Editor's note: The financial professionals suffered last year, just as ordinary investors did. But you can get an individual edge over the hedge funds... And importantly, that's true whether the market is rising or falling. In this essay, adapted and updated from the December 2022 issue of Retirement Trader, Dr. David "Doc" Eifrig explains a technique that can help you outperform – with less risk – regardless of where stocks are headed next...
Do What the Pros Can't (Even If Stocks Fall) By Dr. David Eifrig, editor, Retirement Trader
Stock pickers had an awful year in 2022. Just ask the "professionals"... Years ago, hedge funds lured investors in because they offered something the average investor couldn't get on their own. They could provide more investment choices – real estate, bonds, currencies, derivatives, you name it... And, of course, hedge funds boasted that their managers knew more about markets than everyone else. Many of them had degrees from fancy colleges and access to data that cost a fortune. Today, we know the hedge-fund advantage is getting smaller. Most investors can get a piece of any investment they want with just one click. There's an exchange-traded fund ("ETF") for everything nowadays... real estate ETFs, farmland ETFs, bond ETFs, currency ETFs, and more. And the idea that derivatives are only for the financial elite is gone. Plus, financial data is now more accessible than ever before. Even so, folks keep paying the hedge funds a large fee to pick stocks for them. They still believe hedge-fund managers are the best at choosing stocks that will make them money. But in 2022, that wasn't the case. Last year was a disaster for hedge funds... Meanwhile, one strategy could have helped you beat the investment pros. And as that strong performance during last year's carnage shows, it's a great technique to use in any market environment... The bear market hit hedge funds as hard as anyone. According to an annual report by LCH Investments Chairman Rick Sopher, hedge funds lost $208.4 billion in 2022. Tiger Global's long/short equity hedge fund lost 56%. Its smaller long-only fund plunged 67% during 2022. And Dan Loeb's Third Point lost around $3.5 billion in 2022. The biggest reason why stock pickers struggled last year is that they were too heavily invested in technology. In 2021, tech stocks could do no wrong... All you had to do was close your eyes and pick one. Fund managers didn't want to miss out on the rocket ride. Even if they had reservations, their customers would have taken their money elsewhere if they missed out on those gains. So hedge funds piled into names like DocuSign (DOCU) and Spotify Technology (SPOT)... which both plunged about 80% in 2022 from their highs the year before. My Retirement Trader newsletter is an option-selling service – but a lot of our success depends on the stocks we pick. We want steady businesses whose stocks won't fall by much. That means we stay away from hot, overhyped companies... Instead, we sell options (both puts and calls) on "boring" blue chips. In 2021, when times were good and tech was soaring, it was easy to look at our option-selling strategy and scoff... That year, the S&P 500 Index gained 27%. And the 15 highest-earning hedge-fund managers earned $15.8 billion collectively. Again, it was easy to make money. Meanwhile, in Retirement Trader, we did what we've always done and churned out small winners. In total, we closed 42 trades, all for gains. Our average gain came out to roughly 4%. That comes to about 20% annualized, which sounds more impressive but still trailed the S&P 500 that year. But oh, how the tables turned in 2022. It was a terrible year for stock pickers... But not for us. The S&P 500 plunged roughly 20% last year. In general, falling stock prices are not good for option sellers. However, volatile markets are good for us. More fear and confusion means higher premium payments – the money we collect up front for making these trades. So last year, we continued selling at-the-money two-month options. We stuck with stocks we know well... low-volatility blue chips that gush free cash. As a result, we were able to close 23 trades in 2022 (double that when you count both calls and puts). All the trades were profitable, helping us break our own win-streak record last October... and then keep right on extending that streak. Just looking at our closed positions in 2022, here's how we did for covered calls... Here's how we did for the put trades... These put results are calculated using the potential obligation to buy shares if the buyer exercises the put, called the "capital at risk." That's why we see nearly identical returns between our puts and covered calls. If you look back at our results from 2021, they're nearly identical to 2022's... even as the stock market went from a surge to a tumble. This proves what we've always said... Our conservative, trading-for-income strategy can work in nearly any market environment. It has been more than three years since we booked a losing trade in Retirement Trader. It's an accomplishment we're proud of. And we're going to work tirelessly to make sure we don't book a loser for a long, long time. By selling options – the right way, on safe, blue-chip stocks – you can compete with the hedge-fund traders... without taking on huge risks. And that makes it one of the most reliable strategies you can put to work in any kind of market. Here's to our health, wealth, and a great retirement, Dr. David Eifrig
Editor's note: Doc first developed his option-selling technique at Goldman Sachs... But you don't have to be a pro trader to use it today. He has shown it to thousands of people from all walks of life... And you can see exactly how it works in his brand-new "Real Money Demo," airing now. Watch as Doc shows a professional athlete with no previous options experience how to collect instant payouts of hundreds of dollars at a time... Check it out right here. Further Reading "Most folks get introduced to options the exact wrong way," Doc says. Folks think options are a fast track to major losses. But when you learn to use them correctly, they can significantly reduce your risk... Read more here. "Think about them as insurance," Doc writes. When you sell options, you can essentially become an "insurance salesman" to other investors. That's one reason this strategy is so successful – it allows you to cash in on fear and volatility... Learn more here. |
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