It isn’t that hard to make money, a very wealthy investor once said. You just have to set your mind to it.
His advice will at first seem rather common, but anyone who reflects on it will realize its simple profundity.
Everyone likes to imagine themselves to be a legendary investor, enjoying the trappings of great wealth, but most people lack the intellectual and emotional commitment.
Few investors have the relentless drive to approach financial markets as if they are solving puzzles that are constantly changing. Even fewer have the stamina for a sustained discipline for managing risks and potential rewards.
Those facts are one reason we have advised investors to focus on companies that are managed by experienced, sophisticated management teams who are leaders in their industries. When those best-of-breed managers are married to a strong investment theme—the rise of private equity, say, or the increased dependence of most people on the stock and options markets—interesting outcomes can occur.
The integration of investment themes with an investor mind-set brings us to KKR, the private-equity firm, and
Interactive Brokers,
the online discount brokerage.
The executives who manage both companies are sophisticated and disciplined operators. The stocks of their companies are vulnerable to the usual pitfalls that come with listed equities—economic challenges, fluctuations in interest rates, and so on—but good management teams tend to adapt and overcome. They don’t meekly accept what happens to them. They seek to change it.
We raise this investment theme once more as the market is increasingly realizing that the Federal Reserve may not lower interest rates as quickly as hoped for. Tuesday’s consumer price index report was hotter than anticipated, unleashing another round of hand-wringing about when the Fed may start to lower rates. It’s important to acknowledge the outburst as a marker of investor sentiment, but it is better to ignore the noise and focus on taking advantage of market conditions to better position your portfolio.
It’s hard to know what the economy and financial markets will do on any given day, of course. But KKR will probably find a way to make money, just as surely as any market volatility will prompt Interactive Brokers’ clients to trade, generating significant transaction fees.
Both stocks—which we have highlighted many times in the past at often sharply lower levels—are trading near record levels. There is ample reason to believe that both are headed higher, reflecting their earnings power amid favorable market conditions for their respective expertise.
But rather than betting on upward momentum by using call options to capture gains when stock prices rise, long-term investors could consider the humble cash-secured put strategy to monetize investor fear unleashed by hotter inflation data and buy stocks at lower levels.
The strategy, which is a favorite of this column, entails selling bearish puts in anticipation that the associated stock price could well fall. It requires that investors have the money to buy shares at the strike price.
We suggest it in anticipation that recent stock levels will prompt investors who own the stocks to hedge. They will want to secure some of the gains without triggering taxes that come with a stock sale. Investors who agree with our thesis about investing with skilled management teams whose companies have compelling investment themes can then get paid by the options market for buying a stock.
Consider KKR. With the stock at $95.88 investors can sell the March $90 put for about $1.20. If the stock remains above the put strike price, investors get to keep the put premium. Should the stock weaken and fall below the put strike at expiration, investors can buy the stock and let time, and strong management, take over from there.
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