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.
May 23, 2007
Tropical Views
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 16, 2007
Tropical Views
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 09, 2007
Tropical Views
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.
April 25, 2007
Tropical Views
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.
April 20, 2007
Lattco™ Has More Meaning Now
Lattco is the software which generates new positions for the Snider Investment Method™. It is brand, spanking new. Although Chronim has been using it for almost a year now, and it has been in beta for months and months, this month is the first time it will be used by paying customers.
On our Bora Bora Society trip, we ran a contest to see who could come up with a clever acronym for Lattco, since truth be told, it is just a made up name. The winning entry came from Henry and Paulette Levine:
Leaving Aggravation To The Chronim Organization
We thought you might enjoy some of the other entries as well:
Learning Another Technical Type of Company Options
Leverage And Trading Technique Collator
Learn About Total Trading Co.
Look At Top Trade Customized Opportunities
Look At The Top Call Only
Lattco Arranges The Top Call Options
Leave Alone Tweaks To Change Outcomes
And my personal favorite …
Leave All That Tweaking Crap Out
OK. I admit it. Jim came up with that one!
Obviously, we are having too much fun on this trip. If you are a Snider Method graduate, we hope you will join us next year. If you're not, go to kimsnider.com to find out how to join the club. And if you aren't familiar with Lattco yet, get the full scoop and sign-up at chronim.com.
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.
March 21, 2007
Jim Cramer on Market Manipulation by Hedge Funds
I suspect many of you have seen this video because several people emailed me the link. If you invest money in the stock market and you haven't seen it yet, you MUST.
It is approximately ten minutes in length and it is the most candid conversation I have ever seen recorded about the manipulation of stock prices. I have heard these conversations over dinner but never in front of a microphone or video camera.
UPDATE (3/23/2007): YouTube has taken down the video but you can still view it on TheSteet.com. Thanks James for tracking that down.
Amateur investors want to believe that stock prices are a function of the fundamental value and future prospects of a company. They are not - at least not in the short run.
Amateur investors believe the news they read on the companies they own and think it means something. It does not.
Amateur investors desperately want to believe you can look at historical price, fundamentals and news and figure out which way a stock is going to go over the coming weeks and months. You cannot. No one can
If this video doesn't fundamentally disabuse you of this notion, I don't know what will. And this is just talking about one tactic used by one group - hedge funds. There are many others, like window dressing and marking the close, all going on simultaneously.
Amateur investors, meaning people like you and me who do not run billions of dollars of institutional money, have only two choices. The first is to try to play the trading game against the pros. I am here to tell you it can't be done profitably over long periods of time - no matter how many seminars you take, newsletters you subscribe to, or pieces of software you buy.
The movement in prices is random. There is no ability to predict what is going to happen next. If you don't have the financial ability to move the price, you don't have a chance as a trader over the long run.
The other option is to take the VERY long view. You buy companies that you would be happy to own for many, many years because over the long run, the market machinations don't matter. While you own them you generate income from them, let them sit, whatever. If your investment premise is correct, and you are buying financially sound companies with good long-term prospects, the long time horizon cancels the noise and leaves you with nothing but signal.
The hard part, of course, is that while you own the stock, you have to train your brain to ignore the noise. It is easy to let our emotions take over and assign some meaning to the short term movements in price. But a reaction based on noise is, by definition, going to result in a poor decision.
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TAKEAWAYS:
1. The stock price does not reflect the fundamental value of a company in the short run. This is why an extensive list of stock selection criteria are likely to make you feel better but do little do reduce volatility. It is also why you should not assume a company is " a dog" just because the stock price is dropping.
2. News has no predictive value either.
3. Unless you have the ability to move markets, your only rational choice is to take a long-term approach to investing and ignore what happens in the short run. In other words, go to Bora Bora.
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I would love to hear your thoughts on this topic. Specifically, what are your takeaways from it? Does this change your thinking on the Snider Investment Method in any way? Does it increase your understanding or muddy the waters? Leave your thoughts and comments below.
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.
March 07, 2007
Tropical Views
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.
March 01, 2007
Are You Focused On The Wrong Number?
