Tag: Day Trading

Mama Meme!

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Meme stocks are soaring to the moon as diamond hand traders place concentrated bets on a handful of companies. Meme traders scour the internet looking for stocks to buy and promote to more traders. The meme stocks are rising because, well, they’re rising.

My wife asked me what a meme stock was at dinner last night, and she rarely asks me about stocks, so I knew the trading frenzy has gone viral. I gave her a short answer with little detail, but I told her I would do a deeper dive to answer her question. So here we go.

A group of traders identifies meme stocks through social media sites like Reddit and WallStreetBets. Reddit describes itself as the front page of the internet, while WallStreetBets is a forum for stock and option trades to pump, er share, ideas. The traders typically target companies with high short interest, like Bed Bath & Beyond or SoFi Technologies.

Why would a company with a high short interest be an attractive target? When traders short a stock, they expect the price to fall, so they sell first, hoping to repurchase it later at a lower price – the short seller profits when stocks drop. Most individuals who short stocks are professional traders, whereas meme traders are primarily retail investors. It’s David vs. Goliath. When meme traders start pumping up a stock price, the short sellers must buy back stock to limit their losses, so trading volume explodes as retail traders and short-sellers buy stock. For example, the 10-year average trading volume for AMC Entertainment (AMC) is about 13.5 million shares per day. The trading volume for the last five sessions averaged 571 million shares per day, and it traded more than 750 million shares on Thursday!  AMC has 117 million shares outstanding, so it traded nearly five times the number of shares available every day last week.[1]

Meme traders use rocket emojis to inform other traders they expect their stocks to go to the moon. Another symbol for these traders is diamond hands. If you have diamond hands, you’re a strong trader with the courage to hold your stock while it’s falling. Diamond hand traders unite to try and hold the line as their stocks get battered. On the other hand, if you’re weak and sell your stock, you have paper hands, according to the meme traders. I own index funds, and I rarely sell, so I guess I have diamond hands.

However, it’s hard to argue with the meme traders because their stocks are soaring. AMC is up 2,160% for the year. GameStop is up 1,220%. BlackBerry and Bed Beth and Beyond are only up 109% and 78%, respectively. Several firms offer zero commission trading like Robinhood and Schwab, which added to the speculation, and the Federal Reserve has been accommodating with a near-zero interest rate policy. If we add COVID, boredom, and a lack of sports to the mix, then you have a perfect cocktail for a trading bubble.

Another characteristic of meme traders is they don’t care about a company’s financial statement, and it’s a good thing because the balance sheets for AMC, GameStop, BlackBerry, and Bed Bath and Beyond are horrible. Here are a few of their combined financial metrics.[2]

  • Return on Invested Capital = -43.4%
  • Annual Revenue Growth = -32.5%
  • 5-Year Revenue Growth = -12.2%
  • Profit Margin = -197%
  • Operating Margin = -104%
  • Employee Growth = -24%

I give credit to the meme traders because they’re leveraging the power of social media through Reddit and WallStreetBets to promote their ideas. As a result, social media has leveled the playing field. Before the internet, Wall Street firms like Morgan Stanley, Goldman Sachs, and Merrill Lynch used the press to promote their stocks and offerings. The analyst would promote their ideas on CNBC, Bloomberg, or Fox Business News. Likewise, money managers and professional traders regularly talk their book to sell their ideas. It’s not uncommon to watch a segment on CNBC where a trader tells the viewers they bought stocks or options during the show! I used to call this front running, but maybe the rules have changed.

Should you buy meme stocks? If you want to speculate with a small portion of your account, and you can afford to lose the money, then give it a shot. If you decide to trade a few meme stocks, limit your investment to 1% to 3% of your capital. And don’t use margin! If you currently own meme stocks, sell some shares to lock in your profits because this won’t last.

If you don’t want to believe me, here is what the management of AMC recently said about their stock:

“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last,” AMC said in the filing. “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

Caveat emptor.

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” ~ Jesse Livermore

June 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.

[1] YCharts

[2] Ycharts Comp Tables

Buy The Rumor, Sell The News?

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Is America waking up from its COVID slumber? The number of people getting vaccinated is increasing daily. Yesterday, Governor Greg Abbott of Texas eliminated the mask mandate, and he’s allowing businesses to open up at 100% capacity. Mississippi is doing the same. President Biden anticipates most Americans will receive the vaccine by May. Are we ready for another Roaring Twenties?

