WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
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Posted by Martin May 16, 2020
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Should you be investing now?


TDA
 

No crisis, slump, selloffs, recessions, and even depressions last forever. The markets eventually recover so when you start buying and adding when the markets are low due to panic and media hysteria, you will end up ahead of the game at the end.

Even in 1930 depression, which lasted some 20+ years (if you bought at pre-crash highs) and you added or bought during the market slump you still got better off.

People like to compare 1930 market with today’s market and freak out about a prospect of a prolonged recession/depression and future lost decades, but they are comparing something which is not comparable.

It is the same as with this covid-19 artificial hysteria being compared to 1918 flu pandemic. But again, here you are comparing uncomparable. How can you compare a healthcare system of 1918 with capabilities and capacities of healthcare 2020?! In 1918 we didn’t even have penicillin! Ventilators? Forget it! Health insurance? Forget it… It didn’t exist back then. And same goes with the stock market. SEC didn’t exist (whether they matter much or not these days), regulations didn’t exist, FED failed to respond as aggressively as it is responding today: they lowered interest rates only once from 6% to 4% and completely failed in purchasing debt from banks, they started purchasing debt note in 1932 when the damage was already done, there was no employees’ safety net such as unemployment insurance, food stamps, or other measures the FED and government have and use today.

So saying that today, we are heading to a long term suffering and depression is ignoring today’s social and economic power of our society and economy. And it doesn’t matter, what wide range of FED conspiracy, economy, and market manipulation theories you believe.

Let’s look at the market history and how long would you have to wait for the markets to recover if you were unlucky enough to buy at the very top:
 
TDA
 

1929 – 1960
If you bought in 1929 at the top, it took about 31 years for the market to reach those same levels. But, don’t forget how the market operated back then vs. today. It would be yet another mistake to say, the market today is the same as it was in 1929. It was not. Investing in the stock market back then, and well into 40’s to 60’s, was considered a speculative game which the true gentlemen avoid. A true gentleman buys bonds, not stocks (re: “Common Stocks As Long Term Investments”, Edgar Lawrence Smith), so only a very little public participated in the stock market (e.g. Jesse Livermore). Stock buybacks were extremely rare back then and up to 80’s semi-legal or pure illegal.

1965 – 2007
The recovery took 30 years but we were in the same boat as before. The share buybacks took place after 1980 and in 1995 computers started being involved in trading. Although NASDAQ was founded in 1971, the true electronic trading as we know it today started picking up in wide scale when personal computers (PCs) reached households in 1995. There you can start seeing a sharp rise of market as general public started participating in trading. This was also a period when 401k plans were started (1980) and started picking up on a larger scale when defined benefit plans were slowly and inevitably abandoned by companies. Today, as I know, only teachers (and possibly only some) and USPS still operate and provide defined benefit plans. Everyone else is participating on defined contribution plans. Add to it that computerized high frequency trading started in 2000 (it was here since 1930 though the speed and scale skyrocketed in 2000 and beyond). All this caused the markets rallies became sharper and higher, leading people into thinking that FED, HFT, and aliens from Mars manipulate the market. Declines too became sharper, deeper, violent, but shorter in duration.

2000 – 2007
Computerized trading, 401k funds, ETF funds, hedge funds, algorithmic trading, massive public participation in the stock market, speed, instant information about the market and economy, FED’s aggressive policies compared to the past make the markets responding faster with greater volatility to any economic blip in the news. This caused the true recovery took 7 years instead of 30 years.

2008 – 2013
The information speed, computerized trading, access to cheap cash, all that causes reckless trading and overextending the markets or economic policies. This will be happening and there is no way to prevent humans greed or fear. We will always screw things up no matter how many rules you put in place. This crisis took about 5 years to recover.

