Concentrate Your Bets!

Do you know Theodore Johnson? He worked for UPS and never earned more than $14,000 per year, but he was worth more than $70 million when he passed! He invested consistently in UPS stock and rarely sold. In addition to his UPS stock, he retired in 1952 with $700,000 in savings.[1] He put all his chips on his employer’s stock. He concentrated his bet, and UPS delivered! He won.

Andrew Carnegie said, “Put all your eggs in one basket, and then watch the basket.” Concentrating your bets in a handful of stocks flies in the face of conventional wisdom to diversify your holdings, but if you want to get unbelievably wealthy, go all-in with a few stocks.

Peter Thiel, a Paypal founder, invested $1,700 in his Roth IRA and appeared to follow Mr. Carnegie’s advice. In 1999 he bought 1.7 million Paypal shares at a penny per share before it was publicly traded.  EBay acquired Paypal in 2002, and the value of his Roth IRA jumped to $28.5 million. His Roth IRA is worth $5 billion today![2] Mr. Thiel nearly doubled his money every year, producing an average annual return of 95% for twenty-two years!

Warren Buffett, Bill Gates, Jeff Bezos, Elon Musk, and numerous billionaires bet on themselves and won. They invested heavily in their company stocks, and it paid off – handsomely. If you bought shares in their companies from the beginning and held on, you made a considerable profit. For example, Amazon is up more than 174,000% since it went public in 1997. By comparison, the S&P 500 has risen 477% from 1997. So go big, or go home.

Amazon is a monster stock, but it lost 94% of its value from 1999 to 2001, dropping from $107 to $6. It would take more than ten years for Amazon to reclaim its previous high touched in 1999. Microsoft is another wealth creation machine, but after the Tech Wreck in 2000, Microsoft shares fell sharply, and it would take more than twenty years for the stock to recover. Finally, Apple is the “it” stock for a generation of investors. The iPhone and its ecosystem have changed the world. However, before Apple was Apple, it struggled. In 1985 it fell 75% from its all-time high, dropped 74% in 1998 and 80% in 2003. In 2009, it lost more than 50%.

Putting all your eggs in one basket is difficult. It requires courage, conviction, and faith, especially when you’re losing money. Investing in a few companies is not for the faint of heart. I doubt many investors remained invested in Amazon after it fell 94%, but those who stayed the course made big bucks.  

Of course, to become uber-wealthy, you need to own profitable companies. Moreover, you need to be in the right place at the right time, and a little luck doesn’t hurt either. Enron stock was once a high-flyer minting billions of dollars in profit for its shareholders before it imploded. If you invested your life savings in Enron, you lost it all – 100%.

Investing in a few select stocks also requires patience. For example, Mr. Buffett accumulated most of his net worth after age sixty despite becoming a millionaire at age 30. More than $70 billion of his net worth came after he qualified for Social Security benefits.[3] For the past thirty years, Berkshire Hathaway stock has trounced the S&P 500 by a ratio of nearly 6 to 1. At age 90, Mr. Buffett is now worth more than $101 billion.

Few people have the emotional fortitude or foresight to invest everything in a few companies and hold them for decades. Still, if you’re one of the brave souls willing to ride the market’s volatility, you can make it happen. Also, hindsight is 20/20. It’s easy to look backward at Amazon or Apple and say I could have done it, but trying to find companies that will grow exponentially for decades is like trying to find a needle in a haystack.

For the record, I’m a proponent for most individuals to invest in a diversified portfolio of low-cost mutual funds based on their financial goals. However, here are a few suggestions if you want to aim for the moon and hope to pick a few winners.

