Investing Strategy

**KTP** · 12-29-2010, 03:36 PM

One way to get by the negatives of buy-and-hold is to write covered calls on your long term stocks. I especially like this on dividend paying stocks, although they don't generate as much money for selling the call. This is considered an even more conservative strategy than regular buy-and-hold but in a sideways market it can really add to your yearly returns. The downside risk you take is no more than if you simply bought and held. You are limiting your upside potential if the stock market goes to the moon, but you can sell the calls as far out of the money as you like, knowing that if you get called (where they request to buy the stock you hold at the option price), you have at least locked in that amount of gain.

Here is a simple example, using a real stock at real prices (today's closing price). I will use Exxon here (XOM) as the stock you are holding.

Ok, say you bought 1000 shares of Exxon today at $73.37 (closing price) and you sold 10 contracts for Jan 2012 $80 Exxon, instantly receiving $2800 (you could actually use this money to buy something else right away if you wanted). Now your 1000 shares are locked in for a year, but you still get the 2.4% dividend, so worst case at the end of Jan 2012 you have made $2800 more than you would have if you had just done regular buy and hold. If Exxon closes above $80 by Jan 2012 and your shares are called away, you made: $2800 + $1760 dividend + $6630 profit from having to sell at $80 = $11,190 on your $73,370 investment...over a 15% return. Not too bad for a super conservative investment. This would work best in a tax deferred account, but I may start using it in my taxable account if I can convince my wife to let me upgrade our wells fargo account to write covered calls. That account is loaded with very high quality dividend paying stocks already, so is perfect for this strategy.

**jpg7n16** · 12-29-2010, 04:24 PM

I'd highly recommend watching this discussion with Warren Buffett. (1 hr 27 mins)

Warren Buffett MBA Talk

The main thing to remember is that the trading systems usually have alterior motives. They give 'free' seminars... that show how their expensive trading software can beat the market easily. (Which in order to use the software shown at the 'free' seminar, you have to buy it)

And no one wants to go buy a program that says, 'you need to do a bunch of work, evaluate the economic prospects of the companies future, find the best companies poised to do well in that market, and then buy low and hold for a really long time.'

It's not sexy to have to work hard.

Like in magic (and in cereal) tricks are for kids. Grownups focus on the fundamentals. What is the long term value of the company? What is it selling for? If selling for less than the value, buy. If not, don't buy.

Understand the industry (do your homework), find good solid companies, with honest and able management, and get in at a reasonable price. Then buy and hold.

**jIM_Ohio** · 12-29-2010, 04:47 PM

People which buy and hold (like me) focus their money management time on other things- like helping others- and not bragging about buy and hold.

**KTP** · 12-29-2010, 04:52 PM

Originally posted by jIM_Ohio View Post

People which buy and hold (like me) focus their money management time on other things- like helping others- and not bragging about buy and hold.

Who was this directed at? I don't think the OP or I was bragging about buy and hold, rather just discussing ways to squeeze a bit more out of a conservative investment strategy. Not your usual helpful post Jim...must be tired from all those practice exams.

**disneysteve** · 12-29-2010, 06:45 PM

I think most of us, from time to time, get the urge to speculate. I say take a small portion of your portfolio - maybe 5% - and go wild. Trade all you want and get it out of your system. Just be responsible with the rest.

Currently, I have a SEP-IRA that has a hair under $800 that I'm using for trading. That represents a fraction of a percent of our portfolio, but just doing that trading satisfies that urge for me. It isn't about the dollar amount. It is about the process.

**jIM_Ohio** · 12-29-2010, 07:44 PM

Originally posted by KTP View Post

Who was this directed at? I don't think the OP or I was bragging about buy and hold, rather just discussing ways to squeeze a bit more out of a conservative investment strategy. Not your usual helpful post Jim...must be tired from all those practice exams.

WAY MISUNDERSTOOD

the reason the OP is not seeing much "promotion" for buy and hold is that it is simple and boring. There is not much to promote, or profit from, advertising buy and hold... there is reason to profit from timing and selling newsletters, so the reason you see more of those items is greed, not because more people do it.

**gambler2075** · 12-30-2010, 02:59 AM

As someone who has traded fairly successfully (at least so far) I would say that of course, it is natural to want to beat the markets and manage your own investments. Why only get 5% a year when you could get 50% or more? Mutual funds are boring, right?

Well, sure, 5% may be boring but it sure is a heck of alot better than -50%, right? And as someone who has been there, let me say that if a non-trader tries to trade, then I can almost guarantee that he or she will do worse than the overall markets.

People see a trader apparently doing well and it seems so easy, right? Well, sure, but they also don't see all the people who try trading and lose all their money. Do they see a successful trader and have any idea how much time and effort it took to get there (speaking for myself, although I wouldn't necessarily say I have made it as a successful trader, I have spent literally 8-12 hours per day, every day for about the past 5 years learning to trade.) I don't count the 3 years before that where I was completely clueless when it came to trading.

