In today’s post, we’re going to look at 20% returns.
If you have a trading and investing question, you can submit a question by voice here!
This week’s question:
“Hey Sasha, my name is Arsenio Williams. I have a question about percentage or return.
How can someone achieve the 20% percentage of return on their stocks?”
I’ll give you some thoughts and insight on this.
More about High Percentage of Return
If we’re looking at a high percentage of return (20% or so), you have to understand what are we mean by that.
- Are we looking at 20% per day?
- Are we looking at 20% per week?
- Are we looking at 20% per month?
- Or per year?
I’m going to guess you’re talking about on a per yearly basis. And the reason for that is because typically the market we’re looking at 8%-10% per year is your return on investment.
If you’re looking for maybe around 20%, let’s look at this number as a goal or what we’re aiming for.
There are a couple of different ways to do this and to achieve this. I’ll give you a few ideas to think about. However, you can modify it based on your needs. There are a few ways to do it.
Way #1 – Look at The Stocks that you pick
The stocks you pick will determine this. This is what most people look at.
Answering these questions:
- Which stock is going up?
- Which stock is better?
Way #2 – Trading Frequency
The more trades you do, the higher your percentage of return will be if those are winning trades.
Let’s say you start with $5,000. That capital grows to $5500. Now you take that capital and invest. And then you make more money and reinvest. Now your percentage of return at the end of the year from the starting balance of $5,000 is more. Or it makes it much higher.
Way #3 – Win/Loss ratio in Trading
Focus on this ratio.
If you’re winning much more than you’re losing, that’s a good thing.
Way #4 – Draw Downs in Trading
And you have to look at your drawdowns. How much are you losing? All of a sudden, you’re making $600 on a trade, $600 on a trade, $900 on a trade, and then you’re losing, let’s say only $100, well, that’s great.
But if you’re losing, let’s say $4300, well, that makes it a little bit tough. That reduces your percentage of return.
Way #5 – Expenses in Trading
I’m talking about not only these drawdowns, but I’m talking about your commissions. That’s because of the more that you trade, the higher these commissions.
However, after a while, you can call your broker. Don’t be scared to give them a call and they might be able to reduce it if you’re an active.
Then also your expenses at the end of the day is taxes too. People don’t talk about that often. We’re going to leave that part out because everybody’s tax situation is different depending on the types of trades that you’re doing.
Remember, that sometimes a 20% return can drop you down to 12% of your tax bracket is a bad tax bracket. Or you’re trading something funky. Whatever the case is.
Anyway, it can drop you down quite a bit. The percentage of return of what you can keep in your pocket is also essential. And that’s the whole point behind proper tax planning.
We’re going to talk about using leverage, and this is more margin or options, which I’ll show you.
Percentage of Return – on Screen
This is what most people start with – Tesla.
The reason is if you choose the right stock while you get in it here early on and if the stock climbs, you could make in a couple of years a 700% return on your investment.
That’s phenomenal. That’s fantastic. That’s what people are doing.
If you go with Walmart, here’s the same thing. What’s my percentage of return? 80%-90%, and that is amazing as well.
That’s what you’re looking at as you look at the percentage of return. A lot of people look at stock picks. That’s usually the easiest form.
Then you have to take a look at all these other factors:
- What’s my frequency?
- What’s my win-loss ratio?
- What’s my drawdown?
To increase your percentage of return, you have to increase the frequency, your win-loss ratio, and you can reduce your drawdowns and reduce your expenses. Or of course, you can leverage more.
These, I think, are self-explanatory. I’ll talk a little bit more about leverage for those of you that are new.
But these take strategy, skill, experience to make them happen. There’s no magic formula to increase your win-loss ratio because everybody is trading differently. They’re trading a little bit differently.
There’s no magic formula to reduce your drawdowns. If you have a drawdown, that’s big, and it affects your profits. That’s going to have an impact on your return.
Let’s take a look at more the leverage part of it, which is kind of what people do.
