May 01, 2008
Volatility Isn't the Enemy
Kim likes to tease me on the radio show each week for my former role in "financial pornography." That's the term she uses to describe the mainstream financial press, which includes my former employer, The Dallas Morning News Business section.
While I don't consider my former colleagues purveyors of pecuniary smut, I do see Kim's point. In an effort to explain financial news to the largest audience possible, the mainstream press dumbs things down a bit. You have only a couple of sentences - and sometimes only a headline - to convey information. Context is often cut out.
This isn't as much a problem in newspapers and magazines as it is on television, where if you can't tell a story in 20 seconds, you might as well not tell it at all. No wonder you see the friendly faces on CNBC and Fox Business reduce each story to its lowest common denominator, complete with flashy graphics and ominous music. The anchor may try to tell you what the market did today, but all you can focus on are the giant letters at the bottom of the screen: RECESSION?. (The question mark is very important, since they don't want to imply we're actually in a recession; they're merely asking. Right.)
One of the more misused terms right now, and often in big, bold letters at the bottom of the TV screen, is "volatility." News reporters tell us that investors are scared of the market's volatility. What the reporters mean is that investors are scared that the market may go down quickly. But that isn't the definition of volatility. As Nick Murray points out in the April edition of Financial Advisor Magazine, " 'Volatility' (like 'leverage') denotes a phenomenon which cuts both ways. That is, it means, in the context of markets, sudden, sharp, price movements in either direction."
The average investor hears "volatility" and thinks only of something negative. But "volatility" can be positive, too - especially for the investor who uses options to generate income.
Volatility is one of several factors that affect option premiums. According to the Options Industry Council:
Volatility is simply a measure of risk (uncertainty), or variability of price of an option's underlying security. Higher volatility estimates reflect greater expected fluctuations (in either direction) in underlying price levels. This expectation generally results in higher option premiums for puts and calls alike, and is most noticeable with at-the-money options.
Because the Snider Method® investor sells options, higher option premiums mean more income. In other words, volatility can be your friend.
But back to the fear-mongering coming from the media. Lots of outlets are treating the recent volatility as something unusual. The truth is quite different. Ed Easterling, author of Unexpected Returns and a past guest on Kim's radio show, explains:
For most of the past four years, volatility has been unusually low-and, in late 2006 and early 2007, volatility fell into the lowest three percent of all periods since 1950. No wonder that investors and market spectators became complacent to market volatility…or maybe complacency about risk led to the low volatility. Nonetheless, the waters of the market were unusually calm. So almost any increase in volatility is now startling and anxiety-producing. This longer-term measure (which is a little slow to react since it requires twelve months of information) has recently increased to near 12%. That's a lot higher than its low of 5.5% in January 2007, yet still below average.
…
The current level of volatility is approaching the levels experienced during and around 2002. An historical perspective of volatility reflects that higher volatility periods are normal and can extend for quarters or years.
The moral of this story is don't be surprised by the recent volatility. In the grand scheme, it's normal. And volatility by itself is nothing to fear, regardless of what the newspapers or television pundits tell us.
--James Pecht
SOURCES:
1. Easterling, Ed. "Volatility in Perspective," Crestmont Research, March 31, 2008 (updated). http://www.crestmontresearch.com/pdfs/Stock%20Volatility%20Perspective.pdf (Accessed April 29, 2008).
2. Murray, Nick. "The 'V' Word," Master Advisor, Financial Advisor Magazine, April 2008.
3. Options Industry Council, "Options Pricing," http://www.optionseducation.org/basics/options_pricing.jsp (Accessed April 30, 2008).
Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.
Options involve risk and are not suitable for all investors. Before opening an option position, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available by calling 866-952-0100. Please read it carefully before investing.
September 06, 2007
Mean Reversion
Someone once asked me if I ever get tired of teaching the same thing twice a month, month after month. The truth is that I really don’t. Each section of the workshop is jam-packed with information, some of which we drill into and some that we mention in passing in order to serve a larger point. In my weekly research, I run across variations on some of these themes pretty often. This time I ran across an article discussing mean reversion as it relates to housing bubbles.
During the Snider Investment Workshop we use a farmer analogy to describe mean reversion. We compare what we do as investors to what a farmer does to make a living. The point of the comparison is that a farmer’s yields are subject to seasonal cycles and so his harvest size will fluctuate as a result. Sometimes he will have bumper crops, and at other times he has locusts in his fields or the land simply is not yielding quite as much.
In our case, we mention that Wall Street is a closed system and that in a closed system, nothing can exist in a state of extremes indefinitely. What we mean by this is that when we hit periods of market fluctuation, we know that even if the market is down significantly, it will come back eventually because financial markets are mean-reverting. It’s the “knowing when” part that we can’t predict, so we don’t try to.
Because the stock market does this, stock prices and our resulting option premiums will naturally fluctuate similar to the farmer’s yields. This will result in varying income amounts from month to month from the Snider Investment Method. I get that concept intuitively and on a gut level, this makes perfect sense.
So when I ran across this Investopedia article called, “Why Housing Market Bubbles Pop,” it gave me a little jolt. The author asserts that, “Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don’t ever think that the value of their home might decrease.” I admit -- I am one of these people. I like to think my house will continue to appreciate and if it does so indefinitely, that’s great too. But I know on a gut level this is probably unrealistic. As author Barry Nielsen points out:
Too often, homeowners make the damaging error of assuming recent price performance will continue into the future without first considering the long-term rates of price appreciation and the potential for mean reversion. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. Since about 1998 home prices began to rise rapidly above the long-term trend and have continued in that direction ever since.
