Investing: The Naked Truth

“Honey, I want to sell some naked puts.”

Naked?

If my husband Bigfoot wanted to do a little nude sunbathing on our enclosed, private patio: No problem.

If he got a wild hare to streak the local campus: I’d put it down to post-midlife crisis and file it away for future dementia monitoring.

But no, he wants to write an option to buy a stock if it falls below a certain price,  hoping it doesn’t so that he can collect a premium. The financial newsletter he reads says it’s one of the safest bets you can make.

Bets. I already don’t like the sound of it, so I do a little research. Sounds pretty straightforward. Assuming there are no complications, which could lead to “potentially catastrophic losses,” according to Wikipedia.

Now that kind of exposure offends my moral sensibilities!

But what do I have to offer as a sensible alternative? No matter what we do with our savings, there’s no safe place anymore.

We’re not alone. If you own a 401k, you’re a gambler too.

Consider the alternatives.

I could trust a money manager and pay him a fee to do the same kind of things my husband wants to do.

Financial managers used to say, just hold onto a diversified mix of stocks and bonds and you’ll do well in the long run.

Now, after the Great Meltdown of 2008, many of them are out of business. They didn’t even survive to profit from the Great Meltup of 2009. Those who did are understandably skittish. They tend to take profits and leave the table sooner, leading to even more market volatility, and greater potential gains–or losses.

I could buy Treasury bonds, which used to be considered the ultimate safe haven. But how safe are they really, now that China, the big buyer who’s kept the market stable for the past 20 years, is making threatening noises about our debt? And you can see why: We now have $13 trillion in outstanding public debt, the Treasury Department says, or $43,000 for every man, woman, and child. Paid for by Treasury bonds owned by Chinese, Europeans, Americans, and everyone else who bought them, all expecting to be paid back with interest some day, because surely there’s no way the U.S. government will ever default on its debt.

Is there?

For the first time, ever since Greece defaulted, the question is being raised in some financial circles. Because the mind-boggling $13 trillion, bad as it is, is likely to keep growing. There may be more stimulus packages. There may be more wars. And there will definitely be more people on Medicare.

What if we just imploded, like Greece?

Actually, the mainstream business press says Greece is doing OK, at least for now. The Euro community decided it was too big to fail, so Germany bailed it out.

But I don’t know. Does this look OK to you?

 

Greece's recent debt history, between 1999 and...

 

Still, maybe Greece will manage to survive and stay in the European Union.

But what happens if you’re too big to fail and too big to bail out?

Just thinking about it makes my head ache, and anyway it seems like one of those remote,  “fat tail” chances.

Just the same, I think I’ll pass on government debt as a safe investment.

What about gold, the investment standard that has held up through the ages? As the value of government debt and the dollars the indebted government creates fall, the value of gold rises.

Image courtesy of www.platinumgoldcoins.com, broker/dealer for precious metals

Value of the Dollar Relative to Gold, courtesy of Charles Vollum, http://pricedingoldlcom

I could buy gold coins and gold bars and put them … hmm, where could I put them? Under the mattress? What if a burglar steals them?  In a safe deposit box? There are reports of things disappearing from them sometimes. Maybe I should bury gold in a hole in my back yard like a pirate and hope I don’t forget where I put it, like the old guy in Hans Brinker and the Silver Skates.

But gold bugs say the yard is too close. If you want gold or silver, you need to keep it abroad somewhere, out of the reach of long-armed Uncle Sam, who made owning it in this country illegal during the Great Depression. (We couldn’t have another one of those again. Could we?)

Gold and silver may be shining investments, but they are unwieldy and complicated. And the world market for them is much smaller than stocks and bonds, small enough that a few huge banks have the ability to corner and manipulate it to a large degree. Which is exactly what the gold bugs accuse them of doing.

I could put my money in an index fund. Now there’s a simple concept. Mutual funds that merely track an index, such as the Dow Jones, as a class actually perform better than those managed by experts. They’re said to be so simple, even a monkey could run one. (A Dilbert  cartoon once featured a hedge fund run by carefully selected monkeys. Yes, their fees are higher… but high performance has its costs.)

