My investment strategy over the years - RE: curious_george

[Financial.Velociraptor]

@Financial.Velociraptor

Is there any way you can outline your general investment philosophy? Are there any books you would recommend?

I remember reading some about it years ago and something about leveraged bond funds and using options to generate income. It seemed kind of risky to me at the time but it has obviously worked out well for you. I am a simple index investor, mostly in a basic vanguard index all stock fund, and don't have that much investment knowledge.

Has your investment philosophy changed over the years at all?

Thought this deserved its own thread.  People other than CG sometimes ask.  I'll preface this with saying that I have had at least a dozen people ask me how THEY should invest after seeing my results.  Every single time, after exploring their knowledge, risk tolerance, values, etc., I have recommended indexing.  What I do is not for everyone.

Dial back to about 2004 when I started investing in earnest.  My strategy was to put the amount into my 401k that maximized my company match, and put every bit of surplus cash against my mortgage.  I held a 30 year mortgage a little less than 7 years from 2002 to 2009.  At this time my philosophy was NO debt, and then index with a 40% bond allocation and 20% international.   Basically, a more conservative version of what my very EMH influenced graduate education for MBA Finance made me "prove" (and I mean repeatedly) with the ONE HIGH AND HOLY MATHEMATICS [AMEN]. 

Come the 2008 crash, I was approaching a null mortgage and found my job in the highly cyclical oil field services industry was somehow secure despite it being a downcycle for oil and gas (the fracking revolution was just around the corner).  I realized I was about to have reliably 1,500/month to put into the markets.  I explored my risk tolerance and found that it had gotten a lot higher and was only going up when the mortgage was extinguished. I decided to tilt to 100% equities and be aggressive and even use some leverage for what I felt was an unstoppable Fed stimulus.  I did a lot of reading on Motley Fool, and other websites and slowly came to realize that the EMH I had been taught at University was only "largely" true.  I decided I would exploit weaknesses and learn to use options.

Come 2012, my career was sort of stalled.  I had FU money (at least what counted as FU to me with a paid off house and car) and just couldn't be motivated to kiss ass, play politics, or put in "face time" (I rarely went past 40 hours, even during quarter close cycles).  I was essentially unpromotable but unfireable because I had so much institutional knowledge and happened to be the peculiar sort of accountant who had written a lot of hard coded queries and SAP code that a lot of people relied on but didn't know how to maintain.  (I left SOLID documentation for IT when I left.  I was already maintaining it for audit purposes.)

I didn't hate my job. But it was soul less.  I did the math, and I could Barista FIRE.  I didn't know what that was,  I didn't find the FIRE community until 2015. I figured I'd deliver pizza part time after a 6 month break to detox.  At this time, I had a little more than 10% withdrawal rate. I did not consider it sustainable.  I scanned the horizon and noted there was 1) a lot of yield chasing going on in 2012 and 2) there were several high yield Closed End Funds that were trading well below their NAV.  I saw a short term opportunity to exploit a pricing inefficiency and earn crazy yield.  I  used leverage (on already leveraged funds) and produced a passive (but not sustainable) income of 35,000 from my taxable 'nut' of 170,000 or so.  NOTE: Do NOT recommend this approach.  I was admittedly in some junk and got lucky and was in the right place/right time.  I needed 25,000 to cover my budgetary needs so used the 10,000 surplus to pay on the margin loan as well as establish some long term positions in blue chips (which I wrote covered calls against for more income) and to acquire some lower yielding but more secure bond funds. 

I did that for about a year and started exiting the CEFs as they moved into pricing that was above NAV.  The market had given me a nice gift and I gladly paid the tax hit.  I tilted into what I called Big Cheap Tech.  In 2013-14 there were several large cap tech and near tech companies that were trading at a discount to the S&P on a price to cash flow basis, were producing stable growth, and inexplicably had options that were priced like they were still risky moonshots.  I traded a mix of covered calls and puts on margin against these names.  There stayed in a long reliable uptrend for years and I could earn 18% annualized on their options.  My downside, was possibly ending up owning some really great companies for the long term. 

