The Market Is Relentless Like An Angry Lake

In stark contrast to the tropical picture that accompanied my last post, today's weather was gray, cooler, and very windy. The lake was gray/brown with large whitecaps. Burgees and flags flew straight out. No one was out for a leisurely stroll even when the sun emerged in the afternoon. But we had guests and the guests wanted a boat ride. So we braved an angry Lake Dora.

Ordinarily I'd accelerate past the sights [old hotels, boat houses, golf courses, and large homes] and head to my destination. Today, following that pattern, I would have had a boat full of water and needed a kidney transplant. I wouldn't be able to boat as usual until the wind and swells lessened. But I still needed to make progress so I motored on slowly toward my destination.

The stock market we've experienced the past 18 months is like an angry Lake Dora. You can't make progress or even tread water with a passive buy and hold strategy unless you have the staying power of a Warren Buffett and an iron stomach. You need to modify your approach until the old one works again.

If you believe that we aren't going to experience a bull market or a significant, lasting, bear market rally anytime soon, as I do, then the combination of a solid stock paying a good dividend and writing covered calls can be a desirable strategy. I've been doing this over the past year and a half to great success. This approach will work better in a market that is falling 50%, but it will still work in a flat market, so consider it.

You have to assume that any stock that is currently owned is loved and will be held through the entire down cycle. If it was going to be pitched, there were better times and prices. My explanation of writing covered calls will be simplistic, so if you become intrigued you will need to do some basic research before you act. 

I happen to like garbage companies and I recently wrote calls on Waste Management, WMI, as I have every 30-60 days for months. My total investment in WMI is down over the period, but much less than the stock's decline since I've received the call premiums and the stock dividends. They make a bad situation less bad.

Toward the last part of February the stock was selling at $28.50 and I sold the right to buy the stock from me at $30 on March 20th for $.30. My decision was would I accept a $1.50 price increase, plus a $.30 premium, plus a $.29 dividend on March 20th and be happy. I decided I would be happy to get a 6.3% move in less than 30 days [ it would be 7.4% if the dividend is included] so I wrote the call. The brokerage cost was minor. If WMI is less than $30 I keep all the premium and write another call. If it made a larger move upward I will be forced to sell for $30 or buy back the call. When I've bet wrong and incurred an opportunity cost I've accepted my fate and made the sale. Frankly, I've saved myself a lot of grief by having some stocks called away from me that would be worth a lot less now. 

Covered calls, inverse bonds, gold, and some defensive stocks have helped me negotiate an angry lake until the sun comes out, the wind dies down, and the burgees go limp.