Tyros and market idiots, of which there are an unlimited, replenishing number, always assert that this moment in market time is different than the past. In their view, stock prices can defy financial gravity and become unmoored from concrete facts and corporate earnings.
The All-Too-Familiar Mass Delusions
Mass delusions have played out during many market epochs, including the birth of technology, booming housing prices, low interest rates, cryptocurrencies, the rise of artificial intelligence, and even prescription drugs that help people lose weight without exercising.
The Perpetual Challenge
The perpetual challenge for long-term investors is balancing the risk and reward of each moment in time because only a handful of companies—and investors—seem to truly thrive over time.
A Closer Look at Today’s Market Landscape
These thoughts are worth contemplating as the stock market is once again near record highs, options volatility is unusually low, and the end of 2023 means each day brings predictions about what the new year may hold.
Will laggards be leaders? Does the decline in the 10-year Treasury note bode well for battered financial stocks? Will top technology stocks that have produced most of this year’s market gains—including Alphabet, Apple, Amazon, Microsoft, and Nvidia —do so in 2024? No one knows the answers.
Focusing on Facts and Long-Term Success
The best approach to known unknowns is focusing on facts made truer by time.
Dividends accounts for about 45% to 50% of historic stock returns, and inflation adds another few percentage points. We also know the stock market rises over time, and that people always need places to deposit and borrow money, just as they need computers and technology.
A Solid Approach for Investors
A solid approach is to ignore the omnipresent market hyperbole, relax, and buy blue-chip stocks of well-run companies that are critical to how people live, and that ideally pay dividends. If you do that, you will temper the risk of investing and position yourself for long-term success if you can keep calm during chaos.
The Power of Conditional Dividends in Stock Investing
Investors have long sought ways to enhance their stock-ownership experience and generate additional income. One strategy that has gained popularity is the use of “conditional dividends” through selling puts and calls. But what exactly are conditional dividends?
Conditional dividends refer to the options premium that investors receive in exchange for taking on certain obligations. If an investor sells a put and the stock price falls below the put strike, they must be willing to buy the stock. Conversely, if they sell a call and the stock price exceeds the strike price, they must be prepared to sell the stock. It’s important to note that these positions can be managed to avoid buying or selling stock, but that’s a discussion for another time.
Why are we mentioning this approach again? Because amidst all the noise and hype in the market, it’s essential to remember simple, time-tested strategies. While options premiums may currently be low due to low implied volatility levels, employing the conditional dividend strategy allows long-term stock investors to get paid by the options market.
Take Bank of America as an example. The stock has experienced a 7% decline this year, primarily due to concerns surrounding the value of its bond portfolio. However, Bank of America is a well-run company with a significant shareholder in Warren Buffett’s Berkshire Hathaway.
With the stock trading around $30.58, investors have an opportunity to either buy or sell stock by utilizing options. For those seeking to buy stock, selling the February $28 put can yield a premium of about 59 cents. On the other hand, existing stockholders can sell the February $33 call for approximately 48 cents. In the event that the stock price falls below the put strike at expiration, investors can acquire more stock. Likewise, if the stock price moves above the call strike as expiration approaches, adjustments can be made to avoid selling the stock.
Admittedly, this may seem like mundane material. Yet, over time, this approach helps compound returns – a principle that even Albert Einstein regarded as the eighth wonder of the world.
Ultimately, it’s crucial to remain focused on the fundamentals. By embracing these tried and tested strategies, investors can consistently reap the rewards they seek.