Q3, 2026 Newsletter Commentary

My wife Susan and I recently returned from a wonderful trip out West. We visited Yellowstone National Park and took in the magnificent beauty of Wyoming, from the Grand Teton to Old Faithful, the hot springs, the Grand Canyon of Yellowstone, the waterfalls, the John D. Rockefeller Jr. Memorial, the national monuments, the wildlife, and so much more. I highly recommend the trip, especially this time of year, when the fall colors are incredible and the crowds are considerably smaller. I’d recommend going when you’re younger. There’s so much to see and more opportunities to fully experience everything it has to offer.  

On the return trip, our flight was delayed, and we sat on the plane for a full two hours before we even took off. I was seated next to a younger man in his 40s. I said hello, but he was not in the mood to talk, so I turned my attention to my iPad and my favorite articles, all related to the stock market. With about an hour remaining in the flight, my seatmate turned to me and commented on how bad the stock market was. I was amazed. I explained that we were very close to an all-time high and that the financial markets were doing quite well. I told him I am still in the business and how much I love it. His reply surprised me: his father is in the same business and has been for nearly as many years as I have. His father is 77 years old and still working full-time, as I am. 

His comment turned out to be helpful to me. If he felt that way, I suspected others might feel the same, so I thought it would be worthwhile to address some of those concerns here. If someone in your own family is feeling the way my seatmate did, please feel free to pass this letter along. 

As you know, our investment strategy includes some downside protection, and reviewing a few of these strategies seems timely. 

When the S&P 500 Index falls, and it is a matter of when, not if, our approach as long-term investors should help lessen fear and keep emotion from dictating one’s decisions. 

Baron Rothschild has often been quoted as saying, "Buy when there is blood in the streets." That is a difficult philosophy to follow. In my opinion, our approach makes it easier. 

When the overall stock market declines, our accounts will naturally fall as well, but our goal is for them to fall less than a broad-market index. You may already be familiar with the structured notes we create specifically for BBPWM clients. We have notes coming due roughly every two weeks, and the way we create them makes our portfolios quite different from most. Rather than accepting whatever terms a single bank offers, we contact most of the largest investment banks and have them compete against each other for our business. This helps us get the best terms available at the time for our clients. 

For example, a note linked to the S&P 500 Index with a 13-month maturity may provide long-term capital-gains treatment on any gains, potentially resulting in a lower tax rate. Most of our notes also include 10% downside protection against market declines and, in many cases, offer twice the upside participation of the underlying index, subject to a stated maximum return cap. 

A second area I have personally been investing in for over 50 years are Closed-End Funds. While these funds offer no specific downside protection, our goal is to only purchase them at a discount greater than 10% to their Net Asset Value (NAV). Simply put, an investment of $10,000 might buy the purchaser a share of securities worth $11,000 or more. That discount is one reason Closed-End Funds can potentially provide greater returns. 

A third investment vehicle is the Defined-Outcome ETF, often called a "Buffer" ETF. These have only been available since August 2018. They aim to limit losses on a market index over a set period of time in exchange for a cap on gains. Many investors buy them on the day they are issued. We do not; we never purchase them as a new issue. Unlike a Structured Note, which is typically held to maturity, these ETFs trade on the stock exchange every day, and as the market moves, each fund's remaining upside and remaining protection shift. The sponsors publish those figures daily, and that creates opportunities. After a pullback, for example, a fund bought partway through its period may offer more room to its cap than it did at launch. We evaluate these changing terms much the way we evaluate Closed-End Funds looking at where a fund stands today rather than where it started. 

We are also very selective. Our most recent model listed 300 potential ETFs, and only nine met our criteria. Depending on the fund, these securities can provide protection of 10–15% in a down market, with upside caps that in some cases reach 15–18%. 

A recent example is a note we purchased on September 29th: a buffer ETF tracking the Nasdaq-100 had 336 days remaining in its outcome period. An investor purchasing it at that day's price and holding it to the end of the period could potentially see returns roughly in line with the index's gains, up to an estimated cap of about 15.8%. If the index fell by as much as 15%, the estimated loss would be limited to about 2.5%. 

My investment goal has always been to build a strategy that can produce positive returns in a range of market environments, not just when conditions are favorable. Option writing has been a meaningful part of that for many years, because it gives me a more flexible way to pursue that goal and reduce portfolio risk. Listed options trading began in 1973 with the opening of the Chicago Board Options Exchange, shortly after I entered the investment industry, and I have been writing covered calls ever since. Over that time, I have found call writing to be a practical portfolio tool. It is not a replacement for security selection or diversification, but it complements both. The goal is not to speculate on dramatic market moves. Rather, it is to use options in a disciplined way to improve the return profile of a position and potentially generate income and cash flow. 

In plain terms, Covered Call Writing involves selling a Call Option on a Stock or Exchange-Traded Fund (ETF). In exchange for agreeing to sell those shares at a predetermined price if the option is exercised, the investor receives a premium upfront. That premium can provide an additional source of cash flow and income beyond dividends and interest of the underlying position. 

Covered calls can be particularly useful in markets that are flat, moderately rising, or somewhat volatile. In a flat market, the premium may provide income even when the stock makes little progress. In a modestly rising market, the investor may benefit from both price appreciation up to the strike price and the option premium. In a moderately declining market, the premium provides a limited cushion against losses, although it does not eliminate downside risk. If the stock stays below the strike price through expiration, the option may expire worthless, and the investor keeps both the shares and the premium. If the stock rises above the strike price, we can either roll the option to a new strike price and expiration date or allow the shares to be called away at the agreed-upon price. 

Writing covered calls can also be a tax-efficient way to generate additional income from stocks you already own. Gains or losses on the option are generally treated as capital gains or losses rather than ordinary income, such as the interest you receive from a taxable bond. That gives us more flexibility in deciding when gains and losses are realized, although the exact tax treatment depends on the investment and how long it has been held. 

If the stock rises and the call option is getting close to being exercised, we may decide to "roll" the option. That simply means buying back the current option and selling a new one with a later expiration date, and often a higher strike price. If buying back the original option creates a loss, that loss may be used to offset other capital gains, depending on the applicable tax rules. Rolling can also let us keep the stock rather than having it sold before we are ready. Covered calls can also help us be more patient with a stock that has gone up in value. If we do not want to sell a position yet, especially before it has been held for more than one year, we may be able to collect option premium while continuing to own the shares. Holding the stock longer may allow an eventual gain to qualify for the lower long-term capital gains rate, provided the options are structured to meet the IRS rules for qualified covered calls. 

Used selectively and matched to an investor's goals, covered call writing can be a practical, disciplined way to generate additional income, provide some downside cushion, and manage positions over time. 

When evaluating individual stocks, we combine fundamental research, quantitative analysis, market intelligence, and independent third-party research. We regularly review analyst commentary, earnings expectations, valuations, company fundamentals, growth trends, price momentum, and overall market sentiment. 

An important part of this process is comparing several independent equity-rating services. Each one evaluates companies in its own way. By looking at them together rather than relying on any single rating, we can test our own thinking, see where opinions differ, and decide which opportunities deserve a closer look. These ratings are one input into our research, not the decision itself. 

Finally, a word of thanks. Much of our growth over the years has come from clients introducing us to their family and friends, and there is no greater compliment. If you know someone who could use a second opinion on their investments, or who, like my seatmate, is simply uneasy about the market, we would be glad to sit down with them, with no obligation. 

As always, please give us a call. We welcome any questions or comments you may have.