lystn

Hey everyone, Kirk here again at Option Alpha. On today’s daily call, I want to talk about why hope and pray is a terrible investment strategy. Oh my God. I don’t even know where to begin with this, but I just realized that so many people have this hope and pray, cross your fingers behind your back investing strategy. I think what drives me crazy about this is that when things go bad, they blame everybody else. You know it. Deep down, you might be one of those people who believe in index investing or believe in just buy and hold strategy, but you know deep down inside that if things go really bad, you’re going to blame somebody else. It’s the banks, it’s the real estate, it’s this country or that country or what the North Koreans were doing or not. But ultimately, it’s your fault. That’s what I’ve realized a long time ago thankfully through a lot of good mentors and people who I’ve met and books that I’ve read and seminars that I went to and everything that I’ve learned, is that anything in life especially in investing is ultimately your fault one way or not. Hope and pray is a really bad strategy because when you just hope and pray that the markets continue to go higher, you put all of your eggs in one single basket and when that basket falls, then you’re left with nothing and nobody to look at and blame but yourself. You can’t blame everybody else. You can’t point the finger at everybody else. I think that index investing in particular I think has gotten a really good reputation in the last let’s say ten years since the markets have dropped because we’ve haven’t had practically any down moves in the market. But the problem I always see with index investing and I’ve mentioned this a couple of times before in the Facebook Lives that we’ve done is that when people buy into this philosophy of index investing, they passively buy at whatever valuation the market is at. Markets are not always at a great valuation for a long-term buy and hold strategy. In fact, right now when I’m recording this podcast, forward PE ratios on the SaP 500 are at levels that we haven’t seen before since some of the biggest market tops in history as far back as the 28 depression. That means that index investors are just passively buying at these levels because that’s what they do, because that’s what these robotic investment houses do. They just buy, buy, buy, buy, buy. No matter the value, whatever, it doesn’t matter. Money is in the account, buy more stock. Money is in the account, buy more stock. That’s a really, really bad strategy and that’s the one biggest downfall that I see to index investing, is this passive blind approach to buy and hold without any concern really for valuation. I think that if you’re listening to this or if you’ve been sent this maybe because if you’re listening to this and you have a friend who’s maybe a buy and hold investor, maybe you sent him this podcast recording and help open his eyes to things, I think what you have to realize is that the one true way to make money and generate consistent income is through cost-basis reduction and through being balanced. That’s what options do. Not only just a very simple option strategy like a covered call which reduces cost basis, but also to reduce cost-basis through dividends. That’s why most of the SaP 500 gains particularly with regard to total returns are drawn through or come through dividends because it’s a way to reduce cost-basis. It’s a way to get paid a premium for holding stock. That’s what options trading is. It’s just another way to do this, to sell your position, to sell some options and to put up some margin, put up some capital at risk, but get paid a premium along the way. I think if you can do that, get some cost-basis reduction in your positions, plus be balanced, plus have the ability to trade both sides of the market like lots of hedge funds and lots of financial institutions do, I think ultimately, you’ll see much more stable returns in your portfolio long-term and you definitely won’t succumb to huge market drawdowns that you would’ve otherwise if you were just passively doing the buy and hold, hope and pray strategy. Hopefully this helps out. As always, if you guys have any questions or comments, let me know. Until next time, happy trading!