Will today be different?
And it is my belief, that this trend of faster trading, faster declines, and faster recoveries will continue to certain extend. But yes, you need to be prepared for a situation that you buy stocks and the market will decline and stay down for a prolonged period of time. This will also be happening. But should this prevent you from investing? My answer is a resounding no. On the contrary, you should be buying now. You should have been buying back in March. And if we decline again in the near future to retest the lows, you still should be buying. Even if the market stays down longer than 5 or 7 years, you still will be better off if you keep buying now.

How do I protect myself in this market?
To protect myself in this market is to use a strategy which is less affected by declines. First, my strategy is oriented to generating income. If you are a growth investor and buy stocks which generate nothing, only growth, you may stay underwater for a very long period of time. Look at the Apple (AAPL) chart. Apple could drop and stay down for up to two years before it picked up again. If you bought in September 2012, it took until September 2014 to recover. If you bought in 2015, it took until 2017 to recover, and in 2018 it took until 2019.

And there are stocks which stayed down for years or never recovered (for example Yahoo!). That is a reason I seek income from my assets. One way to monetize my assets I hold is, of course, buying dividend stocks, ideally those, which increase dividends even during crisis. Another way, an investor can add to protecting income and value of her portfolio is using options and monetizing their portfolio selling covered calls against assets you own, or selling puts to buy assets you want to own. That way, you collect premiums (you may look at it as another dividend) on top of the dividends and it allows you to generate income. And that income can be then used to purchase more assets, or just withdraw from your account and spend however you want, for example pay your bills, or buy an ice cream. And you can do it even in time of crisis, recession, or depression, no matter how long it lasts.

 
TDA
 




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Posted by Martin May 10, 2020
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I bought a stock, it fell like a rock, what shall I do now?


Someone asked. He bought 100 shares of SWK (Div Aristocrat, now one of those Kings). Stock was at $173.35 and dropped to $129 and he thought well it is a King, what could go wrong. Continued dropping to low of $72 and now at $117.33 and question is, what should I do to make money, do I just wait and it will be ok? He is ok buying another 100 shares. Any suggestions?

 
SWK
 

This amazes me all the time. People buy stocks and then ask what to do. Did you heck had any plan why are you buying it in the first place?
Same as many long term investors, they are long only till the next selloff…

If he bought in for a long haul of the next 20 – 30 years as a dividend growth investor, his question is irrelevant and since he is asking, it probably was not his intent (long term investor like Buffett, or didn’t do his homework).

If he bought for short term speculation to make a quick buck, he missed the boat and should have sold in February.

If you have a short term plan and now changing it into a long term plan because the stock fell down, you have no business in the stock market.

If you have a long term plan and now changing it into a short term plan because the stock fell down, you also have no business in the stock market.
Sort out what you want before you invest.




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Posted by Martin May 08, 2020
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Stock market expectations (May 08, 2020)


The market completely invalidated all my expectations in the last week. We were range bound and we broke the range on April 29th just to give it all back the very next day. We returned back into the range. A false breakout? It seemed like one. Until this week.

Amid bad data people were expecting this market to fall badly. Pessimism out there is the highest since 2015. And today, we have received another batch of bad employment data. The market rallied up +1.68% and everybody is outraged and complaints about the market being overbought, manipulated, fake, and whatever else emerged again. But if you look at the underlying data, the picture shows that this market is not overbought at all, manipulated at all, and it still has a room to go higher.

I would also prefer some retreat and longer consolidation to give this market some more strength to run and align itself with the economy, but, today’s market is not about today’s economy! It is about future expectations.

For example, unemployment data. Everybody was expecting a carnage at labor market. Everybody was predicting 20% – 25% unemployment rate. I have seen people saying that the bad data are yet to come due to a reporting delay. And the data came. Data were bad, sure, but not as bad as expected. Instead of 20% unemployment, we only got 14%. Instead of expected 22 million job losses in April, we only saw 20.5 million lost jobs. Not good, but better than expected.

