Transcription
Covered calls versus capital recycling. Which one grows your wealth faster? We put it to the test. Uh, as you can see, I'm here with Recycle Your Money again.
>> Thanks for having me. I got to ask, so when we first connected on Instagram, it seemed like you were all about covered calls. Can you tell me the story about what changed?
>> Yeah, so I had a long journey of going through covered calls. Um, when I first originally invested in in the market with the M1 using margin at least, I always used as my anchor, but when I invited margin into it, I really decided that when using margin, you kind of needed this dividend cash flow to pay down your debt essentially, kind of like as how I viewed it as like a rental property. I was using it like cash flow. Uh, and so when I first started, I started using these big uh, NEOS funds. I used QQQI, SPY, BTCI, and if you ever saw my first original video, you would see I had like a 6040. And no matter how many times I would always mess with it because I was always trying to like maximize growth while getting cash flow to help me pay down the debt, I noticed that I was always kind of running into performance lagging. And so the more I looked at it, I kept looking at no matter how I do this, uh, I was lagging in performance. and and you can look at that because when you use M1 and you click the view my benchmarks button, it doesn't count your margin into it. So, it's just doing your pure portfolio. So, I could see it performing next to just my benchmark. And the more I looked at it and the more I watched it, it was the more I realized how detrimental these covered calls were on my long-term performance. Uh, and not too much in Yeah.
So, it seemed like it maybe took you a while to realize that covered calls weren't as they were lagging in performance like you mentioned. And I feel like a lot of people spend a lot of time before they come to that discovery. Maybe they never even come to that discovery. I watched your last video where you talked about covered calls in a lot of detail. I'm sure you'll link the description down below, but for those who didn't get to watch that video, what made you realize that wasn't as good of a strategy as maybe what you do now?
>> So, it's funny that you mentioned that. Uh because when I first started with covered calls, I always kind of knew that they were going to lag in performance, but I was like, it doesn't matter cuz the most important thing is paying down your debt when you're using margin or you're borrowing money uh just to avoid a margin call. And so by doing that, I was always going to have cash flow to help me pay it even in down markets. What I did realize as I got further and further into it is these things spin their income off of their NAV, if you're unfamiliar, that's net asset value. Uh it's basically the value of the fund. When you're doing covered calls, you're essentially capping your upside and if it goes through your strike, they it's the right to exercise or sell your shares. So basically, you could lose your shares. You're essentially selling. Um and that is what selling a covered call is. And so you're always capping your upside on that. And so I knew that when I got started. Um, but I always wanted to use it to pay down the debt. And as I got further into it,
>> real quick again would be with NAV. I if everybody if they're not familiar with what that is, my understanding is a lot of people buy stuff like Misti or Ulti and they might put like5 or $10,000 in there to to pay down some of their margin because they get this really high yield. And you talked about this in your other video, but it seems like the performance just decays often and that you're kind of paying yourself your own money back. Can you dive a little deeper into that? I feel like you're more the expert on this. That's kind of my base understanding.
>> So, it's funny that people people say that like you're paying yourself back and it's it's not exactly true that you're paying yourself back. Like, if you're in a tax advantaged account, it's it's okay to use covered calls. Uh but when you're in a taxable, especially using margin, uh you do get this thing where it looks like you're paying yourself back because of the nav decay. What it's really doing is they're basically selling these covered calls and they're paying you out these premiums. And when you're always locking your upside, there's nowhere to go except for down. So if the market goes flat or up, you're going to basically trade flat. And if it goes down, you're going to go down. And then when it recovers, you will have locked it down again. So basically, it just doesn't recover. And so it looks like you're paying yourself back. What you're doing is you're paying out these massive premiums. If you look at total returns, they are still positive. Um but the problem is is like if you miss the 10 best days in the market and the market recovers because it typically does. You're going to get maybe a little to no none of that recovery. So you might just lose all that capital appreciation on the upside. Which in the end, in my opinion, and yours obviously too, capital appreciation is where you get most your gains. It's not through dividends.
>> I agree with that very much. And so, if people don't know this, we actually met through Instagram and you bought a copy of my ebook. Uh, it was money isn't real, which kind of catchy title. And I guess I'll leave it up to you to say if you got value from that, but did that change how you do things now?
