Aug 3 2008

I believe that people spend more time investigating what car to buy than taking care of their personal finances. Many people work hard, save and then turn to a financial planner, broker or other "experts" and hand over their life savings and hope they can turn their life savings into a retirement nest egg. Years ago I took the same approach and found how dismal returns can be. I decided it was better to learn how to manage, invest and grow my savings. I decided to become fully informed.

That was back in 1975 and today more than 35 years later I have continued to invest in some of the best companies in the world. Some stocks I have picked, such as Coca Cola, or Royal Bank Of Canada I have traded for more than 10 years. Over that time period I have sold covered calls and naked puts to slowly reduce my cost basis in the stock to the point of zero. I thought it would be interesting to start this website and pick some stocks to see how they turn out during what many are calling the worst financial crisis since The Great Depression.

My style may be different from others. I believe in following strong, large cap companies and working with options and stocks on those companies. I also take my capital and divide it into 3 segments. 30% in cash or like instruments, 30% in laddered bonds and 40% in stocks. I've laid out this website to document my strategy. Remember Trade At Your Own Risk. These are examples and are not financial advice or investing recommendations. I strongly urge every investor to paper trade to learn how to handle your portfolio, before committing actual capital. Read the disclaimer

Aug 3 2008

I believe that no one can forecast with accuracy the direction of stocks and markets. We can surmise when a bear market is upon us and when a bull market has returned. Gurus will tell us that the market over time always goes higher and that stocks always move higher, eventually. I once owned stock from past years that not only did not ever recover but collapsed and some disappeared all together. While it is true that I can write off my capital losses, I find it small consolation that I can write off my losses against my gains. What also bothers me is that when a stock is rising, not one adviser can tell you when to sell. Instead they say "overweight" or "underweight" or use "tight stops" and such jargon. In the end I found many years ago that a better mix was not to commit all my cash EVER to stocks. This way when a stock I liked fell, I had cash available to purchase more and average down.

I decided after paper trading for about 3 years, that options were the best way to handle my investments. I learned that through selling naked puts I could get into stocks at a discount and use other people's capital to eventually be assigned shares. I then learned that through selling covered calls I was being "forced" to sell my stocks and take my profits throughout the trading cycle. Stocks move up and down a lot. There are literally dozens of events that affect stocks.

Over time, I found that by rolling and using other strategies (which I have documented in my trades) I could decide "when" I was ready to accept assignment from naked puts and if exercised I had "sold" my position and secured my profit. I began to build an income from naked puts, which I then used to eventually accept assignment on the stock. (Read here about why I love naked puts) Basically I was not using my own capital to invest, but the income generated through the option selling. Even in some of the most severe downturns I found that I could still delay being assigned by continuing to roll my naked puts and through the use of other strategies. Then when assigned, I sold covered calls which eventually would force me to sell my stock and take my profit. Then I repeat the cycle.

The most important thing was consistency in return. I aim for a 1 percent return on my entire stock portfolio every month. So for example if I had a 20,000.00 portfolio, I would need to generate 200.00 in income. Often I found that the 200.00 is generated through using just a portion of my entire portfolio.

For example with Intel at 19.20 if I sold four naked puts at a $19.00 strike which brought in $.50 each, then I was committing $7600.00 to the Intel naked puts in the event I was assigned. However this left 12,400 in capital that was not invested. I would therefore sell further out of the money naked puts on other stocks for perhaps one half a percent return. As an example if Microsoft was at 25.00, perhaps I would sell 5 naked puts of the $23.00 strike for .15 cents.

This meant I would earn (in the example) - $200 (Intel) + $75 (Microsoft) for $275.00 or 1.3% and have a total of $19100 invested. I found that this happened quote often, providing many months were I was earning more than 1%.

With my capital spread out between two companies with one at higher risk of assignment - Intel, and one at lower risk of assignment - Microsoft. Basically the stock that was higher risk was bringing in the majority of the income and the other trade was bringing in less but kept a lot more capital in positions with lower risk of assignment.

Then with each month I would take the capital earned and compound it by adding it to the original amount. For example as per above, after the first month I had now earned 200.00 which meant I now had available 20,200.00 for investing. The next month I would have 20,400.00 and so on. Therefore there are many years where I see gains over 12% just through this compounding effect.

On top of this is the time when I may hold stocks for a month or two during which I may collect a dividend. That also adds up.