Add to the mixed bag of apocalypse that some companies are reporting rehiring employees at a faster and higher pace than expected as the economy starts slowly reopening. With these reports of slowing down unemployment claims, speeding up rehiring employees, FED stimulus, companies reporting better than worst earnings (yes, not all of them, but some are, and they are used as those first sparrows indicating spring coming) and the market suddenly appears as not high enough.

For example, after Shanghai Disneyland reopened this Friday, it got immediately sold out. This again indicates that people are willing to go back to pre-virus activities than expected. And the gloomy expectation was set by German experience earlier last month when people didn’t go shopping as expected and reopened businesses saw slow starts. It is all past and the future looks differently all of a sudden. And remember, the market looks at the future. It doesn’t predict it, it expects it. And it tries to price that expectation in.

The question would be, is it too optimistic? If so, it will correct itself again. If not, it will rally even more. And today’s momentum is “a bright future ahead of us.

I have a friend, who is in the same engineering field as I am. He works in a different company which stayed partially open, unlike mine. And whenever we talk, he says the same thing: “We will see a very sharp recovery. I have tons of new proposals coming in and clients bombarding me with new requests for proposals, they are all coming back and fast…” At first, I didn’t believe him. I though, when people start losing jobs, there will be no new demand for services, jobs, etc. But it is not happening.

Of course, this may all come to an end if those bright future expectations fail to materialise and and the future will not be as bright as expected. Or the future still be bright, but not as bright as the market is pricing in. Then we will see a decline. But as of today, do not blame the market for acting irrationally because of the data we see today. It is all about hope. It always has.

When looking at the market trend it is apparent that the sideways trend broke to the upside. It may return back inside next week, but the underlying data indicate rising strength behind this market which may push us higher.

People say the market is again overbought, but if you look at the weekly chart, it is not true. The RSI reading is slightly below 50 (a midpoint). The distribution is on a decline, accumulation is on the rise, this is also apparent on a daily chart, where accumulation is on a rising path again. Big players are buying shares. Nothing to throw a party about but it is happening. A weekly trend is still up although weakening, which doesn’t mean a trend reversal is in. And there is still a lot of room to go.

I expect the market to respect the new trend lines (either a major one or the secondary one and crawling slowly higher towards the 3020 resistance. Unless we fail again and go back into the previous range (see the two black lines indicating the sideways channel). The trend is still quite bullish.

 
SPX 05082020 -01
 
SPX 05082020 -02
 
SPX 05082020 -03
 




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Posted by Martin May 08, 2020
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Leverage investing, mainly in these times of selloffs!


I keep struggling with enough cash to invest. I want to invest a lot be buying equities, hold them, collect dividends, and monetize those holdings to generate even more cash. But family life, bills, kids in college, and situations like “something always happens int he worst time ever” is preventing me from investing more. So I was searching for opportunities how to boost my investing while using less cash.

And of course, one way to do it is to trade a Poor man’s covered call (PMCC), where you buy a long term LEAPS and start selling covered calls against it. I like this strategy because, instead of buying 100 shares of a stock for full price, you buy a LEAPS for less than a quarter of the full price.

For example, I bought LEAPS for PPL stock. It cost me $570 per contract. If I decided to buy 100 shares of PPL, it would cost me $3,000 instead.

 
PPL poor man's covered call trade
 

The picture above indicates my PMCC trade and what I have done with it since opening. A nice part is that I have collected enough premiums to lower the original cost of $527 down to $349. And I will keep doing this until the cost is zero and / or the LEAPS gain in value again to close the position and reopen a new one.

However, the problem with this is, I do not own the asset and I do not collect the dividends. And I want the dividends. The dividends are true passive income. Selling PMCC is not as you have to work for it, monitor the position, keep selling new calls against the LEAPS and eventually close the position, roll the LEAPS, sell new calls, etc. If the market closes today for several months, the dividends will keep coming, the PMCC will stop generating cash.

So I like to be trading true covered calls (CC) rather than PMCC but, during the period of low cash, I have no choice.
 

But this hasn’t satisfied my thirst for more leverage, safe leverage though. But what is a “safe leverage”?