I did mostly that until about 2018, when I began mixing in some net debit spreads.  The strategy made a huge shift from being mostly doing fundamental analysis to using more technical analysis (recommend https://smile.amazon.com/Technical-Analysis-Financial-Markets-Comprehensive/dp/B087Z1SPTJ/ref=sr_1_4?keywords=technical+analysis+books&qid=1664478038&qu=eyJxc2MiOiIzLjI4IiwicXNhIjoiMy4xMSIsInFzcCI6IjIuNzkifQ%3D%3D&sr=8-4).   I found you could make accelerated gains with net debit spreads that would even pay off if the market moved against you, but just a little if you bought "in the money".   Today, I do a mix of spreads that are in the money and at the money (which return about 85-110% over about 2 months) based on how much I like the chart.  My exposure is much lower and put the rest in closed end municipal bond funds.  Yield is terrible and my tax rate is low so it is perhaps a poor choice but they are almost as safe a treasuries with better yields.

As I approached 2020, WR was down from a little over 10% to a little over 5%.  I played the pandemic badly, and the most recent crash as well and am now a little over 7%.  Current strategy is about 90% net debit spreads and the rest covered calls, expect "permanent" positions in munis.  Of the net debit spreads, I am mostly bearish; that is I make money if the underlying stock stays even or falls.  Finding dogs is like shooting fish in a barrel in this market.  For example, I have 2 covered calls expiring  on the 21st, 2 bear spreads, and 1 bull spread.  Marked to market, I expect 15,227 in profit on 27,240 capital at risk over an average of about 60 days hold time.

The intent was always Barista FIRE.  I feel like I can sort of limp along to social security now with better odds than when I retired (12 years or so).  And I intend to switch to BF.  But I'm not going to sling lattes.  I'm exploring various non profits where I can work part time doing something I can take pride in and have passion for.  That could even be accounting again but not for some huge faceless corporation that helps destroy the planet for fun and profit.  The 'found money' is ear marked for some home improvement projects and to take my elderly father on an all expense paid trip to Rome to see the Vatican. 

Life is good.

I'll take questions on options trading but will caution first that it can be a little bit demanding and unless you are on meds that happen to have strong anti-anxiety qualities, probably very stressful as your mark to market P&L can move very fast from day to day.  Again, everyone I have ever given investing advice to, I've recommended that index and that they have a "enough" bonds, with enough driven by their risk tolerance with encouragement to err on the side of caution.

[TreeLeaf]

Thanks for the background @Financial.Velociraptor ! This is pretty fascinating stuff.

[MustacheAndaHalf]

Come the 2008 crash, I was approaching a null mortgage and found my job in the highly cyclical oil field services industry was somehow secure despite it being a downcycle for oil and gas (the fracking revolution was just around the corner).

It's been over 10 years since you were an accountant for the moboil industry.  To what extent do your current energy investments rely on knowledge from that time?  Do you keep up to date on developments there?

In 2020 I recall energy took a big hit.  Oil demand dropped as Saudi Arabia initiated an oil price war, and flooded the market with supply.  I assume your 2020 performance was hurt by that combination.  I believe a majority of the market now expects recession in 2023.  Have you made changes to how you invest in energy, so that 2023 will not hurt your investments in the way 2020 did?

[Financial.Velociraptor]

Come the 2008 crash, I was approaching a null mortgage and found my job in the highly cyclical oil field services industry was somehow secure despite it being a downcycle for oil and gas (the fracking revolution was just around the corner).

It's been over 10 years since you were an accountant for the moboil industry.  To what extent do your current energy investments rely on knowledge from that time?  Do you keep up to date on developments there?

In 2020 I recall energy took a big hit.  Oil demand dropped as Saudi Arabia initiated an oil price war, and flooded the market with supply.  I assume your 2020 performance was hurt by that combination.  I believe a majority of the market now expects recession in 2023.  Have you made changes to how you invest in energy, so that 2023 will not hurt your investments in the way 2020 did?