>> It actually did change. So, I've been investing for a very long time. I actually have a lot of agreeance with his approach. But there's a thing about me like you're mentally when you start taking margin, you just immediately feel like this pressure on you a little bit at first that oh my gosh, I have this massive debt on me. I need to now immediately start paying this back. And so that's where it kind of made me think like, oh, I need Ulti or these massive distributions to help me pay it down. And when I saw your portfolio, it was what I knew all along, but I just couldn't mentally kind of think about it. Um, because I knew that over the long run or when markets were good, that his approach, just using growth funds or capital appreciation was going to severely outpace. And you can see it in his own portfolio. He's grown massively on how much appreciation he's gained. And so one thing I will say is that one of my biggest turning points and it like was an epiphany in my head is I was talking my strategy with uh my brother and my mom and basically we were all using these covered call products and I was like oh yeah you can invest in these covered calls and pay down the debt. And now when you think about it, it makes sense. But then I came up with this other idea where I was like, well, if we're getting a 12% yield and I'm reinvesting at 12% instead of paying at five, I would be compounding so much faster and I could just let it kind of appreciate on me, which I started doing that instead. And as I thought about that, then all I was like, why am I doing this with a covered call product then? I'm basically trying to create a growth fund out of something that isn't meant to grow. It's supposed to just spin off income.
>> And so,
>> yep. So with what I do, which you can see it's grown very much in the last year and it since 2022 it's grown quite a bit and it's honestly it's pretty steady upwards even though 2022 was a huge like uh 25 30% draw down for most of the year in VGT which is what I invest in and 2025 in around April the low March April and you can see there's like not even a dip because of the way that I utilize the strategy and the full blueprint is in my ebook. book, so I won't dive too much into it, but I do think that most people think you need to live off of your dividends when really you can live off of your appreciation and you can keep on using margin. And honestly, the other day we had a really insightful chat where maybe the strategy changes once you get to a million plus portfolio, but I think this is the fastest way to get to a million plus portfolio. Would you agree with that?
>> Uh, I agree a lot actually. the more I've looked into it and I agree that total returns are all that matters.
>> Agree. And I guess one cool thing that I am not very familiar with but that you had talked to me about that I actually like to learn a little more about would be hedging. You had mentioned that you hedge so when the market goes down too like it was today. I'm down 6,500 for today. So just 1% so it's not really a big deal, right? But how how do you hedge? What do you what do you do?
>> So, I know recycle your money doesn't exactly use retirement accounts, but I have a Roth IRA. And the reason I use it is it's like a kind of a way I trade my money around without taking all these taxable events. I kind of use it as my own hedge against my margin account because you can always pull your contributions back out. And so basically what I've been doing is I put a portion of my portfolio, not all the time, but when signs of cracks start to show and I feel like, all right, now is the time I should probably think about hedging because I will say this before we get too far into it. If you're hedging all the time, I mean, the market typically trends up and to the right, you would be losing money consistently. So you have to kind of hedge at the proper moments. And so I use a portion of my assets in a ticker fund called SQQQ. It's like TQQQ or it's a triple leveraged fund, but it's triple on the inverse. So anytime the market goes down 1%, you'll go down or you will gain 3%. And so I use that on my Roth side a little bit and kind of if the market starts to take a spin, I then grow by a 3x amount. And why do I use the leverage version? because you could just short the mar the market one to one. Well, think about how you leverage this uh with an inverse fund. I'm only ever risking say I use 10 to 20%. I'm risking 20% of my portfolio because the market most of the time goes up to gain 60% of what the returns are. So, anytime it does go up, since it's three times, I'm getting 60% of my portfolio's performance with only risking 20% because it's using again leverage. And that's the one thing cool about triple leveraged funds that I do like is there's no such thing as margin calls because you're not actually borrowing money. So, you do that outside of your brokerage. Like, I have a individual brokerage. So, you wouldn't hedge within the same brokerage. You would do it in maybe your Roth IRA or something that's not taxable. And if I'm understanding you correctly, there's probably a time maybe around February or March this year where you started to hedge and buy these triple inverse funds. And then if if your individual brokerage started to do not very well and you were getting close to getting margin called, you could then sell from your Roth IRA where you are getting a profit because you're essentially shorting the market with a leveraged fund. And then you could move some of that over to to protect yourself from getting margin gold. Am I understanding you correctly?
>> Yeah, you're right. You're spot on. Uh, one thing I will say is I've never gotten to that point where I needed one. But in a lot of people always say like those flash crashes can happen and stuff. Um, that would protect me entirely from that just because if something like that were to happen, I would be growing by that amount.