  1. Limit your trading pool to 10% to 20% of your investment capital. Mr. Thiel allocated a pittance of his net worth to his pre-IPO Paypal shares.
  2. Identify companies looking to change the world. Of course, this is easier said than done, but they’re out there somewhere. It might not be apparent at first, but you could find one if you do your research. Also, you can be a little late for the party. If you bought Apple stock after the iPhone appeared in 2007, you still made 3,000% on your investment![4]
  3. If you work for a company that offers an employee stock purchase plan, take advantage of it by allocating a percentage of your pay to buy shares. Also, you can probably purchase your company stock inside your 401(k). Automating your equity purchases through your payroll department is an efficient way to accumulate wealth.
  4. Does your company offer restricted stock or stock options? If so, consider receiving a portion of your compensation in the form of equity. After your shares vest, hold on to them for the long haul.
  5. Think long-term. You may catch a shooting star and make money quickly, but more likely, your wealth journey will take decades. Patience is required.
  6. Tune out the noise. Naysayers, experts, pundits, and family members will try to knock you off your perch, but if you have conviction in your strategy, stay the course.
  7. Regularly review your strategy and investment thesis to make sure you’re still on the best path.
  8. Watch your basket!

You probably won’t need billions of dollars to retire comfortably, so save your money, invest often, diversify your assets, follow your plan, and good things will happen.

If you chase two rabbits, you will not catch either. ~ Russian Proverb

June 29, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.orlandosentinel.com/news/os-xpm-1991-11-24-9111221103-story.html, Charles Fishman, November 24, 1991

[2] https://www.nbcnews.com/tech/tech-news/billionaire-investor-peter-thiel-has-5b-his-tax-free-retirement-n1272317, Cyrus Farivar, June 24, 2021

[3] https://www.cnbc.com/2020/09/08/billionaire-warren-buffett-most-overlooked-fact-about-how-he-got-so-rich.html, Morgan Housel, September 8, 2020.

[4][4] Ycharts June 29, 2007 to June 29, 2021

I Want It All!

I’m addicted to stocks. They’re shiny objects to me, and I want to own them all. I’m not impressed with cars or material things, but show me a portfolio of stocks, and I get excited.

I run several stock screens daily, looking for the next market mover, hoping to find a company that can rise 10x or more. I search for large, mid, and small size companies. Some screens filter for earnings, others for dividends. My anxiety surges because I want to buy them all, and I know I can’t; it’s mathematically impossible.

When I started my investment and financial planning firm, I made the gut-wrenching decision to sell my stock holdings in my IRA. I said goodbye to Apple, Home Depot, Microsoft, Pepsi, McDonald’s, and dozens more. It was a tough call, but I had to do it; it was a humbling experience, but I needed to check my ego at the door.

However, I kept my historical allocation of 75% stocks and 25% bonds after buying a basket of mutual funds managed by Dimensional and Vanguard. My passive approach gives me exposure to tens of thousands of companies. I no longer fret about missing the next great company because I probably own it in one of my funds.  

When I owned individual stocks, I checked my IRA balance constantly, trying to absorb every tick. Now that I invest in mutual funds, I go days or weeks without looking at my balance. My IRA is in capable hands, so I don’t feel the urge to micromanage the investments. And my anxiety level has dropped.

My IRA rebalances a few times per year if the allocation gets too aggressive or too conservative, so my turnover is low, and I will keep my 75% allocation to stocks for the foreseeable future. Since I converted to a passive investment model, my average annual return for my IRA has been 11.9%.[1]

Another reason to go passive is that most active fund managers and stock pickers fail to outperform their benchmark. According to Morningstar’s SPIVA study, more than 80% of large-cap mutual fund managers underperform the S&P 500.[2]

It was hard to surrender my stock-picking model, but I did it, and so can you. My passive IRA gives me global stock exposure, reduces my stress, frees up my time, and generates decent returns – not too shabby.

Humble yourselves before the Lord, and he will exalt you. ~ James 4:10

May 6, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Last five years, ending May 6, 2021.

[2] https://www.evidenceinvestor.com/morningstar-active-passive-barometer/, Robin Powell, April 1, 2021

Do As I Say?

