Are You Missing the Boat?

Last week on November 1st I had a lunch meeting with a friend.  It is our second lunch meeting in less than a month.  I’ve played golf with him a time or two and really don’t know a whole lot about him, other than he was looking for a way to make his money work both smarter and harder.   He told me he felt like he was “missing the boat” on some investment opportunities that could lead to larger than normal returns.

He’d heard on the golf course one day that I trade options in one of my accounts and this peaked his interest so he decided to by my lunch to “pick my brain.”  Now I have always been one who wants to share any knowledge I have that can help someone else.  This reminds me of a story … then I will finish this blog:

Your Tea Cup is Full

Once, a long time ago, there was a wise Zen master. People from far and near would seek his counsel and ask for his wisdom. Many would come and ask him to teach them, enlighten them in the way of Zen. He seldom turned any away.

One day an important man, a man used to command and obedience came to visit the master. “I have come today to ask you to teach me about Zen. Open my mind to enlightenment.” The tone of the important man’s voice was one used to getting his own way.

The Zen master smiled and said that they should discuss the matter over a cup of tea. When the tea was served the master poured his visitor a cup. He poured and he poured and the tea rose to the rim and began to spill over the table and finally onto the robes of the wealthy man. Finally the visitor shouted, “Enough. You are spilling the tea all over. Can’t you see the cup is full?”

The master stopped pouring and smiled at his guest. “You are like this tea cup, so full that nothing more can be added. Come back to me when the cup is empty. Come back to me with an empty mind.”

You see folks, I’ve always been a believer in the fact that I can have all the knowledge that can fit in the gray matter between my ears … but if I don’t give some of it away … I will not have room up there for anymore.  It’s called an Abundance Mentality.  Steven Covey wrote about his in his highly acclaimed work 7 Habits of Highly Effective People.  I picked the next few paragraphs up from Success.com where John C Maxwell discusses 6 tips to Develop and Model an Abundance Mindset.

Most people are deeply scripted in what I call the Scarcity Mentality. They see life as having only so much, as though there were only one pie out there. And if someone were to get a big piece of the pie, it would mean less for everybody else.

The Scarcity Mentality is the zero-sum paradigm of life. People with a Scarcity Mentality have a very difficult time sharing recognition and credit, power or profit—even with those who help in the production. They also have a hard time being genuinely happy for the success of other people.

The Abundance Mentality, on the other hand, flows out of a deep inner sense of personal worth or security. It is the paradigm that there is plenty out there and enough to spare for everybody. It results in the sharing of prestige, recognition, profits and decision-making. It opens possibilities, options, alternatives and creativity.

Covey tells us that when you live in a world of scarcity, you compete for available resources, even when there is an abundance of them.

When I speak to audiences across the country, I often hear about the challenges people face in the workplace. More often than not, these difficulties stem from a scarcity mindset.

Leaders who allow a scarcity mindset to work its way into their culture pay a high price. When resources (money, opportunity, recognition) are perceived to be limited, paranoia, fear and politics thrive. In this environment, people become nervous and afraid to make a mistake. As a result, teamwork and innovation suffer.

Effective leaders, on the other hand, develop and model an abundance mindset. By doing so, they create an environment where they can positively influence their team—and where their employees can thrive. Here’s how to spread this positive mentality through your team.

And I will add through your friends and family …

Offer words of appreciation. Let people know how much you value their contributions. People want to know that their work matters. Your influence and happiness will increase in direct proportion to the appreciation that you show your team. I have found this to be one of the fastest and simplest ways to build a more abundant life.

Choose to see opportunity. The next time your team is faced with an obstacle, flip it around and consider it an opportunity. Face the challenge with optimism and make sure your team sees you modeling that attitude. You’ll be surprised at how quickly problems dissolve and how soon optimism becomes your default mechanism.

Remind yourself that there is more than enough. As Covey said, there is enough pie to go around, so break that nasty habit of comparing yourself to others. Repeat after me: There is plenty for everyone. Say the sentence often enough, and it’ll become second nature.

