“Gold is a pet rock.”

“Gold doesn’t have any yield.”

We have all heard the quotes from various places in the investment world on gold and other precious metals. Investors have been trained for decades to look for other opportunities, be it stocks, bonds, or real estate. I think that we are going to see that change in coming years, and I think with some of the geopolitical uncertainty and questions around the financial system, now is a good time to consider allocating to physical precious metals. I’ll be updating a couple sections to make today’s post more timely, but I think having at least a small slice of precious metals is a good disaster insurance policy and a hedge for potential chaos.

Like I have said before, I think we are in the early innings of a cyclical shift in markets. We had a long run of declining interest rates, low inflation, relative peace, and globalization. Now I think we are looking at a trend of rising interest rates, higher average inflation, increased conflict around the world, and deglobalization. To some extent, all of these trends feed into one another. Bringing parts of the supply chain back to America is probably a good thing for most Americans, but it’s almost certainly inflationary, and I haven’t seen a war that wasn’t inflationary. To be clear, this is a view of what I think things will look like over the next three to five years, not what might or might not happen over the next three to five months. Overall, it’s an interesting backdrop for precious metals.

I’m not going to pull a Peter Schiff and tell you “the sky is falling, buy gold” or one of the guys you see on the podcast circuit talking about the futures market manipulation. First of all, it’s not my area of expertise, and second, I don’t run a gold fund or bullion dealer. All I’ll say is that you should take anything said on the topic with a grain of salt, especially if someone is talking their book. There will always be someone pointing to inflation, real interest rates, or trust in governments as a reason to buy or sell gold and precious metals.

A wise man once said that violence is the only currency that never loses value. In my opinion, gold and silver are a close second. I’m a history buff, and I’m not going to go into some long rant on the history of fiat currencies and money, but I think now is a good time to consider physical precious metals. I’m not talking about price exposure. If you want pure price exposure, you can look up the various Sprott Physical Trusts. I’m talking about disaster insurance.

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Disaster Insurance

I’m not a doomer, and I’m actually very optimistic about America’s future over the next two decades. I do think that we are in for a bumpy ride over the next several years, which is why I think it is prudent to have some precious metals on hand. Whether it’s buried in the backyard, in a safe, or in a vault nearby is up to you to decide. Personally, I think it’s important to keep them somewhere where they can be accessed fairly easily.

If the shit hits the fan, are you going to be able to get your precious metals from a vault in Switzerland? If you live in America, probably not. What happens if the electric grid goes down? Again, I’m not trying to be overly pessimistic on the current situation, but it’s worth having a contingency plan with physical precious metals. All of these options have different pros and cons, but there are several things that could make physical metals a good hedge for the current geopolitical landscape.

Geopolitical Uncertainty

I’ll be writing in more detail on the geopolitical situation next week, but it still looks like a powder keg waiting for a spark. Europe has a variety of issues that their current political system is ill-equipped to solve, and at least one powerful faction in the EU seems to be desperate to get directly involved in Ukraine. The Middle East is a giant question mark, from what is going on in Syria, to what might or might not happen with Israel and Iran. If the potential for conflicts expanding wasn’t enough, we have the US being bipolar on tariffs with several trading partners. It would be one thing if they were consistent and clearly laid out the plan for tariffs, but when tariffs are constantly in flux (even one example of intraday tariffs), it creates a lot of uncertainty.

The second thing is the debt situation here in the US. We still have a ton of wasteful spending (even if funding to some of the most egregious examples is being slashed), not to mention unfunded liabilities like Social Security, Medicare, and Medicaid. We will see what DOGE can do, and I won’t complain about what they have done so far. They will need to cut out the same waste and fraud in the Military and entitlements to put a serious dent in the problem. Basically, we are stuck in between a rock and a hard place and I think inflating the debt away is the path of least resistance.

Another thing to watch is the potential for a central bank digital currency (CBDC). I think that’s highly unlikely here in America (at least for now), and more likely to happen in Europe in the near future, but that’s a tangent for another day. Another tangent that I don’t have time for is on David Rogers Webb’s book The Great Taking. It’s worth taking a look at his thoughts on the plumbing of the financial system, but I think a mass confiscation of financial assets laid out in the Great Taking is highly unlikely. It would be the equivalent of flipping the financial game board and lead to absolute chaos, but it’s something to keep an eye on. The point is that I think having some wealth stored outside of the conventional financial system is good insurance against some of the potential landmines on the horizon.

Spreads For Physical Metals

Before I get into my thoughts on the big three precious metals (gold, silver, and platinum), I should mention the spreads between the spot price and buying the physical metals. Buying the physical metals is not the vehicle for you if you’re looking to buy and sell with any frequency. You are going to pay a premium to spot prices when you buy, and you will probably be closer to spot or even a discount when (if) you decide to sell. Basically, you get a papercut when you buy physical precious metals, and a papercut when you decide to sell.

Like I said earlier, if you’re bullish on precious metals and just want exposure to the price, the Sprott Physical Trusts are probably a better option with lower transaction fees. For the physical metals, the spreads will fluctuate depending on the product, how much you buy, and several other factors. For example, you will typically pay more for an American Eagle (gold or silver) than a bar of the same size. Ideally, it is something that you plan to hand down to future generations, but physical metals are only a logical choice if your time horizon is measured in years.

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Gold: Pet Rock Or God’s Money?

While gold ($2,963.30/oz) has been an afterthought for most investors for decades, I don’t think that will be the case for the coming decade. I wouldn’t be surprised if we end the year in the $3,500/oz ballpark, and longer term I think we go a lot higher. I could go into central bank buying, the lack of trust in governments, or any of the other things that could be a factor for gold in more detail, but I think a lot of signs point to a higher gold price in coming years. Overall, I think it’s a pretty good setup for gold bulls, and I think we are in the process of gold being remonetized.

With all of the chatter about gold on the country’s balance sheet being revalued, or gold backed treasuries, that we are watching gold become money again. I remember hearing Doug Casey talk about this being the last gold bull market (hopefully a future podcast guess), but there is a nonzero probability that we wake up one morning, and the US has revalued gold higher. I’m not here to tell you gold is going straight up and to the right, but gold is God’s money. It always has been and it always will be, and I don’t think you have to be a rocket scientist to figure out that gold will hold its value better than a fiat currency like the US dollar longer term.

Silver: Industrial or Precious Metal?

The answer is a little bit of both. There are other people that can go into the supply and demand picture in more detail, but at some point silver priced in dollars heads a lot higher. Some investors point to supply issues, increased demand from solar, or other factors, but I don’t think we will get a bull market in gold without silver participating to some extent. When that happens, and to what degree is anyone’s guess, but I don’t see a future with gold heading towards $5,000/oz and silver staying stuck in neutral in the 30s.

For investors looking at physical silver, the spreads can be a bit painful, but if you’re planning to hold it for years instead of months, I think it’s worth a look. In a worst case scenario, you probably won’t be exchanging gold for a tank of gas and some food. Silver is probably the logical choice for smaller day to day transactions. I like the risk/reward for silver below $35/oz, and I think it’s a matter of time before we see all time highs in terms of dollars. That might take years, but for investors with some patience, physical silver is worth considering. While I think silver is interesting as the lagging precious metal, I think the most interesting physical metal for speculators is platinum and the other PGMs.

