Profit From Diversifying Trading Strategies (Episode 21)

So there's a couple things that are interesting that's happening with the market. I think one thing that's interesting that's happening is you see a lot of the companies that profited from the whole stay at home work from home pandemic. Well, the way I like to explain it, what happened is a lot of these companies pulled forward, you know, maybe 10 years worth of business. You look at the zooms, you look at the DocuSign, the customers that they were going to sign up over the next year to 10 years, they pulled forward all those customers into one year. And so you saw these stocks super shoot up, right? All these stay at home stocks work from home stocks, high flyers, but now the reality is who's left to sign up for a zoom who's left to sign up for a DocuSign. DocuSign pulled all the realtors, all the, you know, you name it, the banks, everybody jumped on the bandwagon, zoom, everybody signed up for account.

And so what happens is you have this huge growth in some of those names, just for example. And then now they're only, I guess the best way to say it. They're only left to lose customers. They're not really left to gain a huge amount of subscribers that can beat what the numbers they've been putting up in the past. And so you've seen a lot of those stocks come down crash. And the other thing that's happening in some of the more well known, like the Microsofts of the world, people are nervous about inflation. So people are nervous about labor costs, nervous about the cost of materials to make computers semiconductors. Then you got the war going on. Anything that has to do with running a factor, using gas, all of those things are cost that are going to increase and potentially play against the earnings report that are gonna come out.

And so you're seeing a readjustment for what's going on in the market and for that uncertainty yet a readjustment for the certainty that we know that inflation is here, labor costs has gone up. Heat gas has gone up and material products, prices have gone up as well. So there's a piece of uncertainty, which is how long is this gonna last? And then what's that gonna do to supply chain? And then there's also a piece that's certain is that costs have materially gone up and that's gonna play into the earnings. And so you have this recalibration of what we believe a company should be worth and is not just throw a dart on the wall in and buy something like it was during the pandemic, after the big sell off. And everything's gonna go up now, I think traders and investors are starting to realize like, okay, now I actually have to have some skill and know why I'm in this company and know how to read a chart and know how to forecast about where I believe this company and this chart is gonna be going.

So the way we're talking to our traders to look at things is if you only know how to make money from stocks going up, then you're right. You're like, well, where's the next growth stock coming from? What should I be buying right now? Now I don't wanna come over here and talk to 'em in gloom, big picture, long term, the market goes up. So if you are a long term investor, you don't need the money in the next five to 10 years. I think if you buy anything to at mimics the S and P 500 or some of the great stocks that are in the S and P 500 or an ETF or something that follows it, I think you're gonna do fine long term. So rather than trying to go in and pick the individual winners, I think you go with the ETF or something that mirrors the overall market.

If you can wait long term. Now on the flip side, if you're a trader, it is less about what stock is gonna go up and more. So what we're teaching people is how can you be right? Even if you're wrong, which is how can you play the downside with some upside protection. And then when you play the upside, how can you play the upside with some downside protection? So just to be specific for the listeners, what we're teaching is like, let's say you are bullish, but we're using calls. We tried a lot of call options. We're saying, okay, be bullish with your call options, but we're teaching our members to go three to one. So for every three call options, you might wanna have one put because there's so much volatility in the market that if you're right and the stock goes up, those three call will more than outpaced.

The one put that you buy. But if that stock crash, what happens is because of the volatility they're crashing so hard that that one put, will recoup your investment, or may even overtake how much you spent for the call options. So you're putting yourself in a position where you can be right. Even if you're wrong, you're trading in this market right now, because trying to pick each day, what's going up, what's going down. It could be up big two days in a row, down big, the next two days. And you just gave it all back. And so if you have both sides covered, I think you, Hey, be able to keep your sanity a little bit better. Yeah. And you remove the need to be right. And I think that's where most traders go wrong. They're trying to be right versus being strategists and saying, I don't know which way the market's gonna go, but I'm prepared if it goes either way, as long as I get a decent enough move, I'll either break even or make money. So that's how I'm looking at the market.

