As an options trader, I don’t really concern myself too much with the directional tendencies of the market. Yes, I will have my occasional bias, but the bias is based on short-term overbought/oversold levels, better known as mean-reversion in the world of statistics. And once I have my so-called directional leaning I most often wrap a high-probability strategy around my bias using options. These simple steps are the foundation of almost everything I do as an options trader. And while these steps give me an edge, if used in the right manner, they still do not guarantee profits at each and every turn.But when you have the ability to take all emotion out of the equation and limit yourself to simple mechanics you are well on our way to becoming a capable options trader.
So when I hear pundits speak with conviction about where they think the market is headed I just shake my head in disbelief. Maybe I should let the asset-gatherers in on a secret, “in investing, it’s when you start and when you finish.” Several years ago Ed Easterling of Crestmount Research debated with a client on the long-term prospects of a market with above average returns.
As stated in a NY Times article:
At the time, the average individual investor expected that the stock market would return about 10 percent a year over the next 10 to 20 years — or about 7 percent after inflation — according to surveys by the University of Michigan’s Survey Research Center, as well as UBS and Gallup.
But historical averages can vary widely depending on their starting and ending points. For example, averages that start before the 1929 crash are substantially different from those that start after it, and Mr. Easterling felt that choosing a single date was arbitrary. In response, he created the chart above, which shows annualized returns based on thousands of possible combinations of market entry and exit.
After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981. From the end of 1979 to 1999, $10,000 would have grown to $48,000.
“Market returns are more volatile than most people realize,” Mr. Easterling said, “even over periods as long as 20 years.”
Basically, guessing where the market is headed over the long-term is a fool’s game. It an exercise in futility. Yet, the talking heads are more than wiling to guess away at the expense of the not so savvy investors who take the “experts” advice seriously.
But that does not mean we can’t be successful over the short-term. And out short-term efforts lead towards achieving long-term goals. And again, that is exactly why options traders trade high-probability strategies for life. Because they all know, once they figure out the mechanics, high-probability strategies offer the best opportunity for the individual investor to succeed from year to year. More importantly, options strategies offer the income investor one the most reliable ways to bring in steady income other than the typical dividend path most investors take.
Tomorrow, I want to go over a few tendencies for January, plus talk about the return of implied volatility in the year ahead.
Until then, have a great night!
If you are a believer in a statistical approach towards investing please do not hesitate to try my options strategies. I use simple mean-reversion coupled with probabilities for each and every trade. Give it a try, it’s free for 30 days.