Naturally, there is speculation about whether we're headed for a housing bubble burst. We can certainly speculate, but since we can't really know for certain, perhaps we are better served by looking at the causes of the recent mortgage troubles and learning from the mistakes. Like many things, it seems too much tolerance for risk is the culprit. “Risky behavior as it relates to the housing sector comes in several forms which ultimately can cause bubbles to burst. Excessive risk-taking where housing markets are concerned is when homeowners, mortgage lenders, mortgage investors and property investors take on more credit risk." Factors that can account for the increased risk tolerance are:
- Mortgage products with low initial monthly payments that make homes more affordable.
- Easy access to credit (a lowering of underwriting standards) that brings more buyers to market.
- A potential mispricing of risk by mortgage lenders and mortgage bond investors that expands the availability of credit to borrowers.
- The short-term relationship between a mortgage broker and a borrower under which borrowers are sometimes encouraged to take excessive risks.
- Speculative and risky behavior by home buyers and property investors fueled by unrealistic and unsustainable home price appreciation estimates.
- A lack of financial literacy and excessive risk-taking by mortgage borrowers.
The last point the Mr. Nielsen makes is the one I find most interesting. We constantly stress the need for financial literacy here at Kim Snider Financial Communications, and I do have to wonder how many situations, like the sub-prime mortgage mess could be avoided with a little education. Most of us instinctively know when we’ve bitten off more than we can chew, but sometimes we just need to know why. I’d be willing to bet that most of the folks who took on mortgages they couldn’t really afford knew it, but ignored their gut instinct. I think taking a moment for a gut check is a good thing. It can save you a lot of heartache down the road.
-Alison Abney
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
February 17, 2007
Apache Seasons
There was a man who had four sons. He wanted his sons to learn not to judge things too quickly. So he sent them each on a quest, in turn, to go and look at a pear tree that was a great distance away. The first son went in the winter, the second in the spring, the third in summer, and the youngest son in the fall.
When they had all gone and come back, he called them together to describe what they had seen.
The first son said that the tree was ugly, bent, and twisted.
The second son said no it was covered with green buds and full of promise.
The third son disagreed; he said it was laden with blossoms that smelled so sweet and looked so beautiful, it was the most graceful thing he had ever seen.
The last son disagreed with all of them; he said it was ripe and drooping with fruit, full of life and fulfillment.
The man then explained to his sons that they were all right, because they had each seen but only one season in the tree's life.
He told them that you cannot judge a tree, or a person, by only one season, and that the essence of who they are and the pleasure, joy, and love that come from that life can only be measured at the end, when all the seasons are fulfilled.
If you give up when it's winter, you will miss the promise of your spring, the beauty of your summer, fulfillment of your fall.
PROPS:
Thanks to Snider Investment Method Workshop alumni John McGehee for sending this.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
January 26, 2007
Affluenza
James Pecht, our resident wordsmith, recently shared a great book with me and I thought I'd pass it along. The book, cleverly titled Affluenza, is now in its second edition and was also broadcast as a TV series awhile back. The authors define Affluenza as "a painful, contagious, socially transmitted condition of overload, debt, anxiety, and waste resulting from the dogged pursuit of more." Ouch. If we're honest with ourselves, where is this idea more evident than right here in Big D? I'm a Dallas native and Dallas has been good to me, but excess really is everywhere you look. Case in point: how many shopping malls does one city need? I can count three gigantic ones all within a five-mile radius of my home, and that's not counting all of the big-box stores a mere stone's throw away.
Now don't get me wrong, I like nice
things and so do most people. But, really, do I need four watches and eight
different types of purses? This idea is cleverly illustrated in the book's
foreward. It has two photos side-by-side. One is of a family in
The reason I write about this topic is because it provides some insight into one of the more serious financial issues we face nationally: the negative savings rate. Although I am not a negative saver, I do wonder what would have happened if each year I had bought 2 or 3 less of each item I own multiples of and instead had saved that money in an account accruing some interest?
So instead of just wondering about it, here's my plan for the next three months. Every time I find myself tempted to purchase a multiple of something I already own, I am going to instead conscript the amount of the would-be purchase to serve a more noble cause: my savings account. I'll let you know how it goes by the end of April. Wish me luck!
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
October 26, 2006
Real Financial Heroes
You know those Bud Light "Real Men of Genius" commercials? These spoofs speak our language:
Mr. Impulse Buyer Guy
Mrs. Addicted to Big Sale Shopper
Mr. & Mrs. Too Much Home Buyer
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
June 27, 2006
Thought for the Day
"Only those who risk going too far will ever know how far they can go." - Anonymous
June 12, 2006
Leadership
Leadership - to lead people in a journey towards an uncertain, but desirable result, and importantly, to fend off the anxiety and discomfort that followers will experience along the way.
Thoughts?
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
May 31, 2006
Second Thought of the Day
Since Scott's quote is from Stevenson, I feel compelled to blog my favorite Stevenson quote of all time.
"If a man loves the labor of his trade, apart from any questions of success or fame, the gods have called him."
Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not protect against market losses in a declining market. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal.
May 08, 2006
You thought Burt was funny?
|
I found this on my camera at home when I was downloading pictures off. I laughed so hard it hurt. It is a bit dark, but I think you can get what is going on. -Andrew
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal. |
May 03, 2006
2006 Cruisin with Kim
| This is the memory video we produced of the cruise. -Andrew
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal. |