Berkshire Hathaway held their annual shareholder’s meeting in Los Angeles on Saturday led by Warren Buffett and Charlie Munger. The two held court on everything from Bitcoin to taxes. At one point, Mr. Buffett mentioned the twenty largest companies in the world by market capitalization. The list included powerhouses like Apple, Amazon, Facebook, Tencent, and Walmart. He wondered how many of these behemoths would be on the list thirty years from now. He then highlighted the top twenty companies from 1989, and not one of the companies made the current list. The 1989 list included IBM, Exxon, GE, and Merck.[1]

Mr. Buffett added that most people should invest in an S&P 500 index fund and ignore picking individual stocks because the top companies are constantly changing. Owning index funds gives you access to the world’s leading companies, regardless of their size or location.

Despite Mr. Buffett’s previous comments on buying an index fund, his stock crushed the S&P 500 by 114% for the past thirty years. So should you do what he says or do what he does?

However, if we shorten the window to ten years, the S&P 500 beat Berkshire Hathaway by 39%.

For the past five years, the index has outperformed Berkshire Hathaway by 33%.

And, finally, for the past year, the two are locked in a dead heat.

Investing is more than buying stock in Berkshire Hathaway or picking an S&P 500 index fund. Instead, investors should choose a globally diversified portfolio of index funds, including domestic, international, emerging, and small-cap stocks. Adding a pinch of bonds and real estate holdings will also help.

The United States accounts for 57% of the world’s market capitalization.[2] US stocks trounced international companies for the past ten years by 184%, so why invest in a global portfolio? Because markets are perpetually moving. International markets outperformed US stocks during the first decade of this century – 2000 to 2010. And adding small caps can give your portfolio a boost. For the past year, small companies crushed large ones by 34%.

I agree with Mr. Buffett that most investors would benefit from a basket of index funds. Index funds are low-cost and tax-efficient. They also give you exposure to thousands of companies around the world. Another benefit of index funds is that you don’t have to find tomorrow’s winners. According to YCharts, there are 21,079 publicly traded securities. Is it possible to unearth tomorrow’s best companies today? An arduous task, but if you owned several index funds, your odds increase dramatically. It’s also less stressful.

For the past thirty years, a balanced portfolio of mutual funds consisting of 60% stocks, 40% bonds has produced an average annual return of 10.29%, and it has made money 83% of the time. A $10,000 investment is now worth $193,300.[3]

Mr. Buffett’s advice is usually correct, so I recommend we follow it this time by investing a majority of our nest eggs in a basket of index funds.

“A low-cost index fund is the most sensible equity investment for the great majority of investors,” said Buffett. “By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.” ~ Warren Buffett

May 3, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.yahoo.com/news/warren-buffett-evolution-worlds-largest-183022665.html

[2] DFA 2021 Matrix Book

[3] DFA Returns Web – 1/1/1990 to March 31,2021.

My NCAA Basketball Bracket

What a tournament! March Madness did not disappoint. I was rooting for Baylor to win, and they did! I entered ESPN’s Tournament Challenge and finished in the 94th percentile, ranking 843,000 out of 14 million. My final game prediction was Baylor beating Gonzaga 74 – 72. The final score was 86 – 70. As always, there were several surprises and exciting moments like UCLA’s march to the final four and Jared Suggs game-winning shot.

Scott Drew inherited a struggling Baylor Basketball program in 2003 with the goal of winning a national championship. His assistant head coach, Jerome Tang, joined Coach Drew’s staff the same year. It took them eighteen years of blood, sweat, and tears to realize their dream. At the time, Baylor Basketball was involved in a scandal when one player murdered another, and their former coach was making financial payments to players.[1] It was a dark time to take over the program, but their perseverance, faith, and vision paid off.

Investors can learn much from the Baylor Bears and their run to the national championship. To succeed as an investor, you need a plan, patience, vision, and luck. Long-term thinking is a must. And, buying stocks when they’re down is an excellent way to acquire great companies at discounted prices.

