Would you rather spend money on a Lamborghini, mansion, and jet, or make more money for non-profit ventures? Sometimes, something outside of ourselves drives us to do amazing things for other people.Today, Toby Mathis of Anderson Business Advisors talks to Bryan Canter, an experienced investor turned active trader. He has spent the past seven years developing his trading education through several training programs.
- What prompted Bryan to get into trading? Interest in non-profit side that needed funding by leveraging existing job and money
- What’s Bryan’s level of involvement? Expected 8 hours a day for 4-5 years of education to reach expert level to dedicate 1 hour a day for market assessment and set up trades
- How and where did Bryan start? Introduction to trading stocks and options at David Mitchell’s trading education company called, Neuventure, now named TRADEway
- What were Bryan’s results? Lost money, but not because of the system; 5% of traders are successful, and 95% of traders lose money
- Is Bryan making money now? Yes, by primarily trading in futures markets
- What’s Bryan’s advice for others? Find platforms that give you the ability to paper trade
- What are naked calls and naked puts? If selling naked puts, you don’t own the company, but someone can make you buy it at a certain price
- Did Bryan get free money and sell a put (you get money, and you get to keep it)? Two strategies: Sell naked puts on stocks and crude oil futures
- What’s the percentage loss that Bryan’s willing to take? 25% loss on selling puts, but usually gets 10% gains
- What’s the difference between investing and trading? In real estate, investing is owning rental real estate, and trading is buying something (i.e., fix-and-flips)
- What’s the purpose of options? Acts as insurance because prices of options fluctuate with market volatility and a decrease in value over time
- What makes a successful trader? Recognize the need and commit time for college-level education, and find mentor assess trades with people
- What’s Bryan actually trading? Follows trend trading strategy, but not trying to pick the top or bottom, but 60-70% of the middle
- Why does Bryan like futures over stocks? Fair growth stocks can be Ponzi scheme if they’re not paying a dividend; futures contract usually goes against some kind of commodity
- What is Bryan’s advice for future investors about stock vs. futures markets? Put every penny you can into investing in high-quality dividend-paying stocks
Full Episode Transcript
Toby: Hey guys, this is Toby Mathis with the Anderson Business Advisors Podcast. Today, I have an interesting gentleman, Bryan Canter, who comes to us from the lovely state of Colorado. I asked him on, for the reason of his experience and going through a lot of different training programs in being a very, very active investor. First off, welcome Bryan.... Read Full Transcript
Bryan: Thank you very much. I appreciate it.
Toby: Just to get started, where are you from? How did you get into this stuff? In that order.
Bryan: From is a hard question because I’m actually a retired military but I spent 23 years in the military, so I was from all kinds of—
Toby: Congratulations and thank you.
Bryan: Temporarily now, Colorado Springs. I’ve probably started investing, if you will, back when I was in college in 1987. That was my first foray into just doing the normal, I was buying stocks, some ETFs. Before, there were no ETFs, I would find mutual funds and things like that, but then I got into active trading, very active trading in about 2012. I spent the last seven years in my trading education.
Toby: What caused you to get into the trading? What prompted you? Keep in mind, I have thousands of clients that are traders. I’m always curious as to what was it that got the hooks in.
Bryan: There were some things that I wanted to do on the nonprofit kind of side, that needed funding and I realized the level of funding that I was going to need for those things was never going to come about, trading time for money. I wasn’t ever going to be able to get a job is going to generate enough money that’s going to be able to fund some of those nonprofit ventures. I wanted something that could leverage the money that I had.
Toby: This wasn’t about getting a Lamborghini, a bigger house. This wasn’t about getting a jet and travel around. This was because, “Hey, I needed to make some more money so I could do some nonprofit activity”?
Bryan: Yeah, and it couldn’t take up all my time. If it was something that was going to take 8, 10, 12 hours a day, then I wasn’t going to be able to dedicate the time to the nonprofit efforts either.
Toby: What was the nonprofit, if you don’t mind me asking?
Bryan: It’s a little complicated. I’m writing but I am also starting a publishing company and it’s a niche-purpose publishing company, mostly he trying to publish fiction, if you will, for, say non-Christian audiences, secular audiences that have some Christian principles embedded in them just so that people will be exposed to ideas that they otherwise normally wouldn’t have. I can’t do the writing myself either. I want to be able to enable some other authors that are in that market.
