How A Pre-Socratic Philosopher Taught Me Options Trading
I’m in Las Vegas this week to give presentations to MoneyShow attendees and to speak with subscribers about my newsletter advisory services.
In one of my talks, I told the audience my favorite investing story about how a pre-Socratic Greek philosopher taught me how to trade options. This week I want to tell you, The Deep Woods reader, this story, as it will give you a sense of why I think it’s important to cultivate all kinds of knowledge about the world and not just knowledge directly related to stocks, bonds, exchange-traded funds (ETFs) and options.
So, what do I mean when I say a pre-Socratic philosopher taught me how to trade options? Well, to understand this, we must go back about 2,500 years ago to Ancient Greece and learn about a man named Thales of Miletus.
Thales was a brilliant philosopher and one of the first real Western thinkers and scientists (although “scientist” wasn’t a term that was used at the time). He is best known for his thesis that “all things are water,” which we know now to be erroneous, but was a groundbreaking thought, given the scientific infancy of 6th century B.C. Greece. Moreover, Thales was among the first thinkers to make hypotheses that were testable and falsifiable, both bedrock principles of scientific inquiry today, but absent among his fellow thinkers at the time.
According to the Internet Encyclopedia of Philosophy, none other than the great Aristotle identified Thales as the first person to investigate basic principles, the first to question the origins of substances and matter and therefore, the founder of the school of natural philosophy.
Among his accomplishments was the successful prediction of an eclipse of the sun that occurred on May 28, 585 B.C.E. Although it’s not known exactly how Thales was able to predict this event, the most likely explanation is that he studied the solar and lunar cycles.
Yet what can we learn as investors from Thales?
To answer that, we must realize that Thales was a philosopher and a man not particularly concerned with the accumulation of monetary wealth. And because of his lack of wealth, he often was criticized by the elites of Athenian society during his own life. In order to prove the elites wrong, and to demonstrate the power of reason and natural philosophy, Thales did something that should put him in the trading history books.
Based on his study, assessment and knowledge of the Greek climate, Thales reasoned that there would be a particularly good harvest for olives one year. But rather than sit on this information, Thales had taken the next step and put deposits down on all the olive presses in Miletus over the preceding winter.
Thales basically cornered the market on olive presses for a small investment. Stated in modern trading terms, Thales bought call options on olive presses and paid a small amount for the right to control those presses (i.e. he paid a small premium for the option).
When his prediction of a bountiful olive harvest did indeed come to pass, Thales’ bet paid off handsomely. The boom harvest created heavy demand for the olive presses, and because Thales held a virtual monopoly on the presses, he was able to rent them out at a huge profit.
In my opinion, this was perhaps one of the most important events — not only in market history, but in the whole of human history.
The reason why is because Thales demonstrated that “science” and the accumulation of wealth really are connected. And, as the old saying goes, knowledge is power. He also demonstrated that if you know what your competition doesn’t, you will have a tremendous advantage over them.
It is for this life lesson, as well as the accompanying investing lesson of Thales and the olive presses, that we should be thankful for the man from Miletus.
I know I am thankful for him, as his foresight and virtual creation of the concept of options trading has allowed me to help investors make some serious profits. And, that’s precisely what we have done this year in my Bullseye Stock Trader advisory service.
Since we launched in late December, we’ve had 14 closed trades, with 12 winners. Moreover, many of those options trades have been double-digit or even triple-digit percentage winners.
To find out more about my Bullseye Stock Trader service, simply click here.
So, the next time someone asks you about who your favorite investor is, forget about Warren Buffett or Ray Dalio or John Templeton. Instead, give Thales of Miletus a shout out.
ETF Talk: A Fund that Provides Exposure to Social Media
If, as Eric Schmidt says, the internet is indeed “the largest experiment in anarchy that we have ever had,” social media almost certainly plays a central role in this conundrum.
While politicians both in the United States and around the world endlessly debate the question of whether speech on social media should be regulated, social media companies, beyond the usual suspects of Facebook (NASDAQ: FB) and Twitter (NYSE: TWTR) still provide ample opportunities for investors.
The Global X Social Media ETF (NASDAQ:SOCL) currently is the only exchange-traded fund (ETF) available that can give a prospective investor access to this dynamic part of the global economy.
Specifically, SOCL focuses on providing investment results that generally correspond to the price and yield performance, before fees and expenses, of the Solactive Social Media Total Return Index. The ETF caps the weights of each pure-play social media position at 10% and the weight of non-pure play companies at 4.75%. However, the fund also underweights U.S. companies relative to international ones, since SOCL excludes American tech giants Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM).
Conversely, SOCL overweights companies from China, Japan and Russia.
Some of this fund’s top holdings include Twitter Inc. (NYSE: TWTR), Facebook, Inc. Class A (NASDAQ: FB), Tencent Holdings Ltd. (OTCMKTS: TCTZF), NAVER Corp. (KRX: 035420), IAC\InterActiveCorp (NASDAQ: IAC), Alphabet Inc. Class A (NASDAQ: GOOGL), NetEase, Inc. (NASDAQ: NTES) and Spotify Technology SA (NYSE: SPOT).
