One of the biggest mistakes I made when I first started investing was not treating my investing like a business. Instead I basically followed the advice of my broker, my friends, or articles I read in money magazines. I truly did not have a clue what investing was all about. But as years passed and I either lost money or made very little I realized that I had to get serious. I decided to treat my investing like a business.

Here is how I began to turn the corner on my investing. I learned that in order to be consistently successful I needed to take a completely different approach to my investing. The first thing I did was stopped trading. I didn’t sell anything immediately but I bought nothing more. I did not return phone calls from my broker. Instead I read a number of books about various companies and why they were successful; companies like Wal-mart and Coca Cola. Next I spent 6 months at a local college taking a course on managing a business. I learned hundreds of things and over the next year here is what I implemented.

Running My Business:

There Must Be A Profit:

In order for my business to be viable there must be a profit. That means that I could no longer take losses. It meant that when my broker told me that everyone was losing money, it was an excuse – not a reason for being unprofitable. I realized that while my investing might be unprofitable, the broker was still being paid.

My Employee:

If my business is not profitable then I cannot afford an employee. I learned that employees make an income because my business is growing and they are contributing to my business growth. That meant my broker was being paid no matter how much I was losing. I explained to my broker that as my employee it was important that he be adding to the earnings of my business. He seemed quite shocked by this and told me that my attitude was very negative.
I fired my broker. I was just lucky that there was no severance package required.

My Salary:

I found that it was important that I have a salary. I was now CEO, CFO, and everything in-between. But without a profit I could not get paid. Everything again came back to profit.

My Products:

Next I had to decide since I was running a business what products would I be selling. That’s where the stocks and bonds came in. It is important that I have a profit. This meant that the stocks and bonds I invested in were the products of my business. I therefore had to decide what products was I going to have in my business. As I wanted my business to be around for a few decades at the very least, I decided that this eliminated high flying stocks and penny stocks.

These type of stocks could make me a lot of money overnight sometimes, and they could lose everything just as fast. As I was now running a business I needed products that I could “sell” long term and rely on for steady income. I began to look around and found stocks like Johnson and Johnson, Coca Cola, Royal Bank Of Canada and dozens of others.

A Steady Cash Flow:

I learned that a business needs a steady cash flow. The cash flow is important because it allows for projection of income. I learned that business keep a certain amount of cash available for contingencies and the rest is set aside for salaries and benefits, bills and then reinvestment back into the business. I decided to split my capital into cash, bonds and stocks.

They All Paid A Dividend:

Every stock that did not pay a dividend I sold. I didn’t even look at the price. There were some big losses and very few gains. The stocks I kept all paid a dividend. This meant that immediately when I invested in my “product (stock)” I was paid something back – a profit. I never was paid anything for penny stocks or high flying stocks. Truly it was such a revelation because with my former employee (ie my broker), he would recommend something and I would buy it. He never called and told me when to sell after a nice run up in a stock. I was just always buying something. I guess his belief was that someday everything was going to be worth millions of dollars. Incredibly by my selling out when I did, I missed so many of the companies going bankrupt in the 1970s. More than three quarters of the companies I owned in the early 1970’s were gone by the end of the decade, so while I had some pretty big losses when I sold out, I still had some capital, which would not have been the case had I held on for a few more years.

The Need For Bonds:

As my stocks paid a dividend I could plot out on an annual basis when the dividend would be paid to my business. I then turned to bonds. I took 30% of my capital which was $10,000 and spread it out in 1 to 10 year bonds at $1,000 each. Each bond paid a different interest rate. This bond ladder was going to be renewed each year when one would mature and I would then go out another 10 years. I suddenly had a regular payment back to my business. Bonds became the staple of my business as I knew exactly when the interest payment would be paid.

Keeping Up The Inventory Levels:

By setting up my bonds to renew each year and having dividend payments spread out through the year I could plan in advance for when I would have enough income to add to my inventory – in other words add more stock or bonds. I therefore spent time looking over various companies and decided in advance what I would be buying next when there would be enough capital available to reinvest.

