Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

The S&P 500 stock market index is near a 52 week high at roughly 4270 right now. But what’s surprising is that less than half of all the companies that make up the index is trading above their 50 day moving average.

This is strange because you would expect most components in the index to be doing well. But instead the recent rally seems to come from just a handful of mega-cap companies related to artificial intelligence. Because the S&P 500 is a market-cap weighted index, the larger components in the index such as Microsoft and Apple have way more influence over its movement than the smaller companies.

But if we compare it to an equal weight index of the same group of 500 stocks, we can see the two are diverging away from each other.

The orange line is the original S&P 500, while the blue line represents the S&P 500 if each component affected the index equally.

If this bull market rally is really sustainable then I would expect to see more broad market participation and not just technology stocks doing well.

This is why I think a market pullback will likely happen over the next week or so.

The largest component of the S&P 500 is Apple stock. And it is already showing early signs of price exhaustion.

For example, the relative strength index (RSI) is a momentum indicator and it has recently peaked over 70. Whenever this happens Apple shares tend to lose value over the next few days.

The blue line is Apple’s daily stock price, and the purple line below is the RSI.  I’ve marked with gray dotted lines where the RSI went over 70 in recent months.

This doesn’t guarantee a pullback or correction. But I think it might be took late to try and chase this rally.

Of course the stock market can always move unpredictably. For now though it appears to be overbought, especially the large-cap technology stocks.

If you’re a long term, buy and hold investor, this shouldn’t impact what you do. But if you swing trade or have some play money on the side to time the market, this seems like the time to be extra cautious. 🙂

______________________________________
Random Useless Fact:

Two-thirds of Canadians report being asked to tip more according to a recent poll done by the Angus Reid Institute.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

You may have noticed the stock market going up lately. But the S&P 500 index has only been driven up by a handful of concentrated companies in the technology sector. The AI hype is real. Most stocks, however, are actually trading below their 50 day moving averages.

The financial sector has been one that’s been underperforming. My largest holding, TD bank stock is down about 15% now compared to just the previous quarter. Why? Because there are signs of cracks in the backbone of the economy.

According to Reuters, more consumers are falling behind on their debt payments. Worsening economic conditions would lead to “credit deterioration throughout 2023 and 2024 with losses eventually surpassing pre-pandemic levels given an oncoming recession,” predicted UBS analysts led by Erika Najarian. Still, loan defaults are forecast to stay “below the peaks experienced in prior downturns,” they said.

We’ll have to see how this all plays out, but I expect further volatility in financial stocks going forward at least for now. TD stock’s dividend yield is almost at 5% now which is looking pretty attractive. But I am waiting for signs of a turnaround before putting more money into the market. There will be a time to buy these stocks again I’m sure. 🙂

Canada literally saw 0% GDP growth in the latest data so I don’t expect the BoC to increase interest rates in June. But the Fed will probably bump the rate up by 0.25% in the U.S. as inflation down there is still stubbornly higher than what they want to see.

In any case, I’m back from vacation so I’ll be back to updating the blog regularly now. 😀

______________________________________
Random Useless Fact:

The sun is one of the best sources of vitamin D for the human body.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Retail investors such as you and I cannot compete with the big fund managers when it comes to speed or scale.

But there are other factors to consider when making money in the financial markets.

Here are some things to keep in mind that should give us an advantage over the institutional players. 🙂

Time: Large fund managers need constant liquidity because clients may want to pull their money out. They can’t lose too much money too quickly. But as a long term investor you have the advantage of time on your side. You don’t care if the stock market falls 20% next year because you don’t need the money until you retire decades later. This allows you to capitalize on longer term trades that Wall St. simply can’t afford to make.

Less regulation: Large fund managers must follow onerous regulatory requirements to demonstrate proper risk management. But individual investors don’t have capital requirements and can concentrate all the money into a handful of investments, or use leverage which many large money managers aren’t allowed to use. This gives retail investors more flexibility and make the most from changing market conditions.

Smaller transactions: When big players buy or sell shares they have to do it over the course of days or even weeks because their volumes are so large they can move the price of the markets against their position. This is why timing the market, should it be done, favours the individual investor because we can get in or out relatively quickly without moving the markets.

