Category Archives: Finance

The stock market is not rocket science

Stock valuation is not rocket science. If you look  at U.S. stock prices realistically, private debt is at an all-time high relative to GDP (on a total amount, per capita, and as a percentage of GDP)! The unemployment figure widely publicized is not high, but the U6 number which includes marginally attached workers is super-high (and has been for years). So things are not as good as many people think, especially regarding the future growth prospect of corporate earnings. Factor in the fact that the stock market has been propped up by a low interest rate policy, and we have a potential recipe for slow stock price growth going forward, if not a big downward move in U.S. stock prices. When interest rates do finally increase, watch out!

Another big issue is the algorithmic traders run the short-term stock market! Whenever there is a big short-term move in either direction, they are usually a big part of the cause, if not the sole reason. They are doing their best to get paid when the market goes up or down. When trading volume increases, regular folks often start to buy or sell following the lead of the algorithms, despite not necessarily understanding short-term price action driven by support or resistance levels, and written into many trading algorithms. These algorithms will change direction and push the short-term market a different direction in order to capture quick profits.

I believe people will significantly adjust their investment portfolios when interest rates rise bringing many overbought stocks down to their appropriate valuation.

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The day after Armageddon for stocks

Now, a day after Armageddon, and the first time the DOW closed down more than 300 points for 3 days in a row, futures are up big time. This is a zig zag stock market. A bunch of people will buy today thinking we’ve hit the bottom, but a new sell off is likely on the way (and could happen today). If for no other reason, there are more companies at 52 week lows (as a percentage of the total stock market), than ever before. Being at a 52-week low usually spells trouble for a stock at least for a few months. We will see.

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You Have Time To Achieve Your Dreams!

I was able to earn a graduate degree while working a demanding, full-time job! I was also able to write a 59,000 word book while running a business. If one puts their mind to it, anything is possible, regardless of time constraints!

There are 24 hours a day. How you use them is up to you!
24 Hours per day
Sleep 5 5 5 5 5 5 5 5 5 5 5
Travel 2 2 2 2 2 2 2 2 2 1 0.5
Work 6 7 8 9 10 11 12 13 14 15 16
Dining 2 2 2 2 2 2 2 2 2 2 1.5
Miscellaneous 1 1 1 1 1 1 1 1 1 1 1
Hours Left 8 7 6 5 4 3 2 1 0 0 0
You have the time to achieve your dreams!
www.GregoryCollier.com
24 Hours per day
Sleep 6 6 6 6 6 6 6 6 6 6 6
Travel 1 2 2 1 0.5 1 1 1 1 1 0.5
Work 6 7 8 9 10 11 12 13 14 15 16
Dining 1 2 2 2 2 1 1 1 1 1 1
Miscellaneous 1 1 1 1 1 1 1 1 1 1 0.5
Hours Left 9 6 5 5 4.5 4 3 2 1 0 0
Including a minimum of 1 hour per day for dining, plus 30 minutes
of miscellaneous time, everyone should have time
to achieve their dreams!
24 Hours per day
Sleep 7 7 7 7 7 7 7 7 7 7
Travel 2 2 2 1 0.5 1 1 1 1 0.5
Work 6 7 8 9 10 11 12 13 14 15
Dining 2 2 2 2 2 1 1 1 1 1
Miscellaneous 1 1 1 1 1 1 1 1 1 0.5
Hours Left 6 5 4 4 3.5 3 2 1 0 0
24 Hours per day
Sleep 8 8 8 8 8 8 8 8 8
Travel 0.5 1 2 2 3 3 1 1 0.5
Work 6 7 8 9 10 11 12 13 14
Dining 2 2 2 2 1 1 1 1 1
Miscellaneous 1 1 1 1 1 0.5 1 1 0.5
Hours Left 6.5 5 3 2 1 0.5 1 0 0
24 Hours per day
Sleep 9 9 9 9 9 9 9 9
Travel 3 2 3 2 2 0.5 1 0.5
Work 6 7 8 9 10 11 12 13
Dining 2 2 2 2 2 1 1 1
Miscellaneous 1 1 1 1 1 1 1 0.5
Hours Left 3 3 1 1 0 1.5 0 0
24 Hours per day
Sleep 10 10 10 10 10 10 10
Travel 3 1 1 3 2.5 1.5 0.5
Work 6 7 8 9 10 11 12
Dining 2 2 2 1 1 1 1
Miscellaneous 1 1 1 1 0.5 0.5 0.5
Hours Left 2 3 2 0 0 0 0
24 Hours per day
Sleep 11 11 11 11 11 11
Travel 1 1 2 2.5 1 0.5
Work 6 7 8 9 10 11
Dining 2 2 2 1 1 1
Miscellaneous 1 1 1 0.5 1 0.5
Hours Left 3 2 0 0 0 0

