A few weeks ago, I wrote a well-received piece on Trader Planet titled ‘Will a Greek Exit Trigger Another European Crisis?’
I went on to explain why it wouldn’t and it was likely nothing but a short-term temporary panic in which we as investors and traders should take advantage of.
Although I feel for the people of Greece who are suffering the most from the inability of their government to get their act together over the past five years, these events occur more often than not and it is up to us to take advantage of these situations that will either make or break our year in terms of performance.
Perceived fear renders many traders and investors to shy away from taking on positions during times of crisis because they let the negative media cloud their logical judgment. I too fought hard to overcome this when I first began trading, many times letting the media get the better of me.
This ties very well with what I wanted to talk about today, as I believe that success in the markets requires you to be a lion and have a full meal when it’s available. I like using analogies like this as it explains things a little simpler.
I’ve always dreamed of creating stable consistent everyday trading income.
In fact, I thought this was the only way I could trade to finally quit my job by replacing my regular income with daily trading income. Logical right?
Except, it doesn’t happen this way!
I wish I could tell the market, Mr Market my bills are due and like my job, I used to get paid monthly, now please do so as well, ok?
In other words, I tried to invest and trade eating regularly like a horse taking small regular bites at a time.
The markets go where they want to go and prediction is futile. For those who believe they have come up with a strategy to get paid daily, weekly or monthly without fail, think again.
Yes, there are income strategies involving options and dividend stripping etc., but in the long run, these strategies work mediocre at best because you give up long term capital growth.
Yes, you will get your small percentage income from say writing covered calls and puts, and for those more adventurous, naked calls and puts, which I highly recommend you stay away from. These strategies can work well for a very long time when everything goes according to plan, but can backfire badly by wiping you out when something goes wrong.
How do I know? I did exactly that and wiped out an entire years profit over night.
Writing options (especially naked) can be seen as picking up pennies in front of a steamroller. Most of the time you can pick them up, but on the odd occasion, the steamroller rolls straight over you leaving you nowhere to go. Those odd occasions also happen more often than we would like to think, also known as a ‘black swan’ event made famous by Nassim Taleb.
Events like the recent Greek crisis creates extreme volatility that pushes prices of stocks across the board down, regardless of their quality, even if the event had absolutely no financial impact what so ever to the stock in question.
We have seen great companies like Oracle, Intel and Wal-Mart just to name a few drop over 10% recently in what was really a non-financial impact event to their bottom line.
It is therefore imperative to recognize these events for what they are.
To be a success, think like a contrarian and avoid running with the crowd. I learned this over a long period of time and came to the conclusion that the very best, the Warren Buffet’s, Carl Icahn ‘s and David Tepper’s of the world stalk their prey and pounce when the opportunity allows them to do so and they eat like a lion, feeding them well for the rest for the year.
Why do you think Warren Buffett says he has his ‘elephant’ gun ready and loaded?
Don’t get me wrong, I trade short to medium term as well, taking in a lot of smaller profits along the way, but it is times of crisis like these which really allows me to achieve the returns I need to cover the long periods of market quietness.
