I was about to ask Linda to marry me. My knowledge of diamond rings was one level below my awareness of the cast of Sex in the City (a show I have never watched). How many of us take our hard-earned money into a mall jewelry store and purchase an engagement ring from “some person” . Thousands of dollars on an object so meaningful and yet so few are willing to make an informed decision. Sure that salesperson will guide us but how do we know if that advice is in our best interest or that of the salesperson? Or even correct advice? The only way to truly know is to become an informed consumer. I purchased a book about diamond rings and learned about the 4 Cs of a diamond’s grading criteria. Now it was time to go shopping, intellectually armed. Linda loved the ring and said yes!
Many of my readers assume that I am against hiring a stockbroker or financial planner. That is not necessarily the case. There are many ethical, talented and hard-working professionals who will serve you well in your investment career. For those of you inclined to have a third party do the research and recommendations for you, this may be the path to take. But how do you know if the expert is in fact a top-shelf pro? Just like I became an informed diamond ring consumer, so to do we need to become enlightened about our investment choices.
So your broker tells you to buy 5 stocks worth a total of $50,000. He will generate a commission on these trades. I ask you: How hard did that broker work for the $50k? How many hours did he travel to and from the office? How was the traffic, weather, parking etc.? The point is that we owe it to ourselves to be in a position to say Mr. Broker:
1- Stock #1 is one of the worst performing stocks fundamentally….in the lowest 20%. Why did you recommend it? OR
2- Stock #4 has been in a downtrend for the last 4 months with several negative earnings reports along the way. Why did you recommend it? OR
3- Stocks #2 and #3 are in industries out of favor. Why should I buy those stocks rather than others in better performing industries? OR
4- All the stocks are in the same industry. Why didn’t you advise a more appropriate diversification of my holdings? OR
5- I checked all 5 stocks and they are great both fundamentally and technically. You did a fabulous job. It’s okay to go ahead and purchase them. Keep up the good work.
Now you have earned the respect of your financial representative. He will be cautious and do extensive due-diligence before making any recommendations to you. He may even come to you for a stock pick from time to time! That’s actually happened to me with stockbrokers who I see socially. One thing for sure, you will BOTH know that it is YOU and NOT him who is CEO of your own money.
Industry in the Spotlight:
I am always looking for industries that give us the best chance for the highest stock rate of return. One that has caught my eye is the Coal Industry (Energy -other group, on the IBD website). It ranks #1 over the past 4 months, #1 over the past 6 weeks, and #2 last week. How’s that for consistency?
We, as Blue Collar Investors, are so fussy that many of the stocks within this industry still will not earn its way onto our watchlist. Two that DO meet our system criteria are:
ACI
ARLP
You may also want to keep your eyes on WLT and BTU. These are equities that don’t quite meet our system criteria at this time but have made me lots of Blue Collar Cash in the past.
Please use the “comments” link of this article to share with us any stocks or industries that have caught your attention.
Interesting Fact: Buy and hold and forget about it?
One philosophy of stock investing suggests investing in great blue chip companies and letting it sit for years and years without trading in and out of that equity. One such company that fits that mold is General Motors. When I started my journey of self-education in stock investing there was an expression: As goes General Motors, so goes the stock market.
Today, General Motors was downgraded and closed @ $11.43. This represents a 53 year low! In other words, if you invested your hard-earned money in GM 53 years ago you would have lost money. If you factor in inflation, the amount of that loss would be obscene.
How about this: Buy and hold until the factors that motivated you to purchase that stock to begin with changes, then sell.
I will address this issue of stock investing without selling options in my next book (I’ve been writing it for 9 months and will figure out a title when complete).
My best to all,
Alan
Take a look at FLIR (defense electronics). Also STLD, an Alan favorite.
Barry
Here’s another buy and hold example I just heard this morning on CNBC:
If you had purchased Microsoft, one of the greatest tech companies of all time, 8 years ago, you would have LOST more than 50% of your money as of today!
Alan
As a CPA I am always mindful of using time spans as a measurement. Admin is correct. If you bought MSFT 8 years ago, and held it, you would have lost 50%.
On the other hand, if you had bought 100 shares of MSFT 15 years ago you would have paid $8,850. Today you would have 3,200 shares worth $88,800.
You can’t just buy and forget it. If you would not buy that stock today, perhaps you should consider letting it go. Please do NOT use taxes as an excuse to keep a stock. Tax laws change. Anyone who took long term gains in 1987 paid ordinary income rates. Our current 15% may change next year. It’s about what you keep, not what you pay.
THIS MARKET GIVING YOU A HEADACHE?
If it is, it should be a milder migraine than those who didn’t sell options. I have been selling predominently in-the-money strikes and most of my equities (you know, the greatest performing stocks in the greatest performing industries) are ABOVE these strikes)…no headache here, not yet anyway.
Here is some of the economic news that affected the market last week:
– The consumer confidence index fell to the fifth-lowest ever; the expectations index reached an all-time low.