Is it margin? Or any other debt to leverage your investment?

No, it is not margin or any other debt. These can actually get you into trouble and eventually ruin your investments.

And then it struck me. Why not using PMCC as a leverage? It will be a safe leverage, exposing myself to the market at a very low cost but controlling the same (larger) amount of shares as if purchased at full cost. And my new strategy has been born.

We can agree that over the long period time the stock market tends to go higher. Yes, there will be periods of time when the market will go down and struggle. It may be for a prolonged period of time (a typical bear market lasts up to 3 years, average is 1 and a half year), but generally, it will go up. and I am going to take advantage of this phenomenon and buy the entire index (here, it will be IWM, and SPY). But to buy 100 shares of IWM or SPY would require $11,691 and $27,910 cash respectively. I do not have it! So, how can I buy 100 shares of each!?

Well, that’s where PMCC comes handy. I can buy 3 years LEAPS on both indexes and it will cost me little less than $2,000 for IWM and $4,000 for SPY (talking about ATM LEAPS calls). I will be exposed to, and control 100 shares of each index for a fraction of its price. And we can safely assume that in the next 3 years the market will be higher (mainly when we recover from this covid selloff). And here is my “safe leverage”. Yes, I can lose all I paid for those LEAPS if the market doesn’t go higher in the next 3 years, but that would happen if I keep sitting on those LEAPS and do nothing. But, this will be a PMCC strategy so immediately, I will start selling covered calls against those LEAPS and lowering my cost basis.

Today, for example, IWM is trading at 116. I can buy 120 LEAPS, pay about 18.00 (or $1,800) for it. If the stock reaches $140 a share, an goes no more higher for the rest of the LEAPS life, I lose nothing. Add premiums for covered calls to it and it is a win-win trade.




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Posted by Martin May 07, 2020
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3 Dividend Kings For Rising Income


The coronavirus crisis has dealt a severe blow to the global economy in 2020. Stocks have not surprisingly performed poorly as a result. While the S&P 500 Index is meaningfully off its 52-week low, it remains down 11% year-to-date. For income investors it is particularly challenging, as the Federal Reserve recently lowered its benchmark rate to zero.

As a result, investors should use the recent market dip as a long-term buying opportunity. But danger still lurks, especially among the hardest-hit market sectors, which means investors should also be selective when considering stocks for purchase.

We believe the Dividend Kings are a haven for dividend growth investors. The Dividend Kings are a group of just 30 stocks that have each raised their dividends for at least 50 consecutive years. They have demonstrated an ability to withstand recessions without skipping a beat. These 3 Dividend Kings should continue to increase their dividends every year, even during recessions.

 

 · Dividend King #1: Johnson & Johnson (JNJ)

 

Johnson & Johnson is a healthcare conglomerate with a diversified business model that includes pharmaceuticals, medical devices, and consumer healthcare products. Johnson & Johnson was founded in 1886 and currently generates annual sales above $82 billion. The company currently has a market capitalization of nearly $400 billion.

The company has performed relatively well to start 2020. In the first-quarter earnings report, the company grew revenue by 3%, while adjusted earnings-per-share increased nearly 10% for the quarter. Johnson & Johnson lowered its full-year outlook owing to the coronavirus impact on the global economy. The company now expects sales in a range of down 3% to up 0.5% for the full year. However, investors can be confident that the company will return to long-term growth, thanks to its world-class business segments.

For example, Johnson & Johnson has a robust pharmaceutical pipeline to bring multiple years of positive growth to the company. Oncology sales increased 22% last quarter, while immunology sales increased 13%. The company also has an excellent balance sheet, with a AAA credit rating, to help it navigate the coronavirus crisis.

Johnson & Johnson has increased its dividend for 58 consecutive years, and the stock has a solid yield of 2.7%. With an above-average yield and steady dividend growth, Johnson & Johnson remains a strong dividend growth stock, even if a recession hits.

