Hi Everyone,
Since 2016 I have watched as we have continued to receive an abundance of financial notices/advertisements daily in our emails. Capitalizing on our fear, the so called leading and famous experts try to subscribe us to their advice books and newsletters, with a deluge of doomsday market warnings. They usually claim to have previously made accurate and earthshaking predictions among the world’s economies and markets. I used to get nervous and bail on investments as I was duped into subscribing and reading their articles.
Now I realize that fear like mine is the market tool these authors use to sell subscriptions. Over the past 18 years I learned the expensive way, that while the experts on occasion had a major win, over time their track record wasn’t so good. More often than not their warnings fail.
Sooner or later there are indeed huge market collapses. E.g.
• In 1996, my investments were doing fairly well until Alan Greenspan chairman of the federal reserve crashed the market for a year, notoriously claiming we in the market were suffering from a case of “irrational exuberance”.
• In 2008 there was a major collapse in all markets brought on by left wing congressional and executive interference with the lending markets. Terrible politician created credit policies had just forced congress to save Lehman Brothers. Large numbers of people without the means to pay, were being given loans to buy expensive homes and properties – I know as my sister in law was one who believed President Obama was going to buy her house for her. Cost of housing climbed insanely. Within a year or two, the market became flooded with defaulted loans, housing values crashed, repos soared. Worst of all, even with the resulting congressional interference to fund lenders, in a multi-year long back lash, normal loans for any purpose at all, no matter how worthy, just were not being made. In fact, federal money intended to fix that, was grabbed by banks and financial institutions and was crookedly diverted by them to gobble up other banks and financial institutions. The world didn’t stop but the financial and real estate markets suffered devastating losses.
• In March of 2020, another major crash occurred as the world did come to a stop with China’s warfare virus, Covid 19, getting lose in the world. This is another example of financial devastation brought about by multiple compounded acts of bureaucratic and political stupidity on an international scale.
• In May of 2021, Elon Musk announced that Tesla would no longer accept Bitcoin for payment resulting in a crypto crash of 50%.
It doesn’t take much to trigger a crash and as we have frequently discussed, our goal is to chose a diverse collection of investments such that we make a decent profit from both boom and bust.
In his most recent promotion, Jim Rickards, one of the dooms-dayers mentioned above, suggests that with the huge rush into AI driven trading, we may be in for another major crash. Like biological brains AI operates in a learn as you go fashion. Unlike biological brains, AI does it orders of magnitude faster, it never tires and it only sustains those actions and behaviors that succeed. Because of the incredible speeds involved in AI decision making, movements can happen fast and big. As widespread AI is focused on both making big money fast, and protecting money from otherwise negative reactions just as fast. Any negativity could trigger AI to sell huge positions for cash very quickly. With large numbers of AI servers trading for big institutions, and all AI servers learning similar things, its not hard to believe that a major crash could initially happen – devastating retail investors with margin calls and low portfolio values – followed by a turnaround a few days later where many retail clients are suddenly broke and most of the bargain buying is institutional.
In point of fact, we have no idea how big a problem the long term participation of AI in our markets can cause. Only the AI systems will be able to tell us that. But, we do have an advantage – following our investing principles, our focus is mostly on making loads of money with the rare large dividend payers rather than on the up and down swings of their stock prices. Our strategy anticipates the dips and profits each time from them. Even when AI is involved, 90% of our dividends are be paid on the basis of how actively our companies sell and profit from stock options (some of which are sold to the very institutions with AI engines). According to our investing principles, if an Extreme Dividend stock is high, we buy only a small position and enjoy the dividend, but if the price dips and dividends are still high, we buy more and average our price down growing both our dividends and our profitability. Thus, we are usually quite profitable in spite of how deeply AI or any other extrinsic action might affect Extreme Dividend stock prices.
PRINCIPLE 9 – SELLING AN EXTREME DIVIDEND STOCK FROM AN INVESTMENT POINT OF VIEW
Investments are only about two things – making profits and protecting against losses.
We have discussed how fake news is often deliberately created to deflate stock prices which we view as bargain hunting opportunities – capitalizing on other people’s gullibility. Sometimes we sell naked puts on these stocks to either make a fast profit or to buy them even cheaper.
When we find out that there might really something wrong in the market or with a stock, we can sell our position to conserve cash or we can buy puts with some of our profits to insure our position value while still collecting the next dividend.
Sometimes we experience high stock price growth in the form of exuberance – rational or otherwise. At this point do we sell our position for a profit?????? There are advantages, disadvantages and alternatives:
• If the stock has been held >1 year, the capital gain is considered long term and is subject to a reduced tax rate.
• But, those wonderful huge dividends end with the stock sale.
• Alternatively, if we choose a price slightly above what we think the price will climb to, we sell a call option against our stock which expires after the next dividend ex-dates. This usually allows us to collect the dividends and increases our capital profit in the case of a forced stock sale as we have already collected extra cash selling the call. On the other hand, if the stock price drops below the option strike price, the call we sold is bought back cheaper or expires worthless creating further profits for us while still maintaining the dividend. Both cases = PROFITS, PROFITS, PROFITS!!!!!!
• Another consideration is If the time between dividends is great or if the payout changes significantly we may want to shift our money into better or sooner paying opportunities with the option of shifting back.
If the fundamentals drive a market or a stock higher there are methods to try and determine if we are experiencing a breakout or peak range. Ideally, we want to sell at new record peaks but as seen above, smarter moves might be to collect increased dividends plus make money off of covered calls which we can sell multiple times as the stock crosses above and below a threshold price. If you are interested in how charts helps with pricing and timing, just let me know.
This week our biggest dividend players are PSEC, LFGY, NVDY, DIPS, PLTY and MRNY. We need to pay special attention to NVDY and DIPS as NVDA’s earnings come out Wed. evening after the Dividend declarations are announced. We could end up with decent dividends but a price pullback the next day.
Thanks for the feedback everyone.
Regards,
Clint