by phil - February 26th, 2011 10:51 am
I love the Berkshire Hathaway annual report!
Especially Warren Buffett’s letter to shareholders. The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover. Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy: Patience and performance.
I often preach to members the joys of letting gains compound and our $25,000-$100,000 Virtual Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year. Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money. Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money. Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.
In our $25,000 Virtual Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain. In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date. Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.
How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February? THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS! Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders. $10,000 handed…
by phil - January 31st, 2011 6:50 am
I can’t believe we’re doing this again!
Thanks to FINALLY getting out of the damned DIA Feb $122.75 puts at $5.15, we’re up to around $35,000 virtual Dollars on June 11th’s $10,000 Virtual Portfolio (and we ran through the preliminary results last Friday, where we also predicted "Alpha 2 says "Cliff Ahead"). As I said in yesterday’s post "once more into the breach, my friends" and we’re going to put our profits to work with the fairly ambitious goal of getting to $100,000 by December 31st.
This virtual portfolio will be available to Voyeur Members but trade ideas during chat will have their usual 1-hour delay. Premium members will get the trades with no delay and hopefully Matt will have a new system running that will allow Basic Members to see $25KP comments with no delay as well. New trade ideas and updates will be copied into the comment section of this post or, assuming I write one, the updates of this post. If you are not a Member yet, now is a good time to join. Check out the subscription page – Our EXAMPLE trade on C just closed up 200% and our ENP example returned 137% – not bad for free samples, right?
We didn’t play the $25KP this week but Monday’s DIA play in Member Chat was a good example of the kind of trades we’ll be looking for. The trade idea there was:
DIA $117.75 puts should give good bang for the buck at $1.06. If I had the new $25KP up and running I’d go for 10 with a DD at .86 and a stop at .76 for a $400 risk on the first trade.
As you can see from the chart below we didn’t get our chance to Double Down until Wednesday and there was a brief and scary dip Friday morning that touched our .76 level but, of course, my Friday morning Alert to Members went with 2 aggressively bearish plays (TZA and QID) so we were clearly not going to let a little flush scare us.
by phil - December 17th, 2010 8:18 am
Good job Congress!
Way to bend of and take it from your new Republican Masters! Not since Jack sold his cow for some magic beans has a deal like this been made by our "leadership" where families earning between $35,000 and $64,000 go $7,800 further into debt to get a $613 tax break while families earning between $5M and $10M get $38,590 and families earning $50M to $100M get $380,590 and families (or Corporations, of course) earning $500M to $1Bn get $3,859,000 or about 12,590 times more than the average middle class family but, then again, they deserve it because – they are that much better than you are!
Face it, unless you are in an income category where your tax benefit has 5 digits, you are what George Orwell (who worked in England’s Ministry of Propaganda) called a "Prole." In "1984" the Proles (proletariat) were the vast majority of the populace, the working class of Oceana. Though the proles are the majority, they are unimportant. The Party explicitly teaches that the Proles are "natural inferiors who must be kept in subjection, like animals". As one of the Party Leaders observes: "the relative freedom of working-class people is merely a symptom of the contempt in which they are held".
It is not only the Party which regards the Proles as unimportant: the arch-enemy, Goldstein, dismisses them too, referring to the divisions of High, Middle and Low people, in which the Low are essentially destined to remain powerless. This attitude has much in common with the one Huxley shows in Brave New World—the lower castes are mindless enough to be satisfied with little, and can be relied on not to be troublesome.
You’re not going to be any trouble are you? Enjoy your $613, little people. That’s what, about a month’s worth of gasoline and cable TV? Congratulations on your voting acumen – you certainly have gotten the Government that you deserve! I apologize because I had mischaracterized the tax cuts as being fairer to the Middle Class last week, when I said it was only an outrage. I thought that families earning $50,000 would be getting $900, not $613, but it turns out that 12,590 times $287 is another $3,613,330 that could be given to a Billionaire and they NEED that money to buy stuff that might create a job while you would only…
by phil - August 14th, 2010 3:43 am
Talk about feeling outnumbered!