Finally there are those times when the market crashes and stocks have a fire sale. I have cash always available for such opportunities and I step in and pick up those deeply oversold stocks and wait for a bounce. Since starting investing in the mid 1970's I have had at least 6 sell offs that saw returns greater than 60% as stocks recovered. So those returns are also added in. Suddenly I found I was on average earning a lot more than 12% every year, but my trades remained conservative.

I found that this style of trading has worked consistently for me, by staying with large cap, dividend paying stocks and of course they must have options available. The more volume in both the stock and options, the easier it is to implement my strategy. I began to look forward to an increase in option volatility and would listen to the business news during the day to see if there had been any big swings in the market as this always meant higher option premiums. As time progressed I learned to use moving averages and candlesticks to better time selling points.

Now 35 years later my overall strategy has become second nature to me. I no longer chase rising stocks or buy into over valued stocks. Instead I just plod along aiming for that 1% a month.

Aug 3 2008

These are the rules I have developed over the past 35 years:

• I only purchase large cap stocks and NEVER look at penny stocks or any high flier.

• I do not need to follow hundreds of stocks, just a handful of the best stocks or ETFs.

• 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.

• I NEVER commit all my cash to stocks. I keep 30% in cash, 30% in laddered bonds and 40% in stocks.

• I ONLY work with stocks that have tradable options available. In other words there must be some volume available. The more volume the better.

• I aim for no more than 1% a month. 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.

• In my Non-Retirement account I ALWAYS start with selling Naked Puts.

• I read just about everything I can about the company I have invested in.

• I paper trade A LOT.

• 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.

• I accept that the market goes up and down and I hope to be able to make money despite market direction.

• I look forward to increases in market volatility and especially enjoy when stocks go on sale.

• I sell my stock when I am exercised out - this forces me to take the profit I have made.

• I average down on a stock ONLY when I can no longer sell calls with a decent premium.

• If a stock I have naked 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.

• If a stock I have researched and believe is worth holding, should change fundamentals (i.e. go from a strong balance sheet to a weak one, or enter a prolonged period of declining sales) I will sell the stock and select a new one in its place.

• My main objective is income through options, that will reduce the amount of my own capital required to own the stock.

• I try to leave emotion out of my decision making process

• Once the stock has been sold, I repeat the cycle.

Oct 3 2008

In my positions on my website I have used the following commission rates. Per trade $7.00. Per contract $1.25. Per Assignment or Exercise - $20.00

Rates vary with differing brokers. I use Interactive Broker for my Margin and US Portfolio accounts who I believe offer the lowest commission rates available. As I am in Canada, my retirement account cannot be held by Interactive Broker. My retirement account is with TD Waterhouse and in my opinion, while their customer service is very good, their commission rates and fees are far too high. Commission rates are very important when trading and you should seek a quality discount broker with decent commission rates.
 

Therefore these are the typical rates I have taken into account in the positions shown:
Any stock purchase - $7.00
Example:
5 option contracts - $7.00 + 5 X $1.25 = $13.25
10 option contracts - $7.00 + 10 X $1.25 = $19.50
Assignment or Exercise - $20.00

Oct 7 2010

My investing style comes down to my overall strategy. It is important to remember that for me, I have a large chunk of cash sitting ready to jump into my stocks. For example, if COKE fell to 40.00 over the next few months, I would be writing puts all the way down and collecting stock when I was finally ready to be assigned. I only trade large caps and only a handful. On the stocks I follow, I read every single thing I can. I know how much money I have available and how much I am ready to put to work and at what prices. KO is a good example. I am presently holding puts at these levels: 57.50; 55.00; 52.50; 50.00 
 

The stock today (April 29 2010) is at 53.36. Look at the chart below for the past year. It has run up from 42.80 to above 59 around Dec 11 09 and since then it appears to me to be in a trend down. It is now moving in a range and has been for more than 3 months.  I have $113,500 earmarked for all the naked put positions I am holding and I have another 50,000 earmarked for this stock if it should fall back to the upper 40�s.  

But it will be months before I take assignment on any of my positions. I will continue to roll my puts, up, down, sideways, whatever until there is no premium left. Then I might just close and move lower or finally accept assignment on some shares. Meanwhile since May 2009 I have earned about 13,000 to date in income. So far this year (2010) I have only earned about 2.5% on my capital, plus whatever I can get with the capital being held in a savings account � about 0.70% more. But my strategy is long, long term. I will be in Coke for years unless something fundamentally changes. Meanwhile though with 13,000 earned, I could decide to take assignment on some shares and use up the 13,000 I made (I am hoping for the stock to fall below 50). Then I move on and earn more � perhaps another 13,000 in time. Then maybe take assignment on some more shares. All the while I am holding my capital in reserve and building up earned income which will eventually place me in Coke without requiring much of my own money. 
 