Learning to overcome losses is also essential because when you invest, you will own some losers. There were 68 teams in the tournament – 67 losers and one winner. However, every team that made it to the big dance had a successful season, and most of them will return next year. Gonzaga ended their season with a record of 31-1, the University of North Texas won their first-ever tournament game, and Abilene Christian stunned Texas. Cut your losses, learn from your mistakes, and refine your process. Don’t be distraught with your losers, and let your winners run.

Diversification is also a must. The Baylor team has several elite athletes, role players, and specialists, and every person contributed to the team’s success. Your portfolio needs several components to perform well. A globally diversified portfolio of low-cost funds gives you exposure to numerous markets and thousands of securities, each playing a vital role.

To produce generational wealth, build your team, diversify your assets, invest often, and think long-term.

I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed. ~ Michael Jordan

April 6, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://en.wikipedia.org/wiki/Baylor_Bears_basketball

Control

Markets are soaring to all-time highs as the world awakes from its COVID slumber. Year-to-date, the Dow Jones and S&P 500 hit record highs, and the NASDAQ is not far behind. Since the Covid outbreak, all three indices have performed well.

However, if you’re not saving money or can’t control your spending, you will never build generational wealth. Saving and spending are the only two things you can regulate. Market forces drive stock prices and interest rates.

Don’t worry about outperforming the market. If you save and invest regularly, the market will take care of itself and bring you along for the ride.

April 5, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Is This Time Different?

GameStop stock soared to all-time highs last week on the wings of social media traders. The Reddit traders put the short squeeze on GME and almost destroyed two high profile short-selling firms. At one point, GameStop had risen more than 1,600%! On Twitter, Reddit Investors said, “It is the common man vs. the suits.” They added, “I’ve talked to a lot of suits this weekend, and 90% of them are extremely concerned this debacle with meme stocks is going to blow up the market in the near-term.”

As the social media warriors tried to “stick it to the man,” trading on the Robinhood app exploded, and  Wall Street made even more money. Citadel is the primary trader for Robinhood and other firms, and last year they made $6.7 billion trading “free” stocks.[1] The more individuals trade, the more money Wall Street makes. One former Wall Street veteran told me: “We are in the moving business, not the storage business.” Wall Street loves activity, and it doesn’t care about your moral victories or if you want to “hold the line.” Since GME peaked last Thursday, it has dropped 80%. John Maynard Keynes said, “The market can remain irrational, longer than you can remain solvent.”

Is it true? Will a group of day trading, social media experts bring down Wall Street? Let’s review some history.

The Crash of 1929

The roaring twenties was a decade of excess, showcased by F.Scott Fitzgerald’s The Great Gatsby. The era was ripe for speculation following the Spanish Flu, and traders bid up stocks by leveraging their accounts ten to one. According to Macrotrends, the Dow Jones Industrial Average climbed 449% from 1921 to 1929.[2] Towards the end of the bull market, several high profile stocks like Anaconda Copper, GE, GM, Montgomery Ward, New York Central, RCA, Westinghouse, and Woolworth rose an average 158% from March 3, 1928, to September 3, 1929. Less than two months later, the group fell 73% as the stock market crashed on October 29, 1929.[3] After the crash, the government established the Securities and Exchange Commission to protect individual investors. The Dow Jones did not breach its pre-crash high until 1959, thirty years later!

The Nifty-Fifty

The nifty-fifty was a group of large companies that investors loved to own during the 1960s and 1970s. These momentum stocks were made popular by the legendary investor George Tsai who managed the Fidelity Capital and Manhattan Funds.[4] The nifty-fifty stocks traded to excessive valuations, and the PE ratio for these stocks climbed to more than 100. A few of the names included Coca-Cola, IBM, Polaroid, and Xerox.[5]The party ended during the market correction of 1973 and 1974 when stocks fell more than 40%. The Dow Jones declined 71% from 1965 to 1982, and It would take fourteen years for the Dow to eclipse its 1965 top.[6]