Random Useless Fact

Bernard Arnault is currently worth $202 billion, making him and his family the richest in the world.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Air Jordans sell for record $2.2 million

Auction house Sotheby’s just sold a pair of signed sneakers that Michael Jordan wore during the 1998 NBA finals. The record breaking $2.2 million winning bid was actually on the low side of expectations. The pre-sale estimate was a range between $2 and $4 million.

“The sale speaks volumes of Michael Jordan’s legacy as one of the most influential athletes, businessmen and pop culture icons of our time,” says Brahm Wachter, Sotheby’s head of streetwear and modern collectables. What makes these sneakers unique is their good condition. They look pretty much like they did 25 years ago when Jordan took them off for the last time.

If I had $2.2 million in cash I would rather buy a house than these sneakers. Looking rich is expensive. But being rich is cheap. Not that you would ever wear these particular Air Jordans anyway. 🙂

Sports memorabilia can be a profitable investment if you know which ones to buy and buy them early enough. A Michael Jordan jersey was sold last year for over $10 million, setting another record, this time for jerseys.

Jordan himself currently earns millions of dollars every year from royalties.

Random Useless Fact

The Mineral and Gem Museum will pay a $25,000 reward to anyone who can recover a 1kg meteorite that potentially crashed along the Maine-Canada border.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

There are many benefits to stealth wealth, which is the practice of not showing off how much material wealth you have.

Fewer people will ask you for money if they don’t know you have money. 🙂 It’s also easier to determine who your real friends are. You’re also likely to get ripped off since people who appear to be rich are more often financially targeted. And your life in general will be simpler. Because at the end of the day being rich doesn’t have to be expensive. But looking rich sure is.

That’s why many millionaires drive 10 year old cars or trucks instead of the latest models. Or they live in modestly sized homes instead of mansions. They wear everyday hoodies and jeans instead of designer clothes.

The idea of stealth wealth is to live the life you want by spending it on things and experiences that matter the most to you, and not flaunt your wealth for other people to see.

Although this sounds simple in theory, it’s unfortunately not so cut and dry.

There are a lot of things you can buy with money to improve quality of life that’s also very conspicuous. For example flying business class instead of economy. The plane ticket price difference is many folds. And even though it seems like an unnecessary luxury option, so is flying in general if you think about it. It’s hard to put a price on personal comfort.

Driving a nice car and living in a big house has it’s benefits as well on a personal level. Generally speaking more expensive cars are more comfortable to drive in. And a bigger house gives you more room, which is important if you want to raise a family. I own a 2 bedroom condo, and a detached house. There’s a reason why I choose to live in the house and rent out the condo instead of the other way around. And it’s not a financial reason, obviously. 😀

The problem with increasing your standard of living is that you can’t hide your wealth from the world. People can clearly see you’re flying business class, or driving a GLE, or sending your kids to private school, or living in a big house.

Does that mean in order to practice stealth wealth you have to lower your living standards to that of the average person earning the average income? If you did that you would certainly have more financial security and a higher savings rate. But is that the life you want for yourself? 😕 If you have the means to improve your life with material experiences, perhaps you’re close to FI already, would you spend the money?

Financial freedom allows you to live the life you want, spend money based on your values, keep a clear mind, and live a simple life. But what if you already have everything you need financially. You have all your basics needs met like housing, food, fun hobbies, goals, entertainment, companionship, and health. And you don’t have to work anymore, which is most people over 65 years old, or younger if you’re part of the FIRE community. What happens now if you save extra money above your FI number?

If the idea of stealth wealth in the first place is to not base your spending habits on how others judge you, is being reluctant to improve your living standards just a form of self deception? Are you afraid your friends might see you differently if you start wearing expensive cashmere?

Another thought is if you know you’ll reach your FI number within the next 10 years or so. Would you be willing to spend more now to delay your financial goal for 1 or 2 years? If you plan to retire at 45 and live until you’re 90. Does it really matter if you extend your FI date out for a year or two, if it means you can have heated seats and steering wheel? 🚗

______________________________________
Random Useless Fact:

Orangutan and chimpanzee are some of the smartest primates.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Home prices are still high

Despite an aggressive monetary tightening policy by the Bank of Canada, home prices remain elevated in many parts of the country.