It's hard to predict. And if you're looking at specific stocks, one of the ones that was on our radar, it's like Microsoft. So I just pulled up the chart. You could see clearly around two 80 is where Microsoft has very solid support. So that was one stock where like, okay, around two 80 back the truck up, you can buy some, if you look at apple, most people, if you were paying attention, if you put the 200 day moving average on it, apple pull back, hit the 200 day, roughly February 24th, but then it hit it again. It broke it a little bit, but we always teach that support is an area, not a specific number. So it came back to that area again, March 15. So again, good company is not gonna go out of business. And so that was a opportunity for you to, as we say of trucks up and buy a good company. And then we also think AMD's a good company, but semiconductors been getting beat up. But if you look at the chart, you can see right around $102 area are good times to buy some good companies that might just be beaten down or just following this natural volatility up and volatility down. But there's specific points where you're like, this is where both traders and investors come in and put capital to work, as you can feel good about.

So when I'm trading, I primarily am looking at the technicals. If I'm investing, I'm looking at the fundamentals combined with the technicals, because I always say there's still a bad time to buy a good stock or a bad time to buy a good company. But if I'm purely trading, I'm just looking to catch momentum. But I like to trade stocks I'm familiar with, so I'm somewhat familiar with their fundamentals as well. I'm not just in the dark,

Well, the problem you can run into is if you're just looking at the chart, but you're not familiar with the company, then you're not familiar that they're middle of a lawsuit and they're going to announce the results from that lawsuit tomorrow. Right. And you wake up and you're like, why is the stock down 20 points? if you buy a biotech stock just based off the chart and don't realize that they're either gonna get denied or approved for phase three of a drug tomorrow or next week, that can totally throw off what you're seeing in the chart. So it's not a hundred percent wise to just go in off the chart. You wanna have some understanding of what the company does and if there's any pending news litigation, anything like that, that's kind of swirling around it. That could off what you're seeing in the chart.

Yeah. So there's a couple ways that we look at earnings and I like to look at earnings and teach our students or just anyone listening period, just to help 'em out is earnings is a one on time event that can totally derail your investment or your trade. You can look at DocuSign and look at what happened to them over earnings. I mean, the stock failed from 2 32 all the way down to 1 3400 point drop. You could look at Facebook more recently who released earnings and said, you know, user growth, slow. They fell from 3 26 as I'm looking at the chart down to 3 44. So I mean huge 80 point drop. Yep. And so the way I look at earnings, whether you're investing or trading, well, first of all, if you're trading, we don't hold over earnings because that one time event can derail the pattern that we see. Second, if you're investing, we like to, to teach people again, buy some insurance the same way I talked to you about three to one. So if you own the stock, maybe if you per 100 shares or per 1000 shares, you own just grab 10 put options just in case that, you know, it's just like a car. You wouldn't drive a car without insurance, right? You wouldn't go out there on the rainy day with a 16, a teenager behind the wheel and say, ah, it'll be fine. We don't need insurance.

However, we do that with our portfolio. I know people who have two, $300,000 of Facebook stock. And so the earnings event is that rainy day, it's snowing and you're gonna go out and drive in it. And this potential that people can get in the accident, an accident, this case is something going wrong with the growth, the CEO saying something that the market doesn't like, they're missing, you know, whatever the target is had you had that insurance in place, it could have replaced your portfolio, just like it could replace your car if not made you more money from the stock falling. So my thoughts on earnings is going to it with some insurance. Now, a lot of people think if I buy the insurance and don't use it, I wasted my money. Well much like insurance on the car or a house. You pay it every single month and you don't get in an accident every single month. But the one time you do, you are so glad that you had it.

