On paper gains, I’m up 13.6% since the election, and a bit over 9% since 1/1. As I’ve become more risk adverse in my dotage, I’ve been selling more than usual since the beginning of the year. Some might say that 87% in the market is still high, but that is down from 96%, and since I’m given to selling slightly out of the money covered calls as a way of disposing positions, I expect the percentage to drop another 5-10% over the next couple of months, if the market keeps at a slowly rising pace.
I acknowledge that my actualized profits have diminished my potential in that I’ve actually closed out partial positions in Apple, Merck and Home Depot. And I have paid a price for selling calls in Facebook, Boeing, Applied Materials, Alibaba and then paid up to roll to a higher strike. I’m not saying this for sympathy, but as acknowledgment that there are some drawbacks to not riding a bull up without regard for the possibility of a drawdown. But as I alluded to above, I’ve experienced enough pull backs before, not to take the precaution of closing some positions for a gain. I’m not quite Warren Buffet; I have to take out some money every now and again for expenses.
What I know for certain is that the market will not continue at this pace for the whole year. Even if I didn’t sell a thing, I won’t ever be up over 40% for the year. The fact is my portfolio is of a sufficient size and more importantly, of sufficient diversity that yearly gains of the size are unheard of. But I’ve come to accept that consequence, since my choice has made it credible to attain low double digit yearly returns.
The real problem that I have confronted in recent years is having the awareness to invest as the market comes down. It is much harder to invest when it appears that the position might well lose value, than to sell when the position is up in value. There have been enough psychological experiments to prove that the fear of loss is greater than the thrill of gain. What I have learned is that, for me, the best way to overcome this, is to “always” keep buying. I know, I said before this is a time to be more selling than buying, so how I deal with this is to sell some puts on positions that I would hold at the lower strike price. When the market is rising (or only holding even) these puts either expire worthless or I buy them back on the cheap. None of the puts that I have sold this year have been assigned; however, OXY and JPM are now in the money.