The Problem with Trying to Hit Home Runs on Every Trade - Cabot Wealth Network

The Problem with Trying to Hit Home Runs on Every Trade

Which indicators will tell you when this market correction is over?

I don’t really care for market opinions.

Oftentimes, they aren’t objective, just simply self-serving.

I’ve traded professionally for over 20 years and it amazes me the lack of forethought that goes into actual investment strategy. I mean, come on: Don’t boast about returns over the past three years when we’ve seen the market skyrocket to epic heights. It’s downright lazy!

Realistic Strategies, Realistic Returns

Join Cabot Options Institute Masters Club and make money in all markets — up, down or sideways.

Andy Crowder quit a lucrative job on Wall Street so that he could share his expertise with regular investors – instead of super-rich investment banks and hedge funds.

Today, he publishes four different specialized options services for Cabot Wealth Network.

When you join Cabot Options Institute Masters Club, you get all four, at half the price of each separately!

These services each offer a safe way to generate reliable returns – based on statistical likelihoods that give you an 80% chance of success.

Make Money in This Market

2021 saw 70 new all-time highs with a peak-to-trough drawdown of only 5.2%. Incredible! To put that in perspective, we are coming off a year when one-third of the trading days saw all-time highs and losses were maxed out at 5.2% … and the world’s largest index, the S&P 500, was up almost 30%.

So, great job to those professionals touting exceptional returns in 2021. Guess what? An overwhelming amount of investors, professional or otherwise, we’re right there with you.

If you are offended by this opinion, so be it; my job is not to appease egos, it’s simply to do the best by my clients, subscribers and myself as an investor. This has been, and will always be, my goal. Otherwise, I shouldn’t be doing this as a profession.

S&P 500 Historical Annual Returns

S&P500-annual-returns

Source: www.macrotrends.net

Just look at the histogram above. The last three years the S&P 500 has seen returns of 26.9%, 16.3% and 28.9%.

That should be the baseline for returns, right?

So, if you are using a high-beta strategy or a low-probability options strategy trying for 100%, 200% or more, well, chances are you are taking on significant risk in doing so. But people just want to talk about returns; they rarely talk about associated risk or that the stock or strategy they’re using has associated risk that is 3 to 5 times greater than simply buying the S&P 500 ETF (SPY). By choosing this route, those people should expect to have a highly volatile portfolio. And if they don’t have the wherewithal to discuss the risks, they certainly aren’t beta-weighting their portfolio to show the associated risk. Again, lazy!

Most just sit back, pick a stock based on what they think will happen in the future and hope the market cooperates. And when it doesn’t, much like what we’ve seen in 2022 so far, they sit puzzled or just downright comatose. I’ve seen it over and over and over in my career.

I don’t want to hear how great an investor is when the market is making historic returns. I want to know how an investor does during times of duress. Are they actually outperforming the market during bull markets given the associated risk they are taking, or better yet during volatile periods, bear markets, corrections? Transparency please! Is that too much to ask?

The next few years should be interesting. Because I have sense there will be a great humbling among those that have touted returns during one of the greatest bull markets we’ve seen in market history.

Over the past 13 years the S&P 500 is averaging 19% gains, yes 19%, per year with total returns of over 800% since the early March 2009 low. It’s been amazing! Of course, bullish ways could continue, no one knows for certain. No one!

The point is, understand your expectations and the risk associate with your expectations. Try to smooth out your equity curve by implementing high-probability options strategies.

Listen, as investors we are all going to experience losses. It’s called sequence risk, but we can minimize the volatility in our portfolios by using options as they were intended to be used—not as a way to continually seek 200% returns. Just know that taking on that type of risk to seek those types of returns will eventually bite you in the ass. Math tells us the probabilities will play out, as they always do.

I’ve had people call me in the recent past, saying they have $250K and would like to double it over the next 12 months. Really? I immediately respond by saying no one can promise you those returns without taking on exorbitant risk. And if they tell you they can, well, they are straight-up lying to you. Moreover, by taking on that type of risk, seeking those types of returns, you have a greater chance of losing everything. And unfortunately, many have come close to that in 2022.

Again, understand the associated risks you are taking with each and every investment decision you make, whether it’s the strategy or the stock of choice. I’ll be discussing this in greater detail over the coming months with some more advanced topics like beta-weighted portfolios, etc.

Stay tuned!

As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.

Comments

  • Frank M.

    I have an unusual request: When learning to trade spreads, I was taught to always start with the buy side of the trade then do the sell side. I have seen it done both ways – i.e. start with the sell side first.
    It makes a big difference on just which system you use. I asked a large options service what side they used and believe it or not they declined to answer! I consider it important as it can involve big bucks. Mr Crowder what system do you use?

    I have followed your comments for several months and really enjoy your service. I like your approach using probabilities of success, it beats shooting in the dark.

    • Andy C.

      Frank,

      When trading spreads, I don’t leg in, which is what you are referring to. I sell a credit spread at one time. Because I use highly-liquid underlying ETFs and stocks it is typically not a problem for me to get my price. Now, if I was using something less liquid I might leg-in, but that has the potential to create lots of issues, which is why I rarely, if ever, trade underlying securities that are not highly-liquid. It does limit my universe of choices a bit, but I’m okay with that and see it as an advantage.

  • One thing I’ve really liked about your trading Methodology Andy for the past several years is that you take a slow and steady approach. Being mindful of Capital Allocation and Risk Management, I believe this has proven to be more profitable over time than swinging from the fences “hoping” for a Home Run. Best Wishes,
    Annie

    • Andy C.

      Annie,

      Coming from someone that has been following me for a while, I truly appreciate the comments. Kindest!

  • Jeff P.

    I can double that $250,000, provided I am paid $250,000 to do so. People easily confuse their genius with a bull market.

    • Andy C.

      Jeff,

      Indeed. “People easily confuse their genius with a bull market” Unfortunately, I see more and more of this every day, particularly in this market. It baffles me. Lots of so-called “geniuses” when the market is up 30%, yet they are not even keeping up with the beta (associated risk) of their investment approach/strategy/trades.

  • Rich L.

    It’s been a tough year so far for sure. May I be so bold and ask what your portfolio has been YTD or maybe some realistic portfolio return expectations based on the strategies that you write about ? Thank you

    • Andy C.

      Rich,

      It’s been a tough year for some, depending on the strategy you choose to use. But most of the big losses have come from those using high-beta strategies/trades, etc. Or simply those that take a low-probability approach seeking higher gains with their trades. While I’ve certainly had a few losers, I’ve had far more winners. I think many here can speak to that…and can peruse my trades on here for the results. Again, I mostly take a high-probability approach, I’m never aiming for home runs, simply singles and doubles. Of course, as stated in the article, it depends on the risk-associated with the strategies you use to truly gauge how your portfolio is doing. But you are not going to here me boast about trades here, because I understand that it’s a fool’s game. In many ways, I would prefer to talk about losers because that is where we all learn the most. I hope this helps.

    • Andy C.

      Bob,

      You’re welcome! Glad you found the post helpful. So tired of investors, professionals or otherwise, who only discuss their winners and downplay losers. It’s a joke. Losers will occur, we all know this fact. Transparency is key.

      • Lindsay

        Hi Andy, I look forward to reading your concise yet easy to understand article about beta weighting in the near future. This is one area I need help in to spread my risk more appropriately. Thanks in advance 🙂

        • Andy C.

          Lindsay,

          I hope it will be easy to understand and concise. 🙂 I should have something up on the site within the next few weeks. Stay tuned and thanks for the kind words, it is greatly appreciated!

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