Recession or not

Kopin Tan had a great line in this week’s Barron’s.

“Like beer bellies and bald spots, a recession is one of those things whose precise beginning is hard to pinpoint – until the sad evidence eventually becomes hard to refute.” 

We have no true way other than guess if we are actually in a recession yet, but we do know the indices are down and most of our accounts show its harsh reality.  The same Barron’s article pointed out that based on data from the 1973, 1980, 1981 and 1990 recessions, “on average, the S&P 500 fell 23% from it’s peak.” That means we might only be half-way to the bottom of where we’re heading if we are indeed heading towards a recession.  With that fear in the minds of many, I’m going to go with the belief that even if we don’t keep dropping another 10-13% we are not likely for a massive rally that lasts months in the near future and I’m going to start selling more naked calls to try to prosper from it. 

I received the above table in an automated email from TD Ameritrade I get weekly.  I like the quick view of the indices’s returns or in this case, lack there of.  Checking out the “big picture” like this always makes me feel better when I’ve had a bad few weeks.  I can take a deep breath and think, I’m still creating better returns than the indices and that’s what is important to me if I’m going to continue to manage my own investments.  It’s impossible to always be up in each month.  Being up each year is still possible though. 

My return for the past twelve months has sunk all of the way down to only +12.49%.  I’m not being cheeky by saying only +12.49%.  I had been bothered by that since I finished last year, only two weeks ago, with a return of 26.27%.  I’m down 6.08% this year already.  I won’t annualize that for you since it’s just gross.  My in-laws were over our house yesterday and my father-in-law asked what my secret was when I told him about my return for 2007.  The best answer I could give was that I keep emotions out of my investing as much as possible. 

After they left I came back by my computer to look at my math for my trading model.  I try to do this fairly often to remind myself that losses are expected in some months.  Somehow I forget this frequently.  I can actually lose $1500-2000 per month and still end up by 20% over a 12 month period as long as I continue to invest and make up the difference selling options and continuing the stronger cash flow that will balance out my losses.  I beat 20% last year because some months all options expired worthless.  This year I appear to be starting out with a few months worth of losses at the beginning.  I still believe the tides will turn and I’ll end the year up by more than 20% again because I will not let pride get in my way.  I will accept losses when I should and will therefore create greater gains in the longer run.