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I love tea!
Sadly, I don't get any tea leaves as I have excellent filters so I don't spend a lot of time staring into the bottom of a cup for answers. Instead, I prefer to filter the mind-numbing amount of information available to us these days and try to separate the wheat from the chaff - which is another thing people simply don't have to do anymore. Without tea leaves or entrails or bones to cast - how else will modern man forecast the futures? Help us Magic 8 Ball.
Anyway, so we're wondering whether the markets will finish 2012 in the red or in the green or somewhere in between and those just happen to be the colors of tea leaves, which are as reliable as anything when predicting future events. My favorite iced tea maker is the very simple Takeya 11100 (for $17, they don't name them) but for hot tea I love my cast-iron Japanese tea pot with the high-tech filter (hidden inside) and the cool golden dragons etched into the metal.
Now, I can predict, with a great deal of certainty, that next January, I will still be using my cast-iron tea pot. For one thing, the design is thousands of years old and hasn't been improved upon. Also, it was freakin' expensive, so I'd need a damned good reason to change it. We've been through a lot together so I have an emotional attachment to it and my oldest daughter loves dragons and drinks tea with me out of the matching iron cups - all things that are not likely to be replaced over the next 12 months.
My Takeya, on the other hand, is relatively new and replaced my more expensive Mr. Coffee Iced Tea machine that I had been using for over a decade. Not the same one but, when the last one crapped out I didn't like the design of the new one so I began experimenting with alternatives and ended up loving the Takeya, which is cheaper, easier to clean and makes much better iced tea. Could I have predicted last year that Takeya would be the winner? Not at all - I'd never heard of them. That means, although I LOVE it, I don't feel as sure that it will remain my favorite next year. In fact, like a quantum event, the act of my writing this article may cause someone to point me toward a tea maker I like better and thus alter the outcome of my prediction.
Could I have predicted that the Davis Family's value of Mr. Coffee would plunge in 2011? Nope, never would have guessed - my first impulse was to run out and buy a new model but they made changes I found unappealing, which forced me to re-evaluate my decision to own them. This is why it's not only difficult to predict the future but dangerous as well - the act of making predictions tends to paint analysts into a corner, where they spend a great deal of time and effort trying to justify their predictions - even as they unravel around them.
As I said on Friday, I don't like to make predictions unless/until I have a good reason to and the arbitrary turning of a calendar page is not a reason for me to force guesses on what will happen when another 366 days pass (leap year this year).
I went skiing this weekend and even people who normally don't bother me wanted to know what I thought the markets would do next year and, when I got home, I have well over 100 emails from various media people wanting to know the same. The sad truth is, unfortunately, that there are so many strong cross-currents in play at the moment that attempting to chart a course now that will get you to a goal at the end of a year's journey is a fool's errand - yet everyone lines up to hand the charlatans a few sous in exchange for their "knowledge" of the future.
"Always in motion is the future" - Yoda said that and, of course, Einstein agrees - it's elementary physics but that doesn't stop people from paying a fortune to have people tell them the unknowable. The stock markets make a great scam for Futurists who want to separate the masses from their money because it's essentially a binary outcome - stocks go up or they go down so any random guesses made by "experts" are going to be half right.
Combine that with the fact that very few pundits actually commit their predictions to writing and it creates a culture of "expert" prognosticators who feel very comfortable making predictions with very limited information because, on television - it's more important to look like you know what you're talking about than to actually be right.
We don't do predictions, per se, at PSW - we teach our members to "be the house" and make money off of the endless supply of suckers who THINK they know what's going to happen. The equally endless supply of media prognosticators who are willing to sling their bull at the beautiful sheeple insures that there are always plenty of them lined up to pay us a premium because they "know" where a stock will be down the road. Our job, as option salesmen - is simply to bet that they don't.
Do you think Shelly Adelson ($22Bn) or Steve Wynn ($2.5Bn) sit up in their suites worrying about whether the next spin of the wheel will be red of black or do they just count the green provided by the people who think they do know and come to play? They even sell "system" books right in the casino gift shops - the more people who think they can beat the house - the more money the house makes. Like the markets - casinos are a rigged game - not so much that they openly cheat, but that the odds are stacked against the individual player in favor of the people who "make the book."
Very much UNlike the casinos, we investors are able to make book by selling options to other gamblers. They don't let you deal poker and take the rake and they don't let you toss the roulette ball and say "sorry folks" as you scrape all the chips off the table but they do let you sell Apple (AAPL) 2013 $300 puts for $18.50 to someone who believes that AAPL will be lower than $281.50 in 12 months. Similarly, there is another guy who is equally certain that AAPL will be higher than $535 in 12 months and that guy will pay you $20 for the $515 calls.
As the bookmaker in this situation, you are collecting $38.50, which is almost 10% of AAPL's total price and, because you CAN'T lose on both ends, you are essentially betting that AAPL will not fall below $261.50 (down 35%) or rise above $553.50 (up 37%) over 12 months. Can you lose? Of course you can lose. You can also hedge against those losses but that's not what this post is about. The point is that, like Steve Wynn or Shelly Adelson, you may lose 35 to 1 on any individual spin of the wheel but, over many years and many, many spins - the odds are very much in your favor.
Now, you can play a strategy like that and just play the odds but we like to combine the tremendous ability to be the house whenever we choose with our FUNDAMENTAL outlook on stocks so, rather than sell AAPL calls, we may only sell the puts as we're very confident with AAPL's VALUE over $300 and we are knowledgeable enough of the mechanics of options that we know how and when to adjust our bets if they begin to move against us.
Selling AAPL $300 puts for $18.50 is NOT one of our favorite bets at the moment because AAPL has run up and we don't have the same degree of certainty we had last year, when we sold January 2012 $250 puts for the same price (they expired worthless, of course, for a 100% gain). That's OK, though - because there are 9,000 other stocks we can do this with and every day we learn a little more and see a little more and every day our "degree of certainty" moves up past 75% as we find another trade we are comfortable making. While we occasionally stray to the dark side of the table and make a few bets ourselves - we never lose site of our JOBS - and our jobs are to SELL premium.
Being the house is, without a doubt, the best and most consistent way to make money in the stock market.
THAT's my prediction for 2012 because - whether the markets are in the black or the red - we can collect the green all year long by simply taking the wagers, especially the ones where we can sell into the excitement of the masses - who are egged on by the pundits who claim to have all the answers - God bless them all.
Disclosure: I am short DIA, USO.
Additional disclosure: Positions as indicated but subject to change.