Platinum & PGMs - Speculation + Insurance

Gold and silver get the lion’s share of attention from investors focused on precious metals, but I think platinum could have the most upside of all three. Platinum and the other platinum group metals (PGMs) have a huge gap between supply and demand. South Africa and Russia are the two largest producers of PGMs by far. Unless you think we are approaching mass-EV adoption, the gap between supply and demand makes for an interesting risk/reward setup. The PGMs are more scarce than gold, and most of the demand comes from catalytic converters.

As far as physical metals go, it’s probably easier to look at platinum ($1,002.10/oz) versus the other PGMs like palladium ($993.60/oz) and rhodium ($5,550/oz). If you think ICE engines are going to be around for years if not decades, it’s worth taking a look at all of them. The major investable platinum group miners are located in South Africa, which creates some uncertainty for investors, even if there is huge upside if platinum prices start to run. Platinum (and other PGMs) might not be as useful as silver or gold for bartering in a worst case scenario, but I think the setup is the most interesting of the precious metals from a price asymmetry perspective.

I have talked a bit about disaster insurance, and I think buying physical PGMs is somewhere between insurance and speculation. I wouldn’t start with the physical PGMs before gold and/or silver, but it’s an area I’m watching closely. I think platinum will catch up and pass gold if we get a bull market for precious metals, but we will have to wait and see. At the end of the day, there’s a reason the platinum tier on credit cards are above the gold tier.

Conclusion

I’m not the guy who will sell fear and then drop a link to an affiliate bullion dealer at the end of the post, and I’m not going to tell readers what they should do with their resources. For me, I think it is a prudent approach to have at least a small amount of physical precious metals on hand for the off chance that we do enter a more chaotic time. I’m bullish on the metals to varying degrees, and I think using a vehicle like one of Sprott’s physical trusts makes sense for investors looking purely for price exposure. For more octane on the upside, the miners are an interesting option.

I’m not a “prepper”, but I have started to take steps to prepare for some of the unlikely outcomes that could be on the horizon. I think we could be heading into a chaotic time, and having some physical precious metals is just one aspect of being ready for whatever may come. However, I don’t think it makes sense to go overboard where the only way that a strategy pays off is the worst case scenario coming to pass. That’s how you end up in the middle of nowhere on a compound with a stockpile of bullets, bullion, and MREs.

I think that we’re in for a bumpy ride over the next couple years, but longer term I think America will be in great shape if we make it through the next several years in one piece. The only problem is that the path from here to there looks like it’s filled with twists, turns, and landmines. That’s why I allocate a small slice of my investments to physical precious metals, like gold, silver, and platinum. My thoughts on physical precious metals can be summed up in one sentence:

I would rather have precious metals and not need them, versus needing precious metals and not have them.

Disclaimer

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

“Gold doesn’t have any yield.”

We have all heard the quotes from various places in the investment world on gold and other precious metals. Investors have been trained for decades to look for other opportunities, be it stocks, bonds, or real estate. I think that we are going to see that change in coming years, and I think with some of the geopolitical uncertainty and questions around the financial system, now is a good time to consider allocating to physical precious metals. My podcast with John Polomny is what prompted this post, and I think having at least a small slice of precious metals is a good disaster insurance policy and a hedge for potential chaos.

Like I have said before, I think we are in the early innings of a cyclical shift in markets. We had a long run of declining interest rates, low inflation, relative peace, and globalization. Now I think we are looking at a trend of rising interest rates, higher average inflation, increased conflict around the world, and deglobalization. To some extent, all of these trends feed into one another. Bringing parts of the supply chain back to America is probably a good thing for most Americans, but it’s almost certainly inflationary, and I haven’t seen a war that wasn’t inflationary. To be clear, this is a view of what I think things will look like over the next three to five years, not what might or might not happen over the next three to five months. Overall, it’s an interesting backdrop for precious metals.

I’m not going to pull a Peter Schiff and tell you “the sky is falling, buy gold” or one of the guys you see on the podcast circuit talking about the futures market manipulation. First of all, it’s not my area of expertise, and second, I don’t run a gold fund or bullion dealer. All I’ll say is that you should take anything said on the topic with a grain of salt, especially if someone is talking their book. There will always be someone pointing to inflation, real interest rates, or trust in governments as a reason to buy or sell gold and precious metals.

A wise man once said that violence is the only currency that never loses value. In my opinion, gold and silver are a close second. I’m a history buff, and I’m not going to go into some long rant on the history of fiat currencies and money, but I think now is a good time to consider physical precious metals. I’m not talking about price exposure. If you want pure price exposure, you can look up the various Sprott Physical Trusts. I’m talking about disaster insurance.

Subscribe now

Disaster Insurance

I’m not a doomer, and I’m actually very optimistic about America’s future over the next two decades. I do think that we are in for a bumpy ride over the next several years, which is why I think it is prudent to have some precious metals on hand. Whether it’s buried in the backyard, in a safe, or in a vault nearby is up to you to decide. Personally, I think it’s important to keep them somewhere where they can be accessed fairly easily.

If the shit hits the fan, are you going to be able to get your precious metals from a vault in Switzerland? If you live in America, probably not. What happens if the electric grid goes down? Again, I’m not trying to be overly pessimistic on the current situation, but it’s worth having a contingency plan with physical precious metals. All of these options have different pros and cons, but there are several things that could make physical metals a good hedge for the current geopolitical landscape.

Geopolitical Uncertainty

The first is the geopolitical situation, which looks like a powder keg waiting for a spark. Some people think that WWIII has already started, which might be a bit premature, but I’m not optimistic about the direction things are heading in Ukraine or the Middle East. Taiwan is another potential hotspot. The second thing is the debt situation here in the US. We are adding one trillion to the debt every three months, not to mention unfunded liabilities like Social Security, Medicare, and Medicaid. Basically, we are stuck in between a rock and a hard place and I think inflating the debt away is the path of least resistance.

Another thing to watch is the potential for a central bank digital currency (CBDC). I think that’s highly unlikely here in America (at least for now), and more likely to happen in Europe in the near future, but that’s a tangent for another day. Another tangent that I don’t have time for is on David Rogers Webb’s book The Great Taking. It’s worth taking a look at his thoughts on the plumbing of the financial system, but I think a mass confiscation of financial assets laid out in the Great Taking is highly unlikely. It would be the equivalent of flipping the financial game board and lead to absolute chaos, but it’s something to keep an eye on. The point is that I think having some wealth stored outside of the conventional financial system is good insurance against some of the potential landmines on the horizon.

Spreads For Physical Metals

Before I get into my thoughts on the big three precious metals (gold, silver, and platinum), I should mention the spreads between the spot price and buying the physical metals. Buying the physical metals is not the vehicle for you if you’re looking to buy and sell with any frequency. You are going to pay a premium to spot prices when you buy, and you will probably be closer to spot or even a discount when (if) you decide to sell. Basically, you get a papercut when you buy physical precious metals, and a papercut when you decide to sell.

Like I said earlier, if you’re bullish on precious metals and just want exposure to the price, the Sprott Physical Trusts are probably a better option with lower transaction fees. For the physical metals, the spreads will fluctuate depending on the product, how much you buy, and several other factors. For example, you will typically pay more for an American Eagle (gold or silver) than a bar of the same size. Ideally, it is something that you plan to hand down to future generations, but physical metals are only a logical choice if your time horizon is measured in years.

Subscribe now

Gold: Pet Rock Or God’s Money?