As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!" Of course, as I often tell people I am neither bullish nor bearish – I’m rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions. Despite the fact that this is the range we predicted last October and is the range we’ve been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.
I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die. That does make me kind of bullish by comparison doesn’t it? We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades. As PT Barnum once said:
"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success."
Balance is the key to long-term success and we’ve had many conversations about that in Member Chat. Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us. As Ravalos said Friday in Member Chat:
"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the
by Option Review - August 12th, 2010 4:30 pm
Today’s tickers: CSCO, M, SPWRA & LEN
CSCO – Cisco Systems Inc. – A disappointing revenue forecast for the current quarter by computer giant Cisco late on Wednesday spawned more fears about the strength of global demand moving forward. Cisco’s shares fell pretty close to a 52-week low and stand 24% lower than an April peak. Options traffic was extremely hectic at 327,000 contracts. Atypical of a company in the aftermath of its earnings was a rise in implied volatility, which gained more than 10%. What stands out today is the put activity, where we’re noticing a preponderance to write premium. Investors are likely trying to take advantage of as much of a 13% share price decline to $21.00 on Thursday and used options expiring in the September contract to attempt a long entry to the stock. By selling puts at the $20.00 strike for 37 cents, investors are prepared to have stock in Cisco put to them at expiration in the event the stock trades south of the strike price. If not, they retain the premium in full as compensation for providing stock bears with the insurance. Of 12,000 contracts traded at that line, seven out of eight contracts were sold to the bid. The pattern was repeated in less daring fashion at the October $17.50 strike where an investor acted as a willing Cisco buyer through expiration in exchange for a 17 cent premium on 5,000 put options.
M – Macy’s Inc. – Despite its upbeat predictions for the remainder of the year when it topped earnings predictions on Wednesday, shares in Macy’s are caught in an otherwise weaker environment for retailers. Its shares are 1.2% lower at $20.26. Nevertheless one option investor took advantage of the current bout of weakness by targeting a call spread that will expire after next quarter’s earnings have been announced in November. The bullish play involved 20,000 call options spread evenly between the $21.00 and $24.00 strikes implying a maximum gain of $3.00 less the cost of today’s trade, which nets to 91 cents. The maximum gain of $2.09 would only occur in the event that shares in Macy’s rose 18.5% from present although on a simple breakeven basis the investor needs Macy’s shares to gain 5.5%.
SPWRA – SunPower Corp. – A chunk of 20,000 put options was traded on SunPower earlier at the far-dated January 2012 expiration. Time and sales…
by Option Review - May 19th, 2010 4:24 pm
Today’s tickers: ARG, QSFT, VTR, MET, SPWRA, USO, JPM, BMY, ADI & EXPE
ARG – Airgas, Inc. – Options investors initiated diverse bearish strategies on the distributor of industrial, medical and specialty gases this afternoon with shares of the underlying stock lower by 1.75% to $61.73 as of 3:15 pm (ET). Pessimistic players are likely wary of potential sharp share price erosion should Air Products & Chemicals Inc., the industrial gases maker forging a hostile takeover of Airgas in a proposed $5.1 billion bid for the company, fail to ultimately close the deal. Maybe bearish options investors are taking a cue from Paul Huck, CFO at Air Products & Chemicals, who yesterday stated, “there is a large drop in the stock price awaiting this, should Air Products go away” because “If we go away, who else is going to show up and pay this?” Airgas’s share price, which is up roughly 39% since Air Products’ offer went public ahead of February 5, 2010, would likely come crashing down if for some reason Air Products walks away given the lack of other serious competing offers for ARG at this time. Bearish traders bracing for potential share price hemorrhaging purchased a debit put spread and sold calls in the July contract and enacted a ratio bearish risk reversal in the October contract. One investor purchased 2,925 puts at the July $55 strike for a premium of $1.50 each, and sold the same number of puts at the lower July $50 strike for $0.65 apiece. Net premium paid for the spread amounts to $0.85 per contract, thus yielding maximum potential profits of $4.15 each if Airgas shares decline 19% to breach the $50.00 level by expiration day. The sale of 5,000 calls at the July $65 strike for an average premium of $1.05 each may or may not be the work of the same investor. Open interest of 19,000+ calls at the July $65 strike implies the call seller could be closing out a previously established long stance on the stock. Otherwise, the responsible party expects to keep the $1.05 premium per contract received on the sale as long as shares of the underlying stock do not exceed $65.00 ahead of July expiration. Finally, one pessimistic individual populating the October contract sold 5,000 calls at the October $70 strike for a premium of $1.28 each in order to buy twice as many puts…
by phil - May 15th, 2010 6:35 am
You can’t lose what you don’t have.