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I like the short put spread option strategy when I’m bullish on a stock

I trade options and like the short put spread option strategy when I’m bullish on a stock. With a short put spread:

  • my risk is capped (I know exactly how much money I can lose)
  • I know my maximum potential profit up front, and
  • the margin requirement is minimal

To set up an option play, my analysis is always thorough; however, this doesn’t mean I’m guaranteed to profit – profitability is never guaranteed. If anyone tells you otherwise, they either don’t know what they’re talking about, or they’re lying.

I analyze potential option plays post market-close, pre-market open, and intra-day.  Though prices can change dramatically overnight and intra-day, by starting my analysis after the end of a trading day, I can focus more intensely on my analysis, without the distraction of intra-day news and price swings.  Having analyzed closing-prices, I can prepare for anticipated price moves when the next trading session begins.

Two things I look at in detail are an option’s open interest and daily volume. I want to know which strike price has the greatest number of open contracts and the trading activity in those contracts. This is important because it’s a potential indication of where large traders (institutional investors, etc.) may try to pin a stock’s price at option expiration.

I sell out-of-the-money put options (i.e. options with a strike price lower than the current market price). I usually make sure the put options I sell have a strike price at or below that of the put option with the most open interest. I simultaneously buy put options on the same underlying security with a lower strike price, which limits my risk: I can only lose the difference between the strike prices plus commission, less the premium I received (credit received for selling a put option).

I prefer using this strategy in a short time frame prior to option expiration. By this I mean anywhere from a few days to a few weeks prior to expiration. This hopefully allows me to capitalize on the fact that a stock’s price may stay in the range I desire, maximizing my profit potential. I want the options to expire worthless so I keep as much of the premium a possible (100% if the options expire out-of-the-money).

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Generational Wealth

Too often I see people spending their money frivolously, and I admit, I’ve done it myself. Spending money is usually fun. Yet fundamentally, wasteful spending satisfies a short-term desire, often at the expense of long-term success. In other words, there’s an opportunity cost.

In the early years of my career I worked at several leading financial institutions, providing operational and technical support to fixed income traders. These were high-net-worth individuals, many of whom grew up in high-net-worth households. So whenever I got an opportunity, I would ask questions in an effort to expand my knowledge. The traders would often tell me things like:

  1. “Don’t take risks with your money; take risks with other people’s money,” and
  2. “Accumulate principal, then live off the interest – never, ever spend the principal.

The first point is an example of the risk taking philosophy of many people who accumulate significant wealth by using the financial resources of others. This includes corporate resources used to create profits; the more profits one creates for a company, typically, the larger income one can demand. “Other people’s money” also includes client resources: it’s no secret that wealthy hedge fund managers did not simply accumulate their wealth because they’re great investors. They magnified their wealth by charging a 2% fee on assets under management (AUM) and 20% on profits. So the first key is getting AUM (aka “other people’s money”), and keeping it long-term. To reiterate, this does not require one to be a great investor, but rather a great marketer.

