Optimism in equity investing can pay off, but it’s not a straightforward yes-or-no proposition. Historically, markets trend upward over the long term—global equities have provided approximately 7%-8% annualized real returns since the early 20th century despite wars, recessions and crashes. An optimistic investor who remains in the market diversifies and avoids panic-selling during downturns often benefits from this compounding. However, blind optimism can be a trap. Overconfidence may lead to chasing bubbles or ignoring risks and overvalued investments — such as the dotcom crash or the 2008 financial crisis — during which investors who didn’t examine the economic merits and realities of some stocks, hedge, or rebalance faced losses. Behavioral data shows that optimists sometimes overestimate returns and volatility, resulting in poor timing or overexposure. Balanced optimism, discipline and risk management outperform pessimism and reckless exuberance. In contrast, pessimists often miss opportunities by holding cash. While having some dry powder makes sense, the problem is that, due to the inflationary effects of money printing and debt, a cash holder, even net of interest, fails to keep up with inflation over time. It is well-documented that Warren Buffett’s Berkshire Hathaway significantly reduced its equity exposure ahead of the most recent downturn. This suggests that the “Oracle of Omaha” did not perceive many attractive investment opportunities and likely viewed the assets he was selling as “fully valued.” Certainly, valuations were above historical averages, which, combined with economic uncertainty, creates additional downside risk, and some stocks have fallen sharply. One example is Fluor , which I covered in September . The stock surged nearly 30% from its lows in September to election day in November. Since then, it has lost all those gains and more. The engineering, procurement and construction company (EPC) trades at a modest 14x forward earnings estimates, well below the 25-year median of 20x. The enterprise value-to-estimated earnings before interest and taxes ratio of 6.7x reflects a discount of over 25% compared to the 20-year median of approximately 9x. While the stock is down, options premiums have risen, making overwriting strategies more attractive. Cash-covered puts and diagonal call spread risk reversals are just a few strategies one could use to start exploring the market. However, it’s often best to keep things simple when markets are as volatile as they are now. A straightforward strategy is buying a stock one appreciates and selling (or ” writing”) upside calls to generate some additional premium. This strategy is commonly referred to as a “buy write.” The trade Buy FLR shares, priced at $33.28 as of Friday’s close, and sell the May 35 calls against it at approximately $2.10 per contract. This generates a standstill rate of return (the income received from the call, assuming the stock doesn’t meaningfully rise or fall over the 33 days until expiration) of 6.3%. If the stock rallies through the strike, there’s a chance it may be called away at $35, but net of the premium collected, that would result in a total return of nearly 11.5% in roughly one month. Not bad, even for a pessimist. Get Your Ticket to Pro LIVE Join us at the New York Stock Exchange! Uncertain markets? Gain an edge with CNBC Pro LIVE , an exclusive, inaugural event at the historic New York Stock Exchange. In today’s dynamic financial landscape, access to expert insights is paramount. As a CNBC Pro subscriber, we invite you to join us for our first exclusive, in-person CNBC Pro LIVE event at the iconic NYSE on Thursday, June 12. Join interactive Pro clinics led by our Pros Carter Worth, Dan Niles, and Dan Ives, with a special edition of Pro Talks with Tom Lee. You’ll also get the opportunity to network with CNBC experts, talent and other Pro subscribers during an exciting cocktail hour on the legendary trading floor. Tickets are limited! DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