The Tech Wreck

Technology stocks soared during the mid-nineties as the internet brought elaborate trading tools to the masses. The internet turned individuals into trading machines with access to websites managed by E*Trade, Schwab, and TD Ameritrade. If you need proof of the excess, please Google E*Trade investment commercials.  From January 1995 to February 1, 1999, the Dow climbed 144%, and the NASDAQ soared 233%. Stocks like Qualcomm, Enron, Iomega, Worldcom, Global Crossing, and pets.com mesmerized day traders. A new paradigm arrived until the market corrected. The NASDAQ tumbled 70%, and the Dow Jones fell more than 32%. The tech-wreck brought the party to a halt. It took the NASDAQ more than fifteen years to recover its all-time high!

Today

Boom and bust cycles are part of investing. Pursuing quick riches through day trading is fleeting, and it only lasts a few years, at best. It took the stock market an average of nineteen years to recover the losses from the Great Depression, Nifty-Fifty correction, and Tech Wreck.

Is this time different? I doubt it. Individuals who trade without a plan to chase short-term riches will suffer when the market corrects. Long after the GameStop fiasco is over, large Wall Street firms like Goldman Sachs, Morgan Stanley, and Citadel will still be standing.

Be careful. Trade lightly.

“The four most dangerous words in investing are: ‘this time is different'” ~ Sir John Templeton

Book Recommendations

This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth S. Rogoff

Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

Irrational Exuberance by Robert J. Shiller

Against The Gods by Peter L. Bernstein

Barbarians at the Gate by Bryan Burrough

The Big Short by Michael Lewis

The Panic of 1907 by Robert F. Bruner

February 2, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://www.wsj.com/articles/gamestop-frenzy-puts-spotlight-on-trading-giant-citadel-securities-11612089000?mod=searchresults_pos4&page=1, Alexander Osipovich, January 31, 2021

[2] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

[3] Only Yesterday by Frederick Lewis Allen

[4] https://en.wikipedia.org/wiki/Gerald_Tsai

[5] https://www.investopedia.com/ask/answers/08/nifty-fifty-50.asp ,Barclay Palmer, March 24, 2020.

[6] https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

Follow the Bouncing Ball

To make money in stocks, buy winners. To make money betting on horses, pick the fastest one. To make money betting on football, pick the best team. It’s obvious! As Will Rogers once said, “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it. Of course, it’s impossible only to pick the winners.

In 2016, the energy sector rose 29.2%, and it was the best performing sector. If you invested in energy in 2016, you lost 2.5% in 2017, 20% in 2018, 9.3% in 2019, and 33.1% in 2020. The energy sector was the worst-performing sector for four years in a row. This year, it’s one of the best.

Utility stocks were the worst-performing sector in 2013 but the best in 2014. Financials finished 2019 as the second-best sector, and last year it was the second-worst.

Healthcare stocks underperformed energy stocks by 32% in 2016 and outperformed them by 26% a year later.

Trying to pick the best sectors or stocks can result in a feast or famine. If you’re correct, you’ll make money. If you’re wrong, you’ll lose money. Simple.

From 2011 to 2020, the S&P 500 index was never the best nor worst-performing asset class, nor did it finish any year in negative territory. It was consistent and stable relative to the individual sector components.

An S&P 500 index fund, or total market index fund, gives you exposure to every sector without trying to pick the best and avoid the worst. A broad-based index fund is an excellent choice for any portfolio.

January 14, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts

Bye, Bye and Buy Bonds?

Interest rates are trading near historical lows, but they’re rising. Since July, the yield on the 30-Year US Treasury has soared 42%. Last March, it dropped to a low of .99%. Now it’s yielding 1.88%, an increase of 90%. Rising rates from all-time lows is not a rousing endorsement to buy bonds.