Around the lower mainland for example, prices are still up year over year.

There are a few reasons for this stubborn price behaviour.

1. Those higher interest rates have not been felt in the mortgage market yet. It usually takes 12 to 18 months for monetary policy to take affect. This year and even into early 2024 should be the time when prices really come down.
2. There’s not enough inventory on the market. Home owners don’t want to sell and listings have dried up.
3. Increasing demand continues to keep prices elevated. Canada just saw a 1 million population growth, the fastest since recent history. On average the country builds about 200,000 housing units per year. That’s not enough given the amount of immigration we’re seeing.

A couple of weeks ago I made this video that goes deeper into these reasons and give a timeline for potentially the bottom of the housing market.

______________________________________
Random Useless Fact:

Samsung has the brightest smartphone screen at 2,000 nits of brightness.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Here are 10 lessons from an portfolio manager that averaged 29% annual return from 1977 to 1990

1. Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

2. Over time the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.

3. Behind every stock is an actual business. Find out what it’s doing. The more you understand it the better.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Volatility in markets continue

Not a bad month but because February is kind of short I was not able to make too much.

I mostly sell put and call spreads being fairly conservative with my Deltas and $2045 represents about 0.5% of my portfolio size.

About half of this month’s profit or $1,046 comes from the net credit I’ve earned through my Alphabet options challenge.

I’ve recently sold some stock in order to free up some margin space.

With economic conditions getting worse I think there may be another leg down in the stock market in the next few months.

By selling some shares and paying back some margin debt I am able to use more buying power for short term option trades.

It also creates a buffer so my margin requirement remains healthy in case stocks drop a lot more. 🙂

______________________________________
Random Useless Fact:

The hottest something can get in a microwave is 100°C or the boiling point of water.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

The cost of higher returns

One advantage stock investors have over fixed income investors is higher returns over a long period of time.

But this benefit comes at a price. The trade off for better returns is more volatility or the tendency to change rapidly and unpredictably.

Volatility is often seen in a negative way. But objectively it should be neutral to a portfolio’s expected returns.

You could lose 20% of your money, but you could just as easily earn a 20% gain. Introducing more volatility doesn’t change the expected return of an investment per se.

In fact, Warren Buffett has dismissed the idea that volatility represents risk.

“The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.” (Warren Buffett – 1993)

He also argued that holding currency-denominated assets such as cash or Treasury bonds, which have their value eroded by inflation over time, is actually riskier than owning stocks for the long term.

So the best way to look at volatility is to accept that it’s part of the investing game. And like any game you have ups and downs. 🙂 The real risk is not knowing what you’re investing in.

The volatility in the stock market today is necessary payment for continued, long term growth. And if you understand this your portfolio of high quality assets should do just fine over time. 🙂

______________________________________
Random Useless Fact:

Film studios are always thinking of new ways to make money

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

What drives the stock market higher or lower?

In one word, it’s liquidity. 

Below on the left is a bar graph of global liquidity in US$ trillion.
And on the right is the Vanguard Total World Stock Index ETF (VT) over the same time.

Notice the correlation between the two?

Here’s what they look like overlapped together.

This is why in order to understand the stock market it’s important to know what the central banks around the world are doing.

And according to recent data it appears central banks are loosening monetary policy again.

Although the Fed and the Bank of Canada are tightening conditions in order to fight inflation, the rest of the world may not be on the same page. And because we live in a global economy, what other central banks do will ultimately affect our retirement accounts over here.

Japan is not worried about inflation

According to Reuters, global strategist Matt King estimates around $1 trillion has been pumped into the global system in the last few months.

The Bank of Japan’s $291 billion purchases of Japanese Government Bonds (JGBs) in January was the central bank’s fourth monthly net purchase in a row. Since October, the BOJ has bought more than $475 billion of JGBs. The purchase was so great it outstripped the combined liquidity drain from the Fed, European Central Bank and Bank of England, resulting in a G4 net liquidity injection of $115.3 billion.