It's pretty easy to implement. And it's pretty cheap to implement. I mean, if you got a hundred thousand dollars in Facebook, what's it worth to spend five, $6,000 on some insurance? Yeah. If it doesn't blow up on that earnings point, you spent 5,000. But on the flip side, if it continues going higher, you should more than recoup that 5,000 back. But when you have $5,000 in put options and the stock falls a hundred points, that's a good payday. That'll recoup your portfolio. When you have that type type of insurance in place.

So the biggest difference is when you're investing, I look at investing as more of a long term thing because again, the market history has strong. The market goes up over time. So you'll hear people say, don't try to beat the market. Don't try to time the market, just put your money in the mutual fund and everything will be okay. And to a certain degree, that's true. If you just mirror the S and P 500, no matter if it's the pandemic, no matter if it's the real estate crash, nine 11, a plane flying into a building, you look back over the great, the we've always come out of it and gone higher, long term. So if you got 10, 20, 40 years long term, that's investing, you wanna put your money in something that you don't necessarily have to think about, but every five years come back, make sure it's in the right portfolio and make sure it's mirroring the right index in case you need to switch it.

But only every about five years, would you want to reevaluate that? So that's how I look at investing. It's kind of the tortoise, right? It's slow. And uh, long term, the way I look at trading is that I'm more worried about what's happening maybe quarter to quarter, which is why we're willing to trade for up to 30, 60, 90 days and get out before earnings. And then we're looking to take advantage of momentum. So I look at trading as what money can I make right now to change my life today, not 10 years from now and 40 years from now. So if I'm looking at paying off debt by had a new car, anything of that nature, I'm looking to say, can I come in here and snatch a quick 5,000, 10,000? You know, I've done videos where I made, I was trading. I believe it was DocuSign before it dropped. This was back when it was roaring through the pandemic I went in with, I believe it was like 200 contracts and I made something like $430,000.

And so I took that money and we paid off our lake house in Michigan Uhhuh. And so my point is that was a trade. I was not looking the whole DocuSign for 10 years. I was saying, what can I do right now? Short term? Because I knew everybody was staying at home, getting online. I just saw all the real estate agents signing up for DocuSign. I did something outta bank and it was like, you can't come into the bank right now, but we'll send it to you through DocuSign. I said, even the bank, like everybody was using it. So I was like, okay, most likely on to beat their earnings. And then zoom had reported like a week or two before that. And so I said, if zoom shattered their earnings, they're in the similar industry, taking advantage of work from home. I had all the reason to believe DocuSign would do it.

So my point is trading is taking what's happening in the micro right here right now. Where's the momentum going? And how can I cap on that? Knowing I'm gonna pay short term capital gains. But I also know that it's gonna change my life financially right now. And then I have that separate investment account. That's longer term. Maybe won't pull out to 59 and a half, but that money's also not gonna do a whole lot for my life right now. So that's kind of how I separate the two. And then how I look at picking stocks or my strategies for the two.

Yeah. So in those events, I try to look for stocks that the market may not have gotten when to what's going to happen after earnings is released. And so in that case, it didn't run up pre earnings, which meant it had room to pop. Sometimes the market catches wins. Like we believe it's gonna beat. So it starts to run up before earnings. Then when earnings come off, it sells off and everybody's surprised like, but they had good earnings. Well, the market anticipated that. So everybody was buying it up, going into earnings. So you probably should have closed it out and took your profit. In this case, it did not have a pre earnings runup. And so I was willing to hold it over earning. Cause I believe we would get that pop. And we did, you know, so I know I said, we typically don't hold a trade over earnings. But when you kind of mix that fundamental research with the store, what you believe might happen, sometimes you will be willing to take a calculated risk because in my head I knew that the worst case that would happen is that stock would stay the same. I didn't believe that they would miss earnings. I knew they would either meet or beat and the stock would stay the same. I didn't see the stock selling off. So I was willing to take that risk.