Despite the low rates, bonds belong in a diversified portfolio. Bonds are safe and consistent, and they offer stability not found in other investments like stocks, gold, or Bitcoin. Also, bonds are negatively correlated to stocks, so when stocks fall, bonds rise. During the market correction last March, interest rates dropped 36% as investors purchased US government bonds. As rates fell, the iShares 20+ Treasury Bond ETF rose 15%, while the S&P 500 dropped 12%.

Bonds are a source of funds. When stocks fall, bonds rise. You can use your bonds to buy stocks – buy low and sell high.

Another reason to buy bonds is to match the maturity with your purchase. If you’re buying a new home in two years, then buy bonds with the same maturity – two years.

My career launched more than thirty years ago in Pasadena, California, as a stock-broker hired by Dean Witter. I was young, with no connections, so my primary tool for prospecting was the telephone. I cold-called morning, noon, and night looking for new clients. One of the investments I used for calling was the 30-Year US Treasury bond. At the time, they were paying more than 8%, guaranteed. My pitch was simple: “Hello, Mrs. Jones, this is Bill Parrott from Dean Witter in Pasadena. We are currently offering a guaranteed investment paying more than 8%. Would you like to hear more about it?” I couldn’t give them away because most people thought interest rates were going to rise.  Well, they were wrong, and interest rates dropped more than 87% over the next three decades. If they bought the bonds, they could have enjoyed thirty years of 8% guaranteed income, and their bond would be worth $143 today, a gain of 43%.

Since interest rates are rising, bond prices are falling. The price of a 30-year bond will fall 22.4% if interest rates rise 1%, so my recommendation is to keep your maturities short – less than five years.

Bye, bye, and buy bonds!

January 12, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

Data Sources: YCharts

Bamboo Shoots

I’m reading Chop Wood Carry Water by Joshua Medcalf.

In one chapter, he writes about planting and growing bamboo. After planting the bamboo seed, it must be watered every day. It’s possible to see little to no growth after three to five years. The author adds: “What you don’t see happening is what is taking place beneath the surface. Beneath the surface, a massive, dense foundation of roots is spreading out all throughout the ground to prepare for the rapid growth that the bamboo will experience. So, you keep water it and watering it, and eventually, after five years of seeing nothing at all happen above the surface, the bamboo tree shoots up to over ninety feet tall in just six weeks.”[1]

The author highlights the invisible growth and hard work it takes to be successful – to trust the process. He adds, “Most people want the ninety-foot-tall bamboo tree without the five years of process.

Investors can learn much from this passage in the book. Investors want instant gratification, with little downside. If a stock doesn’t rise quickly, it’s replaced by another in hopes it will fare better. If a portfolio is not growing fast enough, investors want to overhaul it to accelerate the growth rate.

From January 2000 through January 2011, the S&P 500 generated a negative return, eleven years without growth. If you sold the fund in 2011, you missed a 262% return on your investment.[2]

It requires patience, courage, and wisdom to create generational wealth.

January 4, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] Chop Wood Carry Water, Joshua Medcalf, page 64

[2] Vanguard 500 Index Fund, 1/1/2000 to 1/4/2021, YCharts

How to Generate Income with Options

In a low-income, zero-interest rate world incorporating an option writing strategy may give your account a boost.  Writing options on stocks you own or want to own is an excellent way to increase your income without altering your asset allocation strategy or investment plan. If you own individual stocks, this could be a strategy for you. 

There are several ways to generate income from trading options, but I will only focus on two popular strategies – covered call and put writing.

Covered Call Writing

A covered call or buy-write allows you to generate income on stocks you own if you’re willing to sell your shares at a specified price. For example, let’s say you own 1,000 shares of Apple (AAPL), currently trading for $123.25 per share, and you would like to sell them at $130. As a result, you sell the January $130 call for $2.00. Because you own 1,000 shares, you sell ten contracts (one contract = one hundred shares of stock). The $2.00 is the option premium you’ll receive, so ten contracts will generate $2,000 income (10 × 2.00 × 100) before fees. The $2,000 will credit your account on the day of your trade.

