You’ve got to get to the beginning before jumping to the end. That should be the motto I nail to my forehead. Learning about options and covered calls and working ideas and experiments with the stock market over the last couple weeks has me excited by the possibilities. The amount of money just sitting their for the taking is absurd, and it is also a trap. Not a trap. It’s an opportunity with defined risks.
One of the hardest things to understand is that people are more afraid of loss than they are excited by gain. Take a coin flip for example. If you were to offer people the chance to win $100 on a coin flip then everyone would do it. However if it is win $150 or lose $50 then more people wouldn’t do it than would even if the potential gain is the same and by the rules of probability plus $150, minus $50 is the same as plus $100, minus zero.
I would argue that they two fallacies that end up hurting people when they invest, more than anything, are the hot hand fallacy and the sunk cost fallacy. The biggest thing to understand is that systems and plans make money. Which means defined exits whether by loss or gain make money.
It is also important to have more than one system. Systems within systems with diversified income streams. Here is something I decided to do last night. If you go on Facebook and look for the money gurus you will find plenty of people telling young people not to buy a car. They say something like instead of spending $15K on a car that depreciates spend the $15K on an asset that will buy the car for you. I looked at covered call option chains for stocks around $125 a share and best case scenario that original $15K pays for the car in just over two years. Anything faster is a bet and not an investment, and the reality is not everything goes right.
The better plan is to use the $15K, if one has it, as a down payment on a $30K used car. Several advantages here. Most of the depreciation is already out of a used car, a $30K used car is going to have much lower repair cost than a $15K used car, since only half the car value is financed the payments are going to be low, having such a high down payment allows for taking a shorter term, and excess money can be invested towards creating that asset that can pay you.
If we go to CarMax and look the available inventory of $15K used cars are around ten years old and a 2015 BMW 320 I for $15K does sound nice imagine the repair costs on that. Estimated monthly payment on $15K is around $220 on a 60 month loan. Keep that in mind when we see what $30K will get you. The best one on this list is a 2022 Honda Civic Sport with 54,000 miles for $24K. That leaves $9,000 to be financed and that Civic is going to have low repair cost and is only a quarter through its life cycle.
That was a strange tangent, but the Facebook gurus are good at giving advice that makes a nice sound byte but is hollow when you start running the numbers. In other words start at the start. If you’re young and find yourself in possession of $15K go ahead and get the car, finance a part of it, and then work towards not having a car payment while setting aside what you can to invest and build towards an asset that can pay for your next car.
David Huzzard Writes 