The biggest financial obligation each of us have is funding thirty years in retirement. Unfortunately, this is uncharted territory for most of us, including our financial advisors. The baby boomers are the first generation to be almost solely responsible for funding their own retirement. Which means for most of us, the money that we save and invest will one day need to be converted into income.
If that is true, funding your retirement is a primary investment objective, then I would bet you are probably focused on the wrong number. Contrary to what all the retirement calculators will tell you, it isn’t the value of your portfolio that matters. It is the amount of income it can generate.
That is not only true for you, it is also true for your heirs. Your kids are going to be faced with the same obligation. They too will have to fund 30 years retirement – maybe longer by the time they reach retirement age.
So your objective really isn’t to grow your portfolio value. That benefits the asset manager that gets paid as a percentage of assets under management. Your objective is to grow the income your portfolio can sustain. And that is where the traditional way of investing really falls short.
Let me show you an example. Imagine you made a one-time investment of $200 thousand dollars in 2002. If you had invested that money in an IRA, bought an S&P 500 index fund and held it until the end of 2006, the amount of after-tax income you could take for the year would have been around $7500.
By the way, you should know all of these are pretty unlikely – few people knew what an IRA or an index fund was in 1980 and buy and hold is great in theory but few people actually do it!
Now let’s imagine you had invested that same $200 thousand dollars in your IRA using the Snider Investment Method instead. The income you could take out of your Snider Method portfolio to live on in 2006 would be over $17,000 after tax! I don’t know about you but I can live a heck of a lot better on $17 thousand than I can on $7 thousand. A lot better!
Thee difference is even more dramatic in a taxable account. The after-tax amount you could withdraw from the IRA with the S&P 500 index fund would be about $8500 compared to $26,500 more from the Snider Method portfolio.
So you are probably wondering how on earth we are able to get so much more income out of the Snider Method than just owning stocks, bonds and mutual funds, huh?
The amount of income you can withdraw each year in retirement depends on three things: 1) portfolio performance; 2) the percentage you can safely withdraw each year without a high probability of running out of money; and 3) the value that withdrawal percentage is multiplied by.
The average yield of the Snider Investment Method since September 2002 has been 11.6% in IRA accounts and 16.7% in taxable accounts. The US stock market averaged a 4% compound annualized growth rate over the same period.
Second, the amount you can safely withdraw in the first year is almost double for a Snider Method portfolio of over $200 thousand dollars. The generally accepted maximum sustainable rate of withdrawal is 4% with traditional asset allocation strategies and 8% using the Snider Method. It is important to know that is just the first year. Subsequent years could be higher or lower for both portfolios, depending on the withdrawal strategy employed and many other factors.
And finally, the income you can take out each year is a percentage of your portfolio value in traditional investments and the portfolio value goes up and down as the stock market moves. As a result, when the market loses value, the amount of income you can withdraw if you retire also goes down.
Snider Method withdrawals are based on a percentage of the Stake –assuming you reinvest all of the yield, stakes goes up each year by the amount of the cash flow generated, for example, the 16.7% average in our taxable accounts.
As you can see from the table up above, you get to take a percentage of a bigger number because it is compounding consistently year after year. Your portfolio value will move up and down just as it will with the stock market portfolio but the key distinction is the income doesn’t decline when the stock market does.
When the stock market is going up every day, it is easy to be fooled into thinking the grass is greener somewhere else. The key to successful investing is not to constantly chase what is hot today but to choose your investments based on what will meet your financial objectives with an acceptable trade-off between risk and reward. Once decided upon, you stay the course until some life event (as opposed to a momentary bout of fear or greed) causes either your objectives or your risk/reward profile to change.
Earlier this week, the Dow swooned over 500 points, the biggest single day drop since September 11th. Is this the beginning of another bear market? Who knows? I don’t and no one else does either.
What we do know is markets are cyclical. They have periods where they go up and periods where they go down. For me and my family, the most important thing is knowing the income our portfolio can sustain will continue to grow, even if the stock market falls off its lofty perch.
Of course, you may feel differently. Feel free to leave your thoughts and comments below.