If Apple stays below $130 on the third Friday in January (expiration), you’ll keep your shares. You can then sell another call option on Apple, expiring in February, March, or April, and repeat the process. If it trades above $130 at expiration, you’re obligated to sell your shares at $130, regardless of how high it trades above the strike price. If Apple closes at $200 on expiration, you’re still obligated to sell the stock at $130 and forgo the $70 profit.

As a warning, never sell a call option without owning the underlying stock position because your risk is unlimited.

Put Writing

Put writing involves selling a put option on a stock you want to own, comparable to placing a limit order on a stock you wish to purchase at a lower price – except you get paid to wait.  For example, if you want to buy Apple at $110, currently selling for $123.25, you can enter a limit order and wait for it to trade to your price, or you can sell a put and get paid.

When you sell a put, you’re obligated to purchase the stock if it trades at or below the strike price at expiration. If you sell an Apple January $110 put, you’ll receive a credit of $1.13 per contract. If you sell ten contracts, the credit will be $1,130 (10 × $1.13 × 100), before fees. If Apple trades at or below $110 per share, you’re obligated to purchase 1,000 shares at $110 regardless of how far it trades below the strike price. If Apple stays above $110, your option will expire worthless, and you’ll profit on your trade, and then you can sell another put option expiring in February, March, or April.

A put-writing strategy is best suited for investors with a high tolerance for risk. It’s also recommended you only sell puts based on the amount of cash in your account. This strategy is known as a cash-covered put. For example, if your cash balance is $25,000, you can sell ten put contracts on a $25 stock (10 contracts = 1,000 shares; 1,000 shares x $25 = $25,000).

I trade options to generate a few extra dollars each month; it’s my side hustle. I mostly sell puts on stocks that fall sharply, which increases volatility and boosts the amount of premium I receive. When stocks fall, fear rises. An ideal trade for me is to sell a put option on a stock that is dropping 20% or more with a delta of less than 20 (If an option has a delta of 20, it means there’s a 20% chance the stock price will touch my strike price). My time frame for selling a put on a stock that’s getting crushed is three to four weeks because an option is a wasting asset, so if the stock recovers, the option will expire worthless, which is my goal.

A stock rarely drops 20% or more two or three days in a row, in my experience. If a company misses its earnings or revenue targets, investors sell the stock and drive it down to unrealistic levels. When this happens, I try to sell my put option when the market opens and fear is spiking. When investors realize the company is not going out of business, the selling will stop, and my option trade becomes profitable.

Of course, not every option trade is profitable, so I’m quick to cut my losses if I’m wrong. I want to live to see another day.

Options involve risk, but they’re an excellent way to generate a few extra nickels.

Happy Trading!

Terms[1]

Contract: One option contract = 100 shares of stock.

Expiration: The day the option contract expires.   Options expire on the third Friday of every month.  Several stocks also have options expiring weekly.

Call Option – Buyer: An option giving the buyer the right to purchase a stock at a specified price.

Put Option – Buyer: An option giving the buyer the right to sell a stock at a specified price.

Call Option – Seller: An obligation to sell stock at a specified price.

Put Option – Seller: An obligation to buy a stock at a specified price.

Premium: The amount you must pay to purchase an option or the amount you will receive when you sell an option.

Strike Price:  The exercise price where you can buy a call or sell a put.

At-the-money: The stock price is equal to the strike price of the call or the put.

Out-of-the-money: A call option where the strike price is above the stock price. A put option where the strike price is below the stock price.

In-the-money:  A call option where the strike price of the call is below the stock price. A put option where the strike price is above the stock price.

Delta: The amount by which an option premium moves divided by the dollar-for-dollar movement in the underlying asset.

Volatility:  The measure of the fluctuation in the price movement in a security over a period of time.

December 14, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] The Bible of Option Strategies – The Definitive Guide for Practical trading Strategies by Guy Cohen