Fundamental investors are like the wooly mammoth: big, strong, powerful, yet destined to become extinct in the future. And while there is absolutely nothing wrong with the core beliefs and activities of fundamental investors, I just personally believe that the same passion and hard work could be applied to the options market with much better results and less risk. Besides, even Warren Buffett, the biggest advocate for fundamental investing and long-term investment strategy is by many standards the single largest options seller in the market today.
Nobody asks him about his $5 billion dollar short option trades, do they? Not yet anyway since we'd love to have him on the podcast.
In today's latest show, I want to present the case as to why I believe that more "old school" fundamental investors should become professional options traders instead. In fact, you'll see that there are many similarities between options trading and a long-term, buy and hold stock investor. Plus, I'll quickly rant about the "Netflix Effect" and how technology and social media is rapidly changing the landscape for all businesses in the future.
Key Points from Today's Show:
1. The Numbers Are Conclusive
- Most fundamental investors are really committed to analysis, and digging into the analytics of companies before making an investment in the stock.
- With analysis of companies, all the numbers are truly just projections of what may happen in the future.
- If fundamental investors put as much effort into analyzing options trades, they would be highly successful.
- The numbers are so conclusive that if you want to generate income, you've got to be an options seller.
2. Long-Term Investing Strategy
- Fundamental investors prefer the long-term strategy, which is well aligned with options trading.
- They focus on long-term growth and consistency, with small investments that compound over time.
- This is also the best strategy for options trading, which we teach here at Option Alpha.
- Options trading is a long-term game, making small trades to have the compounding effect in the future.
- Another pillar for most long-term fundamental investors is diversification and investing with the margin of safety.
- The problem with diversification for fundamental investors is it works until it doesn't.
- However, when the market goes down, everything becomes auto-correlated and diversification is thrown out the window.
- With options trading, when the market goes down, you can start transitioning your portfolio to take advantage of the market drop.
4. Controlling the risk
- Fundamental investors believe that they control their risk by knowing the numbers, having a margin of safety, and by diversifying their portfolio.
- However, if you are a long stock you are still trading with a 50/50 probability of success.
- With options, this controlling risk factor can be applied in a much better way.
The Netflix Effect
- Technology and the market is moving at such a faster pace.
- The barriers to entry for new companies to spring up out of nowhere and completely switch everything around has become so short that a company that is here today could be gone tomorrow.
- The biggest problem with fundamental investing now is that it never sees the company that nobody can see.
Netflix completely changed the entire market for movies and took Blockbuster out of commission, which was a $6 billion company. In a mere year and a half, the company declared bankruptcy. Nobody knew how powerful Netflix could become and how quickly it could take market share from Blockbuster. This "Netflix Effect" is disrupting hundreds of thousands of companies every single year.
*With options trading, there will always be a 30 day window to trade the next price movement that a company has, and you do not have to be invested in a stock for a 5 or 10 years outlook.