Bryan: Very cool. Well hey, sometimes it’s having something outside of ourselves that drives us. I’ve seen some people do really amazing things when they’re doing it for other people. Then whenever they do it for themselves, they managed to step on landmines and it’s horrible. They find anything that they could do wrong and go do it.
You got into the trading world, that’s really exciting and you decided, “Hey, this is something I could do on the side.” Were you full-time employed at the time that you did this or were you already retired?
Bryan: I was retired in the military, but I was working for a defense nonprofit, Johns Hopkins University Applied Physics Lab. I was working for them at the time that I got started. Since then, I have stepped away from that and to be able to dedicate time for writing and using the trading basically provide financial backing for that.
Toby: Very cool, so you’re just looking for something. How many hours a day were you looking to dedicate or was it even hours a day? Was it hours per week or maybe hours per month? What was the level of involvement you want to be involved?
Bryan: The goal changed. My goal and the goal was to do about what I’m doing right now, which is about an hour a day, being able to do the market assessment and set up the trades. I put the orders in advance, so they just execute automatically. I have to do that because I personally don’t have the discipline to control them, but I did recognize that for a period of time, I was going to have to go to college. I was going to have to get, you know, you obviously can’t get trading in a typical university, but I have to go to some of the education things.
I expected to dedicate eight hours a day to this for a good four or five years to be able to get to the level of expertise that I need.
Toby: Did you? Is that what you spent? What did you end up doing?
Bryan: I did, apart from a little bit of travel and also taking care of my elderly parents that needed some assistance, I did end up putting a good six to eight hours a day for three or four years, at least.
Toby: How did how started? Where did you start? What did you do.
Bryan: It was interesting. I actually was introduced to Anderson through my first trading education company. David Mitchell runs, at the time, it was called […] on Wall Street, they’ve rebranded as trade right now. That’s primarily options trading. That was an introduction to trading stocks and trading options and then some of the different kinds of strategies that you could use.
Toby: I think David’s been our clients since 1998 or 1999, a minister down in Texas, right?
Bryan: Yeah, that’s correct. He’s got his hands on a whole bunch of stuff, he’s an active minister, works with trading education and they’ve recently started a space company for reusable rockets and things like that.
Toby: Very cool. He’s not boring, that’s for sure. You got in there. You went through those guys, so that was more option trading and a lot of just stocks, right?
Bryan: Yeah, and the baseline, you’ll learn in all of these things, everything, trades off from the baseline and price really is the primary mechanism that you’ll use, price and pricing patterns, technical charting, is what you’re going to use. Then, if you’re going to trade derivatives, like options, you’ll do that off of the movements of the base stock. They teach you to trade stock and then you can use that knowledge, apply that knowledge to trading derivative […] stock options.
Toby: Very cool. You started looking at stocks. What do you remember most about when you first got started?
Bryan: At that point, although I had a brokerage account where I could buy stocks, honestly, I didn’t even have enough knowledge to have the kind of brokered account that I needed to trade options. I had to set all that up. To begin with, a lot of it was just simply the mechanics. I can’t tell you how many bad trades I ended up making just because I messed up the order process, with something silly like that, or misunderstood the chart. Learning charting, learning the mechanics.
Toby: Interesting you say that. Words of advice for somebody who’s starting now?
Bryan: Clearly, you paper trade, so you find that almost all platforms out there that’s going to give you the ability to paper trade.
Toby: Get all your mistakes out when you’re not actually betting money on it. If you’re going to learn to gamble, don’t do it when you’re in Vegas sitting at the table with real money. Go in your computer and learn to gamble on a simulator.
Bryan: Absolutely, and that helps you get the mechanics down learning the charting software, the platforms and that kind of stuff.
Toby: Yeah, wow. You started there. You took your lumps, sounds like. Did you do okay or did you lose money? What did you end up doing out of that?
Bryan: Overall, I lost money and the reason was not the system.The system that they teach is very good. I got a very, very good education about what options are, how they work, how trading works and all that kind of stuff. You’ll find the reason that 5% of traders are successful and 95% of traders lose money is right—
Toby: That’s a crazy stat. Where did you hear that one?