Why is the BOJ being so aggressive buying bonds? Because it wants to keep its 10 year bond yield low at 0.50%. Any time the yield moves too high the BOJ comes in to buy as much as possible to drop the yield back down to 0.50% again. This manipulation or “yield curve control” is criticized by many investors in the international community. But with a debt to GDP ratio of 261% I don’t blame them. The more debt you have, the less you can candle high interest rates.

If I were making monetary policy decisions over there I would probably do the same to provide financial stability.

Ongoing global bailouts 

Japan isn’t acting alone. Europe and China have helped pump the $1 trillion of liquidity into the global financial system lately.

Remember the real estate debacle in China where bankrupt developers halted construction and homeowners refused to continue making mortgage payments? To prevent this from turning into a full blown crisis the PBOC’s liquidity injections in December and January totaled $450 billion, around 3.5 times more than its total injections in the past two years.

And the bank may not be done yet. This BNN article below is from 3 days ago.

King estimates that this $1 trillion injection from all these central banks is enough to push global equities up or down roughly 10%, add or subtract 50 basis points to investment grade credit and 200 basis points to high-yield spreads.

If his estimate is accurate, this means the stock market should actually be 10% lower today if not for these actions by the BOJ, ECB (Europe), and PBOC (China.)

The Bank of Japan’s QE is now greater than the Fed’s QT

This graph shows that even though the Federal Reserve (Fed) has been quantitative tightening recently, there has actually been a net surplus of global liquidity because of what other central banks have been doing, especially the Bank of Japan.

If you’re wondering why the stock market has been gaining so much lately, you may attribute it to seasonality, like investors using their new TFSA and RRSP contribution room.

But I think the flows from these central banks give a better explanation for why markets have been so buoyant this year.

So what does this all mean? I think in the short term we may see the stock market move higher before seeing another correction. Also, it’s useful to pay attention to what central banks are doing with their reserves.

As King says, when changes in even the least significant line items on central bank balance sheets are measured in the hundreds of billions of dollars, “they should command investors’ respect.”

By introducing more quantitative easing so readily in the last few months policy makers have made it clear they do not want to crash the global economy. They may talk tough when it comes to fighting inflationary pressures. But when they are forced their hand, it appears they would rather risk higher inflation than financial turmoil.

The Fed will probably capitulate and begin to ease as well. It just hasn’t faced a situation where it’s hawkish tone has been questioned yet. 🙂

______________________________________
Random Useless Fact:

Introverts and telemarketers have something in common.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Starting a new year of options

It has been a decent good start to the new year. I earned $3,607 in net premiums from trading options.

About half of this amount came from my 2 weekly trading challenges that I share on Twitter and YouTube.

For my Google options challenge, I’m trying to make a 50% annual return. So far it’s been 30 weeks and I am on track to completing this goal making about $200 per week.

A new challenge that I started in January is trying to beat the S&P 500 by trading S&P 500 options using the SPY etf.

It had a bumpy start and I was lagging behind the index for all of January. But now I have finally caught up.

The goal here isn’t to achieve a specific investment return, but to simply make more than investing in the index. We’ll have to see the final result by the end of the year. 🙂

New strategy I’m testing out

I have started to trade 0 days to expiring SPX options by selling a credit spread only a few minutes before markets close.

So for example, at 3:58 PM when the S&P 500 is at 4000 points, I will sell a 4005 call option and buy a 4010 call option.

Since the 4005 option is worth more than the 4010 option, I will earn a net credit.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Stocks are going up

The commonly accepted definition of a bull market is when the price rises by 20% from its low point.
And this past week the S&P 500 shot up to 4,170 points marking a 20% gain from its low back in October 2022.

So the bear market is officially over and we are technically in a new bear market now. 🙂

But this doesn’t mean everything is fine and we’re going back up to all time highs next.

The market has to face a few hurdles first.

Extreme Greed Warning

The first thing to be aware of is that stocks are in a precarious situation right now according to CNN’s Fear & Greed index.

I tweeted this out on Wednesday when I noticed the index reached as high as 80, signalling extreme greed.

This typically means a correction is imminent.

The stock market has done well year to date.

But now's the time to be careful and think about trimming some winning positions. pic.twitter.com/Xy9YTLL2xc

— Liquid 🚀 Freedom 35 Blog 🕊 (@Liquid_f35) February 3, 2023

The second headwind facing the market is seasonality. Certain time periods of the year will perform better than others. 🙂

Here’s a chart going back nearly 100 years showing the varying average returns by month.