The reverse is true for people with Millions in a stock virtual portfolio. Phil points out that the reson you don’t run a large hedge fund trying to make 100% gains is that the people who invest in those funds are more interested in what we call "preservation of capital" rather than generating wealth. Generally, the people who have $1M of investable cash to play the markets have already achieved a great deal of success, often by taking their own risks along the way. For most of us, $1M is hard to come by and, while we want to put that money to work – we certainly don’t want it wondering off and joining the circus.
As a high net-worth investor, you need to decide how to diversify your assets to suit your long-term goals. We’re not going to get into that here – let’s just say that if you want to gamble and go for some of our "more exciting" plays, perhaps allocate a portion of the virtual portfolio to those. Whether that’s 5% or 10% or 30% is up to you but it is good to fence off your risk to a sensible, manageable amount that you really can afford to lose while keeping the bulk of your market allocation well diversified and well-hedged.
I have my own 5% Rule. Phil’s famous 5% Rule deals with the predictable movement of stocks in their trading ranges but my 5% Rule, which Phil also agrees with is simply "Do not put more than 5% of your virtual portfolio in the stock of any one company!” This is so much easier said than done for many reasons!!
 Transition to Large Numbers
Moving from a 5 or 6 figure account to a 7 figure account has a profound impact on many traders. In fact, our friend Dr. Brett refers to the effect “performance anxiety” can have on a virtual portfolio and notes that one of the causes is the responsibility felt by traders as larger dollar amounts are traded. Phil advocates a system of "purging" Short-Term Virtual Portfolio gains when they gets too large and shifting money into safer investments in a Long-Term Virtual Portfolio – it is good to have a strategy for balancing out your holdings, not just target goals.
by phil - May 8th, 2010 5:43 am
I’m just doing a quick wrap-up this week because, surprisingly, it MIGHT be time for a new Buy List!
I had said to Members on Cinco de Mayo, in our 5% Rule Review, that if we broke below 1,155 we would retrace all the way to 1,100 with our 5% Rule resistance points around 1,100 at 1,155, 1,114, 1,100, 1,073 and 1,045. We actually spiked as low as 1,066 on Thursday but finished the week at a very sad 1,110 as we watched for that "weak bounce" zone to be broken all day. This does not bode technically well for the markets next week but I told Members we would have to give the markets a pass for the day. Based on the uncertainty of the weekend, we can’t expect a lot of capital commitments ahead of the EU decision. After all, we’re in cash – why shouldn’t other smart funds be too?
When I predicted we’d hit 1,000 on Wednesday, I did not think it would be on Thursday! The markets are now negative for the year and the S&P has spiked almost to the Feb low of 1,044 (and our lowest close was 1,056). That’s right, these 5% Rule numbers are the SAME ones we used back then and it’s the same series we used to measure our winter run at the end of last year. We expect a bounce here, hopefully at least a test of 1,155 on a relief rally if Greece is "fixed" yet again on Monday but we’re not going to be too impressed until we’re over that line.
Still that means it’s time to at least lay out a new Watch List, which is the prelude to a Buy List – giving us a list of stocks we’d like to get into at lower prices. Our last Member Watch List was back in December and by Feb 6th we had our famous Buy List, which we triggered at Dow 10,058 for a very successful run through March 18th ("Bye Bye Buy List!"), when we closed 2/3 of the positions and we have since cashed out the rest as I got more and more worried about the rally, finally calling for all cash last week.