I still stay informed on Oil and Gas but not to drive investment.  By 2019, I had exited all my O&G positions, which were overwhelmingly midstream yield plays.  (Back of the napkin calculation revealed the amount of time I was putting in at tax time versus my net gains meant I was "working" for less than minimum wage).  I just reviewed my closed trades for 2020 and found only two oil trades in Conoco and Duke, both of which were deep in the  money bull call spreads with two week or less holding periods (I held the Duke spread for 3 days!) I played oil only very cautiously in 2020.  My big blow up was in a double leverage mortgage reit fund I reasoned couldn't keep going down because the yield was up over 30% and surely that would drive buying.  The fund liquidated instead and I lost about 40k in capital and the largest source of my dividend income.  2022 was an error of staying bullish too long.  I'm now mixing long and short bets (and most of the long bets are oil majors and short term because that is the only sector up reliably this year.) 

Immediate current process is to get up early Monday morning and research what hit 52 week low and 52 week high in last trading week.  I look at those charts for smooth trend lines and double check against RSI and recent volume and place a trade accordingly.  It is currently a completely technical approach.  Assuming I claw back, all profit that puts me under 6% is going to municipal bonds.  Playing even more defense...

[MustacheAndaHalf]

I just reviewed my closed trades for 2020 and found only two oil trades in Conoco and Duke, both of which were deep in the  money bull call spreads with two week or less holding periods (I held the Duke spread for 3 days!) I played oil only very cautiously in 2020.

In 2020 I aimed at beaten up stocks, where oil was beaten up twice (pandemic low demand + Saudi overproduction).  I planned to make a good return despite bankruptcies, but only two stocks collapsed.  Both were small oil companies... but fortunately the third stock, Callon Petroleum (CPE), made 10x using call options.  That was a rough time period for small oil companies.  I also held calls on Occidental Petroleum (OXY), which paid off well (but less than CPE).

My big blow up was in a double leverage mortgage reit fund I reasoned couldn't keep going down because the yield was up over 30% and surely that would drive buying.  The fund liquidated instead and I lost about 40k in capital and the largest source of my dividend income.  2022 was an error of staying bullish too long.

I recall you prefer higher yielding CEFs and ETFs.  You might aim for 6% or 10% yield, unleveraged.  The REIT that collapsed sounds like it had 15% yield before leverage.  Maybe there's a sweet spot in between your usual high yield plays and the danger zone this mortgage REIT went into.

Although the Fed made no sense in Dec 2021, I only sold my high risk investments.  It took struggling until the end of March (2022) to realize I needed to invest against the market.  My riskiest investment right now is inverse bonds, which pay well as rates go up... but in a crash, yields could collapse, inflicting losses (I used leveraged inverse long-term treasuries, so negligible risk of default)

[mistymoney]

@Financial.Velociraptor

Is there any way you can outline your general investment philosophy? Are there any books you would recommend?

I remember reading some about it years ago and something about leveraged bond funds and using options to generate income. It seemed kind of risky to me at the time but it has obviously worked out well for you. I am a simple index investor, mostly in a basic vanguard index all stock fund, and don't have that much investment knowledge.

Has your investment philosophy changed over the years at all?

Thought this deserved its own thread.  People other than CG sometimes ask.  I'll preface this with saying that I have had at least a dozen people ask me how THEY should invest after seeing my results.  Every single time, after exploring their knowledge, risk tolerance, values, etc., I have recommended indexing.  What I do is not for everyone.

Dial back to about 2004 when I started investing in earnest.  My strategy was to put the amount into my 401k that maximized my company match, and put every bit of surplus cash against my mortgage.  I held a 30 year mortgage a little less than 7 years from 2002 to 2009.  At this time my philosophy was NO debt, and then index with a 40% bond allocation and 20% international.   Basically, a more conservative version of what my very EMH influenced graduate education for MBA Finance made me "prove" (and I mean repeatedly) with the ONE HIGH AND HOLY MATHEMATICS [AMEN]. 