Bryan: In a number of different places. Actually, if you go to the trading education places, they aren’t going to tell you that because they don’t—
Toby: They want you to think you can make a ton of money.
Bryan: Yeah, and they don’t want you to believe that what they’re teaching you probably has a 95% chance of ending up in failure. There have been a number of studies done, a matter of fact, one of the articles I wrote earlier for the Insanity Investments firm, talks about the differences between investing and trading. In there, a bunch of academic studies have gone back and taken a look at it and then a bunch of industry studies as well.
Toby: That’s been my experience too. I look at tax return, so I tend to be like, “All right, somebody could say they’re making money.” You ask people when they’re leaving Las Vegas and say, “How’d you do?” they all broke even. Well, you got billion dollar casinos that didn’t build themselves. Somebody is losing and they’re never going to really tell you, not against somebody, “I’m about broke-even,” no. There’s certain things where you really are gambling.
I was like, “At trading, you better know your stuff.” Investing is where you’re actually the house, then you can absolutely buy things and then hold them over a long period of time, your time horizon is very long, because there’s going to be blips, but historically, the stock market goes up.
Bryan: Absolutely, yeah. It’s trading is the high risk activity, with investing—
Toby: But you can marry them together, too, like knowing when to trade. It sounds to me like you did some of that. You went and you jumped into the option trading and like a lot of people we see, they jump in with high hopes and then the reality is a little different and a lot of it is the eight inches between your years. It’s the mental side of it. You realize that you may have a tendency to be a gambler or you grab onto things that you won’t let go. It’s almost the psychology. How much of that was your issue?
Bryan: 100% of my losses were my issue and my issue was, I’m an engineer by training, I was in the military, I just don’t like to be wrong, so I have a problem accepting my losses.
Toby: You’re a guy.
Bryan: I just was not stopping that. I went back and applied the system stockout rules and found out that in my first two years of trading, if I had followed my own stockout rules, I would have at least come out even and would not have lost money, but I didn’t. I have a problem taking those losses.
Toby: You’re making money now, though, right?
Bryan: Yeah, I am. Again, a good part of that was migrating to a system that was a little bit more mechanical, so I do my market analysis now before the market opens. I put my trades on with limit orders and I’m primarily trading in the futures markets, right now. Those orders will execute without me going in there. The only thing I can do now is go in there and go, “I am going to change that a little bit,” or cancel my order out or something like that. My best strategy now is just to keep me out of it, put my orders and do the analysis, walk away and don’t even look at the computer until the next day.
Toby: Then you spend about an hour a day setting these things up?
Bryan: Yeah, about an hour.
Toby: Did you end up where you wanted to end up then? When you first started you said, “Hey, I want to help my nonprofit out. I want to get into these other activities,” and now here you are, it sounds like you’re working about an hour a day in the market and you’re able to make it. Are you at your goal then? Are you able to do the things you want to do?
Bryan: Yeah, I’m pretty close to that. I will tell you that the system that I’ve been using right now, for me, still needs to prove itself out over a longer period of time. I’ve been using it for about four months. I did very extensive back testing. I back tested it over about 10 years and because it’s futures, it goes across a broad variety of markets. It’s not like the stock market, because the stock market has been essentially going up for 10 years. If you back test the stock strategy for the last 10 years, it better have made money, because the market’s been pretty consistently going up.
This is in commodities markets, stock market indices, financials and even some currencies and things like that, so it’s a broader range. The back testing tells me it consistently makes money, that’s based on mechanicals, that’s basically entering and exiting the trades when the system tells you to. I’ve had pretty decent successive that over the last four months. I want to see how that works out, but if things work out based on, thus far, the last four months plus the back testing, then I should be able to, in about an hour a day fund my publishing company with somewhere between five and seven books a year, is what my goal is, to be able to publish. That’s just because I don’t put more personal time.
Toby: That’s really cool, so you’re going to be sponsoring other writers and things like that.
Toby: That’s your why.
Bryan: A quick foray off to the plan or the thing. A lot of publishing is going to self publishing right now, hybrid publishing where you might be able to pay somebody $10,000 and they’ll facilitate helping to publish the book for you. I want to be able to sponsor those authors, so to be able to put about $10,000 per book into the publication and the marketing, so that they don’t have to come up with that money up front. Then we’ll split loyalties until I pay myself back or my company back, which by the way, was my set up through Anderson.