While gold ($2,352.80/oz) has been an afterthought for most investors for decades, I don’t think that will be the case for the coming decade. I’m still thinking we could end the year in the $2,500/oz ballpark, and longer term I think we go a lot higher. I could go into central bank buying, the lack of trust in governments, or any of the other things that could be a factor for gold in more detail, but I think a lot of signs point to a higher gold price in coming years. Overall, I think it’s a pretty good setup for gold bulls, and I think we are in the process of gold being remonetized.

It’s not an overnight process, but it’s worth watching a couple interviews of Luke Gromen to get his take on the path for gold (and other commodities). I’m not here to tell you gold is going straight up and to the right, but gold is God’s money. It always has been and it always will be, and I don’t think you have to be a rocket scientist to figure out that gold will hold its value better than a fiat currency like the US dollar longer term. While I think it makes sense to have some physical gold exposure, I think we are going to see silver and platinum outperform gold over the next several years.

Silver: Industrial or Precious Metal?

The answer is a little bit of both. There are other people that can go into the supply and demand picture in more detail, but at some point silver priced in dollars heads a lot higher. Some investors point to supply issues, increased demand from solar, or other factors, but I don’t think we will get a bull market in gold without silver participating to some extent. When that happens, and to what degree is anyone’s guess, but I don’t see a future with gold at $3,000/oz and silver staying stuck in neutral at $30/oz.

For investors looking at physical silver, the spreads can be a bit painful, but if you’re planning to hold it for years instead of months, I think it’s worth a look. In a worst case scenario, you probably won’t be exchanging gold for a tank of gas and some food. Silver is probably the logical choice for smaller day to day transactions. I like the risk/reward for silver around the current price around $30/oz, and I think it’s a matter of time before we see all time highs in terms of dollars. That might take years, but for investors with some patience, physical silver is worth considering. While I think silver probably has more upside than gold, I think the most interesting physical metal for speculators is platinum and the other PGMs.

Platinum & PGMs - Speculation + Insurance

Gold and silver get the lion’s share of attention from investors focused on precious metals, but I think platinum could have the most upside of all three. Platinum and the other platinum group metals (PGMs) have a huge gap between supply and demand. South Africa and Russia are the two largest producers of PGMs by far. Unless you think we are approaching mass-EV adoption, the gap between supply and demand makes for an interesting risk/reward setup. The PGMs are more scarce than gold, and most of the demand comes from catalytic converters.

As far as physical metals go, it’s probably easier to look at platinum ($994.80/oz) versus the other PGMs like palladium ($944.80/oz) and rhodium ($4,725/oz). If you think ICE engines are going to be around for years if not decades, it’s worth taking a look at all of them. The major investable platinum group miners are located in South Africa, which creates some uncertainty for investors, even if there is huge upside if platinum prices start to run. Platinum (and other PGMs) might not be as useful as silver or gold for bartering in a worst case scenario, but I think the setup is the most interesting of the precious metals from a price asymmetry perspective.

I have talked a bit about disaster insurance, and I think buying physical PGMs is somewhere between insurance and speculation. I wouldn’t start with the physical PGMs before gold and/or silver, but it’s an area I’m watching closely. I think platinum will catch up and pass gold if we get a bull market for precious metals, but we will have to wait and see. At the end of the day, there’s a reason the platinum tier on credit cards are above the gold tier.

Conclusion

I’m not the guy who will sell fear and then drop a link to an affiliate bullion dealer at the end of the post, and I’m not going to tell readers what they should do with their resources. For me, I think it is a prudent approach to have at least a small amount of physical precious metals on hand for the off chance that we do enter a more chaotic time. I’m bullish on the metals to varying degrees, and I think using a vehicle like one of Sprott’s physical trusts makes sense for investors looking purely for price exposure. For more octane on the upside, the miners are an interesting option.

I’m not a “prepper”, but I have started to take steps to prepare for some of the unlikely outcomes that could be on the horizon. I think we could be heading into a chaotic time, and having some physical precious metals is just one aspect of being ready for whatever may come. However, I don’t think it makes sense to go overboard where the only way that a strategy pays off is the worst case scenario coming to pass. That’s how you end up in the middle of nowhere on a compound with a stockpile of bullets, bullion, and MREs.

I think that we’re in for a bumpy ride over the next couple years, but longer term I think America will be in great shape if we make it through the next several years in one piece. The only problem is that the path from here to there looks like it’s filled with twists, turns, and landmines. That’s why I allocate a small slice of my investments to physical precious metals, like gold, silver, and platinum. My thoughts on physical precious metals can be summed up in one sentence:

I would rather have precious metals and not need them, versus needing precious metals and not have them.

Disclaimer

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

What Is Your Edge?

Is it knowledge of a certain sector? Understanding market dynamics? Or is it behavioral? For me, two of the most obvious advantages individual investors have are position sizing and time horizon. I think many investors struggle with both topics to varying degrees. Should I put 5% of my portfolio in a single stock? 10%? 20%? 50%? Where is the line where it gets to be too much? This is a question each investor has to answer for himself. There’s no one size fits all approach to this question.

Time horizon is another behavioral edge that is available to individual investors. The idea of making a quick buck trading in and out seems appealing at first, but I decided that approach isn’t for me (after a couple painful lessons). If it works for you, great, but I think that many investors would be better off with a 3 to 5 year time horizon and had longer average holding periods. Again, there is no one size fits all approach. Some people can hold for decades, others feel the need to trade frequently. Today I’m going to talk about my thoughts on position sizing and time horizon while discussing some of the stocks in my portfolio.

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David vs. Goliath

Institutions have plenty of advantages in today’s financial markets. Whether it’s transaction speeds for high frequency trading, massive research budgets, or access to Nancy Pelosi’s latest stock pick, Wall Street has plenty of ways to tilt the odds in their favor. However, I think individual investors can use position sizing and a longer time horizon to even the odds a bit. A lot of institutions have rules around position sizing that limit how much can be invested in one opportunity. In many cases, they can’t have portfolio weights over 2%, 5%, 10%, or whatever the line is. For individual investors, it’s up to your risk tolerance, but a concentrated portfolio is what appeals to my investing style. It’s a double edged sword for sure. If you have conviction on large positions and you’re right, it’s very profitable. If you have large positions and you’re wrong, it’s very painful.

Having a longer time horizon is the other thing that can give active individual investors an advantage. I use the term active loosely here. I keep an eye on my portfolio, what’s going on with each sector and company I’m invested in, but I don’t like trading too frequently. I prefer to go months without trading because that means the voice in the back of my head saying “buy this, sell that” is quiet, and I’m giving the bullish thesis on stocks in my portfolio time to play out. The average holding period for a stock is less than a year now (potentially as little as 5.5 months), and for a lot of institutions, I’m sure half of a year seems like an eternity.

Plenty of institutions have monthly or even weekly performance targets, which means they have to focus on all of the short-term noise (which there is a lot of these days). They hang onto every word of Federal Reserve meetings, debate potential interest rate hikes or drops, weekly commodity price moves, and whatever else might impact what is in their portfolio. I prefer to zoom out and look at the big picture over a three to five year timeframe. If I think oil is going higher over the next couple years, that might have an impact on trades I’m making. I’m not going to get caught up in oil bouncing all over the place week to week, or other short-term market moves once I have made a decision to buy something.