Come the 2008 crash, I was approaching a null mortgage and found my job in the highly cyclical oil field services industry was somehow secure despite it being a downcycle for oil and gas (the fracking revolution was just around the corner).  I realized I was about to have reliably 1,500/month to put into the markets.  I explored my risk tolerance and found that it had gotten a lot higher and was only going up when the mortgage was extinguished. I decided to tilt to 100% equities and be aggressive and even use some leverage for what I felt was an unstoppable Fed stimulus.  I did a lot of reading on Motley Fool, and other websites and slowly came to realize that the EMH I had been taught at University was only "largely" true.  I decided I would exploit weaknesses and learn to use options.

Come 2012, my career was sort of stalled.  I had FU money (at least what counted as FU to me with a paid off house and car) and just couldn't be motivated to kiss ass, play politics, or put in "face time" (I rarely went past 40 hours, even during quarter close cycles).  I was essentially unpromotable but unfireable because I had so much institutional knowledge and happened to be the peculiar sort of accountant who had written a lot of hard coded queries and SAP code that a lot of people relied on but didn't know how to maintain.  (I left SOLID documentation for IT when I left.  I was already maintaining it for audit purposes.)

I didn't hate my job. But it was soul less.  I did the math, and I could Barista FIRE.  I didn't know what that was,  I didn't find the FIRE community until 2015. I figured I'd deliver pizza part time after a 6 month break to detox.  At this time, I had a little more than 10% withdrawal rate. I did not consider it sustainable.  I scanned the horizon and noted there was 1) a lot of yield chasing going on in 2012 and 2) there were several high yield Closed End Funds that were trading well below their NAV.  I saw a short term opportunity to exploit a pricing inefficiency and earn crazy yield.  I  used leverage (on already leveraged funds) and produced a passive (but not sustainable) income of 35,000 from my taxable 'nut' of 170,000 or so.  NOTE: Do NOT recommend this approach.  I was admittedly in some junk and got lucky and was in the right place/right time.  I needed 25,000 to cover my budgetary needs so used the 10,000 surplus to pay on the margin loan as well as establish some long term positions in blue chips (which I wrote covered calls against for more income) and to acquire some lower yielding but more secure bond funds. 

I did that for about a year and started exiting the CEFs as they moved into pricing that was above NAV.  The market had given me a nice gift and I gladly paid the tax hit.  I tilted into what I called Big Cheap Tech.  In 2013-14 there were several large cap tech and near tech companies that were trading at a discount to the S&P on a price to cash flow basis, were producing stable growth, and inexplicably had options that were priced like they were still risky moonshots.  I traded a mix of covered calls and puts on margin against these names.  There stayed in a long reliable uptrend for years and I could earn 18% annualized on their options.  My downside, was possibly ending up owning some really great companies for the long term. 

I did mostly that until about 2018, when I began mixing in some net debit spreads.  The strategy made a huge shift from being mostly doing fundamental analysis to using more technical analysis (recommend https://smile.amazon.com/Technical-Analysis-Financial-Markets-Comprehensive/dp/B087Z1SPTJ/ref=sr_1_4?keywords=technical+analysis+books&qid=1664478038&qu=eyJxc2MiOiIzLjI4IiwicXNhIjoiMy4xMSIsInFzcCI6IjIuNzkifQ%3D%3D&sr=8-4).   I found you could make accelerated gains with net debit spreads that would even pay off if the market moved against you, but just a little if you bought "in the money".   Today, I do a mix of spreads that are in the money and at the money (which return about 85-110% over about 2 months) based on how much I like the chart.  My exposure is much lower and put the rest in closed end municipal bond funds.  Yield is terrible and my tax rate is low so it is perhaps a poor choice but they are almost as safe a treasuries with better yields.

As I approached 2020, WR was down from a little over 10% to a little over 5%.  I played the pandemic badly, and the most recent crash as well and am now a little over 7%.  Current strategy is about 90% net debit spreads and the rest covered calls, expect "permanent" positions in munis.  Of the net debit spreads, I am mostly bearish; that is I make money if the underlying stock stays even or falls.  Finding dogs is like shooting fish in a barrel in this market.  For example, I have 2 covered calls expiring  on the 21st, 2 bear spreads, and 1 bull spread.  Marked to market, I expect 15,227 in profit on 27,240 capital at risk over an average of about 60 days hold time.

