Tyros and market idiots, of which there are an unlimited, replenishing number, always assert that this moment in market time is different than the past. In their view, stock prices can defy financial gravity and become unmoored from concrete facts and corporate earnings.
Mass delusions have played out during many market epochs, including the birth of technology, booming housing prices, low interest rates, cryptocurrencies, the rise of artificial intelligence, and even prescription drugs that help people lose weight without exercising.
The perpetual challenge for long-term investors is balancing the risk and reward of each moment in time because only a handful of companies—and investors—seem to truly thrive over time.
These thoughts are worth contemplating as the stock market is once again near record highs, options volatility is unusually low, and the end of 2023 means each day brings predictions about what the new year may hold.
Will laggards be leaders? Does the decline in the 10-year Treasury note bode well for battered financial stocks? Will top technology stocks that have produced most of this year’s market gains—including
—do so in 2024? No one knows the answers.
The best approach to known unknowns is focusing on facts made truer by time.
Dividends accounts for about 45% to 50% of historic stock returns, and inflation adds another few percentage points. We also know the stock market rises over time, and that people always need places to deposit and borrow money, just as they need computers and technology.
A solid approach is to ignore the omnipresent market hyperbole, relax and buy blue-chip stocks of well-run companies that are critical to how people live, and that ideally pay dividends. If you do that, you will temper the risk of investing, and position yourself for long-term success if you can keep calm during chaos.
Investors also should sell puts and calls to generate “conditional dividends” to smooth the stock-ownership experience. What’s a conditional dividend? In return for receiving the options premium, which is the conditional dividend, investors must be willing to buy stock if they sell a put and the stock declines below the put strike. If they sell a call, they must be willing to sell stock if the price exceeds the strike price. Positions can be managed to avoid buying or selling stock, of course, but that exercise is a story for another time.
We again mention this favorite approach because simple, time-tested facts always get lost among high-pitched market palaver. Options premiums are low because implied volatility levels are low, but you should often use the conditional dividend strategy to get paid by the options market for being a long-term stock investor.
Bank of America.
The stock is down about 7% this year, largely over concerns about the value of bonds owned by the bank. The company is well run and widely held.
Warren Buffett’s Berkshire Hathaway
remains a major shareholder.
With the stock around $30.58, investors who want to buy stock can sell the February $28 put for about 59 cents. Investors who own stock can sell the February $33 call for about 48 cents. If the stock is below the put strike at expiration, investors can buy more stock. If the stock is above the call strike as expiration nears, investors can adjust the call to avoid selling the stock.
This is fairly boring stuff, but over time, this approach helps compound returns, which is so important to investing success that Albert Einstein once called it the eighth wonder of the world.
Paying attention to the fundamentals always pay dividends. It’s an approach that never changes.
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