I’ll reevaluate my assumptions along the way, but I think it’s easier to go from a long-term view of what has an impact on companies and the actual business, instead of what fluctuations in the market might or might not happen on a daily or weekly basis. For me, there is a difference between being an investor and being a trader. I would rather look at the fundamentals of a business, and buy a stock to hold onto it for years, instead of trying to generate returns by trading in and out of something. If you can figure out what works for you as far as time horizon and position sizing, you can lean into the advantages that small investors have against larger financial institutions.

Position Sizing

Financial writers have spilled a lot of ink writing about diversification being important, or being a “free lunch”, or whatever other cliché you can think of. Speaking of clichés, now is a decent time for a Warren Buffett quote:

I like to think I know what I’m doing, and my portfolio is concentrated in what I think are the most attractive opportunities. I have talked about each of the things I’m invested in, but I would rather put 10%, 15%, or 20% of my portfolio in my best idea instead of 3% in my 15th or 20th idea. I won’t go into details here, but readers can see actual weights in my recent trade update post. What I will say is that my top 5 positions make up the majority of my portfolio. Every investor has their own risk tolerance, but I find the risk/reward most appealing in taking large positions in asymmetric opportunities.

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Read more

The thing that makes investing and markets difficult is that every market participant has different motivations, different strategies, and different time horizons. The large financial institutions like BlackRock and Vanguard are like the mindless giants that run ETFs and mutual funds. You buy shares of or , the machine takes that and buys the S&P 500. If you sell shares, the machine sells the S&P 500. No fundamental analysis, no macroeconomic analysis, no comparison to other investment alternatives. You can see how this might be problematic, yet many investors have their 401k set to automatically buy the S&P 500 with every paycheck.

Other financial institutions use algorithms or high-frequency trading to skim pennies off the top, often using payment for order flow to front run other investors. Citadel (a market maker and hedge fund rolled into one) is one example of a company that has huge influence over American financial markets. Hedge funds run a variety of strategies, and they often charge 2% of Assets Under Management (AUM) and a 20% performance fee, many times for mediocre performance. They often focus on short term performance (often weekly and monthly), which can be a drag on long-term returns.

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Where Are The Customer’s Yachts?

One hedge fund manager that I do listen to is Harris Kupperman, who runs Praetorian Capital. He is also a uranium bull, and owns a piece of offshore companies like Tidewater and Valaris . I’m paraphrasing here, but his goal is to generate the best returns on a rolling three year period. If you want an example of what outperformance from a hedge fund would look like, go look up his performance since 2019. His performance justifies a higher fee structure, but most hedge funds don’t in my opinion. I am naturally skeptical of Wall Street and the surrounding group of financial institutions, because what they are best at is transferring money from a client’s pocket to their own pocket. One of the books on the reading list that I will get around to sooner or later is Where Are The Customer’s Yachts?. The short discussion is that Wall Street gets rich while the customers lose money, and for most people dealing with Wall Street, that is the case today.

My advantage against large financial institutions is patience and a long time horizon of three years or more, and the willingness to buy what is unpopular. I have heard it called the cocktail party test. In the late 90s, people were bragging about the dotcom stocks they owned. Today, if investments come up in the conversation, I think most would talk about owning Tesla , Apple , or Nvidia . Basically whatever is hot at the time. A couple years ago I’m sure some of you remember GameStop and AMC going parabolic in a short squeeze. If you are actually looking to outperform markets, you want own the stuff that people think is absolutely insane, but has a brighter future than most people think.

If I tell people that I own South American oil producers like Petrobras , Ecopetrol , and I diversify that with coal companies like Peabody Energy , offshore drillers like Transocean and Tidewater, and I throw in an office REIT like Vornado and a cannabis REIT for good measure, they usually look at me like I have three heads. I fully understand that my strategy wouldn’t work for most investors, but I think that individual investors should adjust their strategy based on their age, risk tolerance, and knowledge.

Playing To Win

I’m a young investor in my twenties, I have no problem taking risks, and I like to think I know a lot about investments and the financial world. Yes, yes, pride comes before the fall, and I completely understand the risks that come with making large concentrated bets, but I think there are several opportunities out there that just don’t come along very often. If you want to be the investor that is buying when something is out of favor, it requires the ability (and the ego) to say that the market is wrong, I think that a certain stock is far too cheap, and the willingness to risk some amount of money on that bet.

I think there is enough evidence that says that the next several years are going to look a lot different than recent history in financial markets, and it’s going to be a good time to own commodities, real assets, and the related businesses. To me it looks like energy is a fat pitch and I’m positioned accordingly. I like to call it playing to win: I’m not where I want to be financially, but if things play out like I think they will, I will be well on my way to financial independence. The short version is that playing to win is playing to get rich.

Playing Not To Lose

On the other end of the risk spectrum, we have the investors that are playing not to lose. These investors already made their fortune, whether its from a business, a long history of saving, or are boomers that have ridden the real estate wave for decades. Instead of trying to grow their assets, they are trying to stay rich. Investors in this position decades ago could load up on bonds, and they would have been able to ride deflation and declining interest rates for years with very little risk. Now, it’s harder for investors in this situation to decide where to put money.

I think it would make sense to diversify. Whether that means 20% cash/bonds, 20% stocks, 20% commodities, 20% real estate, and 20% precious metals (gold/silver), or some other asset mix that significantly reduces risk is up to each investor. While 60% stocks and 40% bonds was the standard formula in the past, I think inflation makes that an unappealing option for investors.

I talked about this topic a bit in a past post, but I think investors ignoring the potential for inflation being higher for longer could be shooting themselves in the foot. If you don’t have commodities, real estate, or another asset that will handle inflation better than stocks and especially bonds, the 20s could be set up to be a lost decade.

A Lesson From My Recent Drawdown

This post was spurred by a recent discussion I had with friends, but I wanted to talk about a drawdown I had earlier this year and the bounce back that followed. It would be great if investing was a straight ride up and to the right. That is almost never the case with investing, and it definitely hasn’t been that way investing in commodities. I had a 6 week drawdown that was a 25% hit. Quick and painful, but I was convinced that I was right. Plenty of studies show that investors often sell bottoms and buy tops, and I had conviction that the stocks I owned were very cheap, and that the downturn was temporary.

Since the bottom, I’m up more than 70% and that certainly feels better than a large drawdown. I’m still very optimistic on my holdings because the valuations are still cheap. We will see how things play out, but commodities and the related stocks often have violent swings in both directions. If you look at the returns from the point before the drawdown to today, I’m up about 30%. It would certainly be less stressful to have those returns in a straight line, but that’s not how financial markets work. They say that volatility is the price of admission to the stock market.

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Different Strokes For Different Folks

I recently got a question along the lines of “Why would you run someone else’s account differently from your own?” The basic premise is that I run my account with the goal of creating the best risk adjusted returns. Sometimes that means taking on more risk than others would be comfortable with, or buying stocks that others would avoid, and having a concentrated portfolio. Why wouldn’t I do the same for clients?

There are several reasons for it. If I lose my own money, there is no one to blame but myself. I’m in the driver’s seat and I’m responsible for every financial decision I make. If I lose money for someone else, I’m also the responsible party. It’s my decision, and that loss represents a combination of someone else’s time, hard work, and their past investments. That’s why I won’t use leverage on other people’s accounts, and I won’t be as concentrated in their portfolio.

