The Stop Trading On Congressional Knowledge (STOCK) Act has been getting much needed publicity lately. CBS's "Sixty Minutes", The Economist, and, even my local paper have been reporting on the legal insider trading that happens on Capital Hill. The catalyst for all of this ink and airtime stems from a recently published book, "Throw Them All Out", by Peter Schweizer. The publication dishes the dirt on our elected officials from both sides of the aisle, and even brings to light the hidden agendas of some of our most respected financiers like Warren Buffett and George Soros.
Although investing and politics are interconnected, I'm not going to go into great detail about the book because I'm not at the high-stakes table, or have an informational edge by being in public office. Like most of us, I'm on the outside looking in and use the time-tested investing tradition of searching for value in an inefficient market. However, I want to highlight a quote from Mr. Schweizer's work: "There is a rule of thumb in the financial industry that 75% of options are worthless when it comes time to redeem them, and that 80% of options traders lose money.".
I'm not trying to use scare tactics to get you out of your options bets, just point out the facts. I don't know how these power brokers on CNBC, newsletter writers, or, bloggers in cyberspace make money using derivatives. They can't all be beating the point spread. I'd like to see their actual profit and loss statements from their brokers. It would give more credibility to the source. Otherwise, it's just a three-card monte ruse.
I use options indirectly in my leveraged/inverse ETF's. ProShares UltraShort S&P 500 (NYSEARCA:SDS) and Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA) are what I'm primarily invested in. They utilize derivatives to pack a punch, but are actively managed. I let the professional traders do my bidding and so far, they've been exactly as advertised. You have to have a certain risk/reward profile to want to invest with these financial instruments, but I did a significant amount of research before allocating resources to them. If you have been following this blog, you know that on paper I'm down from my original investment. I would not recommend them to a majority of retail investors.
That said, I think they are a terrific way for experienced investors to play the macroeconomic picture if you have the stomach for the volatility. I believe I'll get my money back and even more, so I'm sticking with my initial wager. If you want an adrenaline flow, or your endorphins running without a lot of hassle, leveraged ETFs are the way to go. You just buy and sell them with your broker. No margin requirements or the messy business of dealing with options. Just put your keys in the ignition and drive. Nothing has changed in regards to asset allocation in The Ithaca Experiment portfolio since the blog's inception. That's where I stand.
The title of this posting is "round-trip ticket", and it reflects the direction of this blog the last few months. I don't believe in get-rich-quick schemes and prefer to make informed investing decisions, so I'm following up on the stocks I originally wrote about in the first half of this year. Really like a lot of the companies I've been revisiting: Acme Packet (NASDAQ:APKT), F5 Networks (NASDAQ:FFIV), and, Dolby (NYSE:DLB), just to name the more recent ones. Most of the securities I cover are in ValueLine, but I find their research somewhat incomplete and untimely, although very valuable as a starting point. This is why I write this blog.
Conference calls are where I get most of my material. They are a storehouse of information and give you the intangibles. Just don't trust sell side analysts. Many times they are trying to pull a fast one on you for the benefit of their employers, not the individual investor. From all of the research I've done, my take is that although companies in the United States appear to be mean and lean, they do a considerable amount of business with Uncle Sam and in Europe. A majority of the companies that I've been covering fall into this category. These are areas that will suffer significant cutbacks in the next year.
I believe that there will be a major contraction in both earnings and P/E Ratios in 2012, resulting in lower stock prices. However, and it must be noted, I've been expecting a significant correction, if not double dip recession for some time now. I try to compensate for my lack of market timing skills by giving you well balanced articles on securities I believe will be benefiting from the exponential innovation that is engulfing us today.
Best-case scenario, I double or triple my original bet with the inverse ETFs in just a few short years, then begin to buy individual securities that I have already researched here on this blog. Worst-case scenario, I lose some money in my short positions, but since I'm also hoarding cash, I'll still have an ample amount to invest. If I do lose a percentage of my original bankroll, I don't think it will be that much, which is why I continue to hold steady. Sometimes it comes down to dumb luck.
The longer I maintain my position, the more probable it is we will be heading for a worldwide recession. This is by no means a foolproof business plan, but one I'm comfortable with. Until I divest my ETFs, I'll continue my intelligence-gathering mission on what looks good going forward. Next on the docket is Verifone (NYSE:PAY), then United Therapeutics (NASDAQ:UTHR).