Speaking of last week, for those of you who say I don’t pick enough straight stocks – I listed 33 short trade ideas from my unofficial "Sell List" last Friday (4/30) when the Dow was way up at 11,167…
by phil - April 30th, 2010 8:30 am
The stock market will soon be leaving the station, please secure all personal items, pull down the safety bar (our Disaster Hedges) and keep all body parts inside ride at all times. Well you know you can follow all of the safety instructions and STILL get smacked in the face with a black swan (like our friend Fabio, pictured here) which is why we elected to get back to cash ahead of this report. The markets were just too insane this week and who the heck knows if Europe will still be a Union on Monday or what the GDP number is going to be (but I do think it’s a miss).
Since our biggest weekend fear is financial panic in Europe, our cash US dollars will become more valuable in a crisis and if the market drops, all the better as we can ride back in and do some bargain hunting. If the market takes off on good GDP and Greece is "fixed" and Spain is "fixed" and Portugal and Ireland are not really a problem (especially for MS and JPM) and the CRIMINAL charges against Goldman look beatable and and the Financial Reform Bill doesn’t disrupt the market with a disorderly breakup of the big banks and the Bank of International Settlements Report continues to be ignored and the run on the Greek banks doesn’t spread to other STUPID counties – well, then we can BUYBUYBUY because, if all this doesn’t matter, then it’s very likely that the entire planet Earth could explode but Wall Street will keep ticking higher.
Yep, I can’t wait to ride this baby mindlessly higher! After all, what can go wrong? BIDU is ONLY $710 a share, BLK is $190, CMP is $76, GOLD is $84, BUCY is $65, FAST is $56, MMM is $90, FOSL $40, F $13.50, DECK $149, SHOO $55, TPX $35, LZB $14, CTB $22, NOG $16, CEO $176, FTI $75, CLB $150, CIB $46, BBD $19, TD $75, BCA $45, BAP $87, ITUB $22, EDU $94, WYNN $93, FFIV $72, CY $14, CREE $77, UPS $70, UNP $78…
by phil - April 25th, 2010 8:29 am
I’m sorry, I am trying so hard to get bullish but it’s not working…
My only solution is to, as we often joke, switch off my brain and stop reading the news (listening to it is great as everything is coming up roses in TV-land) and ignore the now-exposed shenanigans on Wall Street (why should I worry about my investments just because the people running the game are up on fraud charges?) and for goodness sakes don’t even look at something as depressing as "The Economic Elite vs. the People of the United States of America," neither Parts 1-3 or Parts 4-6 because that can lead to thinking and thinking makes it REALLY hard to go to sleep at night with your money riding on the top of an 80% market while gold is trading at $1,150 an ounce because of overwhelming global instability and a total lack of faith in the global financial markets.
Yep, if we don’t think about all that stuff and focus on the good stuff, like the fact that Unemployment is only 3% for those of us who earn $150,000 a year (for the poor it’s 31%), and 93% of our virtually fully-employed analysts predict the S&P will finish the year even higher (although not too much higher) with only Andrew Garhwaite of Credit Suisse in need of an "attitude adjustment" with his puny target of 1,175, which is 32 points lower than Friday’s close. Fortunately, enlightened analysts like Deutsche Bank’s Binky Chad think we can still squeeze another 100 points out of this rally (about 10%) although Goldman Sachs is wimping out at 1,250, their partner in "whatever you want to call it", JP Morgan is up at 1,300. So it’s BUYBUYBUY from the gang of 12 and we’ll be whipping Andrew into shape by the next report or he may find himself the fall guy for the next scandal…
Oops, sorry, I wasn’t supposed to mention the scandals as that’s not really a buying premise unless of course you look at the sheer volume of things the IBanks were getting away with and then look at the virtual nothing that is being done about it and then we can conclude there is no reason they can’t pump this market back up to Dow 14,000 because we already know it was such total BS last time, when we dropped 50% like…