Notice how February on average actually had a slight loss.

Markets will be facing this historical downside bias this month, so be careful.

The last piece of the puzzle is that the smart money doesn’t believe in this most recent rally.

Dumb money is retail investors and smaller traders (red line in the graph below.)

Usually when this rises above 0.7 and reverses it corresponds to a correction in the stock market.

Meanwhile the smart money or large institutional investors (blue line,) have been sitting mostly on the sidelines.

So just because the bear market is over, it doesn’t mean we won’t go right back into one again soon.

In my latest video from uploaded today I explain why the market may be reacting irrationally to recent events, and what to watch out for next week. 🙂

______________________________________
Random Useless Fact:

Police sirens are typically 110 to 120 decibels loud.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

The act of writing down goals, and tracking them over time greatly improves the chances of achieving the outcomes you want.

So this year I have 5 new goals I want to accomplish for 2023.

2022 goals

• Increase household net worth by $150,000
  Since I am no longer earning money from a 9 to 5 job I expect my income to be fairly low this year. Our household retirement strategy is to withdraw about $60,000 from investments. However because I expect the financial markets to perform well this year the capital appreciation should be more than the rate of drawdown.

• Reduce margin leverage to 1.5 times
  Right now I am borrowing about $300,000 from my IBKR margin account. This is roughly 1.9 x leverage. Since interest rates have gone up over the last 12 months the cost to carry this debt has become quite burdensome. I currently pay about $1,500 a month of interest expense to Interactive Brokers. I expect their next earnings report to be pretty good, lol. I would be nice to lower my interest payments to below $1,000 by the end of this year.

• Read at least 4 books
  I like learning about new things so I want to prioritize some time to reading this year.  I’m currently reading The Book of Awesome by Neil Pasricha.

• Work out at least 3 times a week
  I need to work on getting my body back in shape. I became lazy after becoming a dad. The baby is currently learning to crawl. But by next year he’ll probably be able to run around. I want to maintain a healthy and active lifestyle so I can keep up with the kid as he’s growing up.

• Earn $50,000 in net premiums from trading options
  $50,000 represents about 15% of my IB portfolio which I think is a reasonable return to aim for. The good thing about earning options income is that it’s scalable based on the size of one’s portfolio and is not dependant on market direction. I sell mostly credit spreads which means I make the most money in a flat market. 🙂

______________________________________
Random Useless Fact:

If the restaurant you’re in has these items, chances are their hamburgers cost $25 + tax and tips.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

December was a below average month for options trading.

I only made $570 because some of my trades were quite risky and they didn’t turn out well.

But altogether I’ve made $51,000 from net option premiums in 2022. That’s a lot more than I made in the previous year when I started trading options.

One of the biggest lessons I’ve learned in December is to take smaller risks and sell lower delta options.

Makin 2 or 3 thousand dollars per month consistently is better than scattered returns like what happened with my trading during the summer months of 2022.

One new strategy I am trying now is to buy options on the 5 minute daily chart. The idea is I can make more money this way than selling out of the money options.

It will require monitoring my trade throughout the day. When you buy an option time decay works against you so it’s better to get in and out quickly.

I have heard other have success with this strategy so I’ll see if I can make it work. 🙂

Moving forward in this new year my goal is to earn about $3,000 per month consistently from option premiums. We’ll see how it goes.

______________________________________
Random Useless Fact:

According to the LA Times the price for a carton of eggs in California more than doubled in 2022.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Charles T. Munger is an American billionaire investor, businessman, and former lawyer. He runs Berkshire Hathaway with Warren Buffett.

I’m sure he has enough savings to retire. But he just turned 99 this week and is still working.

Maybe someone should introduce him to the idea of FIRE. 😁

Buffett has described Munger as his closest partner and right-hand man.
If Buffett respects him that much then maybe the rest of us can learn a few things from him as well.

So here are five life lessons we can learn from Charlie Munger.

