Archive for August, 2010

“Brave New World of Investing”

For the longest time, the prevailing thought for making money in the stock market was to buy and hold. Over the last several years, this “strategy” has not only come under scrutiny but has pretty much been debunked. The buy and hold strategy has shown to not work…..period. Now, as always true in the market, there are no absolutes. This is true here too……there are examples of stocks that have improved over time and have had a decent return. But there are not a lot of them. Looking at stocks like GE (General Electric), INTC (Intel), and MSFT (Microsoft), we find that over the last 10 years most stocks have lost value not even taking inflation into account.

The stocks that have bucked this trend have been stocks like PG (Proctor and Gamble) and JNJ (Johnson and Johnson). These are larger, highly stabilized stocks that, most importantly, pay a dividend. Actually, it has been argued by some and supported by some empirical data that the only growth in the DOW and other indexes is due to dividend growth. If this is true, than dividend growth should be examined further! For the record, dividend growth is a form of income generation that can be found in the stock market.  Investors would be best advised to look to incorporate income generation strategies like dividend growth into their portfolios.

But even with the dividend growth strategy, there was not a lot of profit to go around. Seems that most that have done well in the market have done it by picking individual stocks to buy and sell back and forth relying on market timing for when to get in and when to get out. But these people have the time and willingness to be in front of the computer all day every day. This can really only be done by someone who considers themselves a full time trader. This definition does not fit the vast majority of investors. So, true investors must find another way to succeed in the market on a consistent basis.

This takes us back to the supposed success of the dividend strategy via income generation. The problem is that the dividend strategy is just not powerful enough or consistent enough. Not all stocks pay dividends and of the ones that do, most barely outperform inflation. So maybe the dividend strategy is not the answer but a hint to the answer. Maybe it is not the dividend strategy but the idea of income generation that is the secret. Following on this lead, there is another way to generate income in the financial markets that is far more powerful and consistent than dividends…..and can easily outperform inflation. It is located in the options market and called premium collection.

Premium collection is the art of capturing the decaying extrinsic value in an option over the passage of time. There are several option strategies that allow one to collect premium on a monthly basis that are both safe and cost efficient AND provide very good monthly returns! Nowadays, with income generation more important than ever and for more reasons than ever, investors desperately need to learn how to master this technique (income generation through premium collection) in the options market. By mastering this technique, you can not only increase your portfolio but can also generate income to be used in other areas, for other things. Of other interest, premium collection strategies are high probability, low cost, low adjustment trades. Great for those who are not professional traders.

The nice thing about income generation is it really fits the greatest number of investors……those who do not have a lot of time to spend watching the market all day every day, those who do not have big accounts, and those who can’t afford to take big risk. If you as an investor fit into one or more of these scenarios, then you should definitely spend the time, effort, and energy to learn about premium collection. There is a great potential that as our economic situation becomes more and more clear over time, we may see a market that stagnates dramatically for a pretty substantial amount of time. If the scenario plays out that way, we may find ourselves in a situation similar to that of Japan. If it happens, the only way to make money in a consistent, high probability way will be premium collection.

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Every Silver Lining Has a Cloud

Most of you that know me are well aware that I have always said to read more than just the headline. I have always been a very big proponent of reading the whole story and thinking about what you have read and the implications of that story. One of my favorite examples is how the market gets excited over increases in consumer spending. The headline seems to give the pre-market futures a positive jolt leading to an up opening every time!

That is until we find that the increase was strictly due to a spike in energy and food costs. That is not the type of consumer spending increase we want to see. So, a little later, after the opening, the market turns and heads negative and the individual investor is left with a loss, scratching their head and wondering what the hell just happened!

The same thing happened last week. Even with all of the optimistic comments of the past few months from Wall Street and government officials alike on how well the economy has responded to the stimulus and the moves that this administration has made, the Fed announced that they were a little concerned that the economy was slowing down but that they were ready to take action if the recovery were to start to run out of steam. The market reacted very positively to the news that the Fed was ready and willing to act at the spur of the moment if necessary. It all sounds so confident, so reassuring!

There are actually two problems here. The first concern should be that if things were going so great, so perfectly as planned as we have been told, then why would the Fed feel they need to prepare to act?   Why would they be concerned when everyone seems to be telling us that things are going so well? This should therefore cause a sense of uncertainty in the market and the market should have continued its sell-off and should not have rallied into the close.

The second problem was probably not so obvious but apparent enough to those who have been following the economy and have been paying attention. That problem is that just because the Fed is ready and willing to act and seems to know what to do does NOT mean that they have the ability to do it. The Fed is just about out of bullets. They do not have much left in the way of stimulating the economy. Rates are already down around zero and that leaves little to no room to cut rates which is the Fed’s best tool to fighting a sputtering economy.

The realization of these two facts must have hit everyone after the close last Tuesday because after the Fed announcement of Tuesday, the market traded back from down 100 DOW points or so to a point where the DOW actually went positive for a little. We all know that the next day, Wednesday, the market got hit pretty good.

My point here is that not only can the headline be misleading once reading the story but there also may be another side of the story that could often indicate the opposite of the lean of the story. As investors, we must learn to read beyond the author’s lean and get to the meat of the story……the facts! From there the investor must realize that a deeper, truer situation may exist and may come to the surface eventually and affect the market in the opposite way of the intended message.