Studying The Inventory:

Once I had set up my consistent income, I then took the time to analyze my inventory. In a business, inventory can make or break your business. If I have too much inventory or the wrong inventory such as the products that no one wants, then my business will suffer. I needed inventory that could perform. That meant that I had to look hard at the stocks I was buying. They had to be paying increasing dividends so that each year I knew my earnings would increase. For mutual funds, they had to have very low management fees, which most did not. I also weeded out those stocks that paid low dividends, or were not increasing their dividends. I went from 50 stocks and mutual funds from my former employee’s (ie broker) recommendations down to 12.

The Business Plan – Goals and Objectives:

The next important step was setting up a business plan that had goals and objectives for my business and how I planned to attain those goals. I created a list. Things like retire at 60, take the kids to Disney world, have money for new kids clothing three times a year, pay my bills on time, get rid of credit card debt, etc. It was then that I realized that the main goal was to invest 5% of everything I earned and receive at least 10% a year on all my investments and compound those returns yearly, as my spreadsheet told me that over the next 35 years it would mean I could retire by 60 if:

1) I didn’t lose any capital
2) I consistently made 10% annually.
3) I reinvested the earned capital

I remember thinking how in the world was I going to reach those goals. At this point I had a mortgage on my home, car loan, student loan, credit card debt and two toddlers to raise. The goals seemed somewhat out of reach.

The Consultant:

Like any business, I needed more input than just my own. There was no way my business could meet my lofty goals with the knowledge I alone possessed. In the college course the professor had discussed consultants. I realized my business was a bit different but I decided to seek out a consultant. It was a lot easier than I thought. I found my consultant through talking to a number of local investing clubs.

The consultant looked over my business plan and told me it was more than doable. He presented me with his credentials. He was a former broker who had left his firm and gone into investing full time using his own capital. He had only consulted twice before. I was somewhat surprised but he seemed very sure and told me it would take a couple of years to learn enough to go it alone. He gave me his consultant rate, I agreed and the learning began.

The Accountant:

The accountant was my next employee. I spent a lot of time meeting accountants and discussing my needs. We spent quite a bit of time going over my business plan and he discussed with me the various tax advantages of things like RRSP (like an IRA in the US), Margin Account, dividend and bond income, etc. He showed me how to best handle capital gains and how he would apply all my capital losses for the next five years. He then discussed the importance of a lender and how I should talk to my consultant about margin. He became a very important part of my business and met with my consultant a number of times. We all became good friends.

The Lender:

With my business plan in hand I went to 4 different banks. In Canada there are only a handful of banks to borrow from. The first bank I went to held my mortgage. They turned me down flat and offered no advice or support. The second bank was not much better but the third and fourth were interested in talking to me. Both told me they were impressed with the business plan I had developed and told me they had never seen anything quite like it when it came to investing. Both offered to pick up my mortgage and restructure it so that some of the interest would be tax deductible against my investing “business” earnings. It was the fourth bank though that offered me prime rate borrowing and offered to set up the load in such a way that every payment I made to the mortgage would increase the amount available for borrowing for investing. They told me I could pay whatever I wanted at any time, daily, monthly or whenever. The accountant and I worked out how I could apply the dividend payments and the bond interest towards the home mortgage to wipe it out faster and increase the borrowings for my “business”.

The Shareholders:

At this point the consultant and I, had spent close to a year working on paper trading. I had learned a lot about investing and I was ready to begin using actual capital. My lender was in place, I had a small income from my bonds and a handful of dividend paying stocks, and two employees; a consultant to help guide me and an accountant to answer tax questions and do my taxes.

It was at this point that the consultant and I decided it was time to get new shareholders into my business. Part of the reason buy and hold was at one time such a successful strategy, was that while some investors did benefit from it (depending on what stock they bought), it was fantastic for businesses as they could raise capital and increase their businesses by issuing shares that would be picked up in the market place by eager investors who quickly parted with their money hoping that those shares would grow in value as the underlying business grew. Since so many investors were sold on the “buy and hold” strategy, this meant that companies that issued stock had underlying support of their stock from all those buy and hold investors. Many held on despite bear markets, oil crisis, wild inflation, more bear markets, credit crisis and natural disasters. Basically “buy and hold” is very good for companies and the stock markets but perhaps not quite as good for actual investors, depending on what stocks they bought and held..