Risk & Reward

Every investor has to decide how they want to approach investing. Some want to invest in the S&P 500 and set it and forget it. It’s a low effort approach that has worked for a long time, but nothing works forever in financial markets. Others want to speculate in the options market, or with day trading, or buying high risk stocks like junior gold miners. Much higher risk, but much higher reward. I’m closer to this end of the spectrum, but I think investors can dramatically reduce their risk by factoring in valuations and macroeconomics. I like to think of it as more of a calculated risk taking approach.

Your situation might be different than mine, and a variety of factors will impact your approach. Someone that is 3 years from retirement or has a large family will certainly have a lower risk tolerance. That’s not a bad or a good thing, it just is what it is. Eventually I will switch to the playing not to lose side of things, but hopefully not anytime soon. A single man in his twenties can play to win and take more chances. It will probably be a volatile ride, but that’s a risk I’m willing to take for what I think could be a large potential reward. If I’m not going to swing for the fences on some of these opportunities now, then when?

Disclaimer

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

I would love to hear your opinions/thoughts in the comments below. Let me know what you think.

I’m making a list, checking it twice, gonna find out which stock is naughty or nice, Santa Claus is coming to town.

I understand it’s August, but I was thinking about my stock watchlist and I couldn’t help myself with the comparison to the Christmas wishlist. Now if you listen to some of the stuff I have been writing, you might end up with coal stocks in the stocking instead of just coal, but I think making a watchlist (or two) is a key part of being an investor in individual stocks.

Two Watchlists

I have two watchlists: one that I run in the background, which is stuff that I check about once a week. The other I’m more active with, checking on a daily basis. For my second tier watchlist, it includes all of the stocks that are currently in my portfolio and other stocks that I follow closely. This could be because they are in a sector that I like (coal or offshore oil, for example), or other situations that I find interesting. My first tier watchlist is much shorter and includes trades or options that I’m actively looking for if I see an opportunity.

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I haven’t made any trades in a couple months, but there are a couple things that this filtering system helps with. I’m constantly looking for new or existing ideas to bump up to the top tier watchlist, and this can range anywhere from 0 to 5 stocks. Right now, I will write a quick summary of several things I’m watching right now describing why they are on the watchlist.

VinFast Auto

VinFast Auto is an electric vehicle SPAC merger that is closely controlled by a Vietnamese billionaire Pham Nhat Vuong. Basically, it has more red flags than a Chinese Communist parade. Even after the SPAC merger, he controls 99% of the company through several investment groups. I’m not sure why Nasdaq lists this crap on their stock exchange, but shares have gone from $20 to $82.35 in two weeks. This puts the market cap at nearly $160 billion.

I don’t know if the fair value of this cash burning machine is zero, but I don’t think going short makes sense when it’s hard to predict what shares will do short term. I can tell you shares were very overvalued last week at $35, but that doesn’t stop it from more than doubling. I have looked at some options chains and I’m considering buying puts, but the premiums are very expensive due to the insane volatility. There is a 180 day lockup period, and there is a March 15, 2024 options chain (199 days away). If the options get cheaper, I will probably put a couple thousand bucks into puts because I don’t see any reason that shares levitate months from now, especially after the lockup. This one is at the top of my watchlist now, but I’m not going to rush into it if the opportunity isn’t there.

Nvidia

Unlike VinFast, Nvidia is a fantastic company. They have been caught up in the AI bubble as shares are up well over 200% year to date. I won’t be looking to short this one purely on valuation, but if it looks like shares are going to roll over, I might look to buy some put options for a year out. Shares could decline by more than half if 2022 is any indication. I don’t know when this one will turn but I don’t think it’s worth more than one trillion dollars or 40x revenue.

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Enovix

I have already written a post on Enovix , but I’m looking to potentially buy more shares. CEO Raj Talluri bought more shares on the open market recently after the share price decline, but I also wanted to include another article I read recently on the company’s battery technology.

Nova Royalty & Metalla Royalty

These two are still in the research pile, but they are smaller royalty companies that could be interesting in a commodities bull market. The basic idea behind Nova Royalty is that have bought royalties on several copper mines that are in the early stages of development, but once they start producing, they can be very long lived assets. Metalla is primarily a gold royalty company, which typically are a better business than gold miners. These two are definitely more speculative and I still have more research to do on them before buying any, but I think they could be two interesting stocks for a commodities bull market.

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Conclusion

Outside of Enovix, I haven’t been able to pull the trigger on any of these, but I think VinFast is near the top. Those two are probably on the first tier watchlist, while Nvidia, Nova Royalty, and Metalla Royalty are examples of stocks on the second tier watchlist (along with several other stocks). Individual stock investors that are looking to outperform the market should keep track of what is going on and prioritize a couple at a time depending on the opportunity.

Disclaimer

I own shares and calls on Enovix. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

Master Limited Partnerships

Like other partnerships, MLPs have general partners that manage the partnership, and limited partners, that invest in the partnership. MLPs combine the pass-through tax structure of other partnerships with the public market liquidity of common stocks. There are no taxes at the partnership level. Instead, the limited partners pay income taxes on their portion of the partnership’s earnings. Due to the tax structure, MLPs are primarily found in the natural resource sector and have a couple things investors should be aware of before investing in MLPs.

Units vs. Shares

One of the first differences is that investors own units in the partnership, instead of shares in a corporation. There are differences between being a unitholder and a shareholder, but owning units in a partnership creates different tax problems than owning a regular stock.

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Distributions vs. Dividends

One of the best reasons to own an MLP is the tax-deferred nature of the distributions. Unitholders do not pay income tax on distributions received. A portion of the distribution is treated as return of capital and it reduces your cost basis. This potentially means a larger tax hit on the back end if you sell the units, but in the meantime, MLPs offer a tax-advantaged income stream that is usually much higher than the yield on the average stock or the interest rate on bonds.

As a side note, MLPs are not a good fit for retirement accounts. It creates a bigger headache than it is worth, and if you get the tax benefits in a regular brokerage account, it makes more sense to hold units of an MLP in a standard account.

K-1 Tax Forms

While the distribution is a huge advantage of MLPs, the drawback of partnerships is the K-1 tax form the unitholders have to fill out at tax time. My tax accountant complains about them (which is why I only have on MLP personally), and I think investors should be picky their spots with MLPs. My basic thought on it is that if you can buy enough units of an MLP to pay for the additional tax hassle, I think the MLP space is an interesting sector to look at, especially for income focused investors. Readers that are interested in MLPs should do their own research (and consult a tax expert), but I would advise against buying just 10 or 100 units of an MLP. The potential return from a small position isn’t enough to justify the additional hassle.

These are just some of the basics with Master Limited Partnerships, but it should provide a baseline that will be helpful for my posts later this week on Enterprise Products Partners and Natural Resource Partners. Again, investors should be fully aware of the nuances of buying and owning MLPs before buying units. If you want a link to a good page for MLPs 101, you can follow this link to Investopedia.

The other discussion was with someone who is just getting started and is trying to figure out where to start. This is part of why I do the weekly podcast and video posts, so readers interested in learning more can go to the (free) resources that I use for additional information. Today I will be writing about how I view my investments from a 30,000 foot view and how it impacts my portfolio.

I don’t think there is a one-size-fits-all approach to investing, especially for investors looking for something that is more complicated than the cookie cutter indexing approach. Everyone has a different risk tolerance depending on their age and personality. Some older investors I have talked to have no issues being 100% in stocks (which is a big no-no if you ask the typical financial advisor), but they tilt towards dividend stocks that generate income.