Smart Monkey

But it’s still going to be a bumpy ride in an uncertain market. No matter what I do, my fortune and my savings – my retirement! — are tied to fast moving, volatile forces way beyond my control.

It’s like throwing your money into a hurricane.

How did we get into this mess?

Back in the olden days, most people didn’t have much in the way of savings, but they did have extended families and communities to depend on in their post-working years. Many had a vegetable garden, and maybe some chickens and a cow to help with the grocery bill.

Later, when more people were living in cities among strangers, companies had pension plans for those who were lucky enough to live past retirement, which many did not. But then health started to improve, and they did. Lots of them. Underfunded pension plans started going broke.

The government’s solution? ERISA, the 1974 law that took us all out of defined benefit pension plans and put us into defined contribution 401k’s.

Whole industries sprang up around the change. Enormous amounts of money were invested–into the hurricane. Some prospered, some got smashed to bits. It’s still going on.

Isn’t there a better way?

It seems like there should be. Maybe if the country didn’t borrow so much and have to  worry about paying it all back with interest, we could go back to collecting our measly 1.2 percent on a savings account (Remember those?) and still be OK, because we wouldn’t have to worry about our savings eroding through inflation.

But I have to deal with today’s reality.

Should I let my husband try his naked put strategy?

The gains are uncertain, and we have everything to lose.

But the way things are now, that’s true no matter which way you turn.

2 Responses to “Investing: The Naked Truth”

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  1. Michael Meek says:

    I have a couple of comments. Greece is toast and so’s the dollar. All a matter of time. Since 2000, the dollar has lost twenty-five percent of its purchasing power. Since 1913 when the Fed was spawned by the Wilson and the big banks, the dollar has lost more than ninety-five percent of its purchasing power. An ounce of gold does not go through this shrinking when it goes through the laundry (political process). Right now the Fed is buying 61% of this nation’s debt. Where’s it getting this “money?” Well, the Fed does not get money, it creates it. Out of nothing. Let that sink in. The US Treasury issues bonds to the Fed and receives this created money with which it funds the extravagance of the DC pols. It adds up, so that the thirteen going on fifteen trillion dollar US debt pales in comparison to the off-budget, entitlement items that total to a number no one knows how to calculate but ranges from 100 to 200 trillion dollars more.

    Wikipedia puts out warnings on selling puts based on an interpretation of risk akin to that of a father telling his son not to get married because divorce is catastrophic. He might rather tell the son to choose wisely. And such a thing as choosing wisely in the market is a far, far easier thing than one might think at first. Selling puts on Intel or Walgreen is not the same as selling puts on Achilles Boots or Black Bart Cowboy Hats. You sell puts only on stocks you want to own. When you do get put a stock, you then sell calls on it for extra money until it gets called away and you then use the proceeds to further fund your operations, which are slanted in your favor because you are now reducing the risk of buy and hold while earning a decent return and while wating for the interest on the US debt to put a stake in the heart of central planning.

  2. Stan says:

    You have so much information it’s hard to comment on the whole thing, so I’ll just comment on a few things.

    1 – We did not go out of business. It may appear so, since the US government made some banking and financial institutions merge, but believe me we are all still here.

    2 – The best way to buy Gold is with an Exchange Traded Fund. You do have to be careful though and buy one that does invest directly in Bullion. You pay a little in fees, but it still is cheaper than renting a vault.

    3 – ERISA DID NOT cause the end of the defined benefit plan. They failed because of the crash in 1987, when corporations realized they had to put in much more into these plans to make up for the market loss. They decided it was better for you the employee to take on the market risk.

    4 – The naked put idea is very good if you want to buy a stock on the cheap. It really is a bullish strategy. The only drawback is not everybody can do it. Most firms require you to have at least $200K before they allow you to do anything in the options market, besides writing covered calls or going the speculative way and buying options.