The second point is the philosophy of many people who accumulated a large amount of wealth, whether on their own, or from family wealth passed to them. Irrespective of how wealth is accumulated or how much wealth one accrues, if one does not manage their money well, they can blow a fortune.

“…just look at the latest news headlines. I’m sure you’ll see an article about a down- and-out famous movie star, or a current or former professional athlete who has recently declared bankruptcy.”

-Gregory Collier, The Janitor’s Sons: A True Story of Hope, Shattered Dreams, and Winning Despite Adversity © 2012 by Gregory Collier.

Creating generational wealth does not require one to become the next Bill Gates and accumulate a large net worth via the price increase of a single stock. If one manages their financial resources well (including managing risks) and saves and invests for the future, they can establish the basis of generational wealth for their family.

SAVE AND INVEST FOR THE FUTURE!

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Ghetto Economics

My family didn’t move to the ghetto when we relocated from Brooklyn to Detroit. But by the time I moved out of Detroit, my neighborhood had a large amount of crime — it had become the ghetto. Even if I had spent my entire childhood in the most decrepit ghetto in America, it’s irrelevant. It doesn’t matter where you come from — what matters is where you’re going.

While education can help one achieve a level of financial success, good financial management can help one enjoy prosperity for an entire lifetime. In fact, good financial management can help future generations of a family capitalize on opportunities, and bask in the joy of success. This requires managing wealth with knowledge, skill, and appropriate risk management. Conversely, poor financial management can wipe out a fortune and potentially destroy one’s life.

I know many people who consistently earn large incomes. None live in the ghetto, but many have a ghetto mentality when it comes to managing their finances. “Ghetto Economics” is not limited to minorities living in urban areas. I can introduce you to numerous suburban white people who are as “ghetto as hell” when it comes to managing their wealth.

Class is open, please take notes. This is Ghetto Economics 101. Your final grade in this class is based on whether you succeed or fail economically. There are Ivy League MBAs who’ve failed this course, while folks who’ve never taken a college class earned an A. It’s not simply one’s level of education that makes them good at managing their wealth; devotion to using good wealth management principles is required.

Yet, probably the most important factor for continued prosperity is one’s ability to manage any emotional propensity to make poor economic decisions. There are PhDs in business and economics who cannot manage their money because emotions dominate their thoughts. This is practically the same as a medical doctor who’s overweight, smokes two packs of cigarettes a day, and never exercises.

If you do the following things, you are “ghetto as hell,” regardless of your income level. Unless you avoid these pitfalls, you deserve an F in this class, and failing this class may lead to failing in life.

1.      Spend all of your money and save nothing

One way to help achieve this is to attempt to keep up with the Joneses; that is, buy things because someone you know has them. Another way to achieve this is to become a connoisseur of the finer things in life when you can’t afford them: expensive automobiles, McMansions, expensive vacations, and designer clothes.

Even people who earn massive amounts of money can go broke — just look at the latest news headlines. I’m sure you’ll see an article about a down- and-out famous movie star, or a current or former professional athlete who has recently declared bankruptcy. A way to avoid going broke is to maintain a budget and manage your finances meticulously. If necessary, you may need to aggressively alter individual and/or family spending habits in an effort to thrive financially. This may require distancing yourself from friends and family members, and may even cause divorce.

2.      Get payday loans or otherwise use credit poorly

 By spending money you have not yet earned, not only will you waste money on finance charges, you’re on a path to ensuring you remain broke. Every dollar spent on finance charges is one less dollar available to save and invest for the future. Bad things often happen to good people, but good people make bad things happen to themselves when they spend money they don’t have.

Ideally, the full balance owed on a credit card should be paid off each month. The only debt that is “good debt” is that which earns a greater return than the cost of the debt. Many financial advisors consider the purchase of one’s primary home “good debt,” as a long-term investment in real estate tends to rise in value over the long term (that is, many years). Children should educate themselves on using credit wisely, so by the time they are young adults, they’ll understand the optimal uses of credit, as well as the risks. (Adults should educate themselves on this too.)

