The Evolution of an Options Trader
For the past five years, I’ve been doing a lot of thinking about investing in the market. Actually, I’ve been thinking about this for the last forty years but, for the first thirty-five, I followed a traditional path: money managers, index funds, a smattering of real estate and private equity transactions, and a commitment to constantly add to my passive investments. I’ve done fine but . . . man oh man, it’s taken me a long time to get here (I’m 68) and I’m the first to admit that I’ve been a little lucky along the way.
There’s nothing wrong with being lucky but it isn’t replicable. And it isn’t replicable to be Warren Buffett or Charlie Munger or any other superstars of Wall Street. I could spend my life reading Value Line, the Wall Street Journal, Barron’s, Yahoo Finance or a hundred other sources and I will never be as smart as they are. People like that remind me of Michael Jordan, who said one night after scoring 60 points against the NY Knicks, “some nights, the basket looks really big to me.” The truth is that they “see” more in an annual report that the average bear and certainly more than I see.
Don’t get me wrong. I’ve made some good investments. There’s no need to name them; it would sound like bragging. But, they were almost serendipitous. I looked at the numbers but I know that other factors influenced my decision-making and those factors weren’t measurable: the stability of management, the nature of the business, my own experience with their products and services. The truth is that I wasn’t data driven — at least not the way that I wanted to be. I finally gave up trying to be data-driven in large part because there was no set of indicators upon which I could comfortably rely.
But, intuitively, I believed that there was a way a make rational, data driven buy and sell decisions. The search led me to a process in which I would simply cherry-pick the strongest price performing stocks of the S&P500 (over a very long period of time), hold them for a year, sell the laggards (the stocks that weren’t beating the S&P 500 by a fixed percentage) and reinvest the proceeds in the next bundle of stocks that met my buy criteria. I don’t particularly care what the companies actually do. I only care how their stocks perform over a very long period of time. I back-tested the methodology over twenty-five years and, no…