Do you have that amount of time to devote to learning how to do something that you may not ever be successful at? Probably not. Most people don't have that kind of time.

Is speculating fun? Sure. But for most people, I would say you should limit the percentage of your portfolio you try to actively manage

in order to limit the amount of damage you can do to your portfolio. If you do well for the first few hundred trades, then consider scaling up in size. Active trading is far harder than it appears on the surface... trust me, I have seen hundreds of traders try and fail, and get blown out, and only know a few professional traders personally who have the right combination of skills, aptitude, and temperament to make a living off of it. The odds are against you beating the markets, but by all means, if you feel like speculating, go for it, but be careful out there.

g

**KTP** · 12-30-2010, 05:08 AM

Sorry Jim, I did misunderstand your post.

Don't let Gambler scare you too much. I think his definition of a trader is far from where you want to be anyway. He routinely invests hundreds of thousands of dollars on a single biotech stock, which is way crazy risk but he does extremely well due to a lot of research (and a bit of luck I think too). If you do just a little research and stick with a bit less risky investments (such as buying a company like Merck or Pfizer instead of Avanir or Arena) you should do ok. I think you will fall more into the investor category than the trader though.

**Snodog** · 12-30-2010, 07:24 AM

Originally posted by disneysteve View Post

I think most of us, from time to time, get the urge to speculate. I say take a small portion of your portfolio - maybe 5% - and go wild. Trade all you want and get it out of your system. Just be responsible with the rest.

Currently, I have a SEP-IRA that has a hair under $800 that I'm using for trading. That represents a fraction of a percent of our portfolio, but just doing that trading satisfies that urge for me. It isn't about the dollar amount. It is about the process.

This is good advice.

Personally I am not a gambler so I don't speculate with any of our money. I buy and hold and rebalance using boring index funds. My goal is not to be stinking rich at the risk of being broke, so somewhere in the middle is fine by me.

**disneysteve** · 12-30-2010, 07:43 AM

Originally posted by Snodog View Post

Personally I am not a gambler

I, on the other hand, am a gambler. I guess I won't be seeing you when my wife and I go to the casino on Saturday.

That said, I find that the thrill of gambling and that adrenaline rush can be just as strong when I'm betting $5/hand as when I'm betting $50/hand. In fact, I actually enjoy the smaller bets more because I'm not worried about losing large sums of money. I'm a fairly conservative gambler, if that isn't an oxymoron. That's why speculating with just a few hundred dollars is adequate for me.

**KTP** · 12-30-2010, 08:20 AM

Originally posted by disneysteve View Post

I, on the other hand, am a gambler. I guess I won't be seeing you when my wife and I go to the casino on Saturday.

That said, I find that the thrill of gambling and that adrenaline rush can be just as strong when I'm betting $5/hand as when I'm betting $50/hand. In fact, I actually enjoy the smaller bets more because I'm not worried about losing large sums of money. I'm a fairly conservative gambler, if that isn't an oxymoron. That's why speculating with just a few hundred dollars is adequate for me.

DS, you should join me over at optionshouse with your IRA. I think you can open an IRA account there with as little as $500 and your first 100 trades are free (including options if you so desire!). After that, trades are $2.95, which is pretty darn cheap too. I am having a blast making teeny trades for $20 profits here and there.

**disneysteve** · 12-30-2010, 08:28 AM

Originally posted by KTP View Post

DS, you should join me over at optionshouse with your IRA. I think you can open an IRA account there with as little as $500 and your first 100 trades are free (including options if you so desire!). After that, trades are $2.95, which is pretty darn cheap too. I am having a blast making teeny trades for $20 profits here and there.

I'll have to check that out. I'm paying $7/trade right now which makes it tougher to turn a quick profit on a small number of shares. Perhaps after I do my 2010 taxes and make my SEP-IRA contribution for the year, I'll move it over there.

**Snodog** · 12-30-2010, 08:44 AM

Originally posted by disneysteve View Post

I, on the other hand, am a gambler. I guess I won't be seeing you when my wife and I go to the casino on Saturday.

Have fun.

Years ago I was having a blast playing online poker for play money. Then I tried playing for real money and hated it. I guess I have a low tolerance for stress. Too bad as I was doing well and probably could have made some nice money on the side.

**disneysteve** · 12-30-2010, 08:55 AM

Originally posted by Snodog View Post

Have fun.

Years ago I was having a blast playing online poker for play money. Then I tried playing for real money and hated it. I guess I have a low tolerance for stress. Too bad as I was doing well and probably could have made some nice money on the side.

The game changes A LOT when you switch from play money to real money because both you and the other players play differently. With play money, people will make bets and take chances that they would never do with real money. A lot of people get misled by that. They play for play money, do great and think they are experts. Then they move to real money games and get clobbered. I play a play money poker game online. I started with $10,000 dollars a couple of years ago and now have over $1.8 million. If I had reason to believe that I could actually enjoy that kind of success in real life, you can be damn sure I'd quit my job and head to the casino but I know it just doesn't work that way.

Investing Strategy