I prefer individual stocks today for several reasons, but mainly since it provides the opportunity to buy cheap assets (if you choose stocks wisely), something that isn’t possible with real estate today. My basic investment philosophy is buy something while it is cheap (and hated) and sell when it gets expensive. It’s a contrarian approach, but today I want to talk about the three main categories that my investments fall under.

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Stuff That Pays You To Own It

For most investors, this should be the biggest bucket. It includes dividend stocks, rental real estate, and (God forbid) bonds. If you have $1,000,000 in dividend stocks that have an average yield of 5% and $1,000,000 in bonds yielding 5%, you have $100,000 in annual income. That means you have nice returns without having to make a sell decision.

This is especially important for investors that eventually plan to rely on portfolio income for their expenses. If you have no income producing assets, and you have to sell into a stock market crash (like 2008 or 2009 for example), you are potentially setting yourself up for trouble. If you own income producing assets, your net worth will take a hit in a downturn, but you will still have money coming in.

Real estate depends on the situation and leverage but you can generally get higher yields. Today real estate looks expensive to me, but that doesn’t mean I will prefer stocks to real estate forever. I’m sure there are special cases, but I think there is a disconnect between wages (especially for younger generations) and the cost of real estate.

For my portfolio, this includes Petrobras , Ecopetrol , and Peabody Energy . Some might view these stocks as risky, but at the current valuations, I will take my chances. At some point I’m sure it will include real estate, but for now, the best opportunities in my opinion are in the energy sector in the stock market.

For you, it could be Apple or Microsoft (which look overvalued today in my opinion and yield less than 1%), but they both have a strong track record of growing dividends for a long time. It could be bonds or other debt instruments where you collect interest payments. This is not ideal in an inflationary environment, but 5% in a money market is much different than 0.01% in a savings account a couple years ago.

It could be a portfolio of real estate where you collect the rent payments. The size of this bucket will depend on the investor. I think the majority of an investment portfolio should pay you to own it, but that looks different to everybody. It could be 60%, it could be 80%, but I have talked with investors that refuse to own stocks that don’t pay dividends.

Speculations & Special Situations

While owning profitable stocks that pay dividends is a great long-term strategy, I don’t limit my investment options to just income producing assets. I think every portfolio should have some level of speculation in it. Not every stock pays dividends today, but that doesn’t mean it won’t pay dividends in the future. For me, this is Transocean , Tidewater . They don’t pay dividends currently, but their businesses are improving, and I think we will see much higher share prices and some combination of dividends and buybacks moving forward.

Frontera Energy also falls in the speculative bucket, and is probably more speculative than either Transocean or Tidewater. The upside makes it a worthwhile investment due to their small size and offshore exploration, but I think there is more risk there. This bucket should probably be smaller than the first one, but if you can find assets that have a reasonable chance of multiplying a small initial investment, I think it is worth putting a small portion of your portfolio in assets that are speculative.

Short Term Cash / Disaster Insurance

The last bucket will probably be the smallest for most investors, but I think every investor should have short term cash and physical gold and/or silver. If you will allow me to put on my tin foil hat here for a moment, I think there are reasons to hold a small portion of your assets in your physical possession. This includes physical cash (at least a couple hundred bucks for food and necessities in the worst case scenario), and some physical gold and silver. Most of our transactions are made using credit cards and other electronic means, but what happens in the worst case scenario that the electrical grid goes down?

I have seen people talking about Mad Max and other apocalypse scenarios, but I don’t think that it will happen any time soon. I could be wrong on timing, but I think it is worth having some amount of money outside of the banking system. If the worst case scenario does happen, I think people would benefit from having cash, gold, and silver to barter with. If you need to buy water, food, and other necessities, and your bank app doesn't work, and your credit card is just a piece of plastic, it is probably a good idea to have some cash and precious metals on hand.

I don’t want to push the fear narrative that you see sometimes from goldbug investors. You will see some Peter Schiff types talking about the idea that the whole system is going to collapse in the near future, but in the off chance that things do take a turn for the worse, it is probably a good idea to have some cash, gold, and silver in your possession to deal with it. I do think that gold and silver happen to be cheap assets today, so if you don’t have any gold or silver, I think that now is a decent time to be looking at buying physical gold or silver.

Conclusion

Every investor is different, and your risk tolerance and investment mindset is going to have an impact on what you want in your portfolio. I do think that most investors should lean heavily towards assets that pay you to own them. Some will lean towards real estate and physical assets that pay you to own them, but most real estate assets look expensive to me today. We have higher interest rates and we are still dealing with the back end of a real estate bubble built on near zero interest rates. Certain stocks look cheap, but most indices are expensive as well and are very concentrated in high valuation tech stocks.

While I think most investments should pay you to own them, I do think investors should be open to speculations if the risk/reward makes sense. I think energy is a good pond to fish in, especially with the offshore sector. If you look at the supply and demand picture for energy, I think it points to a very favorable setup for the offshore sector. The last bucket is up for debate, but I do think it makes sense to have physical cash, gold, and silver if we see some black swan event where the electronic payment rails go down. This is probably going to be the smallest bucket for most investors, but I will say this: I would rather have some cash, gold, and silver on hand and not need it, instead of the worst case scenario occurring where I would need some physical assets and not have it.

Each investment is different, but if you distill it down to basics, they can fall into one of these three categories. Most investments should generate income, but I do think it is worth having speculations where the risk/reward makes sense, and physical assets to deal with any potential black swan events. This is not a one-size-fits-all prescription for every investor, but I do think most investors should put resources into each of the three buckets. The ratio will depend on what you want as an individual, but I think this is where some diversification makes sense.

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

• The 60/40 stock and bond portfolio has long been considered a diversified all weather portfolio.

• While past returns have been attractive, things don’t look as good moving forward.

• The real returns of the 40% bonds side will be hurt by inflation.

• The 60% stocks side will also feel inflation, but the standard S&P 500 allocation isn’t actually that diversified. It is concentrated in the largest tech companies.

• In my opinion, many investors are over-diversified. Investing is not a one size fits all approach, but I prefer a concentrated portfolio.

The other day I went down to my cigar lounge in Seattle to relax and watch the Kraken game. I’m more of a baseball fan (and a long-suffering Mariners fan), but I enjoy watching hockey and it was a good Game 1 to start their series against the Dallas Stars. They won in overtime but lost last Game 2 last night. After the game, we had a long conversation on markets, finance, interest rates, and geopolitics.

I love talking about all these topics, and quite frankly, I think most people don’t have enough of these conversations. In recent days, we have seen another 25-basis point interest hike and the collapse of First Republic Bank. That’s not the focus today, but from what I have heard, it sounds like there are other banks circling the drain and I’m sure we will be finding out more about the banks in coming weeks. We also discussed inflation, China, Ukraine, and some of the stocks that I think will perform well over the next 3 to 5 years.

I spend a lot of time thinking about macroeconomics and where the world is headed over the next couple years. Everyone has some view on these topics, but for investors, it’s important because it will have an impact on your strategy. In recent years, the 60/40 stock and bond portfolio has been considered a good all-weather strategy where investors could set it and forget it. I don’t think that will be the case moving forward, for several reasons.

