To own stock or not own stock?

Discussion in 'General Discussion' started by stevegee58, Jul 9, 2017.

  1. stevegee58

    stevegee58 Well-Known Member

    The question bluntly: Does owning stocks in individual companies (i.e. long stock, not options) make sense?

    I ask because after years of trading option spreads I've become used to taking only limited risk positions. Based on this it seems like owning stocks is nuts because your risk is losing it all potentially. Even if you use puts to limit risk it's very expensive and the long stock uses up margin quickly. I've had a few arguments with traditional investors who thought I was crazy trading "risky options" and said I should be buying and holding stocks in good companies.

    Does it make sense to master and apply a set of profitable, well-understood option strategies exclusively with all my capital? Or am I missing something by not playing the stock-picking game? Or does a mix of option trading and a long stock portfolio make the most sense?
     
  2. Harry

    Harry Well-Known Member

    You can master only so many things, irrespective of how good you are or how much time you have. This is not to say you should not diversify - you definitely should - markets change and things that have been working for a decade suddenly don't. You may think you have time but then suddenly, you don't. However, it will be ideal (at least for me) if the other components resulting from such diversification were passive investments - either someone trading on my behalf, or index funds, or even an actively managed investment portfolio - I do not care what it is as long as I have confidence it is the right diversification and will give me some yield with passive monitoring (ideally once a quarter, or at max once a month review). But then if you can sit down one weekend every month and pick stocks and can do a good job of it - sure why not.

    Personal opinion: 2019: when our bull run is either 10 years old and it has been proven that it can never end, or we are already in the 1st or 2nd year of recession maybe a good time to pick stocks :) I know things can go up forever but my heart does not want to buy stocks at current prices. There are very few steals.
     
  3. DavidF

    DavidF Well-Known Member

    I do both, but my only major stock holding is Berkshire Hathaway and I use BRK-B options to construct a collar, buying far out (2019) ATM puts and selling approx 20% OTM calls. Advantage with BRK is that it doesn´t pay a dividend so puts relatively cheap (would pay tax on dividend so not zero sum game). I can get a 3:1 reward risk ratio with a collar and I like BRKs long-term prospects. With a PM account it uses almost no margin. Market crashes max loss is about 6% of portfolio. I then feel comfortable using close to 100% of my trading account in standard options strategies. In effect I´m trading 200% of my capital with less risk than simply owning stocks.
     
  4. Harry

    Harry Well-Known Member

    Contrary to what I said above, I can get behind this approach. As I was talking to someone else, we are not in the butterfly or calendar business but we are in the options business and we should get to understand all nitty gritties of options if we have time for that - we may specialize in something but we should still be able to use other tools if the need ever comes. This is one great example of doing something different but still using our core learning of options.
     
  5. DavidF

    DavidF Well-Known Member

    I agree with your first post Harry, hence I need a set and forget approach for the stock part, brain doesn´t cope with juggling risk. Another approach:-I remember Jim Riggio talked about selling SPX iron condors versus all put butterflies and using the cash sitting in account in (if I remember correctly) T-bills. I know next to nothing about the fixed income market but with interest rates as they are today this is perhaps not an attractive option at the moment. But surely better than cash.
     
  6. DGH

    DGH Administrator

    Stock traders tend to swear by their particular specialty--day trade, swing trade, or buy and hold. I have tried them all and have a complete bookshelf in my office and proprietary indicators on my computer to prove it. I finally decided I had better things to do with my time, so I contracted with a third party firm which trades directly from 3 of our TD Ameritrade accounts with our non-options trading money. I can't reveal the name of the company, but they have been rated #1 by Barron's for several years, were recently favorably reviewed in the New York Times, and their principle trader is often on CNBC. In any event, I really like their approach, and they offer "full service" in terms of accounting, tax returns, legal planning, wills and trusts, etc. So, we decided to pony up the money for their annual fee (relatively low for large accounts). So far, we are very pleased with the results, and I don't have to think about earnings disasters, bad news du jour, CEO indictments, etc. The ETFs are all allocated and rotated according to my pre-defined risk tolerance specifications without regard to "window dressing" or company holdings. By contrast, some people absolutely LOVE trading stocks. For them, I say, "go for it", but, unless they are very skilled and disciplined, they may find that the reward is not worth the time and the risk. My two cents worth.
     