Now back to my blog.  As I stated, this young man wanted to have lunch to “pick my brain” on some of the things I was doing with options that he too could implement in his own portfolio.  The first lunch was to introduce him to some of my methods and the second was to get him to take action on some of the things he’d learned from the first lunch.  The total costs of both these lunches were about $50 and while he paid for the first, me in my sharing abundance mentality, picked up the tab for the second.

My young student had recently sold some land and decided to get very aggressive with a portion of the money he’d received.  He was simply tired of buying stocks and ETFs in hopes the market would go up in value and he would make 10% to 12% per year … maybe.  He knows, like me, that 80% of money managers cannot beat the S&P 500 Index Average Return.

We discussed stock research and how I do stock research.  Then we got into the Dogs of the DOW and how I tend to feel about options on those lower cost five “Puppies.”  He decided to set up a portfolio similar to the one I’d set up a couple of weeks earlier.  Since mine was already up 25% in value, we did agree that he should likely change the strike prices on some of the stocks so that he would not lose more than 2% on any one of the investments he’d made.  Higher strike prices mean lower premiums he’d have to pay.

Here’s the 2% rule I use:  Let’s say you have a $50,000 portfolio.  If you are not wanting to lose more than 2% of the portfolio value on any one holding … the most you can invest into that holding is ($50,000 X .02= $1,000).  So if the price of an option contract happens to be say $3.50 per share … the most contracts you could buy would be $1,000 divided by $350 (since all contracts are 100 shares) or 2.86 contracts.  HOWEVER, you cannot purchase .86 (86/100ths) of a contract … so you have to make a decision to round up to 3 or down to 2 contracts.  Just starting out it is probably best to round down.

I use 2% because I know that any option can go to “0” rather quickly (depending on the price of the underlying stock).  So the question really becomes, “Of this $50,000 can I really afford to lose $1,000?”  While I really don’t want to lose even a dollar … I have to understand that investing involves risk and I must be able to effectively handle the risk, from a financial and more importantly emotional point of view.

Now there are some risk management techniques we can use … but that is not the purpose of this article.

What I really want to share here is how one man thought he may be “Missing the Boat” when it came to generating larger gains in a smaller portfolio – and what he is now doing about it.

After lunch this student left me and headed for the public library where he could get online and start trading.  He still had some time before he had to be back at work.

He called later in the afternoon to let me know he’d purchased the following 10 call options on the Small Dogs (Puppies) of the Dow:

Five Calls X 2Of these call options you will see that one is what is called At The Money (ATM) and the other is Out of the Money (OTM).  In other words, CSCO was trading at close to $45 per share on the day he made the trade and had a few dollars to go up to hit $47 per share.

I told my young student that if he would send me the details I would build a spreadsheet to help him track his investment in these calls options over the weekend.

Today is November 5, 2018 and the sheet has been completed and I’d like to share that with all of you.

DS Portfolio

As you can see here … since Thursday last week (and remember our market is not open Saturday and Sunday) my friend has had gains in 7 out of 10 options and is down slightly in three of them.  As of this writing his overall return on his initial investment of $5,378.36 was $669.64 so he is up in 4.5 calendar days by about 12.45%.  If this trend continues for 365 days (one year) he could be looking at gains of somewhere around 1,150%.  Yes, I’ve already called him and told him not to hold for a 1150% return … to be happy with a 100% return but that he should probably not sell any of these until he gets much closer to his expiration date which is still 438 days in the future and a lot can happen between now and then.

Should any of you decide to “Get on The Boat” and do any of this … I’d encourage you not to look at it daily unless you can get a real handle on your emotions.  Emotions can cause us to do some weird things – like selling too soon into a down market … or selling too soon into a rising market … or holding to long in either market.

Like the song – The Gambler by Kenny Rogers … “You gotta know when to hold ’em, know when to fold ’em, know when to walk away and know when to run!”  In other words, you should not only have an entry plan … but also an exit plan.  Then you have to act on the plan and not your emotions.

Please, “Don’t miss the boat” any longer and if you need my help, simple call or write!  Better yet, if you have a financial advisor that you are working with, trust his knowledge and judgement — but talk to him/her and see if a small amount of your money should be invested in options such as this.

Thanks for reading – now get on that boat and go make some waves!

Jerry Nix

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