>> So, I do things a little differently than you and I am actually at 65% margin health. I know you're a little more ballsy than I am with this, but I I'm pretty heavy in tech, so a little bit different than you. You do have some more growth funds than I do, but this got down to like 27% and I was I got to admit I was starting to sweat a little bit because as you do get a bigger portfolio, it does get harder to pay that back quickly. But I did briefly touch on this in some of my other videos as well as maybe last time on your channel. I do have the ability to borrow from a paid off vehicle like my truck where I could drop like 35 grand in here really quick. Just call up my bank and they give me a pretty pretty fair fair interest rate. So maybe like 6% or something like that and I'd have access immediately to like 35 grand and that could keep me from getting margin called. So there's a bunch of different ways that you can stop from getting margin called. And I think it's just powerful that people know that people are so afraid of margin they just don't understand it. I I think Dave Ramsey just pushes that debtree message so much because it's what his whole business model is off of, but it stops people from getting wealthy at young ages.
>> Yeah, I agree with you. And one thing I will note, um I I I am a little bit more leveraged than you are, but uh I live out of my brokerage account. So where you see that withdrawal up to 281,000 on yours, as the market turns, I can't withdraw as much. So if a really bad market crash were to happen, I would have no way of paying my bills because I don't have anywhere to pull from anymore. And so that's why if you're going to go living out of your brokerage account style, you should really think about introducing some form of hedge. And you can hedge in your taxable account. It's you're more than welcome to do it. Um I just there's some of those funds are the maintenance margins will be higher. So, it's going to suck up your available for withdrawal and on top of it, you kind of have to do a taxable event to move the money around. So, I just prefer to use it in my retirement accounts.
>> And correct me if I'm wrong, but one thing to note with this is when you're going to hedge, when the market starts to recover kind of quickly, you want to get rid of that hedge asap because it's eating away at your returns. You're essentially like doing two different things that are going in different directions. Would I be
>> SP? So, I don't do a full like one beta hedge or zero beta hedge, which would just mean that if the market goes up or down, I'm basically not moving. It'd be essentially being just in cash.
>> Uh, I always make sure that there's more upside than downside. But I will say when I do use the hedge, um, if we're ever down more than 30%, I would release the hedge and turn it off. And that's when I would, yeah, most average market crashes are like 35%. So at that point the to me it just doesn't make sense to be hedging towards what I would assume would be the bottom.
>> Yeah. So one just to pivot real quick before we wrap up for the day would be one thing that people are probably curious about would be the events of this week. So this week here we have a Fed meeting where I anticipate they're going to cut rates and I anticipate over the next few months I think we're in the middle of a bull market and I think we're headed up. I know it's just nobody can predict the market. What are your thoughts? Where do you think we're going?
>> I think that end of year, this is just a guess, but I would say we're going to end up and to the right. Uh, one thing that most people may not know is December historically is where you're it's the most negative month of the year. Uh, why is that? Most people are either tax loss harvesting or taking their gains or there's also such a thing as tax gain harvesting so that they don't pay taxes on that. And so December we might end down a little bit but I think in the overall we are going to end up into the right. I'm personally hedging currently right now just because with Trump messing with these tariffs the market kind of fluctuates a lot. And I don't know if you remember April that was a tariff announcement that dropped the market 24%.
>> Yep. I remember I did make a lot of money then though. It did make me sweat though that's for sure. So, I guess one other thing to note would be when the Fed does cut rates, it does make the strategy we now both implement a lot easier because our monthly cash flow just increases and we're not responsible for as big of a payment. It it just makes life a lot easier. So when you do have a decent size margin and you start to get even these 25 basis cut decreases in uh you just save like 50 bucks a month, 25 bucks a month for doing nothing. So it's like free cash flow, free cash flow, free cash flow every couple months. It's very nice. obviously on the other way when the market's going up with rates. That was a pretty horrible time since I started this in 2022 when rates started at 2% and then they tripled in a year. Yeah, I didn't enjoy that. But now on the way down, it's it's kind of like when you go uphill and then you go back downhill. It's just so much more of an enjoyable ride. Anything else you got before we wrap up?
>> No, I think you pretty much summed it up. I only thing I always like to end one of my videos with is is if you're going to go into a marginal account or start playing with margin, make sure you understand every aspect of it because this is a lot of high risk. That's why not to plug it, but recycle your money does have an e guide. Uh not necessarily do you have to buy it to go and use margin, but it's definitely something you might want to know before you start leveraging all this money because there are risks you could lose everything.
>> Absolutely. Well, thanks for having me and hope to see you again soon.
>> Yeah, you as well. Thanks for stopping by.