1. Be a continuous learning machine. You will not get very far in life based on what you already know. Go to bed every night a little wiser than you were when you woke up that morning. The best way to learn? Read.
   “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” — Charlie Munger
2. Take some time to sit and think. Humanity would have fewer problems if more people had the ability to sit quietly in a room by themselves.
   “We both (Charlie Munger and Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.” — Charlie Munger
3. Learn to destroy your old ideas when they become obsolete. A wise individual changes their mind all the time. If something doesn’t work, or if there is a better argument, then you need to adapt.
   “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.” — Charlie Munger
4. Clone great ideas. There is no harm and no shame in copying other people’s ideas, especially that ones that have been successful in the past.
   “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger
5. To get what you want, you have to deserve what you want. It may seem some people are luckier than others. But in the long run we all get out of life what we put into it.
   “The world is not yet a crazy enough place to reward a whole bunch of underserving people.” — Charlie Munger

______________________________________
Random Useless Fact:

Most people are better off  investing in an index fund than picking individual stocks.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

A year of unexpected challenges

At the beginning of this year I set out to accomplish 6 goals for myself.

I only managed to complete 3 out of 6, lol. Next year I shall lower my expectations.

What caught me by surprise the most was how unique this year has been for the economy and financial markets.
Out of the last 10+ years I’ve been investing, I have never witnessed something like this before.

If you could go back to a year from now, who would believe you if you told them the following…

• That Eastern Europe goes to war with many innocent lives lost.
• Food and energy prices go through the roof.
• Both stocks and bonds fall in price at the same time.
• China locks down 25% of its economy, causing its GDP growth to fall to the second lowest level since the early 90s.
• Massive supply chain disruptions worldwide causing inflation in developed countries to rise to 40 year highs.
• Plus, we see the most aggressive policy tightening cycle by central banks in modern history.

Almost none of these events were on anyone’s radars at the end of 2021. Inflation was thought to be “transitory.” Most economists were forecasting the Federal Reserve to hike rates by just 1.00% in 2022. And 4,910 was the median forecast of 45 strategists polled by Reuters to determine where the S&P 500 was going by the end of 2022. Today the index is sitting at 3,844. That’s a miss of more than 1,000 points or 27%.

So given that context, here is what happened with my goals for this year.

• Increase household net worth by $300,000
  Fail. Our net worth only grew by about $180,000. We actually lost a lot of money on paper on our liquid assets. However, because we have over $3,000,000 worth of real estate and we use the government assessed value of our properties which is updated at the beginning of each year, our real estate actually increased a lot in 2022. Unfortunately due to a cooling real estate market I expect next year’s new assessed values to fall quite a bit dragging down our net worth.
• Borrow $130,000+ on margin
  Pass: I started the year with $110,000 of margin debt. And now I have $320,000 lol. This represents a $210,000 increase. I wasn’t expecting to take on this much debt this year, but the stock market keeps falling so I’m inclined to keep buying because as stocks get cheaper, their future expected returns become higher.
• Read at least 5 books
  Pass: I managed to read 5 books in 2022. Ultralearning. The Unlucky Investor’s Guide to Options Trading, Raising Boys, How to Talk to Anyone, and the Daily Stoic.
• Meditate for 60 minutes a day for 60 consecutive days
  Fail: I tried this for about 20 days, and then every other day for 10 more days. Then stopped when I realized I wasn’t getting any benefits from it. I didn’t notice anything different about my day. It’s possible I already spend part of my days in short bursts of meditation so I don’t really need to dedicated more time for it.
• Make 10% return in my margin account
  Fail: This was an udder disaster. I’m down about 20% instead of up 10%. Better luck in 2023. 😅
• Earn $20,000 in net premiums from trading options
  Pass: I made $50,324 in option premiums after accounting for all the losses and trading commissions.

Even if we head into a deep recession in 2023 I expect better performance from the financial markets. Historically speaking there are a lot of indicators that point to a positive year for the stock market. I am expecting an economic downturn in the first half of the year, which will force central banks to cut interest rates, which will help bolster financial markets. 🙂

Good luck with your investments. Happy holidays and all the best in the new year. 😀

______________________________________
Random Useless Fact:

If a set of identical twin each marries another set of identical twin their kids will genetically be siblings.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Not the best year for investors

The collective net worth of Canadians fell by $332 billion in the third quarter of this year.