ASSUMPTIONS: 1) Income from stock market portfolio is taxed at 15% long term capital gains in taxable account and 25% marginal tax rate when withdrawn from IRA; 2) Snider Method yields are taxed at 25% - each year in taxable and when withdrawn from the IRA.
FINE PRINT: 1) Your marginal tax rate may be different from those assumed in this example; 2) The yield calculation is different than the return calculation shown by most investment advisors; 3) Current yield is defined as the income from option premiums, interest and dividends, plus the realized gain (or minus the realized loss) from stocks in all closed positions, minus commissions paid for stock and option transactions but excludes unrealized gains and losses from open positions; 4) Current yield is based on historical results for accounts over the period September, 2002 to February, 2007. These yields are shown for illustrative purposes only. These are not a guarantee of yields an investor would receive by investing using the Snider Method; 5) The yields quoted were obtained by using methods substantially similar to those taught in the Snider Investment Method workshop. The yields of any one individual investor can be greater than or less than the average, and the average of future periods can be greater than or less than the average of past periods. 6) Current yield is defined as the income from option premiums, interest and dividends, plus the realized gain (or minus the realized loss) from stocks in all closed positions, minus commissions paid for stock and option transactions but excludes unrealized gains and losses from open positions.
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.
February 22, 2007
Snider Method "Joint Task Force" Update
The following are the minutes of the first meeting of the "Joint Task Force" formed at the SIM Open Space to work on rigorously tested improvements to the Snider Investment Method™. The task force is comprised of Snider alumni as well as KSFC and Chronim staff. Thanks to James B. for running point and producing the minutes.
Meeting Minutes 02/15/07
Attendees: James, Jesse, John C., Tom, Kim, Ron, Kevin
Agenda topics information:
- Volunteer information: I have now heard from all of the folks from the open space meeting as well as the 2 folks that were unable to make it. With John Cooley and Kevin Konecney joining since I sent out the spreadsheet, the current volunteer count is at 13.
- Open space meeting minutes: I sent out the specifics of our meeting minutes. Kim has let us know that the meeting minutes from all of the sessions will be made available via the Snider Insider in a summarized format.
- Yahoo Group
discussion. I opened the topic up for discussion. We had some folks
comment on the positives of a yahoo group:
- A common place for documents
- Allows for ‘timeshifting’ – meaning I can work on something when I have availability, and then post it, then someone else can work on it when they have time.
- You can set it up to keep you ‘up to date’ in batch mode – rather then getting bombarded with notifications at every posting.
- Allows for a moderator to restrict/grand access
- Etc…
- Decision at this time – Not Yet. If / when things get too complex for direct email communications then I/we will set one up as necessary.
- Survey of Skills. One recommendation made by a volunteer was to take a survey of skills to we know what expertise (give or take) that we have within this group. The call attendees thought it was a good idea, so I will follow up with an email asking for folks to give HIGH LEVEL skills they posses.
- Kim – explain “tackle
the issue of stock selection criteria”. Kim explained that it is an area
that she and Jim have discussed a lot since the open space meeting. Jim’s
recommendation is that this team takes a hard look at all factors that
could be considered to be used as additional stock selection criteria, and
compare past results from the Chronim accounts to determine if there may
be some criteria that could be indicative of a forthcoming ‘Dog’. We
discussed at length why this might be a beneficial area for this team to
start working in. The primary reasons being:
- It is something that folks are passionate about changing – as shown by the multiple discussions of Dogs and Winters at the open space.
- It is an area where there may be some ‘lower hanging fruit’ might be available to add criteria to the stock selection criteria.
- It is something that this team could sink its teeth into, and possible come out with a win (suggestion) to give this group legs (to keep running).
- It is an area where this team may be able to interact with other alumni and use their feedback and/or provide them feedback.
- Discussion
regarding historical data: Primarily Jesse and Clayce are looking into the
options available for historical data (Morning Star, Value Line, the
Chicago datasources, etc). Some recommendations made: Make sure it has
data available that was available ‘at the time’ – meaning:
- Before adjustments for Splits. (may run into $25 minimum price rule)
- Before Restatements have been applied. (best case scenario, have both)
- Updatable – keeping it up to date, as well as growing with new info at time passes
- No one has seen a source with both Stock and Option pricing history – would have to be separate.
