How to Profit From Patience
Editors’ Note: Welcome to the new Wall Street Daily Weekend Edition.
In addition to our regular roundup of top content featured at Wall Street Daily during the week that was, we’re now including extended commentary from Editorial Director David Dittman.
And highlighting this new digest is the video-based Saturday Spotlight, which will “shine” on one member of our talented and hard-working team of market analysts each week.
Enjoy! And please let us know what you think of the new format by contacting us here.
I made my bones in the investment newsletter industry as the managing editor and then the chief strategist for Utility Forecaster, a sector-focused advisory founded by my good friend and longtime colleague Roger Conrad that posted some of the best performance numbers in the business according to The Hulbert Financial Digest.
Roger and I worked side by side for eight years before he left to co-found his own online publishing business. I held the reins at UF for two years before moving on to my present duties with Wall Street Daily.
I learned a lot from Roger during our time working together. The No. 1 lesson: Never pay too much for a stock, no matter how good the underlying business is.
We used a “safety rating system” comprising quantitative and qualitative criteria to determine the quality of the publicly traded utilities and companies in related industries that we covered, a universe of more than 200 stocks.
We also set “value-based” buy-under targets to guide our actionable advice.
What we didn’t have was a mechanism such as Lee Lowell describes in today’s Saturday Spotlight that would generate cash flow from high-quality companies while we waited for them to come back below these value-based buy-under targets.
So, yeah, you can have your cake and eat it, too. It’s all about selling put options.
Stock It to Me
One of the problems we grappled with at UF in the mid- to late 2000s was the impact of low interest rates on investors’ appetites.
Anything that paid a significant dividend was bid up as income-focused investors chased yield in an environment where the risk-free rate of return approached zero.
So many of our favorite, high-quality essential-service stocks were priced well above what we considered good value. We constantly advised readers not to overpay.
And we advocated the use of limit orders to enable the purchase of our favorite stocks below our recommended buy-under targets. But there’s no guarantee our chosen stock will ever come back below that limit-order price.
Well, Lee, an expert on using options to help build wealth, has a better solution that allows you to make money while you wait for your favorite stock to come back to value range.
Lee is the author of Get Rich with Options: Four Winning Strategies Straight from the Exchange Floor.
He’s our Chief Options Strategist here at Wall Street Daily. And he provides indispensable knowledge on how to build wealth using options in his advisory Instant Money Trader.
The Waiting Is Easy…When You Get Paid
“One of the greatest things about put option selling,” Lee notes in today’s Saturday Spotlight, “is that you get paid cash up front for your agreement to buy a stock of your choosing at a price of your choice.
“It doesn’t get any better than that.”
You’re making a deal with someone to pay a set price for your favorite stock, say, five or six months in the future. You commit to buying the stock if it hits that price. And they give you cash for the right to “put” the stock to you at your chosen price.
There’s no guarantee the stock you want to buy will slide back to your chosen price – the term of art here is “strike price.” That doesn’t matter; if the put option expires “worthless,” you get to pocket the cash you generated from selling it.
You don’t get to buy your stock at your price. But you can repeat the process, over and over again.
There is the “off chance,” as Lee describes it, that your stock will eventually come back into your buying range.
Think of the May 2010 “Flash Crash.”
Utility investors using put options would have benefitted during the many selloffs – including the “Taper Tantrum” of the summer of 2013 – catalyzed by fears of rising interest rates.
Prepare to Get Rich
It’s impossible to predict when a steep selloff or market crash will happen. Nobody knows, and anybody who tells you they do should be thanked for an entertaining story and promptly ignored.
At the same time, downturns – short and steep, long and painful – are inevitable outcomes based on the fact that the future is unknowable and that we’re dealing with the vicissitudes of humans’ emotional decision-making.
Howard Marks is the author of The Most Important Thing, which Warren Buffett described as “that rarity, a useful book.”
Marks’ pithiest advice is this: “You can’t predict. You can prepare.”
We all know that the surest path to long-term investment success is to buy low and sell high.
Lee Lowell provides the tools that help you prepare to buy low… and to generate cash in the bargain.
“Forget everything you think you know about buying stocks.”
That’s Wall Street Daily Senior Correspondent Shelley Goldberg, introducing her how-to article on put-selling that perfectly complements today’s Saturday Spotlight.
The “money” quote? Well, as Shelley notes about Instant Money Trader, “In fact, of Lee’s 139 total recommendations so far, 132 of them have proved profitable, with a total of $80,952 pocketed, based on 10-contract trades each time.”
Chief Technology Analyst Louis Basenese follows up on a forecast he made early in the summer of 2015, breaking down a series of mergers and acquisitions in the semiconductor space totaling about $80 billion.
If you want to know what’s going to happen next in this unfolding story, you’ll read Lou’s update on the best takeover targets among chip companies.
Senior Analyst Jonathan Rodriguez takes a technical look at the retail sector ahead of that most wonderful time of the year, holiday shopping season.
He also reveals a pretty compelling buying opportunity, backed up with solid data.
Speaking of chasing yield, Chief Income Analyst Alan Gula explores the cautionary tale starring Valeant Pharmaceuticals International Inc. (VRX).
“Now, Valeant may or may not default,” notes Alan. “But what’s clear is that the mispricing in the high-yield debt market allows companies like Valeant to lever up with impunity.
“Equity shareholders are also complicit for having failed to punish companies with too much leverage.”
There will come a time to “load up” on high-yield bonds. But “that opportunity is still some way off yet.”
Finally, Global Markets Analyst Martin Hutchinson has a more staid look at fixed-income investing, describing how investors can protect against interest-rate risk – and generate cash – via bond laddering.
Thanks for taking time out of your Saturday to spend with Wall Street Daily. Enjoy your weekend.