Toby: I like that.
Bryan: Once I pay myself back for that then I can fund another book.
Toby: You ended up in futures and this isn’t, “Hey, this is the best thing in the world to do,” but it sounds like you went through other companies and you started off doing the stocks and options and then did you go to other educational companies as well?
Bryan: I did. I will tell you that I think I’ve done a lot. I’ve probably done too many because instead of just picking a system and going with it, I went through a number. Probably the most extensive training that I got was through a company called Online Trading Academy, Sam Seiden has got the reviewer there.
Toby: That’s why you’re there and they actually have physical locations. You’re going in there and you’re trading all day aren’t you?
Bryan: Yeah, it’s a hybrid. I mean you’ll go to let’s say a 40-hour class where you’ll be in class all week, but then they also have continuing education sessions online and actually live trading education sessions online where you’re watching the markets, analyzing it together, and things like that. That was very, very good education to build on top of what I’ve already gotten from David Mitchell and his group.
Toby: What else? What other ones? Online Trading Academy, they’re not a big futures company are they?
Bryan: They do a core strategy because all of their trading is based on price action and technical analysis price action, so they do a core strategy and then you can branch off into Options, Futures, Forex, or just longer-term investing and trading. I didn’t learn futures from them and that’s where I was introduced to the futures markets through them. I can’t tell you how many very good […] courses, I’ve taken her courses and again, she’s essentially doing price action analysis, and then overlaying some option strategies on top of that.
Toby: She’s a trend trader. She works with us at the Infinity side. She was a roommate of one of our lawyers. Again, this is going to sound sad, but I think that was in 1999-2000. She really did extraordinarily well during that stretch. I still remember the days of Qualcomm going up. I forget how many hundreds of dollars at the end of the year, but it really did well for people that knew how to trend trade. Of course, they tend to give a little bit of it back when it goes the other way. You got to learn how to trade that bear market.
Bryan: You actually make more money faster in a bear market than you can in a bull market because a bull market tends to […] step up. We say that in trading or in the markets, markets take the stairs up and the elevator down. If you know how to trade boots on the downside or if you’re in futures and you’re just selling contracts rather than buying them, you can make a lot of money going down, but it’s a little riskier.
Toby: Yeah. We used to have guys that would do naked puts and if you’re not a trader out there, that just means that somebody can make you buy the stock at a certain price. If the stock’s at $100 and you sell the puts at $50, that means the stock has to go down to $50 before you’re forced to buy it. If it tanks below it and goes down to $30, you still have to pay $50. That’s where you can lose your lunch money. I’ll be danged. I watched some market crash twice. These guys just got taken out back and beaten with a stick. It was pretty extraordinary to watch because they get the free money and sell a put, you’re getting the money, and you get to keep it. Did you do any of that stuff?
Bryan: I actually hate to admit it but right now, two strategies that I do in addition to my core strategy is just something that I kind of play with, but I do sell naked puts on stocks. I also sell naked puts on crude oil futures.
Toby: Explain that one. I want to hear that one. I don’t know how to do any of that. I’m just curious.
Bryan: I was going to say, if you want to pick probably the riskiest thing other than […] or something like that, crude oil obviously moves a lot with geopolitics and things like that. Essentially, there are a few futures contract instruments that you can trade options on, most of them aren’t very liquid, but crude oil is very liquid. It works just like selling a naked put on a stock. The only difference is in the futures markets, you’re renting based on margin. Your futures contract has already levered at about 10-to-1 and then if you’re selling an option on top of that, there’s a lot more additional leverage and the margin requirements fluctuate daily based on the price movements in the underlying. The key thing with selling naked puts is adjustments. If you just buy it and you think you’re going to hold it through expiration and win, occasionally that might work.
Toby: You sell it and you buy it back. You buy it back when it’s…yeah.
Bryan: You got to do rollouts, or you got to turn it into an iron condor, or you got to do something to adjust it when it gets down to a certain percentage of a loss, or just take the percentage loss and get off the table.
Toby: What’s your percentage loss that you’re willing to take?