Looking at Tesla’s example, if you buy 10 shares, here is the thing.
Let’s do ten shares. The stock is 216. If I bought ten shares at about 216, I’m going be spending $ 2160. If that stock goes to $250, I’ll make $338.
Most people will tilt take margin and take things from the bank. If the bank’s giving you a 4%-8% a fee on a per-year basis if you’re making a 20% return on investment, you can make more money from it.
That’s what margin is, and that’s what leverage is all about. If you use margin, you could make more money, or people do that with options.
And one of the first ways they do that is they’ll buy like let’s say a call option. I’m going to use the same amount.
What I did here is going went and got an option contract for a call, which allows me to make money as the stock goes up. If this stock goes to $250, I make not when it comes to a stock I make $354. But here, in this case, I would make $2,100.
I’m spending about $2,195, and I get about 2,098. If it happens immediately, that’s how much I make.
The downside with options is if you had a volatility problem here.
In that case, it would be $2,200. But the issue here is you have this theta problem, which is your loss per day.
That’s because to have this contract, to have this option, the choice to buy that stock at a bet lower price, or to have this contract, you’re paying something. And you’re paying this contract fee every day. That’s the simple way I could explain it for you without getting too technical.
But every day you lose money. In a few days, you could be down $273 if that stock doesn’t move.
If you’re just a regular stock investor or stock trader, you can hold on to that stock for weeks, months, or years and you’re not losing money. In this case and the option contract, you’re losing the value of that contract. It’s like holding a coupon to go to a baseball game.
Well, it’s not that you’re losing money every day you’re holding that coupon. But let’s say the game has already started. If the initial ticket was $200, well, now the game already started, and you might only be able to sell it for $20.
If the game is almost over, you might be able only to get $5 bucks, or you might have to give it away. That’s the same thing here.
This contract has a certain amount of value, It’s 67 days, and I have 67 days for this thing to move. If it doesn’t move, I lose my full $2200. But if it does move, I make way more. That’s another way to approach it. Some people trade lighter. They don’t trade that much. They’ll put these things on where they don’t spend as much. And now instead of risking that full amount, it might take them two or three trades where they risk maybe $800.
Maybe they risk only $400. You could get out of them earlier. But they’ll make $1300 on maybe $815. It’s another way to make money. It’s not the right way to trade options. I will tell you that. The better approach is doing spreads something like this.
It’s way smarter because now you get profits from the theta decay. And that’s a better way to do it. With time you’re making money where you’re the net seller. You could be making $300 on $2478 of risk. And that’s another approach.
But if you look at the basics, this is what you can do:
- you could pick stocks
- the more trades you do, the more you can compound
- the more wins you have, the higher percentage return
- the lower the drawdowns, the better off you’ll be
- you can reduce your expenses
Then you get into the leverage concept and using margin or options. That’s another way to do it. When you’re doing this, you have to understand how are you trading options. Are you doing it the smart approach, or are you doing it in the stupid approach?
Some people pick shots and chances, and they’ll do single contracts like this, which is okay. There’s nothing wrong with that from time to time. But I wouldn’t do this with my full portfolio. You can do this, and this is how you could achieve a higher percentage of return.
However, the smarter approach, of course, if you’re doing options, is to do more like calendar spreads. It gives you more flexibility if you do like custom trades.
Let’s say I’ll skew this, and I now I make money every day that stock stands still. And if it goes up, I still make money. So it creates another winning situation rather than from a stock. It has to move up.
If it moves down, you lose money. If it stands, still nothing happens. And if it moves up, that’s when you make money. Only one out of three of those scenarios you make money. Whereas with an option contract, if the stock stands still, you make money. If it moves up, you make money. If it moves down a little bit, you make money. And if it moves down a lot, that’s when you start losing money.
That’s what you want to think about if you’re looking to increase your percentage of returns.
I wouldn’t scale up until you get a little more consistent on your general or basic trades.