That’s about $8,700 per person. If we annualize this amount it comes out to roughly $35,000.

Unfortunately RBC is forecasting further decline to net worth until the second quarter of 2023.

Asset prices across the board have dropped. It doesn’t matter if you own stocks, bonds, or real estate. Pretty much everything has been hit this year.

There’s a global effort by central banks to tighten monetary policy.

It’s meant to lower inflation, but it also makes borrowing more expensive and reduces liquidity in markets causing asset prices to fall.

But during times like this when we may not feel as wealthy as before, it’s important to keep a few things in mind.

First, net worth is simply a number. It can swing up or down abruptly, but what actually matters is what you’re doing with your net worth. Are your assets earning you capital gains over time? Is your debt tax deductible? Is your passive income increasing? Much like a game of Exploding Kittens, it’s not just about what cards you’re dealt. It’s also about how you use them. 🙂

And second, financial markets can be very volatile in the short term, but tend to revert back to the mean. This year may feel like a drawn out bad dream. But let’s not forget the euphoria investors experienced the year before from the end of 2020 to the end of 2021. It was the complete opposite of this year. Stocks, bonds, real estate, and even some alternative assets such as cryptocurrencies all performed exceptionally well. The S&P 500 gained 28% including dividends in 2021 for example.

When markets move substantially in one direction it often overcorrects in the opposite direction soon after. In fact, technical traders rely on this feature to help make their decisions about when to go long or short. So experiencing a pullback this year after an incredible run last year is really just par for the course and expected.

And finally, the silver lining to a lower stock market is that it correlates with higher future returns. 🙂 Stocks have most likely already taken the bulk of their losses this year. The chance of two consecutive years of losses for the S&P 500 has only been 9% historically.

This means there is a very high probability that stocks will perform much better in 2023 than this year.

And that is certainly something to look forward to. 😀

Which is why I have recently bought some stocks such as Alphabet (GOOGL) in anticipation of higher prices next year. My margin debt is now at $307,000 which is probably the highest it has ever been. But when there’s a discount going on I can’t help but buy, lol.

You can watch my latest video here to see how I’m managing my margin account so I don’t get margin called.

______________________________________
Random Useless Fact:

Hollywood has been depicting air vents wrong this whole time.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

November was a decent month of options trading.

The biggest lesson I learned was to keep my position sizing small so there would be less risk of a major loss.
In the previous month I made a big bet with Meta stock which went against me.

It costed me over $2,000 and wiped out a lot of my other winning trades.
So this time I have reduced my risk, even if it means earning lower premiums.

Through a combination of selling weekly put and call options I was able to make $3,099 net of expenses throughout the month .

After more than a year of trading options I think I’ve finally found a consistent way to generate monthly income while controlling for risk.

I’ll have to see how this strategy plays out over the next few months but it basically consists of 3 ways that all involve shorting options.

1. Playing earnings.
   I basically sell a very out of the money put (or sometimes call if I think a company will miss earnings) the trading period before the company releases its quarterly financials.  I want to sell options when the implied volatility is at the highest point. And then buy it back cheaper when IV collapses the next day, or let it expire worthless. But the income generated is not very consistent. I tend to make more during earnings season like now, but not so much when there are few companies reporting. But overall I can average about $1,000 a month by doing this. If you want to know exactly how I sell options for this strategy I provide some examples in this video here.
2. The daily SPY spread.
   This is a new strategy that I’ve recently implemented since November and it’s been working well so far. I basically sell out-of-the-money verticals on the SPY that expire either 4 or 5 trading days into the future.
   
   So if today is a Monday, I would sell a put spread expiring on Friday for example. I usually choose a delta of 5 to 10 percent. So far I haven’t had to close any positions yet. But when I eventually do it should be a small loss compared to all the other times the spreads expire worthless. I’m currently making about $500 per month using this strategy.
3.  Weekly options.
   The last method I’m using consistently is simply selling weekly options. My weekly Google options challenge is an example of this. Sometimes I trade daily options as well using the SPY, QQQ, or SPX.

