On May 12, 2011, the Wall Street Journal published an article on the Galleon Verdict, the guilty verdict of hedge fund manager Raj Rajaratnam (henceforth referred to as “Raj”). A hedge fund is an unregulated private investment partnership limited to wealthy, accredited investors. The portfolio is aggressively managed using leverage and derivatives. It seems that Raj was generating unusually high returns in short periods of time via illegal activities and his association with so-called expert networks. These are firms that match industry experts with money managers looking for informed corporate news. The SEC is now cracking down on these activities and associations rendering the hedge funds dependent on the same information as you and me. The article summarizes a few positive lessons. It tells us why we shouldn’t bemoan the fact that hedge funds won’t let us in:
- Most hedge funds trading legally underperformed a simple balanced portfolio of index funds over the past 5-10 years. I want to stress here that there ARE some legitimate, outstanding hedge fund managers who garner fabulous returns for their wealthy clients.
- Fund fees are difficult to overcome. They charge 2% of assets under management + 20% of any profits…YIKES! No wonder index funds are so difficult to beat.
- You can get rich slowly but reject all get-rich-quick schemes. I think most of us already knew this but some still fall prey to these tactics.
- The fourth lesson is that when investing in the stock market we must ask ourselves the question: “What’s my edge”. In other words, what do I know that the market doesn’t?
This last lesson initiated a few questions of my own. What is the edge of the Blue Collar Investor? Why is the BCI community growing so rapidly? Why do I have books of your generous testimonials describing success stories many of us never thought possible…what is our edge? Is the answer some deep, esoteric concept difficult to verbalize? On the contrary it is (much like our BCI system) NOT rocket science. Covered call writing, the BCI way, is the antithesis of any get-rich-quick scheme. We spend months educating ourselves and paper-trading to learn the methodology. We do our due-diligence before entering our positions. Risky stocks yielding huge returns are rejected. Some do fundamental analysis, others depend on technical analysis, we do both. Then we add several common sense parameters like avoiding earnings reports, diversification, strike price selection and others. Every step is throwing the odds in our favor, giving us a legitimate “edge”, not the kind Raj was using. We set up organized lists in our portfolio manager and prepare for possible exit strategy execution…the odds are getting better and better. Finally our cash is immediately re-invested unleashing the power of compounding. Think of the average, less-educated retail investor, think of us and then think of Raj. Which group will offer the best opportunity for financial independence? That, ladies and gentlemen, is a rhetorical question. There are many ways to make money in the stock market. The BCI approach to covered call writing is one way. Applying education, motivation and due-diligence to all methodologies is a road to success…there are no shortcuts.
We are CEOs of our own money, independent thinkers not needing others for “hot stock tips”. We invest within our own personal risk tolerance comfort levels and are prepared with an arsenal of exit strategies should the trade turn against us. Finally, our profits are not left at the doorsteps of our local mall but are rather re-invested to unleash the 8th wonder of the world…compounding. In other words, we are educated, motivated investors. We do our due-diligence and are patient for our ultimate goals of becoming CEOs of our own money and financially independent. These principles apply to other forms of investing not just (my favorite) covered call writing. We are Blue Collar Investors…we will not get rich quickly but we will get rich!
Chart of the week: BCR
BCR was added to our premium watch list two weeks ago. It is in the Medical industry segment which has a ranking of “A”. Conservative investors may like this equity because of the low beta of 0.63 and dividend yield of 0.70.
I will be a guest on Unlock Your Wealth Radio on June 4th @ 12:15 PM EST. I will be providing a link next week.
I will be presenting a covered call seminar to the Long Island Stock Traders Group on Tuesday July 12th @ 7PM in Plainview, New York. The group allows non-members to attend at no charge. I will present a basic review of covered call writing and discuss the use of LEAPS options when buying high dividend yield stocks. Time will remain for questions on all aspects of covered call writing. I will post directions as the event approaches.
This week’s reports had a negative inclination but our assessment of a slowly recovering economy remains strong:
- Sales of existing homes dropped by 0.8% in April while experts were expecting a small rise
- The start of new homes fell 10.6% in April worse than anticipated
- Building permits for future construction decreased by 4.0%
- The index of leading economic indicators fell in April for the first time in 10 months
- Japan’s earthquake has caused a shortage of auto parts causing a decrease in auto production by 8.9%. Without the auto component, industrial production actually INCREASED by 0.2%
- According to the minutes of the FOMC April meeting, the Fed expects the economic recovery to continue and inflation to stabilize
- The federal funds target rate will remain between the record low range of 0% and 0.25%
If your head is spinning from the market volatility, a 1-month chart of the S&P 500 and the VIX will explain why. The chart also demonstrates the inverse relationship between the CBOE Volatility Index and the overall market:
The red arrows show a rising VIX and a declining S&P 500 while the blue arrows show the opposite, a falling VIX and a rising S&P 500. As volatility becomes more prevalent my percentage of in-the-money strikes increases.
IBD: Market in correction
BCI: Cautiously bullish favoring in-the-money strikes
My best to all,