So that's where I split it again. If I'm investing, I want to diversify the S and P 500 is gonna have what consumer staples gonna have tech it's gonna have in energy oil. So you're already diversified by buying something that mirrors the S and P 500 or by buying the ETF, even instead of trying to pick the best stock tech stock. If you buy the XK, you got apple, Facebook, Google, you got a piece of them all. So I like to diversify from that standpoint, but I also think a lot of people don't think about diversification from a strategy standpoint. So I like to diversify the strategy. Like I said, if I got three calls, I got one put, so I'm diversified in the sense that if it doesn't go up and it comes down, I'll still either break even or make money. I like to be diversified by doing a spread.

I also like to be divers by having a couple of stocks that I'm playing to the downside and a couple that I'm playing to the upside. And so now I'm diversified that if the market sells off big, my bears trades do well. And my bullets trays don't do so well, but I'm net profitable. And then if the market goes up big, my bears trays don't do so well, but my bullish ones do. So I look at diversification more than just are you diversified by sectors and industries, but are you diversified by strategies? And most people aren't diversified by strategies, meaning they got one game plan by low sale high. And when that doesn't happen, they're confused at why they're not making money.

Yeah. So it doesn't technically put you down the middle because what happens is let's just say you're having, uh, X amount of calls and X amount of puts, well, it's a fixed number that you spent on your cause and puts. So let's just say you spent 3000 on calls, 3000 on puts. Well, as the stocks start to rise, you're not gonna lose more than 3000 on your put side, but your costs have the opportunity to make 6,009,000, 12,000. So sure if your cause only rise by 3000, it's a wash. But remember long term, the market either goes higher or when it's like this, it sells off big. So when it sells off big, you lose maybe 3000 max on your cause, but your puts might make $10,000. And so your net profitable by $7,000. Now you will break. Even if the market doesn't move at all.

So let's just say, you know, for the next two weeks, the market just stays flat. And the stocks that you are trading stay flat. Yes, you will not only just maybe break even, but you'll lose some money because there's time premium in those options. But you have to remember that you won't be profitable on every trade. Your goal is to be wrong, small and right. Big and right more often. So when you're right big and right more often that will offset the one or two times the market doesn't move at all. And you lost some time premium. As long as you don't blow up your account and you live the trade another day more often than not, it's moving up or it's moving down big, not technically sideways.

Overlook. Absolutely. Because if you, I always tell people don't focus on how much money you can make. Let's talk about how much you can lose. And that's what you need to build your strategy around. Because if you're in this long enough, you'll be right. And even if you're only right by a thousand dollars, if you're right by a thousand dollars, 10 times, that's $10,000, right? So when you start playing the long game and the law of averages, the law of large numbers, it works out in your favor. I like to tell people if you do a trade and you're kind of neutral on the trade, have calls, you have puts and you only make a thousand dollars. I always say, there's no one trade. That's gonna make you rich. But there is one trade that will blow up your entire account. Yeah. And so would you rather slowly make a thousand or two consistently or would you rather go all in one trade or one investment with your whole 10,000 and when you're wrong, it wipes out the entire account, but when you're wrong, my way you might go from 10,000 down to 9,000, you might lose a thousand.

You might lose five, 700, but you're not gonna lose the entire amount because one side will offset the other side, depending on, you know, how you're making these stretch strategic moves,

Absolutely. But most people can't absorb a $10,000 loss. I asked people, how did you get this 10,000 in here? I worked, I saved from my job. Well, how long did it take you to save it? You know, three years. Okay. So if you blow this 10 grand, it's gonna take you three years to get another 10 grand in. And I don't think traders focus on their account like that. They only think about how much they can make, not if I lose this, what's the cost of replacing that capital. The cost is three more years of work, but for you can get $10,000 in. And so that's a big problem. And so if you think about wealth preservation versus how much you can make, you'll start to realize like as long as I stay in the game, I'll be right. Long term, even short term for the most part.

Absolutely. The best way is to visit the website, which is the brown report.com on Instagram, the brown report as well. So on all social media, the brown report, or just head to the brown report.com.

Absolutely the brown report on YouTube as well.

Okay. I appreciate you having me.