Over the last couple decades, the 60/40 stock and bond portfolio has basically become financial industry standard. I think part of this due to the laziness of most financial advisors. The other part is likely due to how well the standard 60/40 portfolio performed in recent years. 2022 was actually the worst year on record for the 60/40 portfolio, and I think it was a sign of things to come. In my opinion, there are problems on the horizon for both sides of this portfolio.

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40% Bonds

I talked about bonds briefly in my inflation post, but I think that a lot of advisors and investors are not factoring in the drag on bonds from inflation. Part of that is due to recency bias, which is hard to break after a forty-year bond bull market and relatively low inflation, but I think that the next decade is going to look a lot different from the last one. Bonds are considered a safe and low-risk investment (especially Treasuries), but if you are trying to grow your wealth over time and increase your purchasing power, bonds don’t look like a good risk/reward proposition moving forward. They are certainly more attractive than they were when interest rates were near zero and bonds represented return-free risk, but on the whole, I still don’t find the asset class attractive today.

In the past, bonds would perform well when stocks struggled, cushioning any drawdowns that happened in the stock market. However, if we look forward instead of using the rearview mirror, I think bonds will generally be a rough place to invest due to higher inflation. To be sure, bonds will do well if interest rates fall again (which many pundits are predicting), but I don’t think they will beat the rate of inflation. If you buy bonds yielding 5% and hold them to maturity, when inflation is averaging more than 8%, the nominal value of this part of the portfolio will increase. However, this won’t keep up with inflation and the real purchasing power will actually decrease.

For a simple illustration, we can purchase $1,000 of 1-year Treasuries, yielding 4.59% as I write this. In a year, it will be worth $1,045.90. If inflation over that same time period is 8%, your purchasing power actually decreased over that year. If you decided to go to Costco at the beginning of the year to buy $1,000 worth of groceries, you would get more bang for your buck than if you did the same thing after a year with $1,045.90. This brings me to the concentration risks that I see with the stock side of the portfolio.

60% Stocks

I have talked about a bit about the cyclical nature of markets, and I plan to write a post dedicated to the topic. For now, I think we are closer to a cycle peak than a cycle trough when it comes to most stocks simply due to valuation. I like certain sectors more than others, and these sectors are not a meaningful percentage of most 60/40 portfolios. The standard option for the stock side of a 60/40 portfolio is an S&P 500 index, the market cap weighted index of the largest companies in the US.

The problem with the standard S&P 500 index is that it is heavily concentrated in the tech sector, which is richly valued today. Of the top 10 companies in the index, 8 companies are large tech companies like Apple and Microsoft . If you invested $1,000 in the S&P 500 today, nearly 25%, or $250 will be invested those 8 companies. Some of those stocks are more overvalued than others (namely Tesla and Nvidia ), but the whole group is richly valued today.

The set it and forget it passive investing strategy of investing in the S&P 500 has been extremely successful over the last couple decades, but like my view on bonds, I don’t think that will continue for the next decade. There are some alternatives to the S&P 500, but the main one that comes to mind is well-known Nasdaq 100 ETF QQQ, which is even heavier with its tech sector weighting. If you want to invest in the S&P 500 without the concentration, there is an equal weight S&P 500 ETF , which invests the same amount in the smallest companies in the S&P 500 as it does in the large companies. I think this will generally be a better option moving forward, but I would rather look for the individual companies that I think will outperform all of these ETFs.

Keeping Wealth vs. Building Wealth

Depending on where you are at, your approach to building an investment portfolio is going to be different. For investors that are already wealthy, they tend to be more risk-averse and focused on avoiding large losses. Investors focused on building wealth tend to take more risk in an attempt to increase their returns and build their portfolio in an attempt to build their wealth over time. Either way, I don’t think the 60/40 portfolio is a good fit for most investors moving forward. It might be diversified, but if both sides of the portfolio don’t perform well enough to keep up with inflation, it’s not a good investment strategy for long-term investors.

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Diworsification

Diworsification is a term coined by fund manager Peter Lynch. It basically describes what happens to most investors invested in various ETFs and mutual funds, which own a slice of many different assets but reduces the risk/reward profile of the overall portfolio. To be clear, I’m not saying that anyone should put all their eggs in one basket and just buy one stock in an attempt to maximize returns. I own more than 20 stocks, but the lion’s share of my investment portfolio is in 5 or 6 companies that I find very attractive opportunities over the next 3 to 5 years.

Each investor’s portfolio will be different depending on their mindset, but I think a stock portfolio can be sufficiently diversified by owning as few as 5 stocks. It doesn’t make sense to own just 5 energy stocks or 5 tech stocks, but if you spread things around to different businesses and sectors, you can generate impressive returns if you are intelligent in your investment decisions. Once you go past 20 stocks, it starts to have a drag on the returns if you assume each stock is an equal percentage of the portfolio.

Generally, I think investors should own more of the stocks that they find most attractive. A diversified 60/40 portfolio has worked well in recent years because everything has gone up and to the right, but I don’t think the risk/reward is favorable today. Right now, I’m leaning heavily towards the energy sector because that is where I think the most attractive opportunities are, but I’m sure in the future other sectors will look more attractive compared to energy.

It comes down to opportunity cost. Would I rather own more of my best idea, or do I want to buy a new stock in order to diversify? In theory, diversification lowers the risk of a portfolio, but if you overdo it, it also lowers the potential return. That is where the 60/40 portfolio sits today, and if you think inflation will remain high, your real returns might not be as attractive as they were in years past.

Conclusion

I will be talking about other top picks in the next couple weeks, but Peabody Energy is an example in my own portfolio. It’s a large chunk of my portfolio because I think shares will significantly outperform over the next couple years. If I’m looking at buying another stock, does the opportunity make sense for my portfolio, or would I rather just buy more Peabody? That was my mindset when I was buying shares recently.

I want to be clear that this is not a one size fits all approach. There are factors that will influence what you’re comfortable with, including your age and risk tolerance, but I think investors looking to outperform the market might want to consider a portfolio concentrated in their best ideas. I think this is true no matter what is going on in the market, but if you agree with my assertion that a 60/40 portfolio won’t generate attractive forward returns like it has in the past, it might be a good time to reevaluate your investments. Owning a basket of everything in stocks and bonds has worked for years, but that doesn’t mean it will work forever.

Disclaimer

You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.

• Options are a useful tool for experienced investors. They can be used to speculate or generate additional income depending on the strategy.

• I talk about the basics of buying and selling calls and puts, and different strategies available to investors.

• I talk about the put options I sold on Peabody Energy and my strategy behind the trade.

• This post should be a good introduction to options and a reference for future posts where I discuss options that I own.

While I was writing my article on Peabody Energy, I realized that I should explain the put options I sold on the stock a couple weeks ago. I am by no means an options expert, but I know enough to avoid complicated options strategies that have the potential to blow up in my face.

If you are familiar with options, feel free to skip this post. This won’t be anything revolutionary for you. My goal is to provide some of the basics on derivatives, buying and/or selling puts and calls, and my preferred strategies. Options can be used to speculate or generate additional income depending on the strategy. There are options strategies for every risk tolerance and I go over some of the basics below. This should be a good introduction to options for readers that aren’t familiar with derivatives.

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There is nothing wrong with buying shares of a company instead of making a leveraged bet on the stock with options. Most of my portfolio is in shares of different companies, but I do make an occasional smaller bet on companies using options. When you buy shares of stock, investors win when the price goes up. When you start using options, you have to be right about the timing, direction, and the size of a change in a stock price.

