The ability and the time required to identify alpha through fundamental analysis, unfortunately, is not trivial. To analyze a single small-cap company from scratch based on financial statements takes the order of double to low triple digit hours. You can do this as full-time employment, but to do this as a side job would yield perhaps two investment opportunities every two months, and that’s only if you diligently applied yourself outside of work by putting in an extra 20 hours every week,and if the market eventually catches up with your assessment, and if your investment portfolio can sustain the draw downs while the market makes up its mind about your ability to identify alpha.

The thing with most small businesses is that they are not portable, and they require quite a bit of marketing, two traits that make them not suitable for a wannabe nomad. The first is self explanatory enough. The second means that instead of just kissing one miserable boss’s ass, now you have to kiss everyone’s ass because public opinion has a real impact on your business’s ability to prosper.

For me, the second part of the portfolio is both an intellectual pursuit and a way to generate some spending money. I can retire now on the first part of my portfolio, but realistically, what the heck am I going to do all day lying in a hammock on a beach? While I’m 100% certain that the first 6 months of lying in a hammock will be pure bliss, I’m not so sure about what will happen after the first 6 months. I gave early retirement a try 4 years ago by taking off for 4 months. I can say without reservation that the day I walked out of work, I felt about 20 pounds lighter simply because all the deadlines, all the politics, and all the BS became meaningless to me, but after about 6 weeks of sitting around, despite spending 4 hours a day studying for the CFA, I still felt that I wasn’t entirely fulfilled despite having the MBA to look forward to by the autumn of that year.

That experiment got me thinking what will I do if I were to take early retirement. Yes, chasing multiples of Asian female hotness will take up 4 hours a day for sure. Heck, just swapping SIM cards to manage the multiples of Asian girlfriends will take an hour, but what about the rest of the the day? Work out at the gym for 2-3 hours, get a massage to relax the overworked muscles, one hour. OK, I guess that is a full work day. Then by the the time evening rolled around, I have already done what most people try to chase with their night lives. Then what?

Still, I would recommend at least trying to develop that second source of income because otherwise you end up wasting a lot of time watching TV anyways.

As for trading for profit, it’s not easy. Even with an MBA and CFA and the ability to program in C++, C, Tcl, and Perl, none of my automated trading algorithms have consistently been successful even in back tests. Still, I have been at it for only a few months, so I can see that the problem space is defined, so it’s just a matter of writing more code to anticipate the possible variations.

I thought this Freely matter thing has settled and now it surfaced again I think among all the Freely batches of graduates, I might be the stubborn one who has hang on to this earnings gapping strategy the longest, about 4 years to be exact.

All the refining, analysis, delving into this techniques leads me to this advice – please give it up.

However, if you want to risk a bit of your spare money to “buy an option lottery ticket” in the hope to strike 200% or more profit from an earnings announcement event, then this is the “perfect” technique to pump up your adrenaline. But this technique is so close to gambling that I’m sure you know very well that you can’t earn a consistent monthly income from gambling.

If you’re into forex or index futures trading, I believe your experiences would have “taught” you to be cautious about entering a trade before a major economic report announcement. This is mainly because prices would gyrate wildly after the announcement; and the worst is, you won’t know which direction the price would go to. To top it, prices would sometimes shoot up when poor announcement came out. And that’s exactly the same bullet biting scenario when you trade with earnings gapping.

So for newbies out there who want to learn options trading, avoid this earnings gapping technique entirely. There are other options trading techniques which are far more sensible and less risky than this technique, that is, if you practise the good discipline in money management (the psychology aspect in trading) & the acquire the good skills in risks management (the technical aspect in trading).

Regards,

Tony Chai

Investing in stocks, bonds and property are more reliable ways to grow one’s wealth. When one invests in a stock, he provides the capital for the company whose stock he buys to expand the business, thereby creating wealth. When one invests in a bond, he provides the government or company with the capital to build bridges, factories, etc., thereby creating wealth. When one builds, buys and rents a property he provides a office, accommodation and shop space for people to use, thereby enabling the economic activities of the later, which creates wealth.

But what about options? They don’t. They are supposed to be hedging tools for risks management. They don’t create wealth (beside for Uncle Sam and the brokers).

Hence, I would suggest that a better example to follow is not Mr Chiang who doesn’t deserve the ‘Dr’ title since his PhD is unaccredited, but a down-to-earth book such as “The Millionaire Next Door” written by Dr Thomas Stanley who holds an accredited PhD whose findings are backed with solid research.