Bryan: On selling puts, and I’m willing to take a 25% loss. I take usually 10% gains. Part of the reason I still do that is because it’s one of the strategies that you can still run a very high batting average on. I can get an 80% success ratio, but you got to have that when the loss ratio or—
Toby: Let’s explain this because not everybody is an investor that listens to this podcast, but it’s kind of fun. A lot of these guys are just real estate investors. Explain the options to a real estate investor so that they get it.
Bryan: Well first of all, the distinction between investing and trading in real estate terms is the difference between owning rental real estate and that’s investing, you buy something—dividend paying stocks, and trading is more like doing flips. You don’t go out and try to do a flip unless you know what you’re doing, and you got a good team with you, and all that kind of stuff.
You know the markets. You know how much it’s going to be worth after you do it and you have some background on doing the construction and all that kind of stuff. That’s different swing investing and trading. In real estate terms, an option is very similar to putting down a purchase contract on a house. You may put down some earnest money on a house. You put down $1000 to secure the property. That means you have the option to purchase that property at a given price. You’ve already set that price, it’s a strike price, but it expires at a certain date.
That might be good for two months or something like that. If something happens and the market bottom falls out of the market, all of a sudden the house now is worth 10%-20% less […]. Anyway, a significant amount less than what you—
Toby: We saw that happen here in Vegas. We saw a 75% shrink in about a year.
Bryan: In that case, you wouldn’t exercise your option. You just take the hit, you let them keep the earnest money and then you move on, but on the flip side, if something happens, somebody comes in and announces a new development project in the area or something like that, it’s going to cause real estate values to rise. If that house rises up 10%-15% you’ve already locked it in at that price.
You can either exercise your option, purchase the property and then just own that property, or you can sell your option to somebody else and that’s usually what options traders do, very seldom do you hold an option through expiration unless you’ve sold the options that bought the option.
Toby: In the market, you have options that you can buy for a week, some of them are months, some of them are a year, some of them go out two years, it’s called a leap. You can buy or sell. If you own the stock, I suppose you could do this without owning a stock, you’re selling a naked call but—
Bryan: Naked call and naked puts.
Toby: When you say naked, we’re just talking about that you don’t own the underlying security, so if you are selling puts, and this naked puts means you don’t own the company, but someone can make you buy it at a certain price.
Let’s go through a scenario Bryan. Let’s say that I am an investor out there and I’m looking to buy and I go to you and I say, “Hey, Microsoft is at $120,” or something like that, “Would you sell me the right to make you buy it at $100 and then how much would I have to give you to make you do that?”
Bryan: Yeah. That’s were when I said options, it can get kind of complex. If options were just based on strike price and expiration, it would be a little bit easier, but it’s also the price of those options fluctuates with market volatility, and there’s—
Toby: And time. Absolutely.
Bryan: It decreases in value over time. That’s really the purpose of options. The purpose of options is really insurance. The other analogy you can make if you will is an insurance premium. People that own a very large stock position, a lot of times are concerned about what if the market tanks and goes down? You can buy put options which means that the put option is going to increase in value as the market goes down, just to cover the value of your portfolio. That way, you might take a little bit of a hit, but your option is going to give you a little bit more, and it’s levered. It’s about 10-to-1 leverage or something like that.
Anyway, that’s why 85% of options expire worthless. Selling covered calls is probably the safest. You can do that in a retirement account because it’s one of the safest trading activities that you can make with options because it’s covered, you got the underlying security, you’re the one that’s selling that contract on the house, but you’re selling it at a price that’s so high that most people are going to go, “Well, I’m not going to exercise that option to buy that house because the house would be worth less than what I owe on it. I’m just going to let it expire,” and you can keep your insurance premium for it.
Toby: Yeah. For folks that aren’t used to the security’s market. Let’s say you have a company like, say, Microsoft, just because it was in my backyard for a long time. Let’s say you have Microsoft and you own it, I don’t know what it is today, but let’s just say it’s around $120. What you would do if you owned Microsoft, is you would sell somebody the right to buy it from you at a certain price. Logical, you probably wouldn’t sell them the right to buy it at less than what you paid for it, unless they were giving you a lot of money.
Bryan: Or unless you were really sure that it was going to get down in value for some reason. If it’s trading at $100, you might sell them the option to buy it at $120, and if it goes up to $120…
Toby: You get called out and you pay.