The intent was always Barista FIRE.  I feel like I can sort of limp along to social security now with better odds than when I retired (12 years or so).  And I intend to switch to BF.  But I'm not going to sling lattes.  I'm exploring various non profits where I can work part time doing something I can take pride in and have passion for.  That could even be accounting again but not for some huge faceless corporation that helps destroy the planet for fun and profit.  The 'found money' is ear marked for some home improvement projects and to take my elderly father on an all expense paid trip to Rome to see the Vatican. 

Life is good.

I'll take questions on options trading but will caution first that it can be a little bit demanding and unless you are on meds that happen to have strong anti-anxiety qualities, probably very stressful as your mark to market P&L can move very fast from day to day.  Again, everyone I have ever given investing advice to, I've recommended that index and that they have a "enough" bonds, with enough driven by their risk tolerance with encouragement to err on the side of caution.

first of all, I commend you for sharing your experiences and knowledge on the board, it is interesting stuff.

but before I got to your last paragraph, I was already thinking.....hmmm working a little longer sound a wee bit easier than all this!

[TexasMu]

Do you still have your blog ?  I lost track of the website address.  I used to vicariously follow along with your trades.  I'm not brave enough to do this on my own, maybe one day !

[Financial.Velociraptor]

Do you still have your blog ?  I lost track of the website address.  I used to vicariously follow along with your trades.  I'm not brave enough to do this on my own, maybe one day !

The hosting provider got hacked.  The hackers deleted everything including the back up files and demanded an outrageous ransom.  My friend was the host and it was just a side hustle with like 6 clients.  He refused, and none of those sites exist any longer.  The blog never made any  money and had only a niche following so I didn't feel motivated to start over. 

I still spam puns on The Punitentiary -est 2016 on Facebook.  And of course listen to a lot of music.

[TexasMu]

What a crazy ending to your website / blog !  I really liked the financial transparency page.  Definitely liked the music references as well.  Have you thought about a youtube channel on trading options?  If you get enough followers and monetize it, there is money to be made .  I would definitely subscribe

[Financial.Velociraptor]

What a crazy ending to your website / blog !  I really liked the financial transparency page.  Definitely liked the music references as well.  Have you thought about a youtube channel on trading options?  If you get enough followers and monetize it, there is money to be made .  I would definitely subscribe

I have a perhaps somewhat controversial page in mind on substack.  Reallity is I'm just not highly motivated to publish at this point.   Might write some Seeking Alpha articles though.

[MustacheAndaHalf]

If your YouTube channel features music, that's a "public performance" of music without the rights to do so.  In short, all of your revenue will go to the music rights holders.  There's a famous example years ago of a wedding that racked up millions of views for the funny antics... and gained them zero dollars.  Music playing in the background meant all the money went to the music industry.

So if you talk about trading with music in the background, I predict revenues of zero.

[ChpBstrd]

@Financial.Velociraptor if you are going to BF, I'd think that would change your investing style. When you had no regular income, you were sorta pigeonholed into income plays like writing options/spreads, or buying high risk/high yield stuff.

You couldn't, for example, just invest in the S&P500, growth stocks, or IG bonds because unless you sold a couple shares per week you would not be earning sufficient cash to pay the bills.

From the blog I recall you have very low expenses and very good fiscal discipline. That means a BF gig could cover 100%+ of your costs, and open up the field to any investing strategy you want.

We're probably 12 months or less from a recession in which stocks will go on a major sale, and that recession will likely be associated with great investment values. If you can avoid getting your portfolio murdered for the next couple of years, there's an opportunity to lock in a secure WR. Thus, I suggest the following guiding principles:

1) NO unlimited-risk options plays like selling puts, selling straddles, or selling strangles. And FFS no selling naked calls.
2) NO reaching for yield (looking at you CEFs and mREITs) unless option-hedged in an airtight way via long calls or protective puts.
3) NO large long positions unless hedged - markets could still go way down from here, as the rate hikes will exceed 2000 and before 2008. -40% to -50% total returns are possible over the next 2-3 years.
4) What you're looking for is the opportunity to lock in returns in excess of your 7% WR for the long term. You will probably soon get the opportunity to do this with shares, preferreds, or IG bonds, and not have to go out on a limb with leveraged funds or junk bonds. You will get this opportunity when the SHTF, so you need to be ready to jump on it. We can't be sure which market will be first to offer this deal, so maybe take a moment and write down your buy signals. It could be, for example, an IG bond or preferred stock portfolio yielding 7-8% or an S&P with a E/P ratio (using pre-recession earnings) of 7%.

