THE WEALTH FORMULA
I’ve been called “cold and calculating”, but the truth is I simply recognize patterns, love numbers, and predicting future prices using models and frameworks that I’ve built over time. I will often share these numbers and predictions with confidence which makes me seem cold. My wife suggests I might be “on the spectrum”. But I have yet to be clinically diagnosed.
Life is a journey of discovery and finding your best future self; even better if you can do it with someone you love and trust. Well, in my opinion, wealth is just one part of this puzzle, and I love solving it.
I see wealth as “(Time + Consistency) x Compounding = Wealth.” It is not too complex. I’m someone who plans, is patient, and looks for the recurring pattern. Don’t kid yourself, wealth has a pattern.
I started this wealth journey when I was 21. I figured that to be a millionaire when I retired, I just needed to invest $50 a week with an annual return of 10%.
I knew I could manage that. I knew I could save more and earn a higher return, getting to my million-dollar goal faster.
I did better than expected in the beginning, but when I was around 27, I hit a snag. I realized that my wealth formula was missing something: avoid mistakes.
My First Big Mistake
During the 2008 financial crisis, I made a mistake. I had been investing with borrowed money for a while, which speeds up wealth-building, especially in a rising market.
I kept increasing my borrowing, thinking I understood the risks. But when the crisis hit, I lost a lot of money. Investing with borrowed money was fine when the market was doing well, but when it crashed, I lost many of my gains. I had planned to stay invested for the long term, but when you’re heavily borrowing and the market falls, you can’t just ride it out.
After that, I adjusted my wealth formula to “(Time + Consistency – Big Mistakes) x Compounding = Wealth”. Learning from that tough lesson, I started building my wealth up again.
Don’t Take Risks You Can’t Afford
This is the lesson I share now. No matter how big the potential reward, if you can’t handle the potential loss, it’s not worth it. Imagine if you worked hard for years to save $100,000, then someone offers you a bet: flip a coin, heads you get a million dollars, tails you lose your $100,000.
Would you take it?
You shouldn’t because the potential larger than what you can afford to lose. Compounding can grow your money, but not if you lose it all.
It’s about avoiding risks you can’t afford. Some of those risks include not diversifying your investments. I know someone who got stock options from a tech company that went public. The options are worth a lot now, but all their wealth is tied to one company, which is risky.
Then there’s leverage, which I learned about the hard way. It can wipe out your investments in a crashing market, even if you’re usually right about your investments.
Consistency wins in building wealth, but avoiding big mistakes speeds up the process.
WEEKLY TRADING STRATEGY
I posted about this on X (formerly known as Twitter) this week:
The Call Credit Spread is an excellent alternative to the Covered Call, in fact in many cases I like the Call Credit Spread over the Covered Call because my downside risk is capped, and I won’t lose my equity or capital if the stock declines – see how this relates to the story I just shared?
While call credit spreads and covered calls differ in their construction, they share some similarities, particularly in their income-generating potential and target outcomes.
Income Generation: Both strategies are designed to generate income for the investor. In a covered call, income is generated by selling a call option against shares of a stock already owned. Similarly, in a call credit spread, income is generated by selling a call option while simultaneously buying another call option with a higher strike.
Limited Risk: Both strategies offer limited risk for the investor. In a covered call, the risk is limited to the downside protection provided by owning the underlying stock. In a call credit spread, the risk is limited to the difference in strike prices minus the net credit received. However, the total risk is much lower with the call credit spread.
Defined Profit Potential: Both strategies have a defined profit potential. In a covered call, the maximum profit is achieved if the stock price remains below the strike price of the sold call option at expiration. In a call credit spread, the maximum profit is limited to the net credit received if the stock remains below the lower strike price.
Here is a comparison of the profit and risk profiles if we sold the 135 CALL for April 19 on ARM
CALL CREDIT SPREAD:
Max profit $95 if ARM can stay below 135 on April 19
Max profit $95 if ARM trades sideways
Max loss is $405 if ARM goes above 140 on April 19
No loss if ARM goes down to 120
Maximum return on risk: 23.5%
COVERED CALL:
Max profit $777 if ARM rises to 135 on April 19
Max profit $175 if ARM trades sideways
Max profit is capped at $777 if ARM rises to 140, but you lost $500 in opportunity cost
Loss of $324 if ARM declines to 120 on April 19
Maximum return on risk: 6.1%
So while the charts look different, the outcomes are similar with similar goals. But the Call Credit Spreads requires far less capital and generates a better return on the risk you took. If you want to layer in some additional return, take the capital you saved from deploying and invest it in a low risk, high yielding investment.
CFU Trades BOTH
At CFU, we trade both strategies as our team of 6 traders always try to find the opportune trading strategy for each security as they read and watch the market each day.
Come give CFU a try free for 3 months:
Stephen, President CFU