The NASDAQ has fallen 6.5% over the past couple of weeks. High-flying stocks like Tesla and Peloton are trading in negative territory for the year; Zoom has dropped 17% since peaking last month at $451 per share. Netflix is down 10% from its all-time high. Are investors selling the working-from-home stocks now that the economy is opening up? It appears so because companies like Carnival, Southwest Airlines, and American Express are flying.

One possible outcome of the reopening economy is a broad sell-off in stocks as we start to live our lives again.  We have been staring at screens for the past year with little to do besides ride an indoor bike, binge-watch our favorite shows, and trade stocks. Investing was gamified. Individuals day-traded stocks based on posts on Twitter, Reddit, or WallStreetBets – and the more rocket emojis, the better! As we emerge from our outdoor hibernation, will we still focus our energy on buying heavily shorted stocks with poor balance sheets? I don’t think we will.

The market is forward-thinking; individual investors are concerned with the here and now. Markets are a collection of millions of investors, and the collective reasoning is that the reopening trade is already factored into the current valuation. The recent price action could be sending us a signal that the market may fall when we can roam freely.

If there is a correction, should you sell your stocks? If you own a globally diversified basket of funds, the answer is no. You likely own thousands of companies, so no need to worry about being in the right stock at the right time, nor do you need to time the market. However, if you have been feasting on a few speculative names, then selling some shares is recommended.

Your time horizon is another consideration. If your time frame is three to five years or more, use a market correction to add to your equity holdings – buy the dip. If you need your money in one year or less, sell your stocks and put the proceeds in a money market fund.

Another reason to buy or sell stocks during a correction is your ultimate financial goal. For example, if your goal is to retire with $2 million and your account value is $3 million, reduce your stock exposure because you reached your destination. However, if your portfolio is $1 million, you still need to save and invest to reach your target. In this case, buy stocks if they fall.

Last, the NASDAQ is up 85% from the March 2020 low, and several stocks climbed substantially. If you were fortunate to catch a few shooting stars, lock in some profits. It doesn’t hurt to take some money off the table.

A financial plan can help you quantify your goals and determine your asset allocation if you’re unsure how to proceed. It will guide your investment decisions. During the COVID correction last March, we were stress-testing our client’s plans regularly. The financial plans allowed our clients to remain invested through the correction, and as a result, enjoy the gains from the market rebound. We made our decisions based on facts, not rumors.

I have a strict policy. I will not and do not publicize unsubstantiated rumors about anyone — unless they’re very funny. ~ Jimmy Kimmel

March 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.

This blog is not an offer to buy and sell Bitcoin. I do not own any cryptocurrencies because I don’t understand them as well as I should. If you want to trade this asset class, do your homework.

Red 32

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I like gambling – always have. My high school was located across the street from Santa Anita Race Track in Arcadia, and my friends and I often went after school to bet on a race or two. On some Saturdays, we’d spend all afternoon at the track. In college, my friends and I traveled to Las Vegas or South Lake Tahoe to play blackjack, craps, or some other games. It was fun and exciting; however, I never risked more than I could afford to lose, which wasn’t much.

Since the start of COVID, investors have been gambling on stocks buying speculative names, or using options to leverage their bets. Options volume on the CBOE for calls has increased 247%. To add fuel to the fire, speculators have leveraged their accounts with margin. Since last March, margin debt has increased 63% to a record high of $778 billion!

The trading activity in speculative names and options has increased because of the Robinhood traders, Reddit, and WallStreetBets. John Marshall, head of derivatives research at Goldman Sachs, said, “For the largest online brokers, the number of daily trades has tripled since 2019. But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”[1]

Sundial Growers (SNDL) is the latest example of this craze. After the social media crowd said to buy the stock, it jumped 144% in a few days, and volume spiked 730% as traders poured into it at the top before falling 32%. Dave Portnoy said on Twitter, “Back in $sndl cause I love the rush.” He added: “The $SNDL saga has convinced me you should have to pass an intelligence test to use Twitter.”

So far, GameStop is the poster child for speculation rocketing from $18 to $483 in two weeks before crashing. It’s now down 90% from the high, and the volume in the stock spiked 489% as speculators chased returns.

Here a few suggestions if you want to speculate.

