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Embrace Black Swan Events (Bonus Pick Inside)

Posted December 1, 2021

December’s finally here.

Hopefully you and yours stay safe and healthy as we move toward Christmas and New Year's.

Many investors decide to rebalance their portfolios at the end of the year, selling the losers and making sure they’re not overweight in the winners, so if markets continue sliding, we could see more downward pressure to close the year.

Even if you heeded my advice to tread lightly last Friday, your portfolio likely took a hit as markets overreacted to yet another Black Swan event... the omicron COVID-19 variant.

Then the Dow dropped more than 600 points Tuesday morning when Moderna CEO Stéphane Bancel raised doubts about the effectiveness of current vaccines against the new variant.

Investors are rightly scared about new lockdown restrictions and travel bans, which will disrupt global supply chains even more and lead to higher inflation.

It should also come as no surprise that investors look for any excuse to take profits.

But President Biden assured the U.S. that omicron won’t lead to shutdowns or lockdowns. But how can we be so sure? That's what our leaders said at the beginning of the pandemic...

We’ve known from the start that this virus will mutate into countless variants; there’s nothing we can do about that.

What’s more clear after these sell-offs is how Mr. Market’s reaction to all this can make you incredibly wealthy.

In his 1949 book The Intelligent Investor, legendary investor Benjamin Graham writes of a fictional character named Mr. Market, an allegory for herd market behavior that drives price action during times of optimism and panic.

Mr. Market develops irrational mood swings that determine his buying and selling behaviors.

As the broader markets often develop volatile price movements, Graham argues that you can use Mr. Market’s irrational behavior to decide when to buy and sell stock.

When Mr. Market is fearful and stocks drop, it can signal a buying opportunity, and vice versa.

But you need to know how to read volatility in order to profit...

Reading Volatility

In fact, there’s one consistent and accurate indicator to follow when Mr. Market comes to town.

It’s called the CBOE S&P 500 Volatility Index, or the VIX. Created in 1993, the index tracks put and call option volume on the S&P 500 to project 30-day volatility expectations.

It’s also called the “fear gauge” and sports a historical average level of 19.5.

Looking at the three-year chart, we can see big spikes at the end of 2018 and March 2020, as well as smaller spikes throughout the pandemic.

VIX

A level of 20 or below means the market’s functioning normally. When it’s around 25 or 30, investors are getting nervous. Anything above 40 means the market has entered a full-blown correction.

It may seem counterintuitive, but when the VIX is high and stocks are plummeting, it’s typically a good time to buy because, as you can see from the chart, the index never stays elevated for long. And when the VIX drops, stocks tend to rise.

The secret to making money with the VIX is you can buy the index itself or trade options on it when you think Mr. Market’s become irrational.

The VIX closed up 54% at 29.62 last Friday, a 10-month high.

And now that Fed Chair Jerome Powell spooked investors early this week by saying the omicron variant poses “downside risks to employment and economic activity,” we’ve got to find the right place to put our money where it’ll be treated best, where inflation won’t eat it away.

Resist Inflation

Ray Dalio, co-chief investment officer of Bridgewater Associates — the largest hedge fund in the world — noted this week in an interview with CNBC that cash is trash, saying, “Cash is not a safe investment, is not a safe place because it will be taxed by inflation.”

That means it’s never been a better time to be an investor.

The worst place to put your money is in a bank, where it’ll earn less than 1% interest.

Personally, I’m overjoyed when I see a market pullback.

I relish any opportunity to buy into panic selling and you should too, as buying into panic has turned out to be extremely profitable over the last few years.

When the stock market lost $2 trillion in October 2018, I jumped in headfirst and the market turned around.

After the first COVID scare at the start of 2020, markets shot up again to all-time highs...

Indexes

Now, no one can be certain of market reversals, but as the world learns to live with COVID, there’s an obvious pattern of panic and euphoria.

So while you’re adding more risk through investing in stocks, you’re setting yourself up to reap greater rewards.

And if you’re not getting in on cryptocurrencies or pre-initial public offerings (pre-IPOs), you’re missing out on huge gains... More on that in a bit.

A “conservative” approach in the market right now is to buy exchange-traded funds (ETFs). ETFs have exploded in popularity since their inception in the 1990s because they trade just like stocks and track the performance of just about anything in the market, including indexes and commodities, and can be structured to track specific investment strategies like covered calls.

Covered call ETFs own shares of an underlying company or index and then sell monthly covered calls against those positions. The funds collect a premium for selling the calls and distribute that money in the form of dividends to the ETF holders.

Compared with quarterly dividend payments from most dividend-paying stocks, covered call ETFs pay monthly dividends with above-average yields. These dividends fluctuate with the performance of the funds, however, so your return isn’t set in stone.

I wrote about these ETFs to Outsider Club readers in September and decided to experiment with them myself.

Here’s what I bought:

  • The Global X Nasdaq 100 Covered Call ETF (NASDAQ: QYLD), which pays a nearly 10% monthly dividend, or $0.22 a share.
  • The Credit Suisse X-Links Crude Oil Shares Covered Call ETN (NASDAQ: USOI), which sports a nearly 15% monthly yield, or $0.14 a share.
  • The Nationwide Risk-Managed Income ETF (NYSE: NUSI), paying nearly 15% in monthly income, or $0.18 a share.
  • The JPMorgan Equity Premium Income ETF (NYSE: JEPI), yielding 7.49% monthly, or $0.38 a share.

A bonus income pick that I’ve been investing in for some time now is Icahn Enterprises (NASDAQ: IEP). With a dividend yield of 15.87%, the stock pays $2 a share!

Let compound interest do its work with these funds, and you’ll be sitting pretty in no time.

COVID, Crypto, and IPOs Combine!

Again, it’s never been a better time to be an investor.

And when COVID strikes to bring down the market, crypto comes in to pick up the slack.

We saw a bit of a slide in the crypto market at the end of November after the massive October bull run.

And with investors wary of irresponsible government spending and rising inflation, crypto's looking like a safe haven once again.

But there's another little-known corner of the market that retail investors have ignored during the pandemic.

I'm talking about pre-IPOs, and the profit potential here is staggering.

Pre-IPO investing, also called angel investing, gives you a chance to get into companies before they go public.

We saw this in action last month when Rivian (NASDAQ: RIVN) went public at $78 and then soared 66% in a matter of days. But angel investors made 233% by getting in early.

Our in-house angel investing expert Jason Williams stopped by my desk yesterday to tell me he's adding yet another open position to his pre-IPO portfolio.

He's so excited about this one that he's agreed to drop the price of his service for the first 450 people who sign up.

So if you want to take an ownership stake in private businesses to give you a shot at turning a small sum into millions, you'll need to get into these companies now.

Slots are filling up fast, so don't delay.

To your wealth,

Alexander Boulden
Editor, Wealth Daily

After Alex’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

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