Bryan: You get called out, but you keep that insurance premium money that they gave you to begin with. You haven’t really lost anything. What you’ve lost is you could have sold it at $120 but you sold it to about $100 because that was the strike price.
Toby: Let’s walk through that scenario. Let’s say I own Microsoft or any company, we’ll just call it company A at $100 and I sell to Bryan a 6-month option to buy it at $110. That means, he can buy it from me at $110. If it goes up to $120, how much do I get? I get the $110 and I get whatever I charged him for that option.
Bryan: Yup. You didn’t lose money there. You’ve only had a little bit of an opportunity cost because if you had just not sold the option and kept it and held it, today you could have sold it at $120.
Toby: What Bryan makes is he makes that spread. He paid let’s say $1 for the option and now it’s worth $120. He made $9 off of $1. He made an exponential return and that’s why people are very, very geared towards the option market because when it rains, it pours. It’s actually just the money dumps out of the sky, but the same token goes in reverse, too. When it takes a piece out of you, it takes everything.
Bryan: Yeah. When you’re buying options, you’re hoping that it’s going to move in a certain direction. You’re convinced you’re going to buy calls because you’re convinced that the market’s going to go up, so you’re going to be able to exercise those options at $100 to get something worth $120, then you can trade it out for the value and make that big move.
Toby: Did you go through any courses where you were like, “This is absolute garbage. Everybody here is going to lose their money.”
Bryan: Again, because I know in advance that only 5% of traders are successful, most of the people aren’t going to have the account value to be able to suffer the losses that they’re going to take in life. Regardless how much paper trading you do, you get the mechanics of paper trading but you don’t fix the problems here.
Every class I sit in I can look around and I can go, “Most of the people here are not going to be successful.” The things that can make you successful at trading is number one, recognize that you need to essentially a college level education. You really need to commit the time to do this say eight hours a day or so for two, three, four years.
Toby: That’s trading. This is the people that are playing. I always equate it to basketball or something like that. If you’re going to go out there and play one-on-one with Kobe or James, you better you have your game on because you’re going head to head with very, very good players. If you’re timing the market, you’re going head to head with some very, very good players.
Bryan: Yeah. Actually, you’re going head to head with this really bad player. That’s you.
Toby: You too, yeah. You […] on your own. They don’t have to do anything.
Bryan: Yeah, and it is trading. Like I said, you put the time into it, and you have an account balance that’s going to allow you to take some pretty good losses. In the meantime, you’ll eventually learn.
The people that wins stick with it. They find their trading system that they can backtest and have proven results. The other, probably, absolute key thing is to have an active mentor or some kind of active mentorship program where you’re able to go in, assess your trades with people, and they can say, “Look, you did everything right on this one but the market just didn’t do what you thought it was. You took your losses, stop, and you’re just fine.” This is a win even though you lost some money on it. Or they can look at it and go, “Well, your trading rules said to do this. You did this instead. Why? Talk me through that.” Those kinds of things are helpful in making you a profitable trader.
Again, I do want to distinguish a little bit between that covered call. That thing is a very, very, safe trading mechanism. It’s something that you can do to juice the returns that you’re going to get off buy-and-hold stocks. In investing, you’re probably better off putting in about three or four hours a year in investing. Build your portfolio, a good, solid, dividend paying stocks, the boring ones, then check them once a year to make sure that they’re not going to do the GE thing on you.
Toby: You can put a rolling stop on there. You could just say, “Here’s how much I’m willing to let it go down and I’ll sell it.”
Bryan: If you held it for very long, you’re not going to actually suffer a loss on it because the dividend income will have paid for your cost basis in the stock. That kind of thing where you reassess your portfolio about once a year, you got a good portfolio. Maybe, say, as little as 10-20 good, solid, dividend paying stocks in different industries […]. You can make very good returns over a long period of time.
Toby: It’s getting it slow. If you’re an investor, you just have to be patient. Some people are impatient.
Bryan: Ideally, if you are going to trade, your purpose in trading, you’re never going to trade with your whole investment. That would be absolitely stupid. You got a good possibility of losing all of that.
I’ll go back to the real estate analogy, you’re going to do some flips. Your purpose in doing flips is to generate some money so you could buy some long-term whole rental property that’s going to generate those consistent returns—the income—on a regular basis.