  • Limit your speculative capital to 1% to 3% of your taxable investment account. Do not use retirement funds to buy penny stocks, call options, or meme stocks.
  • Do not use margin.
  • If you make a quick buck, take your gains and count your blessings.
  • If you’re losing money, cut your losses. Do not average down.
  • If a stock has risen 500% or more in a few days, wait for it to pull back before you decide to take the plunge. Stocks can’t remain vertical for long, and beware of parabolic charts.
  • Do your own research. Ignore your brother-in-law’s advice.
  • Only speculate with money you can afford to lose.
  • Beware of the wash rule.
  • If you suffer losses, you can write them off your taxes indefinitely until absorbed. The IRS allows you to write off $3,000 per year if you don’t have any capital gains. You can offset your losses dollar for dollar against any capital gains.
  • John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.”
  • You’re competing against Goldman Sachs, Morgan Stanley, American Funds, Dimensional Funds, BlackRock, Vanguard, Fidelity, Schwab, TD Ameritrade, Renaissance Technologies, and several thousand professional investors with deep pockets. Plan accordingly.

Happy trading and good luck.

“Gambling has brought our family together. We had to move to a smaller house.” ~ Tommy Cooper

February 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.

[1] https://markets.businessinsider.com/news/stocks/retail-reddit-robinhood-trading-boom-means-for-stocks-goldman-sachs-2021-2-1030051688, By Isabelle Lee, February 7, 2021

Enough

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Gamestop stock has soared more than 1,750% over the past few weeks, led by an army of Robinhood traders utilizing sites like Reddit and WallStreetBets. These social media warriors knocked one hedge fund manager to its knees as Gamestop soared to dizzying heights. The day traders forced Melvin Capital to cover its losing trade, and as a result, they needed about $3 billion from Citadel and Point72 to “shore up the fund.”[1] David versus Goliath.

In 1999 I managed a Morgan Stanley office. Morgan Stanley was, and is, an enormous banker for IPOs, and during the height of the tech-boom, they brought hundreds of companies public. I had a front-row seat to the feeding frenzy. The firm introduced a commission-free trading account called Choice, and it unleashed pent-up demand for traders. Some individuals made hundreds of trades per month, trading popular stocks like Qualcomm. From March 1999 to January 2000, it jumped 1,700%, but two years later, it fell to $12, dropping 87%.

Qualcomm was not flying solo. In 2000, Microsoft, Cisco, Qualcomm, Intel, and Applied Materials were the day’s darlings. An investment of $10,000 ($50,000 total) to these companies in 2000 fell to $29,903 in 2017, a drop of 40% over seventeen years! It took more than fifteen years to recover your initial investment for most of these companies, and Cisco Systems is yet to reclaim its historical high reached in April 2000.

At some point, valuations matter, and investors will focus on earnings, revenue, cash flow, and profits; until then, tread lightly and be careful with these high-flying investments.  As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.”

I’m a believer in capital markets, and the less regulation, the better. Buyer beware. If investors make money trading speculative stocks, so be it. But, I don’t want to hear them complain when the market corrects, as it always does. It might appear the best way to make money investing is during a bull market when stocks are trading at all-time highs, but this is not true. A bull market will enhance your wealth, but it won’t create it.  To build your fortune, invest in stocks during a bear market. During the dark days, prices are cheap, unloved, and undervalued – an ideal time to buy stocks.  If you’re patient, you will have an opportunity to purchase a basket of quality companies at lower prices.

The rise of a few speculative stocks like Gamestop, FuboTV, Bed Bath & Beyond, Virgin Galactic, Nikola, Tesla, Palantir, and so on may cause you to rethink your investment strategy. Don’t abandon your plan to chase momentum stocks because a momentum strategy ends quickly, without warning. And when it does, it won’t be pleasant. Have you ever played musical chairs?

After graduating from college, I bought a few thousand shares of a penny-stock from my roommate. I speculated with money I didn’t have, and I lost it all. It hurt me financially, but it was a reason why I entered the investment business. I wanted to learn how to manage my own money for the long haul, and I’m thankful I learned a valuable lesson when I was young and dumb.

I often think it’s easier to make 100% on a short term trade than earning 7%, 8%, or 9% for decades. It’s possible to get lucky in the near term, but it takes courage, patience, wisdom, and fortitude to hold stocks for generations.