I find that as long as I keep my positions relatively small and get out of losing trades quickly before they turn too negative, I’m able to take smaller losses on the downside, while maintaining a decent amount of income from option premiums. 🙂

I expect the stock market will be flat or down this month in December because central banks haven’t stopped tightening just yet. In the past the bottom of the market typically happens only after the Federal Reserve starts to cut rates. We’ll have to see what happens. But I do maintain a neutral to bearish bias throughout this month.

______________________________________
Random Useless Fact:

Cheddar cheese originates from the village of Cheddar in England.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Liquid net worth – July through September

It seems things have gotten worse in the third quarter of 2022.

Stocks continue to fall in general and because I am leveraged my investments are down more than the broad-based market.

My liquid net worth dropped by $64,000 and is now back to where it was after Q1 of 2021.

To take advantage of more reasonably priced companies I bought over $100,000 worth of new stocks this quarter.

Of course I didn’t have any savings so I borrowed the money from my HELOC and margin account to do so.

As a result, both my assets and liabilities increased.

Portfolio breakdown

Here is how my liquid portfolio stands on Sept 30, 2022.

Liquid Assets:
Cash = $14,000 (+$2,000)
Canadian stocks & bonds = $404,000 (+18,000)
US stocks & bonds = $345,000 (+79,000)
Retirement = $245,000 (-14,000)
P2P lending = $13,000 (-7,000)
Mortgage funds = $22,000 (-2,000)
Total = $1,043,000

Liquid Liabilities:
Margin loan = $143,000 (+20,000)
HELOC = $180,000 (+120,000)
Total = $323,000

Liquid Net Worth = $720,000 (-$64,000) -8%

All numbers are rounded to the nearest $1,000 and in $CDN at 0.74/USD

Overall it wasn’t as bad as the drop from Q2, but it’s still a bummer seeing the stocks I own fall more and more.

Pretty much all the new stocks I’ve added to my portfolio in the previous quarter are now lower, lol.

On the bright side valuations are looking attractive for many companies now such as Amazon, Google, and Microsoft.

By this time next year these stocks should most likely be worth a lot more than today. 😀

One change I made to my portfolio in Q3 was to withdrawal some cash from my peer to peer lending account.

I’m basically using this money for living expenses.

I expect the economy to get worse in the short term so I don’t expect a lot of opportunities in lending to small business in 2023.

My plan for Q4

Going in to the last quarter of the year I’ll transfer assets from my RRSP to a new RRIF account.

This will make withdrawing cash more easy.

I am also continuing to buy stocks on weakness.

The S&P 500 index is currently at 4,000 points and some analysts believe the bottom of the market will be 3,200.

For every 200 points the S&P 500 drops from now I plan to invest another $20,000 into the markets mostly by selling and getting assigned put options.

However as mentioned in my latest video December could be a pivotal moment for the stock market with a lot of warning signs.

And I would be very cautious about buying any new stocks right now.

______________________________________
Random Useless Fact:

The longer you age cheddar cheese the more sharp it becomes.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)

Signs of financial stress.

The effects of higher interest rates have a 6 to 12 month lag period before showing up in the general economy.

It appears we’re seeing those related issues now.

A Canadian real estate lender has recently halted redemptions on its fund.

This means investors can’t get their money out which is a pretty big deal. Romspen Investment Corp said the reason behind this decision is because “borrwers stopped making payments.”

Imagine you lose your job and want to sell some investments to pay the bills. But you can’t because of a liquidity freeze.

There is trouble in the United States as well.

When small businesses can’t afford to continue operations they close down. This will lead to big layoffs.

The problems today in the economy is just the beginning. I think next year is when we’ll see really high unemployment.

The stock market rally we’re seeing over the last couple of weeks have been great. But I believe we’ll see another correction from here, at least 10% down before we see highs again.

I plan to invest $20,000 of new money from now until the spring summer of 2023. That’s about $5,000 per month. My savings rate is non-existent at this point so I will be borrowing the money from my HELOC or margin account. 🙂 I do believe the stock market will be higher by the end of next year, but I’m just not sure how it will get there so I’m hedging my bets and pacing myself.

______________________________________
Random Useless Fact:

The world population is now at 8 billion for the first time.

Contents from freedom 35 blog. (www.freedomthirtyfiveblog.com)