With my little business though, I couldn’t issue shares but I definitely needed other investor’s money to help me own more shares in some great companies. To do this I had to get “shareholders” interested in parting with their money. To accomplish this I had to give something in return. That’s where naked puts and covered calls came into play. In simple terms, by my selling naked puts I was telling investors that if they gave me their money I would be willing to buy shares of companies from them at pre-determined prices.

The same strategy for the stocks I held when I sold covered calls. My consultant had shown me that while I could get the dividend payments by holding on to the shares, he explained how other investors would be willing to pay me for the right to take my shares at a predetermined price and time, should I be willing to do this. He had explained how with covered calls, it would force me to sell my shares, capture the gain and then reassess the stock position and determine its viability for another repeat performance.

Every chart he held up showed how companies go up and down in value. Some took months and others took years, but I had been surprised at how many stocks really didn’t appreciate by much over the long haul. By selling out repeatedly and by timing the selling to be a couple of months after dividends payouts, I could guarantee myself some additional income and the dividend which could be put back into my “business”.

The naked put was even better. He showed me how investors would give me their money in return for a guarantee that if the stock fell to a predetermined value I would be willing to buy the shares. Basically they were helping me own shares. He then explained that nothing was written in stone, that I could buy back any position, roll any position or accept the position the way it was. All the while though other people would be giving me their capital in exchange for a “possibility” of assignment.

I suddenly had shareholders who were investing in my little business, every month of the year. With their help my business grew a lot faster as they provided a ready source of capital that assisted me in paying for the stocks I wanted to own.

The Ongoing Business Of Learning:

Like any business I can only stay ahead of the “competition” by educating myself. This means I have to read annual reports, look at the fundamentals of the business and make sure I have the right inventory on my shelves. If I find a stock that is not performing and no longer meets my criteria, I have to shop and find other products to replace them with. I also like to keep a few products on my waiting list and watch them and paper trade them to see if they could be a good replacement or addition to my inventory of stocks. To this end I attend conferences, trade shows and read a lot of materials. The internet has made a big difference in the amount of material available.

My Business 5 Decades Later:

Today more than 46 years later my business has grown considerably. I pay myself a nice little salary, and I don’t really need to retire. My consultant retired a long time ago and we shared a lot of strategies over the years. My accountant retired too, but I use his son who still believes in my business. My bank is not needed any more but they have helped out both my children.

Today I have a lot more shareholders than in the past. They still seem quite happy to invest in my little business and I am pleased they have come along to help me build my business.


I recently received a comment from a long time reader who had some interesting observations to add to my article. Below are his comments:

I find that like in business, you have to develop the ability to shift from strategic thinking to tactical implementation thinking. Strategic thinking being the ability to understand the different possible market “conditions” (volatility, trends, etc) and understand how different option strategies are tools that are better suited for certain “seasons” in the market. (I’m assuming here one wants to go beyond cash secured puts and covered calls and explores other strategies without necessarily becoming an option “day trader”. )

I also find it interesting to note that, like in business, a good performance tracking system in which you track all transactions and their profit and loss, identify trends, see what works and what doesn’t, identify variances from plan and apply the required corrective actions are all what I find “good business practices” that apply to investment like they apply in managing a business for performance.

Having an open mind, willingness to learn, so that you develop your technical skills and continuously generate a pipeline of new ideas, ideas you can rapidly test with paper trading (equivalent to a business focus group or trial customers) before going live and “launching the product ” or doing actual transactions. In a nutshell, have some ongoing product development and R&D capacities at work.  Again, that’s if one wants to learn new techniques, but instead of R&D, one can also get by by sticking long term to a restricted set of strategies and become a high-performer in those strategies. Like in business, you determine to what extent you want to be an innovator vs. a traditional, efficient, high performing company that’s not focused on innovation, but rather on solid execution of simple yet effective strategies. Comment from P.J. Montreal Canada