If you’re experiencing FOMO and want to invest in a few YOLO trades, here are some ideas to help you with your trading.[2]

  1. Limit your trading capital to 1% to 3% of your investment assets. Do not use retirement funds to speculate on stocks with weak balance sheets. Don’t gamble with money you can’t afford to lose.
  2. Do not use margin to buy stocks. Leverage works when stocks rise, but it will kill you when they fall. While at Morgan Stanley, a broker had an account go negative because of a margin call. The client used leverage to speculate on stocks, and when they fell, he lost all his money, and he needed to deposit a check to cover his debit balance.
  3. Take gains if you made big money in the short term. Selling half to three-quarters of your original position is prudent, allowing you to diversify your assets and stay invested. You want to live to see another day.
  4. If you have never traded options, don’t start now. Options are derivatives of stocks, and if you’re not careful, you can lose money quickly. They’re wasting assets, and you must be right on the company, the direction, the timing, the price, the strike price, and the expiration date. If you want to wade into the options market, hire an advisor with years of trading experience.
  5. A financial plan or investment policy statement will keep you focused on your long-term goals. Review and consult your plan often if you feel like you’re missing out on extraordinary gains; chances are, you’re not.

Investors with enough money are less likely to chase returns, hoping to cash a winning ticket. They’re content with their holdings and don’t feel like they’re missing out on the party because they have a plan, and, more importantly, they follow it. If you’re speculating to create wealth, it will evade you like a lottery ticket. It’s better to grow rich slowly than to try and get rich quickly.

Be patient, follow your plan, think generationally, and good things will happen.

Wealth gained hastily will dwindle, but whoever gathers little by little will increase it. ~ Proverbs 13:11

January 27, 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

[1] https://www.marketwatch.com/story/hedge-fund-melvin-capital-closes-out-gamestop-short-cnbc-2021-01-27, 1/27/2021 by Willam Watts

[2] FOMO = Fear of missing out; YOLO = You only live one.

A Kodak Moment

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Shares of Kodak soared more than 2,700% from July 27 to July 30. If you had a crystal ball or insider information, you could have turned $100,000 into $2.7 million as the stock rose from $2.13 to $60. The average trading volume for Kodak (KODK) for the past five years has been 481,000 shares. Two days before shares of Kodak climbed sharply, 284 million shares changed hands.

KODK_chart

The price of Kodak soared because they received a $765 million loan under the Defense Production Act so it can begin producing pharmaceutical ingredients.[1] I had no idea they manufactured drugs. Oh, and on the day before Kodak announced its deal, the board of directors awarded its chairman 1.75 million shares of company stock.[2]

Eastman Kodak was founded in 1888, 132 years ago, primarily to produce film for cameras. Eastman Kodak was a powerhouse, a blue-chip. They were added to the Dow Jones Industrial Average in 1930, where it remained for seventy-four years. Eastman Kodak was part of the nifty-fifty, a group of high-flying growth stocks, during the 1960s and 1970s, along with Bristol-Myers, Coca-Cola, GE, IBM, Pepsi, Pfizer, Sears, and Xerox. In 2012, Kodak declared bankruptcy, and one year later, they emerged from bankruptcy protection, a different company to focus on five divisions: print systems, enterprise inkjet systems, micro 3D printing and packaging, software and solutions, and consumer and film.[3] Pharmaceutical manufacturing is not one of their stated divisions.

My first photography class was in 8th grade. I borrowed my aunt’s 35 millimeter Pentax camera for a school project. I went to Thrifty’s Drug Store to purchase a roll of black and white film. When I finished my project, I dropped off the film at the drive-up Kodak kiosk in the mall parking lot. I returned a few days later to pick up my pictures – a few I still have today. When I became a stockbroker in the early 90s, Kodak (EK) was one of the first companies I purchased. It was going to be a cornerstone of my portfolio because of their growth prospects and dividend yield.

The recent move in Kodak shares may tempt you to hunt for undeveloped stocks in hopes of quick riches. Before you take the plunge and start buying low-priced, speculative stocks, here are a few suggestions to help you avoid some common mistakes.

  • Greed. Since peaking at $60, Kodak stock has dropped 72% to $17.05. The stock remains volatile as speculators try to trade around the news and catch another shooting star. I believe most traders will eventually lose money on this stock as greed attracts speculators like a moth to a flame.
  • Diversify. If you plan to purchase companies trading below $5, buy hundreds of them because most of them will lose money. If you can find one Kodak, among 99 losers, you’ll make money. According to YCharts, 2,826 companies are trading between $1 and $5 per share, so choose wisely. Spread your bets around the table.
  • Limit your speculative capital investment to 3% to 5% of your taxable trading account assets If you plan to purchase stocks below $5. If your account balance is $100,000, then your speculative trading pool will be $3,000 to $5,000.
  • Margin. Day traders try to amplify their gains by purchasing stocks on margin. My recommendation is to avoid margin entirely, but if you must use it, limit your debit balance to 10% of your trading account value.
  • Using options to leverage your gains on low-priced stocks is not recommended because an option is a wasting asset. Professional options traders will increase the implied volatility on options contracts for speculative stocks like Kodak, making them very expensive. For example, the implied volatility for Kodak’s August 21 call option with a strike price of 15 is 300, meaning option traders expect the shares to move up, or down, by 18.8% daily. By comparison, McDonald’s implied volatility is 21, or 14 times less volatile than Kodak.
  • Nimble. If you’re one of the lucky ones to buy a low-priced stock before it takes off, enjoy the ride. If possible, sell enough shares to cover your original cost and let the remainder run so you can play with the house’s money. However, if the stock starts to fall, cut your losses and move to a new idea.