Toby: Let’s say one thing. You can trade very safely if you own the underlying security. The part where I see people get blown up is when they’re just going in buying and selling the option. If you own some stocks, you can sell the option, and buy it right back.
I have clients that do that several times a day. They sell it. They buy it back. They sell it. They buy it back. In any case, even if they were called out, they will still make money.
It’s the idea of owning the company A $100 and they’re selling $105 options. When it looks like it’s going up and then when it starts to pull back, you buy it back as it goes down in price. You can still trade those trends.
I know […] does a good job at it. There’s a lot of folks out there that are very good at seeing that. I have one client who makes strong seven figures just doing that over and over. He goes crazy. He’ll do it over and over in tiny little increments paying very little in the fees for the transactions. He’s making lots of small transactions.
Bryan: Yup. That’s the covered call strategy. Again, it’s so safe that the government will allow you, regulations will allow you to do that in a retirement account. They realize, you can’t really blow it up, and lose a ton of money. You can lose a little bit.
If you get called out when the value of your underlying has gone below your cost basis, still, you’re not going to lose a ton of money there.
Toby: It’s tough to lose it. The company itself can drop. You could have the GE and it drops. If you haven’t sold it, you haven’t lost the money. The old adage if you just hold on to it long enough. If it’s a profitable company, there’s ways to look for profits where the company’s actually solvent without investor activity. The company still makes money and it pays out as opposed to just sucking money in. There are easy ways to figure that one out. As long as it’s paying you something. It’s kind of like a rental property. I don’t want to know what my rental properties are worth becuse I might be tempted to sell it. I’ll just assume I have that rent income every month.
That’s not nearly as much fun as what you’re doing in the futures. You ended up making futures. Give me an idea of what it is that you’re actually trading.
Bryan: For example, right now, today, I have a position on the Nikkei. I’ve got a long position in on the Nikkei. I’ve got short positions on Brent Crude and […] oil. I’ve got a long position on […]. Again, this is all technical analysis. That’s part of why there’s an education piece to it. You’re looking at the price action, you’re recognizing things.
Another psychological problem that I had early, it really bugged me if I wasn’t at the absolute bottom and selling it at the absolute top. I wanted to get that down where I could do right to those levels. A lot of times I was missing out on profits that I could’ve taken and didn’t.
The thing I’ve discovered now, I do follow a trend trading strategy but I’m not trying to pick the bottom. I’m not trying to pick the top. I’m trying to pick the 60%-70% of the middle of the move. If I can get even 50% of that, then I’ll do that.
It’s also a system. Like I’ve said, I put my buy orders in. Once that trader’s in a position, I will always have a stop out order in place. Then, I use what’s called a trailing stop or whatever. I’ll move those up based on the price action of the underlying. I’ll move those up until a point that I become at least—
Toby: In a trailing stop, if it tanks, there’s already a sale order in. It’s usually what cause the market to go crazy. When you start triggering all these algorithms, these computers, all of a sudden they start dumping the securities. That’s when you usually see it taking a nice little dump. Everybody that’s watching it comes in and buys it knowing that they just dumped it all. You hit their trailing stops. Now, we’re going to buy it. Push it back up again and ride it back up. That’s fun stuff.
Bryan: I don’t use automatic trailing stops. I don’t let it adjust to those automatically. Everyday, I look at the price action, and then I put in my personal, this is my choice at this level, that’s where I want to put my trailing stop. I’ll only deal with one contract in each one of these things.
The other thing that I like about futures, to a certain degree, stocks are a Ponzi scheme if they’re not paying a dividend. The fair growth stock is a Ponzi scheme. You are counting on the ability to be able to sell your shares to somebody else at some price whether it went up or down or whatever.
Futures contract usually go against some kind of commodity. […] futures was the guy that’s growing corn this year, he’s not certain of what price he’s going to get corn at. He doesn’t know what the weather is going to do in between. He will pre-sell his corn at a reasonable price with somebody with a futures contract so that he knows, “I’m going to get at least this amount of money for this contract this year.” That’s good enough to make him money. The speculators on the other side or the people they’re buying the corn to use it for producing corn oil or tortillas or whatever, they know what price they’re going to get.
