If you tell the story of 2018, it will consist of two parts.  The first three quarters of the year charged forward, set all-time highs, and extended the bull market.  However, that all changed in October as the last three months of the year saw consecutive declines with indexes nearing or entering a bear market depending on which one you track.  The turmoil to end the year is freshest in our minds, but let's begin by taking stock in the first part of the story.

If you went back to my 2017 year-end note, you would see I mentioned 2018 got off to a good start.  About the time we published that message, the market had gained over 7% in just the first few weeks of the year, and things felt pretty good.  However, not long after, the market quickly dropped over 10% in only a few weeks. At that time, everyone was asking if this was the bear market people had been expecting for many years.  

From January 2018’s Trade Day through February 2018 expiration, the market had some huge daily swings.  This was the start of the volatility that lasted throughout 2018. As option sellers, volatility is excellent for premiums.  2017 was one of the least volatile years on record, but that was not the case last year. The big day-to-day swings will wreak havoc on our nerves, but present good buying opportunities and lucrative option income for cash flow investors like us.  

The market struggled to find any direction for a couple of months before starting a consistent upward trend in mid to late April.  From then through the end of September, it was hard to find any negatives. In July, our portfolio had the highest Monthly Net Current Yield in over two years, and in August the bull market that started back in 2009 during the financial crisis became the longest in history.  The third quarter marked our best for income in over a decade. A good market, more volatility, and higher interest rates all contributed to a great quarter.

Right after the third quarter ended, the direction of the market changed, and we started to see more declines than gains.  Some days saw very steep drops. October, November, and December all finished lower than the previous month with the steepest declines coming in December on Christmas Eve.

After two consecutive monthly declines and a terrible start to December, we prepared for December’s Trade Day which fell on Christmas Eve.  I’d be lying if I told you I was excited to buy more shares of stock that morning. It was made worse by the fact that the market opened lower and finished the day down nearly 3%.  As my lizard brain screamed to find safety, we approached Trade Day just like we have for the past 15+ years applying the rules of the Snider Investment Method we had seen successful so often.  That turned out to be a great decision as Christmas Eve was the most recent low and the market has made big gains since then.

I made a rare prediction in my December note and predicted a bounce after the significant sell-off.  Now, a month later, that looks to be correct at least in the short-term. How things will play out over the next few months may be more difficult to predict. If we get some answers on a trade deal with China, interest rates, and the government shutdown, we could quickly return to good times.  As these things stretch on longer and longer, more uncertainty creeps into the market. At the end of the day, there will always be some type of 'crazy' going on. That is why it is essential to have a consistent approach to handle both the ups and downs.

While the markets declined last quarter, our annualized net income ranged from 5.5% to 7% on average.  I’m sure we would all love if that were even more, but we are in a much better position than the typical buy and hold investors simply waiting to see their security prices increase.  We all get concerned when markets decline, but you should be confident that you have chosen a strategy equipped to handle declines with a proven approach to generate income in bear markets.  

I’ve talked to many clients after they opened their 4th quarter statement from Interactive Brokers.  Of course, there was significant concern over the steep declines in their account value. Declines like we’ve experienced recently cause us all to be fearful and look for ways to stop the losses or reduce the pain.  It is this exact reaction which caused us to shift our focus to income and design a strategy that wouldn’t be impacted by emotions.

In what seemed like a blink of an eye, all stock market investors found their portfolios worth significantly less than just a few months ago.  This is the first big drop in a long time and is a reminder that stocks can and will decline at times. That doesn’t make them bad investments.  It simply means we need to be prepared both emotionally and strategically for these drops.

Emotional reactions to swings in the market consistently cause investors to make the wrong decisions.  Although having cash feels best, these are opportunities to purchase shares at a much lower price than just a few months ago.  This is precisely how the Snider Method works. As markets decline, we are buying additional shares to both earn income and lower our average cost to take advantage of reversals when the market returns to moving ahead.  

It is common for investors to feel more discomfort from poor conditions than excitement from gains.  A big daily drop, scary headline, or bad report will weigh more heavily on our minds than good news. However, taking a step back and looking at it on a larger scale, for our retired clients the Snider Method was able to provide another year of consistent income and fund the retirement you worked hard to achieve.  For our growth investors who may be one year closer to retirement, your income was reinvested in your Stake so that you can have a larger retirement paycheck when that time comes. As time passes, good and bad times blend together. And, as some of our oldest clients have shared with me, you will gain confidence that you have a solid investment approach to last a lifetime.   

With 2018 behind us, that means all of us will be working on taxes during the next few months.  As usual, we will email out your tax documents from Interactive Brokers as soon as they are available and we’ve verified their accuracy.  Retirement account holders with a distribution in 2018 can expect to receive their 1099-R in early February. Taxable account holders will receive their documents in late February or early March.  As always, if you or your tax preparer have any questions, we will be happy to assist.

I’m sad that 2018 ended on a low note because a majority of the year was very good.  It is hard not too, but I hope you don’t get discouraged. It can be amazing how fast markets will move.  Since the lows on December 24th, we have already made a lot of progress recovering some of those unrealized losses.  Staying focused on the long-term and consistently applying the system that has been successful through both good and bad markets will allow us to prosper.

If you have any questions or concerns about your account, please don’t hesitate to contact me.  Part of my role as your advisor is to ease those concerns and instill the confidence we all need to be investors.  Whether it is a phone call, email, or face-to-face discussion, I’m always happy to review your account.

Thank you for your business and continue confidence.  

Jesse Anderson
janderson@snideradvisors.com
214-446-8533