A chasm exists between what we know about the world around us and what we think we know.
The point was raised once more as the world recently watched in surprise as the fierce mercenary Wagner Group rumbled toward Moscow in what seemed an effort to topple Vladimir Putin, one of the world’s most powerful leaders.
Few investors, if any, had even considered that Putin could face a revolt from mercenaries who have long been thought of as administers of the Russian president’s will across the globe. Had the Wagner Group’s war convoy not stopped a few hours outside Moscow, we might have witnessed the start of the collapse of one of the world’s greatest powers.
As a potential civil war erupted in Russia, most of Wall Street was debating the power of artificial intelligence to help or harm stock prices. Almost no one had prepared for what might happen if a nuclear power were controlled by mercenaries who operate an international business empire.
Yet we persist with this false notion that we have meaningful insights because we live with algorithms, data, powerful computers, and a continuous news cycle. Most everyone has become so overconfident on what they think they know that they feel and talk like experts on politics and pandemics and medicine and investing and whatever else. Ask your doctor friends about how many times they have argued with, or been lectured by, patients who consult Dr. Internet.
We have long argued that investors would be much more successful if they focused on financial facts made truer by time—for example, that dividends and inflation have historically generated about 50% of historical stock returns—rather than chasing after the next hot stock. Such actions might even help us to avert America’s retirement crisis.
Pick just about any blue-chip stock. Reinvest the dividends. If you have the wherewithal, curate the stock with put and call options. The goal with options is simple: Try to match or exceed the quarterly stock dividend. If the dividend is 90 cents, for example, try to match or exceed that payment without taking on too much risk in the options market.
The world is volatile, and options, perhaps more than other investments, allow investors to harness volatility, which might otherwise encourage bad decisions. Investors too often react badly to unexpected stock swoons or surges. Options can help them manage stocks to lessen that urge.
Pick just about any quality stock that you own or that intrigues you. To buy the stock below the current price, sell a put option that expires in one month and that has a strike price that is 5% to 10% below the stock price. (Puts let investors sell stocks at predetermined prices and times.) If the stock advances, you keep the put premium. If it falls, buy the stock. Either way, you generate income or get paid by the options market to buy a good stock that you wanted to own.
To generate income, or to sell a stock above the current market price, sell a call option that expires in one month and that has a strike price that is about 10% above the stock price. (Calls let investors buy stocks at predetermined prices and times.) If the stock advances, you can sell the stock at the higher price, or, even better, adjust the call to avoid assignment and sell another call at a higher strike price.
Of course, all of this takes some energy, and maybe even a little real expertise. But not much. Just set aside the overconfident pontification and focus on discipline and action to turn your portfolio into a compounding machine.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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