There’s real industry behind it. There are people that are trading in these contracts. The speculators are essentially just provide more liquidity to oil the machine. They’re big boy traders, they’re trading hundreds or thousands of contracts, and I’m just trading one at a time. I’m just the […].
Toby: That’s alright. We’ll take the crumbs off of that table any day. As long as it’s crumbs, we’re not paying on to it.
Bryan: I’m not trading against somebody else. In this business, everybody can win. Again, like the options market where you’re selling covered calls. If you look at it as insurance, everybody can win. I paid an insurance premium but I was happy to pay that premium because I was worried about this thing going haywire. The guy that sold you the insurance is getting that premium, so he’s happy to.
Toby: Yeah. If you just think that you come in towards the end of the year, we can do this in the tax side. That’s how I got into the investing. It’s always from the tax angle. You’re sitting on a lot of gains and you’re worried about what’s going to happen in the beginning of the year, you can buy puts. Now, you know you can force someone to pay whatever the price is. You don’t have to sell the security and take all your money off. You can still protect your downside. There’s some pretty cool vehicles to do it.
Big question for you, Bryan, before we go. If you were talking to 16 year old Bryan now, what would you tell 16 year old Bryan based off everything you’ve gone through? 16 year old Bryan says, “You know what? I’m thinking about that stock market,” or, “I’m thinking about that futures market.” What would you tell him?
Bryan: Very simple. If I’m 16, I’d work it up to where I could put every penny I could come up with—above living expenses—into investing in high quality dividend paying stocks.
A quick example. Jeremy Siegel did some back work on the S&P 500. He told that if you had just invested on the original stocks, take the top 20 if you will, of the original S&P 500, you would have outperformed the S&P Index by six times if you’ve taken the top four stocks at that time.
You didn’t have to decide which are going to be the best ones. Just take the top four, put $1000 in each one of them. From 1957 to 2003, that $4000 investment would have been worth $6,000,000. If you would put the same $4000 in the S&P Index, it will be worth a little over a million, too. You’re not going to lose either way. If you had just put into the high quality stocks, held those dividend paying stocks—things that are not over value—because valuation matters.
Toby: Ignore the circus, in other words. Ignore it.
Bryan: Ignore the circus. Put the money in certain things. That’s high quality, dividend paying stocks that are boring.
Toby: Good advice. This is complete aside but I have that conversation literally last night sitting with someone who’s sold his company. He sold his company—get this—to WorldCom. He got some cash and he had restricted shares. He’s a buddy of mine. He’s lost $138 million because he has restricted shares when they got caught in that fraud. He was like, “That was the valuable company. I never thought in a million years, I will lose it.”
He was laughing. He says, “The other mistake wasn’t even that.” He looked at five companies that were the tech companies at that time which was Google, Microsoft, Oracle, and a few others—this was many years ago—he goes, “I’d actually put a little bit of money into those. If I’d just done that, I would’ve made back a huge chunk of it already.”
It’s kind of funny when you look at those things. You never know what it’s going to do. I’m just going to say, if I’m going to buy something, it better be paying me.
Bryan: Yeah. That’s, again, the difference between the income and the growth stocks. If you could pick Apple, if you could pick Microsoft, if you picked the ones that are going to be the next growth success, then that’s a wonderful thing.
Toby: There’s 3000 companies.
Bryan: Right. If you go, “I don’t know which one it’s going to be so I’m going to buy every IPO this year,” guess what? You’re going to underperform the market very significantly.
I would encourage anybody that’s looking at investing, buy Jeremy Siegel’s book. You can get the ebook for probably $5 or $10. It’s called The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New.
Toby: I like it. You […] that one. I just want many people over the years. We do 6000 returns plus around here. I can say who makes money. It’s kind of boring. It’s the guys that’s boring that makes the most. That’s kind of fun.
Anyway, I want to say thank you for coming and sharing these with us. I always find these things just fascinating when you see what makes people think. I just really appreciate it. I know it was a chunk out of your day. It sounds like you’ve got all your investments already set so you can just relax anyway.
Bryan: This is play money. If I lose everything, then I may not be able to do the things with the nonprofits that I want to do. It’s the gambling money that you take to Vegas and hope your system is good.
Toby: You love it. That’s good. Thanks, Bryan. Thanks for joining us.
Bryan: Thank you very much. Have a great one.
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