    PK likes this.
  7. Jack

    Jack Well-Known Member

    Since I am not a good stock picker and I have a very long term view, I have been using this simple few minutes 90-10 retirement plan by Warren Buffet, taken from one of his annual letters to shareholders:

    This is the very two-pronged plan he outlined for governing the trust he's leaving behind for his wife:
    My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers


    I do not invest all my money at once but regularly over time (no attempt to time the market). I have done some research and could hardly find any fund that has consistently beaten the S&P 500 index for the past 20 yrs. As usual, this public information is not a recommendation but just my way of handling stock ownership.
     
  8. Luke

    Luke Well-Known Member

    The only place I hold individual stocks is in my self-directed HSA account. I may have to look into another option (currently use HSA Bank and fund my account through TD) because they do not allow options, except for covered calls. I may look for a strategy with this sort of play or look for something where I can do a RTT or similar trade. For now, I have a heavily weighted oil and gas portfolio with dividend and high growth stocks. I'm up significantly over the past two years and thinking about exiting, but some of the yields are just too good to let go of just yet and prices have been hammered over the past two months.

    Any suggestions on other banks offering custodial accounts to utilize an HSA?
     
  9. ACS

    ACS Well-Known Member

    If there are individual stocks you want to own and the account rules allow it then consider cash secured puts using a strike price at which you would want to buy that stock.
     
  10. stevegee58

    stevegee58 Well-Known Member

    Interesting you mentioned this. I started this thread because I was looking at strategies that involved selling puts to build a stock portfolio, then selling covered calls to enhance returns.
    There are several interesting articles about these techniques around the interwebs.
     
  11. status1

    status1 Well-Known Member

    The problem I see with cash secured puts is you need a large account size in order to buy the shares when they are put to you and than you still have to manage them
    Also most good companies with low risk have low premium so you are not getting your moneys worth
    I guess it also depends on where you are in your life
    You don't want to be invested heavily in stocks if you are close to tour retirement

    One thing came to mind if you want diversification is Kevin O'Leary's O'shares
    That seems to be well diversified with good stocks and it has done pretty well so far
     
  12. Kevin Lee

    Kevin Lee Well-Known Member

    I started as a stock investor way before I became an options trader. Now I still manage a stock portfolio and an options portfolio. As a stock investor, I practice value investing, aka the Warren Buffett way. Therefore, it's kind of weird to a lot of people. I have to have a split personality. For options, there is no such thing as "owning" because options expires. But for stocks, I don't trade in and out. I invest. And average holding period is in years, not days, certainly not minutes. A few positions I've held for more than 10 years.

    However, buy and hold is NOT a good way to describe value investing though. Value investors hold an asset only when its price is cheap relative to value. So, it's not the holding period that matters but always the price vs value that determines what you own. Another thing is value has NOTHING to do with market price. Value is determined by the discounted future free cash flow.

    Risk is not defined by market price. Meaning, I bought a stock yesterday and today it plunged by 50%. I lost nothing unless the value of the company fundamentally and permanently changed. The stock didn't become more risky but rather it became much safer to buy because price is what you pay and value is what you get in return. Risk, on the other hand, is defined by price in excess of value.

    That's where the split personality comes in because what I described above is totally different from how a trader thinks. Therefore, to manage the two portfolios well, I have to put on very different hat and deliberately tell myself which one am I wearing at a given moment.

    Having said that, recently I have shifted a big chunk of my stock portfolio into ETFs. Reason is that in order to do well as a value investor, I have to know the business extremely well. At a minimum, I will have to read all the 10K, 10Q reports, attend quarterly conference calls, subscribe to analysis reports, do valuation analysis etc.. on all the stocks I own. It's really a lot of hard work. Although value investing has served me extremely well, I have decided to re-allocate my time to something else. Therefore, I'm aggressively shifting over to passive investing.

    My take is this - although income options has been much more profitable than any other trading or investing activities I have tried, however, I am only comfortable to put in no more than 50% of my capital because unlike stocks investment, there is a real chance of being wiped out. The chances of my stock portfolio being completely wiped out is virtually zero, as long as I'm well diversified. Currently, I'm actually deploying much less than 50% to options. Therefore, yes, stock investment is a critical part of my strategy.
     
    Last edited: Aug 11, 2017
    Fischer, CC, Jack and 1 other person like this.
  13. stevegee58

    stevegee58 Well-Known Member

    Thanks for the insight, Kevin. I started with stocks too and learned a thing or two about fundamental analysis. If I were to do what I proposed in the OP, I'd be looking for stocks with good fundamentals and try to spread the portfolio holdings among unrelated sectors. I was able to set up a reasonable fundamental screen on the Zacks web site that produces a reasonable starting list of candidates.
     
    Martin likes this.

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