– The Federal Reserve Board noted that uncertainty about inflation outlook remains high.
– The housing market remains week with high inventories of unsold homes and poor sales of new homes.
I always look for positives and did find a few:
– The Fed noted signs of overall improvement in economic activity and said that it expects inflation to moderate by later on this year.
– Exisiting home sales actually went up 2% due to discounted home prices and a rise in foreclosure sales.
– The nations GDP (gross domestic product) was revised upward to 1% for the first quarter of 2008, showing modest growth in the U.S. economy and lessening the possibility of a recession (depends on which expert you listen to).
– Strong corporate earnings and healthy P/E ratios suggests that fundamentals for stocks are still sound even if growth remains sluggish.
My best to all,
Alan
Thanks to Barry for the following email about a free website (we Blue Collar Investors just love free websites!). I encourage you to check it out and see if you will find it useful in your stock analysis:
Alan,
You and the rest of the Blue Collar Community might want to take a look at a free website that I just found.
It is: http://finviz.com/
The website has a pretty inclusive Screener, Market Map, Portfolio Manager, as well as other features. If you register, you can use the portfolio manager…it is also free.
All the best,
Barry
Question about In-the-Money Strikes
HI ALAN, I was just sitting here preparing a list for next week and a question comes to mind. I was looking at Massey Energy MEE. The stock closed Fri at 91.19. My theory is possible STO at 90
(6.50 call – 1.19 = $5.31 for a 5.8% return with a $5.31 cent downside protection, but if the stock were to really collapse(its’s been on a great run) what about selling a deep in the money call( example July 65 STO FOR 26.30. Risk is .19cents and if the stock goes up substancially then the STO call will also increase in price, and if the stock would tank one could buy back the July 65 at a lower cost and still make a profit. Am I getting greedy or is this a plausible theory. I looked at it both ways ( If I am assigned the 65 STO would be a wash and the $5.31 would be in my account and if the stock were to go up a lot then the 65 call would also go up but I don’t know how to calculate the amount. Thanks for your thoughts on this. BOB
My response:
Bob,
I really admire people who think outside the box…a sure sign of intelligence and ingenuity. Here’s how I would evaluate the 65 call:
Sell and collect $26.30 per share = $2630 per contract
Shares will probably be assigned @ $65 thereby losing $2619 (9119 – 6500)
Total profit $11 per contract
Commissions about $18
Bottom line = – $7, not a good deal
I love the concept of selling in-the-money calls especially in this market but SUPER-DEEP in-the-money strikes never make you any cash. I’d look at the 90 or 85 calls in this case. The 85 will give you better than a 3% return with more than $6 downside.
The downside protection on the 90 call is $1.19…
Alan
THANK YOU ALAN for your wonderful system. Sharing is caring – here are some of my favorite stocks for covered call trading in July 2008. All of these were picked using the techniques I learned in your classes.
Agrium Inc. (AGU)
Bucyrus International, Inc. (BUCY)
Chart Industries Inc (GTLS)
ENSCO International Inc (ESV)
Swift Energy Co (SFY)
T 3 Energy Services Inc (TTES)
All the best,
David
Thanks so much to those of you who share your research with the rest of us. Although I encourage you to do your own research, checking out the recommendations of many of our commentators can be a great way to uncover some “gems”.
Alan
Great article. Thanks.
I have received several emails asking me how I manage my accounts during a severe market downturn such as we have had this year (actually since the latter part of 2007). With the S&P 500 closing today @ 1263, we are now down 14% since the beginning of the year. We are, in essence, swimming upstream. Many of you who are seasoned investors have seen this many times before…part of the game so to speak. We don’t like it, but deal with it intelligently because we know that there are better days ahead.
First let me tell you what I don’t do:
I don’t panic and act emotionally.
What I do:
– Buy back options that are selling for .30 or less.
Check pages 112-119 of my book to review the possible exit strategies you may want to invoke. This will get you back some of your money.
– Realize that the option premiums I collected, decreased my losses on the stocks I “would otherwise want to own”.
– On the stocks that are down and exit startegies don’t apply, recognize the fact that there are still 2 weeks left until expiration Friday. Things can change for the better just like we got beat up recently.
– We can throw the odds in our favor but there will be down months. Overall, there will be a lot more up months than down. This may or may not end up a down month, time will tell.
Those of you new to my system are probably paper trading for the first 3-4 months as my book and DVDs suggest. It is a positive to go through times like this so when it happens for real, you will not react emotionally but rather intellectually.
Have a great 4th everyone and we’ll attack the market on Monday.
Alan
Any Positive Economic News Last Week?
It was like finding a needle in a haystack but I found a few:
– Unemployment held steady
– Jobs were added in health care and mining
– Public Sector spending increased
– Factory activity increased slightly showing
that manufacturing was expanding.
Hope to see more good news next week.
Alan