Re-Thinking Buy And Hold

Summary

• Even a short term minded trader may come to a point in life that Buy and Hold can hold appeal.
• Diversification is particularly important for a low maintenance, income producing portfolio.
• Income can be significantly enhanced by the sale of long term dated call options.

I had been a classical "Buy and Hold" investor for years.

Part of it had to do with what used to be the exorbitant costs of trading back in the days when either you listened to what E.F. Hutton had to say or you took the advice of one of his competitors.

You surely couldn't do it on your own.

Needing to achieve a 10% price rise just to cover your round-trip trading costs made frequent trading basically impossible for most, especially early in their careers.

But I did listen to E.F. Hutton and I happened to have been one of the lucky ones who took a cold call from a young stockbroker, as they were called back then, who turned out to be a wonderful ally in support of my financial interests and those of my parents.

He was "Buy and Hold" all the way, even when it was an entirely commission based relationship. He traded more often when we went to a managed account and trading costs weren't directly my costs.

Then he died.

I never micro-managed my accounts with him, but I always kept an eye on them from day to day and used to wonder why we didn't trade more often, as noting the frequent ups and downs and all of the lost opportunities.

It was sort of like holding that perfect banana.

How long do you hold it before the rotting process kicks in?

Hindsight is great.

Anyway, long story short, after he passed away, I moved those assets, now at one of E.F. Hutton's successor companies to join the smaller account I had already been trading for myself just to keep me off the streets, taking advantage of lower trading costs at a discount brokerage and especially enjoying low options trading costs.

That marked the real beginning of about 15 years of very, very active trading. Almost all of it was exclusively with covered options. That also led to what was an early retirement, although I probably worked harder at trading than I did ever before.

As I look back on nearly 1,000 closed positions over the course of 5 years that I was also touting to others, the average holding time of those positions was under 40 days.

That was an exciting time for me and I loved making trades, but after a while, it did get tiring.

Not tiresome, just tiring.

After all, I will be just 2 years away from full retirement in a month and one heart attack later, I do get tired.

And tiresome, most around me would say, as well.

In fact, in 2017, I had only 78 closed trades, but my average holding period was just over 300 days.

You'll have to take my word for 2017, as those were all personal trades and not subject to the same kind of disclosure as for the previous 5 years when everything was an open book.

But I always knew this day would come.

It would either come because the covered option approach (or the stock picking underlying the trades) was a failure, or I would just get tired.

I'd like to think it's the latter, although I did have some impressive losing selections over the many years.

With volatility showing some life of late and option premiums becoming enhanced after a long period of somnolence, this may be a good time to position a portfolio to deal with uncertainty ahead.

In my case, as the clock is ticking down on life itself, there isn't much reason to put things at risk of short term fluctuations, but there certainly isn't reason to accept death and move into bonds.

Anyway, the transition from a short term reliance on weekly and monthly options isn't as difficult as I thought it might be and I am setting my sights on having a fully transitioned portfolio by July 1, 2018 and I plan to follow the tenets I laid out about 6 years ago on Seeking Alpha.

Those tenets include diversification and having some "on deck" positions in the event any of the primary positions were assigned.

But these days, I don't want to think about assignment.

I think about taking it easy and collecting income in the form of dividends and option premiums. Why LEAPS? explains why LEAPS, but another article from Seeking Alpha about 5 years ago, was a blueprint for what I am becoming.

A Buy and Hold trader.

Bob Shapiro would have been proud.

Without dwelling on details, and it is a long time between now and July 1st, I already have some of the positions that I think would be perfect for a long term, income producing portfolio and plan to add others with the cash that I've been growing, as I've been less likely to re-invest proceeds from assigned positions.

That list includes a pariah like General Electric (GE), having recently tripled down on that position in advance of the recent dividend. After all, there still can be room for some speculation and some stupidity.

The list also includes Las Vegas Sands (LVS) and MetLife (MET).

Sure, they may both have shorter term challenges, but in the longer term, unless there is a broad market decline, they are as likely to present opportunity as anything else.

What they also offer are nice dividends and nice option premiums. That is the general theme. Pick companies that you are familiar with and that will reward you for sticking around.

In the above example, strike prices 20% or so above this past week's closing prices were selected with option contracts expiring in January 2019. Those strike prices may or may not be attainable, but each investor should ask themselves what they would consider to be a reasonable amount of appreciation for a year's worth of stock holding.

Perhaps it's 10%, or perhaps 7%, but the table can then be re-constructed to determine what the Return on Investment (ROI%) would be if shares were assigned or if shares finished the year with no gain, at all.

In the examples above, it is actually only a 10 month holding period, but for those who really want to buy and hold, you can currently sell options dated as far into the future as January 2020.

More premium and more dividends.

Of course, if there are some out there like me, that may have difficulty making a cold-turkey transition to the longer term approach, you can always hold back a portion of your holdings for shorter term and more frequent trading.

But did I mention that there was also less worry with that longer term approach? Especially if you can distinguish between paper losses and realized losses. If your goal is to make your portfolio work for you in the later stages of life, then it is all about income and less and less about daily fluctuation.

That still leaves the need to discover representative stocks in other sectors, such as Consumer Staples, Healthcare, Energy, Technology and others. I generally ignore Utilities and Real Estate and I usually like to have some kind of a hedge or more volatile position, as well, for some opportunity for current and streaming income.

The challenge right now, as I see it, is that if you have a large portion of your portfolio sitting in cash, you have to be judicious about resisting the urge to plunge in all at once.

That's especially true if hindsight again comes to tell you that you should have known we were sitting at market highs at the time you went all in.

So, at the moment, while I may have some interest in Microsoft (MSFT) or Intel (INTC), I'm not inclined to chase them, but I might have a newly rekindled interest in General Motors (GM), while I await a technology stock with a good dividend to seem more bargain priced.

While people will tell you to average into a position, I'm more inclined to believe that you need to average into a market, even if it is climbing higher.

It's alright to miss out on some of the gains by not being fully committed, but it is really difficult to make up for unjustified full commitment.

I'm ready to re-commit to the longer term, even as my personal longer term may be shorter than ever.

Analyst’s Disclosure: I am/we are long GE, LVS, MET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may buy shares of GM, INTC, MSFT or add shares of GE, LVS and/or MET and concurrently sell longer term dated call options, while perhaps selling shorter term dates options on a portion of those shares.