Four questions

or Register to post new content in the forum

11 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Jan 29, 2010 6:08 pm

I started Fundamental Choice - I love it.  There are a few questions I thought I would pose to the pros.

1) Stop-loss orders: a few guys swear by it.  To me it's not completely intuitive.  Say we stop-loss at -10%, it "feels like" a stock is more likely to drop 10% then go back up than it is to drop 10% and continue down - over long periods stocks go up more than down...what am I missing.  PS, the stock guys I admire most in the office don't do this - but many do.
2) Covered calls - a number of guys swear by it...thoughts?  If you think a stock isn't going up why not dump it and buy one you think will.
3) Research - we get correspondent research - CS and SB seem good to me.  The old pros roll their eyes at it - it "feels like" we wouldn't have II rated analysts if their readers didn't come out ahead.....hmmmm.  
4) I have 19 stocks - each stock gets 5%, cash gets 5%.  I start with S&P sectors, I overweightthe ones i like (Alcoa is 5%...materials is only ~3%)  For industrials I buy enough 5% allocations to get an overweight.  I skipped utilities and consumer staples altogether.  I slightly overweighted consumer discretionary (even though the firm says "even" my wife likes TGT and Borg Warner seems like a good deal...the world isn't coming to an end)...To my question...  Why am I starting with S&P weighting....why not gobal weights which give financials a measurably higher "even" than a US weighting.  Peace out - thanks for your thoughts.
Jan 29, 2010 7:53 pm

Why is this night different from all other nights?

Jan 29, 2010 10:10 pm
NOVA:
1) Stop-loss orders: a few guys swear by it.  To me it's not completely intuitive.  Say we stop-loss at -10%, it "feels like" a stock is more likely to drop 10% then go back up than it is to drop 10% and continue down - over long periods stocks go up more than down...what am I missing.  PS, the stock guys I admire most in the office don't do this - but many do.


Not a pro - but here's what I've learned. Generally stop losses will have the effect of selling out at the bottom or below average price for the day if you put it too close to the current price. It depends on the client's disposition. In the modern world, just set up a yahoo finance alert. If the position is large, then put some kind of sell orders on it (after discussing with client). Or think about buying puts.

NOVA:

2) Covered calls - a number of guys swear by it...thoughts?  If you think a stock isn't going up why not dump it and buy one you think will.


Doesn't generally make sense, but it's a great way to outperform in a down market. If in a taxable account, then selling calls are a way to create a sort of synthetic dividend. Often smart when a client has a target price in mind for a larger position / employer stock.

NOVA:

3) Research - we get correspondent research - CS and SB seem good to me.  The old pros roll their eyes at it - it "feels like" we wouldn't have II rated analysts if their readers didn't come out ahead.....hmmmm. 


II means nothing about accuracy. 99% of sell side analysts suck. The other 1% will tell you something long after they've told everyone else.

NOVA:

4) I have 19 stocks - each stock gets 5%, cash gets 5%.  I start with S&P sectors, I overweightthe ones i like (Alcoa is 5%...materials is only ~3%)  For industrials I buy enough 5% allocations to get an overweight.  I skipped utilities and consumer staples altogether.  I slightly overweighted consumer discretionary (even though the firm says "even" my wife likes TGT and Borg Warner seems like a good deal...the world isn't coming to an end)...To my question...  Why am I starting with S&P weighting....why not gobal weights which give financials a measurably higher "even" than a US weighting.  Peace out - thanks for your thoughts.


You cannot actively manage a stock portfolio and build a businesses as a rookie. If you really want to manage money, then you're in the wrong biz. Not in this environment anyway - just keep it simple. You don't need to use money managers, just build a simple portfolio. With stocks, just stick to the blue chips and keep it simple. Did I mention that you want to try not to complicate things?

Jan 30, 2010 1:31 pm
iceco1d:
NOVA:
2) Covered calls - a number of guys swear by it...thoughts?  If you think a stock isn't going up why not dump it and buy one you think will.



I'm only addressing this one.

There is PLENTY of research out there, that writing at the money calls on the S&P 500 or the Dow, wash, rinse, and repeat, will result in 90%+ of the upside, with 60%ish of the volatility (this means massively better risk adjusted returns). 

Do the research (don't let b.s. about semi-variance skew your view), and see what you come up with.  Two reasons:  Option buyers are holding depreciating assets (time value), so as an option SELLER you are reaping that value.  Second is inefficiency between stock & options markets.

Really, check the research.  So simple to do.

 
I agree with ice. I would also add that selling calls (equaling only about 20% of the account value) for clients against the index, assuming you are an asset allocation guy, that have a 15 delta or less would significantly enhance your return and would never upset a client because his account value would have increased even in the months that it didn't work. Ice and/or Gaddock may have the data to support whether I am right or wrong.  
Jan 30, 2010 3:56 pm

Ron, what sort of hurdles do your clients have to jump inorder to be allowed to write naked calls?

 
 
Edit: Nevermind, index calls.
 
Anyways, what about regular naked calls?
Jan 30, 2010 4:03 pm

LOL. I can't even do them ! If I could I would. Some big hitters at the bank can, not me.



 
Jan 30, 2010 4:11 pm

They limit the FA, and not the client?

Jan 30, 2010 9:53 pm

I am not understanding you? Some top producing FA's can offer options to their clients, but not all FA's.

Jan 30, 2010 9:55 pm

Usually (or atleast from my experience), the client needs to meet certain suitability standards to be "allowed" certain option investments - not the FA.  Usually naked calls are the pinnacle (due to their limitless risk).

Jan 30, 2010 10:05 pm

You are probably right. I am not close to being able to recommend options from the banks perspective so I havent really looked into the rules.

Feb 12, 2010 4:55 pm
NOVA:
1) Stop-loss orders: a few guys swear by it. To me it's not completely intuitive. Say we stop-loss at -10%, it "feels like" a stock is more likely to drop 10% then go back up than it is to drop 10% and continue down - over long periods stocks go up more than down...what am I missing. PS, the stock guys I admire most in the office don't do this - but many do.

A volatility-correlated stop would be the only one I consider worth using. Use the stock's beta and multiply that by a baseline, like say 10%. A high beta stock will get taken out very quickly unless you adjust for volatility.



2) Covered calls - a number of guys swear by it...thoughts? If you think a stock isn't going up why not dump it and buy one you think will.

Covered calls are best used in a sideways to slightly falling market. Like all option strategies, there are specific market conditions that warrant specific option trades. Another way to say the same thing is if you don't know of any stocks you think will be going up, you can generate income on your current portfolio. The one double positive about using covered calls correctly is that when the market is falling, option premiums rise, giving you more income. Read McMillan for details.



3) Research - we get correspondent research - CS and SB seem good to me. The old pros roll their eyes at it - it "feels like" we wouldn't have II rated analysts if their readers didn't come out ahead.....hmmmm.

I have no real insight here



4) I have 19 stocks - each stock gets 5%, cash gets 5%. I start with S&P sectors, I overweightthe ones i like (Alcoa is 5%...materials is only ~3%) For industrials I buy enough 5% allocations to get an overweight. I skipped utilities and consumer staples altogether. I slightly overweighted consumer discretionary (even though the firm says "even" my wife likes TGT and Borg Warner seems like a good deal...the world isn't coming to an end)...To my question... Why am I starting with S&P weighting....why not gobal weights which give financials a measurably higher "even" than a US weighting. Peace out - thanks for your thoughts.

Presumably, the benchmark that you are trying to beat is the S&P500. As such, starting with the index weighting and adjusting weights for your opinion/research makes sense to me.