Kodak was a juggernaut, generating more than $10 billion in sales in 1981, employing more than 120,000 at its peak, and producing 50 million Instamatic cameras between 1963 and 1970.[4] However, it lost its way, and it’s now trying to rebrand itself – again. I don’t know how Kodak’s deal will develop, so tread lightly and be careful.

Nostalgia often leads to idle speculation. ~ J. Paul Getty

August 4, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located 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://finance.yahoo.com/news/kodak-stock-skyrockets-deal-drug-200548406.html?.tsrc=rss, By Michelle Jones, July 29, 2020

[2] https://www.cnbc.com/2020/08/01/eastman-kodaks-top-executive-reportedly-got-trump-deal-windfall-on-an-understanding.html, Reuters, August 1, 2020.

[3] https://en.wikipedia.org/wiki/Kodak, Website accessed August 3, 2020

[4] https://theweek.com/articles/481308/rise-fall-kodak-by-numbers, The Week Staff, October 3, 2011. Website accessed August 3, 2020

Did You Miss the Rebound?

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The first few minutes of a flight are exhilarating as the pilot throttles the plane down the runway and points its nose heavenward. A stock market recovery is fast and furious, particularly after a steep drop. If you miss the start of a recovery, you will forego substantial gains. From the March 23 low, the Dow Jones, S&P 500, and NASDAQ have climbed substantially. The NASDAQ is up 57% while the S&P 500 and Dow Jones have risen more than 45%.

^IXIC_^SPX_^DJI_chart (1)

Did you miss the rebound? Is it too late to get back in the market? If you liquidated your portfolio in March, should you now repurchase your stock holdings? If you’re still standing on the tarmac looking up at a soaring stock market, you can take comfort in knowing that the Dow Jones and S&P 500 are down to flat on the year.

^SPX_^DJI_chart

Outside of large-cap technology stocks, most sectors are performing poorly this year. Small-cap stocks, international companies, and real estate holdings are trading in negative territory. Small-cap and real estate stocks are down more than 14% for the year.

^MSEM_^SML_^MSEAFE_^SPCSERES_chart

Despite the recent rally, it’s not too late to invest in the markets, especially if you purchase a diversified portfolio of funds. It doesn’t make sense to time the market if you own a basket of funds because you will always have some sectors trading up and others trading down. It’s better to stay fully invested so you can take advantage of the long-term trend of the markets. You will miss opportunities if you regularly buy and sell your investments.

Also, markets move. Today’s winner could be tomorrow’s loser. As I mentioned, large-cap technology stocks are outperforming most sectors this year, but it hasn’t always been the case. From 2000 to 2010 the NASDAQ lost 44% while emerging markets rose 102% and small-caps were up 68%.

^IXIC_^SML_^MSEM_chart

According to Dimensional Fund Advisors, a 60% stock and 40% bond portfolio has generated an average annual return of 8.97% since 1926. A moderately balanced portfolio of stocks and bonds has weathered 94 years of booms, busts, wars, pandemics, corrections, depressions, and recessions. And, for the brave who refuse to sell, it has produced generational wealth. A one-dollar investment in 1926 is now worth $3,350. Of course, 94 years is a long time, so what has it done lately?[1]

A Dimensional 60/40 model is up 6.36% for the year and more than 16% for the past twelve months. For the past three, five, and ten years, it has returned more than 10% per year.  On a rolling ten-year calendar, the model has never lost money. The best ten-year performance for this model started in 1982, averaging more than 17.5% per year. The worst decade started in 1929, generating a gain of .21% per year.[2]

Rather than trying to time the market, focus on your financial plan and your personal goals. A portfolio that you own for decades based on your goals will yield better results than attempting to buy at the bottom or sell at the top.

Let time in the markets work for you and your family.