With your consumption needs covered by the side gig, you could literally put your portfolio into treasuries and wait for this moment to arrive. This sort of big picture strategic thinking was never possible when you were income-centric.

[Financial.Velociraptor]

@Financial.Velociraptor if you are going to BF, I'd think that would change your investing style. When you had no regular income, you were sorta pigeonholed into income plays like writing options/spreads, or buying high risk/high yield stuff.

You couldn't, for example, just invest in the S&P500, growth stocks, or IG bonds because unless you sold a couple shares per week you would not be earning sufficient cash to pay the bills.

From the blog I recall you have very low expenses and very good fiscal discipline. That means a BF gig could cover 100%+ of your costs, and open up the field to any investing strategy you want.

We're probably 12 months or less from a recession in which stocks will go on a major sale, and that recession will likely be associated with great investment values. If you can avoid getting your portfolio murdered for the next couple of years, there's an opportunity to lock in a secure WR. Thus, I suggest the following guiding principles:

1) NO unlimited-risk options plays like selling puts, selling straddles, or selling strangles. And FFS no selling naked calls.
2) NO reaching for yield (looking at you CEFs and mREITs) unless option-hedged in an airtight way via long calls or protective puts.
3) NO large long positions unless hedged - markets could still go way down from here, as the rate hikes will exceed 2000 and before 2008. -40% to -50% total returns are possible over the next 2-3 years.
4) What you're looking for is the opportunity to lock in returns in excess of your 7% WR for the long term. You will probably soon get the opportunity to do this with shares, preferreds, or IG bonds, and not have to go out on a limb with leveraged funds or junk bonds. You will get this opportunity when the SHTF, so you need to be ready to jump on it. We can't be sure which market will be first to offer this deal, so maybe take a moment and write down your buy signals. It could be, for example, an IG bond or preferred stock portfolio yielding 7-8% or an S&P with a E/P ratio (using pre-recession earnings) of 7%.

With your consumption needs covered by the side gig, you could literally put your portfolio into treasuries and wait for this moment to arrive. This sort of big picture strategic thinking was never possible when you were income-centric.

I've been giving exactly this some thought. (As well as some new thinking behind what my tax planning would look like).  I will certainly tilt if most of my monthly budget is met with a PT paycheck. 

For now, I have been turned down for the position I most wanted.  Another I was interested in but was past the closing date, wrote back that it is filled.   I'm going to be very choosy. 

I no longer hold any mREITs.  They all got called away when I wrote calls at a strike I felt was overvalued.  I have stopped out of substantially all my CEF positions.  I'm in a few key blue chips, net debit spreads (now mostly in the money bear puts), and cash.  I do think PDI remains a well managed debt CEF, and that the next time it trades below NAV will indicate near maximum pessimism and a buying opportunity.  My "side" income only portfolio is completely liquidated to cash except 1 share I kept open to keep my 100 free trade a year account open at WF.  That will probably go into PDI if it trades below NAV in the next six months.  Like you say, I'm keen on some preferreds when they are priced right.

[MustacheAndaHalf]

My "side" income only portfolio is completely liquidated to cash except 1 share I kept open to keep my 100 free trade a year account open at WF.

Does the Wells Fargo benefit mean you could do 100 free option trades/year?  What are the requirements for 100 free trades?

Vanguard offers that same benefit (100 free trades) when you have $5 million invested in "qualified assets", and 25 free trades if you have $1 million to $5 million.  Qualified assets means Vanguard funds and ETFs.