"What it comes down to, Bill, is this: Investors who want to survive the market volatility, uncertainty and downdrafts that absolutely are headed our way must drastically shift the way they think about the capital markets."
That was the point that Shah Gilani kept coming back to over and over during our most recent chat. Shah, a retired hedge-fund manager and Capital Wave Forecast editor, was in town for a couple of days for a series of strategy sessions.
In the three years since he's joined us, I've found that during Shah's visits to our offices, work eventually stops; the longer he speaks, the bigger his audience tends to get. So, as is our custom, we stole away from the meetings to talk about the markets.
Tales From the Front
I can't tell you how much I look forward to these sessions with Shah: The war stories, anecdotes, lessons and predictions I get from them are better than anything you could ever hope to get from any symposium, workshop, internship, best-seller or blog.
On Wednesday evening, we were sitting in a corner booth at the hotel restaurant/bar that's a few doors down from our office. A grim-faced Shah was staring detachedly at his beer-bottle label as he fretted about the dour prospects facing far too many of America's individual investors.
"They look at the financial markets in the absolute wrong way," Shah said, punctuating his point by slowly shaking his head. "In their minds, bull markets are good, bear markets are bad.
The reality is that there are money-making opportunities in any kind of market. In fact, some of my best trades have been on the "short' side" – when markets were falling.
I can personally vouch for this.
Just last month, for instance, he closed out a "put" option trade on the iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI) for a 277% gain.
And last Aug. 8 – thanks to a Monday sell-off that saw the Dow Jones Industrial Average plunge 635 points – Capital Wave Forecast subscribers reaped gains 456%, 455%, 371% and 197% on four put-option trades that Shah had recommended (three U.S.-related trades and the fourth on the FXI China ETF).
As most of you know, a "put" option represents a bet that the price of the underlying security is going to fall. So it's a play on the "short" side of the market.
>But unlike an outright "short" sale, where the loss is potentially unlimited (if the stock soars instead of falling), the loss with a put is limited to the cost of the option (with Shah's trades, that's usually a few hundred dollars).
"Individual investors erroneously believe that the risks on the short side of the market are massive," Shah said to me. "But with a put option, you can't lose any more than what you paid for the options. You know exactly what your maximum potential loss could be."
And the potential gains, as we've seen, can be enormous.
It's not just fear of loss that causes investors to shy away from short-side trades. Shah believes that Wall Street has conditioned U.S. investors that short-selling – betting against the stock market, and betting against Corporate America – is, well, un-American.
By succeeding at that gambit – and by also conditioning the bulk of the individuals in this country to be "buy-and-hold" players – Wall Street has created a nice big pool of investors to take the other side of all its short trades, where it makes a lot of its money, Shah says.
Beating Wall Street at its Own Game
These aren't baseless assertions. As a guy who's owned an exchange seat, who's run trading operations and who's worked on the trading-room floor, Shah has seen this over and over again.
"Wall Street brainwashed individual investors to think and act this way, and then uses those inhibitions to its own advantage," Shah said angrily. "And believe me when I tell you this: The institutions make a heck of a lot of their money on the short side of the market."
Don't misunderstand. Shah is not telling folks to embark on some short-selling crusade. In fact, he believes individual investors should establish what he describes as "core (long) positions" in five to seven stocks – preferably solid, dividend-paying companies in such industries as banking, pharmaceuticals and technology. Then you can use such strategies as "covered-call" writing and selective put-option trading to augment your returns.
"There's money to be made in any kind of market," Shah said. "You can augment your income by writing covered calls in everything but a rampant bull market. And you can profit from the short side, as well. It doesn't take a bull market to make money."
Indeed, Shah's real message here is clear: The individual investors who will enjoy the most success in the months and years to come will be those who think opportunistically – and steer clear of the "bull market good/bear market bad" mindset.
Shah has developed a new trading strategy that brings all of these elements together. According to Shah, "Today's market is entirely governed by the continious, combined effect of dozens of corrupting influences. The 'free market' is virutally dead."
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.