- Tom shared with us
a high level description of his model. He has tried to (and successfully)
reproduce historically any stock beginning in any month back to Jan 2000.
He has been attempting to put the decisions demonstrated in the Method
Book into code. He has been gathering historical data from several sources
and has backtested his own transactions (he has 6 months worth) as well as
other positions that have gone into winter that others have shared with
him. It is not a complete and comprehensive model. There is much to add to
get the whole process in the model. (for example it doesn’t include
assigned cash to other positions and stake calculations etc…) Tom (and
others) shared some modeling insights:
- Models can cause problems – you begin to believe what your model says
- Models can be good tools to perform some ‘what if’ analysis
- Models can be good to test what is ‘reasonable’
- Models can help give you insight
- There are different types of models: Empirical, Statistical, and Heuristic.
- Having historical (and correct historical) data is VERY important
- We then discussed
the problems with building a full blown model around the Snider Method:
- The method itself, and the options usage in the method has only been available for a short period of time (in comparison with stocks and stock pricing).
- Therefore, you cannot perform massive amounts of back testing (limited to really late 1990s or early 2000s).
- Also, therefore, you cannot historically model the method against varying economic trends (only those that have occurred over the last 6-8 years).
- Some metrics are not re-creatable based on pure historical data – like the overall ‘mood of the market’.
- At this point the
conversation moved to the discussion of What this team
could/should do, and how should/could we move forward. Several points came
out of this discussion:
- The approach of building – from day one – a completely comprehensive model to account for everything – would be TOO MUCH of an undertaking. It would take a great deal of time, and there would be little to show in terms of progress along the way.
- Instead, we discussed taking on smaller pieces at a time. Working towards smaller deliverables, and building momentum through delivering accomplishments.
- This led to the discussion of using the Stock Selection Criteria as an initial effort.
- We also discussed the benefits of breaking the tasks into pieces, and having small subgroups (or individuals) work on them to help accomplish the overall goal.
- We decided there
were a few activities that can all be worked on at once (in parallel), if
individuals or subgroups volunteer to take them on. The items discussed
were the following:
- Tom’s Model (TM): Tom is going to continue the work on his model
- Stock Selection
(SS): Prepare Data:
- Chronim needs to prepare their data for availability (meaning stripping out any customer identify information)
- Purchase the historical data
- SS: Identify the
‘Area of Focus’:
- Define the characteristics of the positions that this effort is trying to eliminate (What makes a position a ‘dog’? ‘undesirable’?)
- Tag positions as Desirable vs. Undesirable
- SS: Perform DB
activities:
- Define what database format will allow for the best flexibility
- Create the DB structure
- Determine the best way to load the data
- Format the existing (stripped) .xls files for import into DB
- Build DB structures to hold historical data
- Import the purchased data into DB (make it usable)
- General (G):
Other general activities
- Gather insight
from unofficial Snider Alumni Yahoo Group
- Catalog ideas for data points (factors) that are to be considered against ‘Undesirable’ vs. ‘Desirable’ positions.
- Catalog currently circulating ‘tweaks’ to the method for the potential of identifying another area to investigate.
- Gather insight
from Open Space meeting notes
- Catalog ideas for data points (factors) that are to be considered against ‘Undesirable’ vs. ‘Desirable’ positions.
- Catalog currently circulating ‘tweaks’ to the method for the potential of identifying another area to investigate.
- Gather insight
from unofficial Snider Alumni Yahoo Group
- SS: Perform
comparison activities:
- Identify the data points (factors) that are to be considered against ‘Undesirable’ vs. ‘Desirable’ positions. – Maybe driven by historical data provided
- Discover averages of the factors for Undesirables vs. Desirables
- Determine if significant differences exist
- Determine a cutoff point – compare Desirables and Undesirables that would be eliminated
- Finally – see if any recommendations emerge
- Finally, we decided
to end the call, I would write up these minutes, layout for everyone the
tasks identified, and see who would be willing to volunteer to work on the
tasks.
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.
