2 Lessons For Investors To Learn (Over And Over Again)

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Includes: AAPL, BAC, CHTR, F, NFLX, T
by: Rocco Pendola

It's true what "they" say, when you have a kid, your world changes. It's even more unsettling to catch yourself talking or acting like your parents did. Saying the same things. Hoping the same hopes.

As a teen, I hated being told the same thing over and over again. Generally, the things my mother beat me over the head with most were the things that went on to consume me. For instance, I spent plenty of time at Mulligan's Brick Bar in Buffalo, New York, during my senior year in high school despite my mother's number one edict - no drinking!

It's probably true ... we naturally gravitate toward experiencing the things others do their darnedest to keep us away from. That goes for many areas of life, from partying to "love" to investing.

The financial media tells us certain things repeatedly. In a recent Seeking Alpha article, I got into what is likely the most popular after a guy told me he was canceling his Netflix (NASDAQ:NFLX) account to fit my stock option investing newsletter into his budget. That naturally leads to what outlets such as Kiplinger remind us of every single month - lay off of the daily latte and you'll be a millionaire by the time you turn 55. But, how many people actually invest their latte money?

Using Seeking Alpha readers to answer that question means you're using an unreliable sample. We're "weird" folks over here. People who get a bigger rush from buying .25 shares of Apple (NASDAQ:AAPL) every month than from sipping on a no-foam, double-pump, soy macchiato.

In this article, I detail two things that investors hear frequently. While it might be tempting to break these rules just to see how it feels, you're probably best off simply learning from somebody else's mistakes.

Do Not Buy Out-Of-The-Money Options. Yes, I am a hypocrite. No doubt. I own NFLX June $40 put options and Ford (NYSE:F) January 2013 $20 calls for goodness sake. And I am not going to be like my Uncle and scold you with "don't do as I do, do as I say." That would be patently absurd.

Here's the skinny. Every once in a while I throw some (cough) play money on the Leafs to win on Saturday night. Next week I am heading to Vegas for a few days and I'll probably drop a couple hundred bucks (legally) into the toilet. Maybe even a little more. It all depends on my relations with Guinness. That borders on stupid, I know, but, at the end of the day, life's short, I have my weaknesses and I keep them in check so it's all good.

These activities comprise about 0.1% of what I do with my life and my money. The same goes for trading and investing. I absolutely believe that Netflix is one of the worst run companies in the world. There's little question in my mind that the whole operation, as it stands, will blow up in smoke sooner rather than later.

That said, I absolutely should still play the trade differently in real-life. Ironically, I play it way more risky with my real money than I do with my simulated cash in the $100,000 portfolio. That's incredibly ironic when you really think about it.

In real life, I am long NFLX June $40 puts. The stock trades for around $125 today. Granted, I bought the puts when the stock was well under $100. But that's not the point. The trade was as ill-advised then as it is today. In my simulated portfolio, I own much more realistic and logical NFLX January 2013 $130 puts. They're slightly in-the-money.

I am going to cover this topic - OTM versus ATM and ITM option contracts - in Tuesday's edition of my stock option investing newsletter. But, in a nutshell, you give yourself no margin for error, no cushion, no mercy whatsoever when you buy OTM options, particularly deep OTM options, over ATM and ITM contracts.

More important to this discussion is my brutal honesty. I like the rush once a while. No doubt. I fully understand that I would be a complete and utter fool to treat anything more than a tiny fraction of my trading and investing that way. I know when to say when. If you find yourself unable to pony up for more expensive ATM and ITM options as a rule, most likely, one of two things is happening:

  • You have a problem. It's not much different than an addiction to gambling or something. You need that rush. You need to put it on the line. There's no strategy involved, just raw emotion.
  • You are in over your head. Let's see, I have $1,000 and that can buy me 20 AAPL March $605 calls and "only" 2 March $460 calls. I gotta go with the size. And you probably need to go back to the drawing board because you're going about using options the wrong way, assuming you consider yourself a smart, long-term investor who does not want to lose more money than an occasional Leafs game or roulette outing will cost you.

Make It A Bill And Forget About It. This gets away from options and digs more into general investing. Just like Kiplinger tells you to skip the latte each month, they and other long-term types tell you to treat investing like a bill. Each month you send $100 to the cable company, $80 to the wireless company and possibly thousands to your mortgage banker. The old adage says you should send whatever you can afford to your investments each month consistently without fail. Treat it like a bill, you never see the money and you will not miss it.

But, you need to take this a step further.

You cannot just call Time Warner Cable (TWC) or AT&T (NYSE:T) or Bank of America (NYSE:BAC) and ask for the money you've sent them over the last um-teen years back. If, however, you contribute $500 a month to positions in TWC, T and BAC, you can get it back. And it adds up fast. Before you know it, you have several thousands of dollars seemingly at your disposal.

When Springsteen goes on tour or the Leafs makes the playoffs, you're tempted to pull some of that money out and spend it on these leisure trips because, after all, you work hard and you deserve it. Plus, it's there. You might even pay a penalty to tap cash from your IRA. Put this money under lock and key or you render the advice you heeded in the first place moot.

I have accounts I have purposely forgotten the password for that get a couple of bucks sent their way regularly. I force myself to send some funds to a simple savings account on a consistent basis. I set a date when I can tap the money. And, when I do, it gets directed to investments, other savings, something I need and maybe a little bit for something I want.

Over the years, I've fallen on my face by learning these lessons only to have to re-learn them. For my money, they represent two of the most important lessons investors can learn and hopefully live by.

Disclosure: I am long AAPL, F.

Additional disclosure: I am long NFLX June $40 put options. And I like the Leafs over the Canadiens on Saturday night. (Smile).