Stock Market Savings

This concept will not become real to you without the following two aspects.

1.    You know going into an investment exactly what you want out of it.

2.    You have purchased your investment wholesale— on a serious low in the stock (and, hence, the option).

Let’s get on to a real life example. When you get to the option section, coming up in a few pages, this will get even more exciting.

You but a stock or $8. It has been as high as $20. It’s been down to $6. Lately it’s been trading between $7 and $11. You buy 1,000 shares for $8,000. It takes three months, but the stock goes to $12. You value is $12,000.

Now, should you…

1.    Sell it all and then hope it goes back down, and then buy in again?

A little voice speaks up: “But what if it goes to $30? After all, that’s what the analysts say.”

OR

2.    Hold on?

Another little voice speaks up, “But what if it goes back to $7?”

OR

3.    Sell part of it—in fact recapturing all your invest­ment, then ride the remainder to greater returns?

For this next section to make sense you need to know why you bought the stock.

Was it…

•     a new start-up and/or a new IPO?

•     a bottom fishing stock, i.e. one having a serious dip in price?

•     a rolling stock and you know the roll range (the channel between support and resistance)?

•     purchased for a covered call strategy?

•     a high quality stock added to your portfolio for strength?

If you don’t know why you got involved, it will be difficult to ascertain the best time to sell. Indeed, except for the last pint above, in all the other strategies the “exit” is more important than the “entrance.” Remember, my rock-bottom investment strategy is to build up your cash flow.

This last statement has gotten me into hot water with a lot of traditionalists around the country. There are the investment clubs, the old-time brokerages, and even journalists who can’t bring themselves to try anything new. The Warren Buffett philosophy is rampant. Don’t get me wrong, I love his strat­egy. After you have mastered your own cash flow strategies and have built up your income, start concentrating on building a solid portfolio of “keepers.”

Two points:

1.   If you have a substantial portfolio and seriously want more income, then take a few thousand dollars and try more aggressive strategies. Call it play money. (Note: most of our Wall Street Work­shop attendees with substantial assets have and do make more profits by taking $5,000 of their $100,000 and investing it in rolling stocks, rolling options, option plays on stock splits, slams, peaks, et cetera, than they make on the other $95,000. Sure their $95,000 is safe and growing nicely. Just think, $95,000 at 10% will produce just under $10,000. But, I’ve seen a lot of people (too many to count) take $5,000 and make over $250,000 a year. And not quite so obvious, this is actual cash flow, not just an increase in value. It’ time to head for the Bahamas.)

2. If you only have a few thousand to invest, then you may want to throw caution to the wind and go for the gusto. If that’s where you are in your life and you want to generate income quickly, most mutual funds, stocks, and bonds will not respond fast enough. It’s time to put a formula (system, recipe) to work and quickly “get in and get out.” It’s the formula that works, not a particular stock.

Something for nothing? Sounds impossible. Well, there are many wild and crazy impossibilities coming down everyday. This chapter is full of possibilities—infinite possibilities. As a matter of fact, the rate of return above is infinite because you can’t divide nothing into anything. It is physically impossible to divide nothing into something. Go ahead—try!

Let’s talk money. You calculate a rate of return based on dividing the profits (gain) by your investment. A $1,200 profit on a $10,000 investment is 12%. That’s simple. Now let’s take on a hard one. A $1,200 profit on a zero dollar investment, produces an infinite rate of return. The trick, my dear Sherlock, is getting $1,200 out of nothing.

Would you like to know that it’s just not that tough? We’re not going to defy gravity or any other law of nature. We’ll just defy the laws of stodgy-thinking, Wall Street insiders who are helplessly locking into boring investment strategies. We are going to take all or some of our profits and buy or continue to own some of the stock. It’s that simple, and while not exactly free, it has that semblance.

How would you like to get your stock investments for nothing? I’m not saying nothing down, but nothing, as in zero, zilch, nada. If you had no money tied up in an option purchase and you made $8,000, what would your rate of return be? For the answer to this question, figure out the answer to this division problem: $8,000 divided by 0 = ?. You say, “You can’t divide by zero.” Exactamundo. If you understand this, your work in real life will take on new meaning. The stars will shine brighter, your marriage will be happier, your kids will mind you, and you’ll golf a 68.