“Time is free, but it’s priceless. You can’t own it, but you can use it. You can’t keep it, but you can spend it. Once you’ve lost it, you can never get it back.” Harvey Mackay

July 21, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located 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://returnsweb.dimensional.com/, data ending 6/30/2020. The 60/40 index consists of the S&P 500 and long-term government bonds

[2] Ibid

I’m the Captain Now

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A high-profile internet celebrity is leading a legion of day-traders with his antics. He recently said, “I’m the captain now,” and referred to Warren Buffett as an idiot.[1] Yesterday on CNBC, he said he had generated returns of 400% after “catching on” to trading.[2] Day traders have moved from gambling on sports to trading in bankrupt companies like Hertz and Chesapeake Energy.  Should you follow this Pied Piper?

Day trading is complicated. If it were easy, everybody would be doing it. It’s my understanding that “the captain” is worth more than $115 million, and he is trading with about $3 million, or 2.6% of his net worth, so he can afford to lose 100% of his capital. He can afford to swim in the deep end of the pool without fear. Several years ago, a client was investing in trust deeds by lending money to people who couldn’t borrow from traditional resources like banks or credit unions. He was a multi-millionaire, and he could afford to lose a few thousand dollars if his borrowers defaulted on their loans. A relative of his wanted to follow his investment strategy, but she couldn’t afford to lose any money. Her net worth was in the low thousands, so if she lost a portion of her assets, it would be catastrophic.

Despite the worst economic data since the Great Depression, day traders are partying like it’s 1999. They appear to be making a killing by trading stocks and ETFs like Hertz, American Airlines, Luckin Coffee, and the JETS ETF. Their portal of choice is Robinhood, where traders can execute their orders sans commissions.

Here are a few tips if you want to start day trading.

  • Have a plan. Work on your entry and exit points. Know what you’re going to do before you start trading. Identify a few stocks and get to know their trading patterns – as best you can.
  • Only invest with money you can afford to lose. If you can lose 100% of your trading capital, and still support yourself and your family, then give it a shot. Limit your speculative trading to 3% to 5% of your investment capital.
  • Only trade in your taxable investment account so you can write off your losses. Do not day trade in your retirement accounts.
  • Do not borrow money to trade. Avoid margin. Leverage is your friend when stocks rise; it is the enemy when they fall. Your account can go negative if you employ too much margin – meaning if you borrow money and you lose it all, you may owe your brokerage account money because of your deficit.
  • Take your gains. If you’re successful, ring the register to lock in your profits. Yes, you should let your winners run, but if you’re trading in bankrupt securities and you make 20%, 50%, 100%, or more, take your profits off the table.
  • Cut your losses. If you’re losing money, cut your losses and sell your stocks so you can live to see another day. Try to limit your downside to 7% to 10% per trade.
  • Inform your spouse, loved one, or significant other that you’re about to embark on a trading journey. Let them know you will be speculating with a portion of their treasure. It’s better to inform them from the beginning that you may lose significant amounts of money. In this case, it is better to ask for permission than it is to beg for forgiveness.

In 1999, the NASDAQ soared 85%; by October 2002, it fell 77%, and it would take seventeen years for the index to reclaim its previous high. The severity of the drop and the prolonged drifting in the market wiped out a generation of day traders. As one speculator said, “I never did make any money out of that,” he admits. “I’m just not able to make it work. It’s harder than it looks.”[3]

Captain Phillips is a movie about a small group of Somali pirates who hijack the Maersk Alabama. When the lead pirate makes his way to the bridge, he looks Captain Phillips in the eye and says, “I’m the captain now.” As the movie ends, “the captain” was arrested by the US Navy, and the Seal snipers eliminated his associates. It didn’t work out for the pirates because they bit off more than they could chew, and they didn’t have a plan.

I’m sure there are successful day traders, but they almost certainly do it for a living, it’s their 9 to 5 job. And, if they have figured out day trading, they’re probably living on a private island somewhere in the pacific.

Happy Trading

“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” ~ Benjamin Graham

June 16, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located 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 are not suitable for every investor.

 

 

 

[1] https://www.thewealthadvisor.com/article/warren-buffett-idiot-says-investor-who-claims-daytrading-easiest-game-ive-ever-played, The Wealth Advisor, June 10, 2020

[2] https://www.youtube.com/watch?v=Q0t_7R2sv4w, website accessed

[3] https://money.cnn.com/2000/08/09/investing/q_daytradewhere/, August 9, 2000