I am a long term thinker. My day to day needs are not very much. I pick large caps and work them for income and eventually own a lot of shares which are often taken out with calls. I live in a moderate house and my expenses are easy to pay and I carry no credit card debt. 
 

Remember I maintain a large cash reserve and I am in for the long haul.  The stocks I have naked puts (and calls on) I am not concerned about their downside. If the market tanks, I am a happy camper. My puts skyrocket. I can usually buy and roll them for much better premiums; and when the stock collapses I am there with my broom of cash� to sweep up the pieces so to speak and take advantage of the fire sale prices.

Sep 17 2008

When starting into an investment I urge every investor to paper trade first. I will often paper trade my strategies for anywhere from a few quarters to years to study my strategy, tweak it so it is consistent for returns and formulate rescue strategies in the event of a market or stock decline. I highly recommend paper trading to anyone, novice as well as seasoned investor.

There are many free paper trading websites which allow you to set up your stocks or ETF's, make purchases in real time or delayed and work to perfect a strategy. I have done mine for years on paper before risking my capital. Once I have established a style of trading that creates profits with very few if ANY losses, that�s the time I begin to apply my strategy with actual capital.

 Jumping into covered calls and naked puts may seem risk free, but it is not. Many investors lose capital; end up being assigned stocks they really do not want to own and eventually sell them for losses;  write calls at inappropriate times; wrong strikes; lock themselves into losses; get exercised out of stock they did not want to give up; buy back calls or puts for dollars that they received pennies in premium for when they sold them;  and many more mistakes. They lose their discipline along with capital and become very disheartened. It takes years to grow capital. It can quickly be lost. Stocks are called risky assets for a reason.

Oct 7 2010

With the unprecedented credit crisis still underway, I feel it is important to understand  why I  allocate my capital as- 40% stocks - 30% bonds - 30% cash.  

As my strategy employs 40% of my capital always in stocks I like to have a strategy that I can use no matter the financial climate. While the Fed is busy propping up stocks, you can also tell from company earnings where fair value is. While many companies are showing excellent earnings, those earnings have to be taken into context with everything from reducing the number of workers employed to the amount of long term debt that has been re-written by almost 75% of US companies. When factored in, the earnings picture is pretty much the same as it was in 2006. 
 

By establishing trend lines and valuation points, it really assists me in knowing what strategy to employ when the market reaches specific levels. An investor can do the same thing with individual stocks particularly when selling naked puts. It becomes easier and easier to know when to sell puts out of the money, at the money or in the money and whether to go one month, two months or further out depending on the stock valuation.

This allows an individual investor to understand how to stay invested throughout the year, while taking into account risk. While the Fed may be propping up the market through liquidity, a lot of that liquidity has actually been reduced from various sectors of the economy and moved to others. Right now you can tell that the Fed�s main goal is keeping the long end of mortgages and credit at low rates, so that is where they are putting most of their cash as they try to force rates down and push the dollar lower. This is impacting American businesses and those of other countries. 
 

I think people need to understand profit levels within companies. Companies like JNJ did not really benefit in sales from the Fed�s initial action, BUT they benefited by re-writing long term debt at rates far below the normal. As well the declining dollar value means many companies will show better profits on their international sales which over the last 10 years has grown substantially. 
 

The Fed intervention has had some long term effects that will play out on the bottom line of many US companies and as a consequence stock valuations can be established to tell me as an investor at what stock price to be prepared to sell puts, accept assignment and buy stock. So despite Fed intervention, it remains very viable for investors to determine stock price valuations in many stocks, at which they would want to sell their puts and or actually step in and pick up shares.
 

In my opinion, this is what investing is all about. If tomorrow we had a major scare (How about a US dollar currency crisis which I believe is coming) and the market fell 600 points overnight and a company like JNJ fell from 63 to 59 or 57. I would know exactly what strategy to employ. I would not need to sit back and think, �well maybe tomorrow it may be cheaper�. Instead I can react immediately and begin to scale into positions. Remember how in October 2008 Warren Buffet announced he was �Buying America�. Aside from all the political hoopla, he really wasn�t wrong. Basically he saw value in many companies, that had become undervalued in the selling. He was early as many that he bought fell another 15% or more, but it turns out he was right. When interviewed on Charlie Rose, Buffet laughed and said that he really is never sure of a bottom in selling, but knew the prices he wanted on his stock picks. Rose said that Buffet certainly is a stock picking genius, but Buffet laughed it off telling Rose that anyone could be successful. He told Rose that it takes a lot of homework and he has his goals established long before something happens and he is a very patient man. He likes to think long term. He likes to buy when there is a sale, and in October 2008 he felt that there was a big sale happening on wall street. 