Using credit poorly can easily lead to having bad credit; this is not good for any reason. Whether due to a catastrophic circumstance, or living a lifestyle of the rich and famous, bad credit is typically a roadblock to success. This can ensure you don’t quality for credit in the future, and prevent you from being able to purchase a home or vehicle. At a minimum, bad credit may require one to pay an extremely high interest rate when approved for a loan or credit card.

Good credit is often a prerequisite for many job opportunities, as many employers consider bad credit a sign of incompetence. Also, from the point of view of many potential employers, someone with poor credit is a risk to a company. Such individuals are often desperate to dig themselves out of a financial hole, and therefore, lack the ability to focus fully on a job.

Long-term strategic financial planning can help individuals and families avoid financial disaster. Some keys are to have the appropriate type and amount of insurance coverage, as well as a savings plan for the future.

3.      Drop out of high school or college

This is a prudent strategy if you aspire to limit your career options and earning potential. The statistics on education and lifetime earning power tell a compelling story of why education is important. Though there are financially successful people who drop out of high school or college (or don’t attend college), I doubt any of the wealthiest people in the world would honestly advise anyone to drop out of high school or college. If I ever meet Bill Gates, I will ask him about this.

4.      Rest on your laurels

 Some people stop working hard once they attain a level of success. This includes those who think education ends the day they graduate from high school or college:   they never focus on learning new things. Many such individuals watch in disgust as the world changes and their nice, safe jobs go by way of the dinosaur — to extinction.

Most often, it is those who continue to expand their horizons who achieve at the highest levels. Whether earning an advanced degree, professional certification, or otherwise enduring the pain associated with striving for a higher level of achievement, one should never rest on their laurels.

If you achieve all of these points, you are well on your way to having a miserable life. If you achieve just one or two of these points, you’re in luck: you still qualify for potential misery. Ghetto economics dominates the lives of many people. In fact, it dominates the spending habits of many local and national governments. Alas, the world has embraced ghetto economics — now much of the world finds itself in peril. Please take my words to heart for your own good: save and invest for the future — and never spend more money than you earn. 

 “To whom you give your money, you give your power.”

—W.E.B. Dubois

Excerpt from The Janitor’s Sons: A True Story of Hope, Shattered Dreams, and Winning Despite Adversity © 2012 by Gregory Collier. All Rights Reserved.

http://www.JanitorsSons.com

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Educate yourself on Finance!

Everyone should study finance. Quite possibly, it is the most important thing people should learn and teach their children, especially behavioral finance, that is, how emotional factors can impact financial decisions. If more people actually understood finance, I doubt there would have been a global financial crisis.

When I moved into a technology role on Wall Street, many of my coworkers laughed at me because I have a MBA in Finance. Little did most of them understand that many of the senior most technology managers on Wall Street hold MBAs, including the global head of IT at the company where I worked at the time. Now many of my former coworkers question why they didn’t continue to educate themselves (especially in finance).

I didn’t get a MBA to get a higher paying job in corporate America, though higher compensation did come. I did it because I wanted to acquire the same level of formal education many CEOs of the world’s leading companies have. This would not guarantee I rise to the level of CEO, but it would ensure I possessed additional tools with which to capitalize on opportunities.

I also chose to study finance because I sincerely believe the more one knows about finance, the better their life will be. As an example, having started my career in fixed income, I’ve become knowledgeable on the subject. This helps me to structure scenarios whereby individuals can use their money to make money, and based on their level of risk aversion. To structure a bond purchase that allows the accrued interest received to pay all or part of one’s living expenses is a win-win situation. This is a strategy often used by the rich and powerful — those who most often have educated themselves on finance.

Take time to study finance and control your destiny.

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