In past articles, I’ve talked about ignoring the news. The current environment seems to be a great time to practice that particular bit of self-preservation. A recent discussion with a good friend reminded me about how easy it is for us to fall into the herd mentality and build on each other’s fears.
My friend was wondering if he should change his financial behavior in response to the ominous things he was reading on the news sites, in particular CNN. My advice was to ignore the news and not to change his behavior. I told him his reasoned financial decisions should be made independent of the state of the economy. Whatever reasoning is used should be sound in any economy. For example, it’s always a good idea to spend less than you make and to have reserves like an emergency fund.
Reject the new
It turns out that the optimal strategy is always to reject the new, which includes new inventions, new medicines, new procedures, and of course news. It’s not that there is nothing of value in the news, but rather that what is of value is buried under lots of stuff that is of no value. Ask yourself when was the last time that a news article actually positively affected your investing? Personally, I can’t remember an instance.
If we take the optimal strategy of always rejecting the new in favor of the old, then we gain the benefit of time as a filter. Something that might seem like a great idea initially may eventually show its flaws. So if we wait until something is “old” we don’t waste time considering those things that didn’t stand the test of time.
Automation as defense
But if we stop reading or watching the news, then where do we get our investing ideas? My suggestion is that the news is so useless as an investing tool that you should ignore it completely. You should craft an investing philosophy that doesn’t require you to be familiar with the news. I would suggest an automated investing strategy.
By automating our investment decisions, we get to think rationally about what a good decision would be before we make the investment. Making that decision before we make the investment is really important because after we make the investment we’re emotionally involved and prone to making decisions without rational reasons.
The classic automated investment strategy is the index fund in a 401k. You put a predetermined percentage of your paycheck in to the index fund every month, and don’t vary regardless of the state of the economy. That’s a nice automated strategy that you don’t have to think about and you don’t need to know the news to execute.
Of course I’ve stated previously that I’m not a particular fan of the index fund. Given my risk averse attitude, my personal choice is to go with one of the strategies that I’ve been working on that are virtually immune to losses like No Lose Stocks or Long Shot Options.
Service updates
I started taking subscribers for Long Shot Options yesterday. I’m offering a 6-month free trial and then $9.95/month after that. The free trial is to let subscribers decide if the service is right for them. As always, I don’t want anyone to pay for anything they don’t find valuable.
I also further automated the No Lose Stocks strategy. I noticed that every time I got an email from the service and downloaded the spreadsheet, I would immediately sort the spreadsheet by “Percent to Profit”. I was looking for the stock that had to rise in price the least to give me a profit. Now however, the service presorts the spreadsheet by “Percent to Profit” and so all I have to do is open the spreadsheet and see if there are any trades to place. That’s one less thing I have to think about when I make my investments.
The Long Shot Options data is also presorted. First the data is sorted by price, then by expiration date, and finally by “Percent to Profit”. The idea is to look for the smallest priced options that have the longest time frame to surprise in and the shortest path to get to that surprise. The data is reported in two separate spreadsheets, one with calls, and one with puts.
Recent observations
At the risk of sounding hypocritical, I’ve noticed some recent (a.k.a. new) changes in the No Lose Stocks and Long Shot Options data. Before a couple months ago, there were maybe 10 to 20 trades that fit my personal criteria for a good No Lose Stocks trade. (I’m looking for stocks that only have to rise in price 10% to 20% to provide a profit.)
Currently there are zero stocks that meet my No Lose Stocks criteria. And when I look at the Long Shot Options data, I notice lots of possible call option trades, but very few put option trades.
It would seem then that the put options are very expensive right now. Or it could mean that the call options are very cheap. Either way, the automated strategies that I’m following are automatically directing me to buy what’s cheapest without my needing to think about it, which is exactly what I want them to do.
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