While these companies are mainly in the software & IT services sector (94.79%), this ETF has holdings in companies that are in the diversified retail (0.84%) and leisure products (0.41%) fields, as well. The fund currently has $140.66 million in assets under management and an average spread of 0.27%. It also has an expense ratio of 0.65%, meaning that it is relatively expensive to hold in comparison to other exchange-traded funds.
In terms of SOCL’s MSCI ESG Fund Quality Score of 1.92, it ranks in the 1st percentile within its peer group and in the 2nd percentile within the global universe of all funds in the MSCI ESG Fund Metrics coverage. This fund’s performance has been mixed in the long term. While it has only been down 4.01% over the past month, it jumped 2.80% for the past three months and remains up 16.30% year to date.
Chart Courtesy of stockcharts.com
In short, while SOCL does have several advantages over some of its peer funds and provides an investor with the ability to profit from the world that is social media, this ETF’s risks and costs are not zero. Thus, interested investors always should do their due diligence and decide whether the fund is suitable for their portfolios.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
In case you missed it…
Celebrating 150 Years of Mind, Metal and the Human Spirit
Last week, America has a chance to celebrate an anniversary that I suspect not a lot of people even know about. I admit that I didn’t really know about it until recently, and I’m a big fan of these kinds of industrial celebrations. On May 10, 1869, the nation marked the 150-year anniversary of the completion of the Transcontinental Railroad.
The “Golden Spike” event happened last Friday in Utah, and to help commemorate the occasion Union Pacific Corporation (UNP) sent its historic steam locomotive “Big Boy No. 4041” to the event. The train made a few stops in Utah over a few days on the way there to help the state celebrate the event where it all happened, a century and a half ago.
Now, you may think of this event as just a quaint little remembrance of things past, possibly as a nostalgic reminder of the country’s expansion into the West. But I don’t think of it this way. I think of it as a chance to celebrate reason, reality and the victory over matter and molecules in the pursuit of a concrete physical goal — a goal to explore and settle new territory and to enhance human existence.
Because you see, that’s what is at the essence of an achievement such as the Transcontinental Railroad.
Imagine the feat of engineering, human capital, financial capital, intellectual capital and hard physical and mental labor it took to lay railroad ties across the entire country. If you’ve ever been on a long drive throughout the desert West or Northwest, you know how rather inhospitable it is. Now think of yourself with no GPS, no air conditioning, no roadside cafés — indeed, no roads at all. Then think of yourself trying to figure out how to build something as grand as a Transcontinental Railroad.
Once you do that, it’s easy to be filled with a sense of awe for reason and the human spirit. I know my heart is swelling with that sense of wonder and reverence even as I write these words.
Yet, when it comes to having reverence for reason and human achievement, there is no better writer than Ayn Rand. In her magnum opus “Atlas Shrugged,” one of the lead characters, Dagny Taggart, is the head of the railroad Taggart Transcontinental.
In the passage below from the novel, Dagny (She) is riding on the “John Galt Line,” a new railroad built with metal that’s stronger, lighter and better than anything ever produced. It was created by the industrialist Hank Reardon, and because of his achievement, Reardon is vilified by the horde of “second handers” who think him too smart, too proud, too arrogant and too protective of his invention. They would rather denounce it as unsafe, that is, until they need it for their own purposes. Then they want him to give it to society for free, and essentially treat him as a slave.
Note Rand’s worship here for human values and human achievement, while also destroying those who regard achievement and the pursuit of values in the physical world as an “ignoble concern” or a “surrender of man’s spirit to his body.”
She looked at the cab around her. The fine steel mesh of the ceiling, she thought, and the row of rivets in the corner holding sheets of steel sealed together — who made them? The brute force of men’s muscles? Who made it possible for four dials and three levers in front of Pat Logan to hold the incredible power of the sixteen motors behind them and deliver it to the effortless control of one man’s hand?
These things and the capacity from which they came — was this the pursuit man regarded as evil? Was this what they called an ignoble concern with the physical world? Was this the state of being enslaved by matter? Was this the surrender of man’s spirit to his body?
She shook her head, as if she wished she could toss the subject out of the window and let it get shattered somewhere along the track.
As I’ve written before, the only antidotes to bad ideas are good ideas. And one way to celebrate and remember good ideas in action is to remember achievements such as the completion of the Transcontinental Railroad.
So, last Friday, I raised a glass and toast the “Golden Spike.” I might even book a trip on an historic railcar in homage not only to the Transcontinental Railroad, but to Ayn Rand, “Atlas Shrugged,” and all the men and women of genius in the world who deserve our reverence, respect and love.
In the name of the best within us!
Heaven at Night
“Las Vegas looks the way you’d imagine heaven must look at night.”
— Chuck Palahniuk, “Invisible Monsters”
The dark-yet-brilliant novelist’s 1999 tome about a fashion model who is left disfigured after a car accident is a beautiful yet distressing read. In fact, the book was originally considered too disturbing to publish. However, “Invisible Monsters” got a second life after the success of Palahniuk’s first novel, “Fight Club.” And of course, I can’t mention that book without mentioning the unforgettable cultural meme it spawned: “The first rule of Fight Club is you DO NOT talk about Fight Club.” If you haven’t read Palahniuk’s work, you’re missing out on some very good literature.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,