Billionaire Investing Secrets For Normal People with Dan Passarelli

**SPEAKER_1** (0:01)
Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

**Kirk Chisholm** (0:10)
Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. So today, I'm joined with Dan Passarelli. How are you doing today, Dan?

**Dan Passarelli** (0:18)
Kirk, I'm great. Thanks for having me.

**Kirk Chisholm** (0:20)
For those of you who don't know, Dan, tell us a bit about your background.

**Dan Passarelli** (0:23)
Well, I started my career many years ago on the floor of the Chicago Board Options Exchange. Started out as a runner and worked my way up to being one of the biggest traders in my pit on the Exchange trading floor.
Long story short, the Exchange asked me to come and teach some classes for them, and found that that was my calling and been helping investors improve their returns with options ever since.

**Kirk Chisholm** (0:49)
Options is one of those weird things. They exist, they've existed for decades, and most people aren't aware of them. Why should people be considering options, if at all?

**Dan Passarelli** (0:58)
Options started out as this really obscure alternative investment. But if you look at volume figures from equities that are traded in the stock market, compared with options that are traded in the options market, the growth in options volume is just really, really huge. That's because people are slowly learning about all the benefits of them. One of the benefits, and really as far as investors go, we can break the universe down into traders and investors. I think I'd like to talk with the investors here in the audience.
As far as investors go, one of the great things is that you can use options to lower your risk while improving your returns. We're trained to believe that if you want greater returns, you have to take higher risk, which is generally speaking true. But when we use some more sophisticated strategies, we're able to tilt that scale just a little bit more in our favor, and that makes a huge difference.
If you lose less, I don't have to sell anybody on the concept of losing less, that's great. But if you can make more, even if it's a little bit more, because investing is about compounding, those returns compound at a greater rate, and you just see these exponential benefits over time, and it can make a huge difference in people's financial freedom.

**Kirk Chisholm** (2:28)
Since we're talking about risk here, I think most investors don't really understand risk.
I think they think of risk as, well, I just put a bunch of different mutual funds together and that'll reduce my risk. Can you talk a little bit about risk and what that means truly as an investor?

**Dan Passarelli** (2:46)
The people who put together a bunch of mutual funds and figure that that is going to reduce their risk, in part, they're not wrong. Diversification does lower our risk, but we can dig a little deeper. First, we can look at the beginning of that, and then we can look at the end of that. As far as where that diversification idea comes from, it comes from the math. When we look at stock prices, risk is measured by something called standard deviation. Fancy term, I guess, anybody who's interested, you could just Google it and go down a rabbit hole and learn a whole bunch about it. But basically, what it means is, it measures how big price swings are. Could be price swings up in your favor or down against you. When we diversify, that smooths that out, and that is one of those tools where we can increase returns while lowering risk and tip the scale.
But options enable us to take that yet a step further by trading an ETF, which is in a lot of ways, I would say a better alternative to a mutual fund, lower costs and very close tracking to what it's supposed to be tracking.
We can actually use options on that ETF and then take that already reduced risk, higher reward and further tip the scale in our favor by reducing the standard deviation again, which is the measure of how big the price swings are in our account. We can reduce that standard deviation and squeeze a little more juice out of it and improve our returns over time.

**Kirk Chisholm** (4:27)
You talked about standard deviation being risk, but that's just volatility, right? I mean, risk is a little different, right?

**Dan Passarelli** (4:34)
Yeah. And I'll tell you what.
Oh, man, we can go down a big rabbit hole with this, and it kind of depends on who you talk to, and there's different schools of thought on that. I personally, and I think a lot of option traders, use that term risk and volatility as one in the same. I can respect other schools of thought who don't and only look at the downside as risk, only look at losing money as risk. When we use standard deviation, we're measuring volatility as you say, but volatility is risk. When you think of risk in the terms of greater chance of reward or loss.