In my case, if I am wrong and the stock continues to collapse, I have many strategies available. I can buy back my naked puts and roll lower, buy back and close for a loss, hold and roll further out at the same strike for more premium, sell more puts even lower, accept assignment on some stock and collect the dividend and if available sell covered calls, or do a combination of a variety of the strategies.
 

The problem so many investors have is short term thinking. They worry that the market will collapse around them; stock valuations will plunge; they will end up holding puts on companies that they really did not want to own; to mention just 3.
 

Instead if investors would establish 3 funds for themselves; stocks, bonds, cash, they might be surprised at the annual results and their ability to sleep nights. The percentages I arrived at suit my investment style and my level of comfort. Every investor needs to decide on their own comfort zones. Almost always when stocks collapse, bonds rise dramatically. The investor can then cash out some of his bonds (at a profit usually) to raise cash to step back in to the stocks that are on sale. As well having some cash available all the time means the investor does not have to sell his stocks in a collapsing market, but instead can step up to the plate and buy them on sale, averaging down on his stock holdings and continuing to sell calls and puts.
 

Case in point � In March and into early April 2010 I was buying bonds. Stocks were in an upswing and bonds prices were moving lower. I moved back into bonds that I had sold from October 2008 to April 2009. Then recently I posted a number of articles explaining how I was selling my bonds. I started selling in July right through until just recently. My bonds have returned 8 to 14 percent depending on the maturity. You don�t have to be a genius to protect and grow your wealth, but you do need a plan. If the market begins to move higher this fall I will be watching bond prices. If they move lower, which I expect they will, I will again begin to buy bonds waiting for another sell off in stocks somewhere down the road.
 

 I would urge investors to step back from the daily noise and look a little further out than next week or next month and realize what is actually happening around them. Unemployment in the US is at historic highs, individual and government debt is massive, housing is absolutely terrible, BUT US businesses have scaled back their employment numbers leading to bottom line returns; debt levels have been greatly reduced and long term rates have been tied in at unprecedented low rates for more than 30 years by many corporations; many have been expanding by purchasing competitors as well as expanding into other markets. A lot of businesses have a lot of cash.
 

The most important aspect of the recovery remains expansion and while unemployment is terrible and governments at all levels are strapped with debt, many businesses are expanding. This is a good sign. But the talking heads don�t focus on this. The old adage that bad news sells, is still true today. I believe that eventually debt levels will become manageable. Governments just like citizens have been living way beyond their means and eventually you just had to know it would end badly. To think that this will be fixed overnight is foolish. This will take decades to remedy. It�s like weight loss. If I can put on 100 pounds over 20 years, I really shouldn�t expect to lose it all within a month. It is just not realistic. But in investing, I need to be invested at all times to garner a return, and I have to be realistic.
 

To make 20 or 30 percent a year or more on my portfolio is just not realistic. To have those kinds of returns I would have to �throw caution to the wind� and commit all my capital and certainly pick all the right stocks and trends. Is this realistic? Not for me. So if my 40% of capital in stocks returns even 15% I am pretty pleased. Then my bonds perhaps 5 to 6 % and my cash 1 to 2 %. Added together maybe a total portfolio return of 8, 10 or 12 percent consistently every year. Some years better than others, but consistently I want that percent return. That�s a huge return which over time will build an excellent nest egg while offering better risk management.
 

I strongly urge investors to step back from the noise. This recovery is about as bad as the recovery that began in Sep 2002 or the August 1998. Both of these were not credit crises and as such the recessions saw unemployment more in the 8% range. I believe the recovery we are in will take a lot longer based on past historic credit crises of other nations. The deleveraging that needs to go forward will take years and that is why I believe it is so important to establish ranges on stocks and the market, so I can remain invested, know what to do at different valuation levels and know when to commit fresh capital when stock or bond plunges occur.  
 

I believe that Investing is not rocket science or luck. It is establishing goals, developing strategies and following those strategies to a profitable conclusion. I cannot accomplish that if I only look a few weeks or a month down the road. America is a great country and I believe the American story has a lot more pages to write.