would have invested $2,250,000 in an S&P 500 Index exchange-traded fund and the other $2,250,000 in cash or near-cash.

“The interest rate on the cash from August to December 2020 might have been about 1% /year, so she would get about $9,000 from that. The S&P index was at 3,294/share on Aug 1st and increased to 3,732/share as of Dec 31st, 2020, an increase of 13.3%.

“She would have earned about $299,250 on the $2,250,000 invested in that portion

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Better asset allocation leads to improved portfolio

 

On January 15, 2018, we wrote about a new year’s resolution suggesting that deciding on an asset allocation would be worthwhile.

As your mindset becomes increasingly aligned with the MMM approach to investing, you will see that there is no such a thing as a bad year. When markets tank, as they regularly do, you will see it as an opportunity to buy bargains. When markets rise, which happily happens more often, you will see it as an opportunity to take profits.

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About investment newsletters. Are they useful?

I have known an interesting man for over six decades – for eight years, he was the physician to the wives and children of the king of Saudi Arabia, among other fascinating things. He spoke highly of The Dines Letter in a recent conversation with me. If you look into this investment newsletter, here are some of the claims which you will see:

  • “I subscribed to The Dines Letter and took roughly $125,000 and turned it into $1 million after taxes.”
  • “James Dines, one of the world’s foremost financial forecasters”
  • “…one of the most fantastic investment calls on record…”
  • “Subscribers continue to reap huge profits”

Who can resist that? The knowledgeable can and do.

This newsletter has been in business for over 40 years; it has wide appeal. However, knowledgeable investors are aware of the unimpressive, evidence-based track record of investment newsletters, generally.*

“…been in business for over 40 years…”? So has the Flat Earth Society and numerous religious cults and other organizations which Monday Morning members look into for amusement.

What do we know for certain?

The best that we can say about the Dines Letter is that it has never faced an SEC enforcement action, as have hundreds of advisory services.

 

*Jaffe, Jeffrey F. and Mahoney, James M., The Performance of Investment Newsletters (October 1998). FRB of New York Staff Report No. 48, Available at SSRN: https://ssrn.com/abstract=937407 or http://dx.doi.org/10.2139/ssrn.937407


We have designed the Monday Morning Millionaire Program to offer abstracted investment education. 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.

Members can read our posts in less than five minutes. Following and studying the links embedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.

Happy new year! Novavax Dec. 29 update correction. 2020 in review.

All of us at Monday Morning wish all of you a happy, healthy, prosperous and serene 2021!

A sincere thank you from us at the Monday Morning program to all those who bought gift memberships and coaching sessions for friends and relatives.

Click here if you would like to buy a gift membership for someone.

On 2020/12/29 we stated that one of our intrepid, fearless investors sold 24 Novavax (NVAX) covered call contracts (2,400 shares) at the market, strike price $130.00, expiry date this Thursday (not Friday), December 31 (C 31DEC20 130.00) and that she received $3.29 per share for  total of $10,600.00. That brought her losses are down to $27,284.45 ($37,884.45 minus $10,600.00). (Her original loss on NVAX, incurred in August of this year when she bought NVAX at its peak, was $232,407.50 in a $500,000 portfolio.) 

Correction, correction!!

Some of our members with sharp pencils pointed out that 2,400 times $3.29 equals $7,896.00 and not $10,600.00 as we stated. That would have brought our intrepid, fearless investor member’s losses down to $29,988.45 ($37,884.45 minus $7,896.00) and not $27,284.45  ($37,884.45 minus $10,600.00).

Worse that that, NVAX shares dropped to $111.51 bringing the value of that one of her portfolios to $267,624 (2,400 times $111.51). Wrong direction but some headway.

Our sincere apologies for the error! Do keep your pencils sharp.

And now, let us review how our members did in 2020.

On, 2020/11/22 we wrote about the disconnection between the economy and the stock market.

In the past, the stock market and the economy moved in parallel. At this time, however, the economy is at its worst in years while the stock market closed 2020 at a new record high!

The stock market does anticipate what will happen in the economy and we hope that this is the case now. We don’t want to see food lines and high levels of unemployment, shuttered restaurants and places where people traditionally gather.

A more obvious reason could well be that interest rates are the lowest that they have ever been in our lives. Money goes where it is treated best and today, saving is not it. Searching for yield and growth, investors have pushed the market to its present levels.

And what does 2021 have in store for us?

Niels Bohr stated that it is dangerous to prophesy, specially about the future. Two issues are almost a certainty. The first, on March 23, 2020, Federal Reserve announced extensive measures to support the economy. Interest rates will remain low for several years.

For the second issue, let us look at the history of market losses. Over the last hundred years or more, there have been 5% market losses practically every year. Three out of every five years of produced 10% losses, one out of every four years have produced 20% losses, 30% losses occurred once a decade and 40% losses took place once every 20 years.

It is possible to connect the two issues above in many ways. And yes, market losses will occur. However, the Monday Morning mindset will see these losses as opportunities to buy bargains. And when markets return to growth, a long-term certainty, our members will take profits.

Once again, all of us at Monday Morning wish all of you a happy, healthy, prosperous and serene 2021!


We have designed the Monday Morning Millionaire Program to offer abstracted investment education. 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.

Members can read our posts in less than five minutes. Following and studying the links embedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.