I’ll start by talking about the basics of call options and put options and wrap up by talking about a couple of my options position to illustrate the potential of different strategies. I want to make it crystal clear that most options strategies carry more risk than just owning shares of stock, and chances are that it won’t make sense for most people. I wanted to write a post for readers looking to understand the basics of options so I can point to it in the future when I’m writing about companies where I own options.

Each options contract is tied to 100 shares of a stock (or ETF, etc.) and has a set expiration date. You can either be a buyer or seller of puts or calls depending on your view of a stock. For an example, I will use part of Peabody Energy’s July 21^st, 2023, option chain because I have already covered the company.

Buying Calls

If you are buying calls, you are betting that the share price will be higher than the strike price at the expiration date. If I buy a $30 contract for $0.38, I’m buying the right to buy 100 shares of Peabody for $30 between now and the expiration date. If the market price of shares rockets to $40 in our example, I can still buy 100 shares for $30. If this happens, the value of the call options increases exponentially. If shares stay below $30 between now and expiration, the call option will expire worthless.

The cost of call options decreases significantly as you go farther above the current share price (the $30 contract is cheaper than the $28 contract for example). The higher the strike price, the higher the chance is that the contract will expire worthless. The OTM (out of the money) call options where the strike price is greater than the current price are riskier and cost less per contract, but they have the most torque if the underlying stock goes up. ITM (in the money) call options, where the strike price is below the share price, don’t have the same upside but they aren’t as risky.

There are factors like time decay and other issues with options that I won’t get into here, but when I’m buying calls, I typically prefer to go out as far as possible, pushing the expiration date out 1-2 years. Buying calls is a speculative strategy, but you can generate outsized returns if you get it right. There are other strategies using calls that are more conservative, like the covered call strategy.

Selling Calls

If you are selling calls, you are taking the other side of the trade. If I sell the $30 contract for $0.38, I am selling the right for someone else to buy 100 shares of Peabody for $30 between now and expiration. If I already own 100 shares of Peabody, this is the covered call strategy. It’s one of the safest options strategies and is used to generate additional income. If I don’t already own 100 shares of Peabody, this is called selling naked calls, which carries way more risk of blowing up. If I sell naked calls, and shares go to $40, I have to go buy shares at the market price to sell them at $30 to fulfill the contract.

The same changes in the price of the call options applies here, but by selling calls I’m on the other side of the trade. A covered call strategy might be a good way to add income if a stock doesn’t pay a dividend or if there is a price you are willing to sell shares. If I’m fine selling Peabody at $30 between now and July 21^st, I can sell a call option, receiving $0.38 up front. If shares stay below $30, the option expires worthless, and I keep the premium. If the shares are above $30, I have to sell my shares for $30, despite the higher market price. Basically, selling covered calls is a strategy the caps your potential upside to generate income. I use this strategy occasionally (once or twice a year), but it is not a strategy I use often.

Buying Puts

While calls are contracts with the right to buy, put options are contracts with the right to sell. If I think Peabody is going to go down in share price, I can buy puts instead of shorting the stock. I can buy the $20 put contract for $0.67, which gives me the right to sell 100 shares at $20 between now and expiration. The value of these puts will rise dramatically if Peabody shares drop. If shares stay above $20, the put options expire worthless.

If you flip the paragraph about the price of call options on its head, it applies to the cost of put options. The cost of put options decreases significantly as you go farther below the current share price (the $20 contract is cheaper than the $23 contract for example). The lower the strike price, the higher the chance is that the contract will expire worthless. The OTM (out of the money) put options where the strike price is lower than the current price are riskier and cost less per contract, but they have the most torque if the underlying stock goes up. ITM (in the money) put options, where the strike price is above the share price, don’t have the same upside but they aren’t as risky.

I buy puts occasionally, but this is rare. I usually go out 6 months or more, but this is a speculative strategy just like buying calls. I actually have a couple stocks on the watchlist where I might buy puts in the next couple weeks, but I prefer selling puts to buying them.

Selling Puts

Selling puts is one of my favorite options strategies. It works well with stocks that you wouldn’t mind buying at a certain price. By selling put options, I am agreeing that I will buy shares at the strike price in exchange for the premium upfront.

This one we can actually use the real example for Peabody’s July 21^st option chain. I sold $30 puts a couple weeks ago, receiving $7.00 for each contract. If shares stay below $30, I will increase the number of shares I own of Peabody by 50%. This is only if I don’t buy back the put contracts before expiration. I plan to buy to close these contracts at some point, but we will see what happens with the share price and the price of the contracts. Either way, I will be writing a trade alert on it at some point by July. If shares go above $30, I keep the $7.00 option premium.

I use this strategy more frequently, but it really depends on what is going on with markets and the stock. This is less speculative, but it is a strategy that works best if you are fine owning the stock. You can generate income from the strategy similar to the way covered calls works.

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Conclusion

I know that this is a long explanation for something that might not be remotely interesting for readers. Buying shares is simple and using options is not. Options can increase your risk and reward depending on how they are used, but they can juice your returns if they are used right. They can also blow up your account if they are misused, so consider this your caveat emptor.

I just want to be able to point to a post giving some information on options for readers that don’t understand when I talk about puts or calls in future posts on companies. Without this background, parts of future posts might sound like another language. I think I have provided a good level of basic information on options, but if you have any questions, feel free to leave a comment or send an email.

Disclaimer

I own shares and short puts of Peabody Energy BTU -0.76%↓. Nothing discussed here is an investment recommendation. You should do your own research before making any investment decisions. Each investment discussed has different risk & reward profiles that might not be suitable depending our your situation.

• Money Market Funds might be a good alternative to savings accounts and their minuscule interest rates.

• I prefer Money Market Funds with a portfolio of Treasuries instead of funds that hold Federal Reserve Repurchase Agreements, despite the lower interest rate.

• Money Market Funds are not FDIC insured like Money Market Accounts or Savings Accounts, but they are a low-risk way to get some return on your cash.

• I list some of the other alternatives for investors looking for cash alternatives.

Money Markets

I plan to dive into other big picture topics and individual companies in coming weeks, but I wanted to write my first post on money market funds. It’s not a frequently discussed topic in most investing circles, but I think it is a relatively low risk way for investors to get a better interest rate on their short to mid-term cash holdings. While money market interest rates won’t keep up with inflation (another topic I will address in a future post), I think it is a logical alternative to bank savings accounts, where interest rates remain close to zero.

I have seen a couple videos and podcasts on money markets and the continued inflows money market funds have seen due to the difference in interest rates between savings accounts and money markets. Money market funds recently reached an all-time high in assets under management, passing $5T in AUM in March. While I think this is a logical reaction to the minuscule interest rates of savings accounts and the issues with the banking system after Silicon Valley Bank’s blowup, some investors are worried about potential for issues created by these continued money market fund flows.

Jason Burack of Wall Street for Main Street has talked about money markets in some of his videos, where he (rightly) points to the money market bailouts in 2019 and the potential for issues created by the Federal Reserve repurchase agreements inside many money market funds. Investors who have been around since 2008 might remember when money market funds broke the buck. Most of those consequent outflows went into safer government and treasury money markets instead of finding a home in other assets. I would be surprised to see something like this happen again, but I think there are good options in money market funds for people who are tired of the near-zero interest rates offered by savings accounts.

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