Seeking Mediocrity

| About: iPath S&P (VXX)

When it comes to investment strategies, I'm a very simple person. I should know, but I've never really taken the interest in learning the definitions of things like spreads and straddles. Forget about strategies like butterflies, iron condors and the like. I just get a headache thinking about those.

The real clue that my cognitive abilities and maybe my desires were rapidly waning was a few years ago when I found myself wanting to learn PHP and MySql. If you don't know what those are, don't worry.

The point is that 10 years ago I could have taught myself through a process of deconstruction or reverse engineering. But that time it just wasn't working, at least not fast enough.

Instead, I did what would have been the unthinkable and bought a book. "PHP and MySql for Dummies," no less.

After two chapters it was in the landfill.

Yet, I'm still not an idiot and I am insulted by a recent assault on the individual investor's ability to compete with "the professionals."

In case you've forgotten, those professionals are the ones that most recently bought you billions of lost dollars in the value of JPMorgan Chase (NYSE:JPM), they also were the ones to withhold relevant information from the purchasing public regarding Facebook (NASDAQ:FB) just prior to the IPO.

The storage capacity of the internet doesn't allow for a complete cataloguing of the egregious analytical errors, miscalculations and bad calls made by the best and the brightest. If the measure of a professional is to value an asset and then see it succumb to market forces and drop by more than 20% in three days, I think I can do that quite easily and with far less effort than they've been putting into the process.

But the past few weeks have seen inflammatory remarks by Steven Rattner and John Bogle who are certainly respected and extraordinarily well-accomplished. Compound that with a recent appearance on CNBC by someone whose name may be forever unknown to me as I'm not motivated enough to uncover it.

He was originally introduced on a CNBC segment as participating in "High Frequency Trading," although he did correct that introduction and stated that he did not engage in such activity, he had simply studied it. His conclusion was that the individual investor shouldn't be involved in the stock market because the playing levels were so vastly different. He used his own love of playing hockey as an example of how amateurs should never mix it up with the professional players.

I guess that there must be an amateur stock market out there someplace, but then I realized that The American Stock Exchange was no longer a stand alone entity.

On the one hand you have Rattner, who very clearly stated his opinion: "Individual investors shouldn't be playing the stock market any more than you should take out your own appendix." As if that wasn't enough, he opined that individual investors couldn't possibly be in a position to understand stock valuations.

Add to the mix the legendary Bogle, who took the opportunity of the Facebook IPO debacle to again promote his baby, the index fund, stating that:

I think the essentially problem is that investors are their own worst enemies ... don't fool around with individual stocks. nobody can predict their price performance. nobody can predict their future value. while nobody can predict the future price of the total stock market, we can predict its future performance, which depends clearly on 100% on how the underlying American economy does.

I guess he never heard of how Europe can whipsaw our markets. Maybe he doesn't get basic cable. Maybe I should pick up shares of Comcast (NASDAQ:CMCSA) as a contrarian move.

There was a time when your stock broker used the various indices as a measure of their own performance. The idea was to beat the index.

My father used to say that while living under Communism, as he did for a number of years, personal pride in accomplishment was lost. The expression that he said was always heard was "it's good enough." That attitude hadn't existed before. He said that there was a time when people took pride in their jobs or the services that they had provided, but the imposition of a single mindset on the entire population changed all of that.

I'm certainly not saying that Rattner, Bogle, and the unnamed guy are modern-day Communists, but feel free to take me out of context.

What they are is saying that for you and I, mediocrity is good enough.

I recently published an article, "Turn The Key On This Retirement Strategy," as a guide for the individual investor to create a portfolio that will protect and hopefully grow their assets. While Bogle, Rattner, et al. are preaching the value of index funds and ETFs, all they do is go along for the ride. Whereas the professional or more sophisticated investors apply strategies to protect their assets, it appears that from Bogle's view, such protection is too good for the individual.

You are expected to be a passive observer. Put your money in and sit back, while you accept whatever it is that you're given. My guess is that they further expect you to be grateful for being able to keep up with an index that could have been just as well assembled by a monkey.

The sample portfolio that I presented included the aggressive use of protection through the use of covered calls. But at present, I want to focus on a concept and tool that we've all heard so much about recently and have been repeatedly been warned to stay away from: volatility. The evil concept that is too unknowable for you and I.

Following the recent implosion of Credit Suisse's volatility ETN (NASDAQ:TVIX), I revisited the world of volatility, having only traded one time previously, the prior year with ProShares Volatility ETN (NYSEARCA:VIXY). This time around I chose to trade the Barclays Volatility ETN (NYSEARCA:VXX) because it offered weekly options, rather than only monthly contracts.

The first such trade was on March 19, 2012. A look at a recount of the trades will show that I bought shares, sold calls, sold puts, had shares assigned on both the call and put sides and added shares. The only thing I didn't do was to sell shares short. That's something that only professionals should do.

Did I really just say that? I'll blame Bogle. Blame Bogle.

In the time period in question, the S&P 500 was down 7.6%. Lemmings followed and were down 7.6% as well. In the meantime, assuming that you took advantage of the simple hedging strategies on your VXX positions, they would have delivered a 2.3% ROI. That figure is based upon the net profit derived from the accumulated capital put at risk. The capital put at risk in the sum of the share purchase price plus the funds held in your account by virtue of selling cash covered puts.

See trading activity in the VXX. (Note that the report has been adjusted for the imputed cost of selling put contracts in the ROI cited above.)

Now, in addition to outperforming the experts and professionals by using a simple group of vehicles, there is a real added bonus. Consider how often you have looked at your portfolio after a market decline. You look at share prices and think that there appear to be some incredible bargains to be had, if only you had the cash available. I say "cash," because for me there is very limited role for the use of margin.

The beauty of the covered call strategy as it relates to the volatility vehicles is that you are likely to be assigned your VXX shares, as its asset value increases. By the same token, your put sales may have expired and left you awash in cash that desperately desires to be invested. The newly deposited cash in your account is just the tonic for depressed equity prices.

In fact, this week, after having been assigned $VXX calls and closing out put positions to take profits, I took the opportunity to open new positions in Goldman Sachs (NYSE:GS), Boeing (NYSE:BA), and Sallie Mae (NYSE:SLM). Those were in addition to cost averaging down on existing positions of Freeport McMoRan (NYSE:FCX), MolyCorp (MCP), and JPMorgan Chase.

Of course, I immediately put the newly purchased shares and the newer lots of existing shares to work by selling call options. Thank you, volatility.

As far as those who believe the individual investor is incapable, I may agree -- at least when it comes to picking stocks and timing it just right. At least when it comes to me. I'm terrible and don't even begin to believe that I can do any kind of meaningful analysis. But the tools are there to cover your mistakes and even survive them beyond what the opinionated and condescending experts believe.

Take back your portfolio!

Disclosure: I am long VXX, GS, BA, JPM, SLM, FCX, MCP, FB.