My Strategy Explained: – The Rules

As the years have passed I have worked towards creating a set of rules that I can follow in order to stay consistent in my investing strategy.
These rules are responsible for ensuring that my investments remain profitable every year. Below are the rules I have developed over 46 years of investing through stocks and options.
They are all important but perhaps one of the more important rules is to keep 30% of my capital in cash, 30% in bonds and 40% in stocks.

These are the rules I have developed over the past 46 years:

  1. I only purchase large cap stocks and NEVER look at penny stocks or any high flier.
  2. I do not need to follow hundreds of stocks, just a smaller number of what I believe to be the best stocks and ETFs.
  3. By buying into large blue chips I am more confident the company will be viable in the future. Therefore I can, with confidence, commit more capital to any position that is down with the expectation of an eventual recovery.
  4. I NEVER commit all my cash to stocks. I keep 30% in cash, 30% in laddered bonds and 40% in stocks.
  5. I ONLY work with stocks that have tradable options available. In other words there must be some volume available. Higher volume is always preferred.
  6. In my non-retirement account I start by selling puts on stocks until assigned. I aim for an overall return of 1% a month for the entire stock portfolio. Once I have made my 1% the rest of my capital earmarked for stocks can be invested at lower out of the money options that have less chance of assignment and which can therefore increase my monthly return but with less chance of assignment of the sold puts.
  7. In my Retirement account I use covered calls. As I live in Canada tax laws only allow covered calls or the buying of options in a registered retirement account. Selling naked options is not allowed.
  8. I read just about everything I can about the company I have invested in. I only trade in companies, ETFs or Products I understand.
  9. I paper trade a lot to try out new strategies to see if I can consistently earn profits. A strategy must be a consistent performer before I implement it.
  10. I enjoy learning new strategies all the time and I am open to new ideas and numerous opinions. The only way I can learn is through remaining open to other ideas.
  11. I accept that the market goes up and down and I hope to be able to make money despite market direction.
  12. I look forward to increases in market volatility and especially enjoy when stocks go on sale such as a bear market.
  13. I sell my stock when I am exercised out – this forces me to take the profit I have made.
  14. I average down on a stock ONLY when I can no longer sell calls with a decent premium. To average lower I use primarily selling put options.
  15. If a stock I have sold puts against, falls rapidly, I often will consider buying the put back AND rolling down to a lower strike or rolling sideways to the same strike, further out in time. I almost always want a net credit. I prefer to earn as much income as possible prior to accepting stock. In this manner I am using other people’s money to pay for the stock while my capital sits in a cash account earning interest.
  16. In times of higher volatility which in my opinion is anytime the VIX is over 22 I use credit or debit spreads or other forms of protection.
  17. If a stock I have researched and believe is worth holding, should change fundamentals such as going from a strong balance sheet to a weak one, entering a prolonged period of declining sales or in my opinion becoming overvalued I will sell the stock and select a new one in its place.
  18. My main objective is income through options, that will reduce the amount of my own capital required to own the stock.
  19. I try to leave emotion out of my decision making process.

Additional Reading:

1. How I Treat My Investing Like A Business

2. My Strategy Explained

3. Why I Cannot Give Specific Trade Advice