 

 · Dividend King #2: The Coca-Cola Company (KO)

 

Coca-Cola is the largest beverage company in the world. It owns or licenses more than 500 unique non-alcoholic brands. It now sells products in more than 200 countries around the globe. The stock has a market capitalization above $200 billion, while the company generates approximately $39 billion in annual sales.

The company reported solid first quarter earnings on April 21st, with revenue and earnings beating analyst expectations. Total revenue declined -1%, while organic revenue was flat year-over-year, at $8.6 billion. North America posted a 4% gain in organic sales, driven by pantry-stocking ahead of and during stay-at-home orders due to COVID-19.

However, this only offset a decline in organic sales in Asia-Pacific, driven primarily by China. Pricing and mix were flat during the quarter. Operating margins were 30.7% on an adjusted basis in the first quarter, up from 28.2% in the year-ago period. Earnings-per-share were up 8% on an adjusted basis to $0.51 from the year-ago period.

Coca-Cola has benefited from the pantry-stocking of consumers during the coronavirus lockdowns, but has also warned investors that away-from-home volume would likely continue to suffer as sports arenas, restaurants, and other public gathering areas experience large traffic declines.

Coca-Cola has increased its dividend for 58 consecutive years, including a recent 2.5% raise. Investors can expect continued dividend growth in the years ahead even during a recession, as consumers will keep stocking their pantries to help offset declines in restaurants and other public venues.

It has also been expanding its presence in still beverages and coffee, to help diversify away from sparkling beverages. Coca-Cola acquired Costa for $4.9 billion, which is a significant future growth catalyst due to the company’s impressive reach in coffee. At the time of the acquisition, Coca-Cola estimated that the global coffee market was growing at 6% per year.

 

 · Dividend King #3: Altria Group (MO)

 

Altria is another recession-resistant dividend stock. It operates the flagship Marlboro brand in the United States. In recent years, the company has diversified away from cigarettes by expanding into a number of adjacent product categories. For example, the company owns the smokeless tobacco brands Skoal and Copenhagen, wine manufacturer Ste. Michelle, and it also owns a 10% investment stake in global beer giant Anheuser-Busch InBev (BUD).

Altria has performed very well to start 2020. In the first quarter, revenue increased 15% to over $5 billion, due to over 6% growth in smokeable products volumes. Consumers loaded up on cigarettes in the first quarter, in anticipation of lockdowns that have taken place in multiple cities across the country. Altria’s adjusted EPS increased 18% last quarter. The rest of the year is not likely to be as strong for Altria, as the benefits of cabinet-stocking fade.

However, Altria has a strong balance sheet and sufficient liquidity to get through the coronavirus crisis. It recently drew $3 billion on its revolving credit facility and suspended its share buybacks. However, it continues to target a competitive dividend payout ratio of 80% in terms of adjusted EPS. Therefore, it would take a significant decline in EPS for Altria’s dividend to be in danger, which seems highly unlikely given the company’s leading market share and brand loyalty.

Altria has a high dividend yield above 9%. Investors should view such high yielders with some skepticism, and continue to monitor the company’s future earnings report. But barring a near-depression in the U.S., Altria’s dividend appears secure. The company has increased its dividend for 50 years in a row, an impressive track record that proves it can withstand recessions.




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Posted by Martin May 06, 2020
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New Purchase for dividend income


Bought 5 BIF shares @ 9.24
Bought 5 ETJ shares @ 9.11
 

We keep ing these CEF funds for income as both pay decent dividend.
 

Boulder Growth & Income Fund, Inc. (BIF) pays 0.41 annual dividend (4.44% yield). The fund invests in dividend paying equities and fixed income papers (bonds) worldwide and its goal is dividend income. The fund constantly trades below its NAV value (usually -16% discount) so, in my opinion it is a good vehicle to invest for dividend income. However, the fund is non-diversified and highly invested in small number of equities. To some, this may be a problem. I do not mind it. The fund has been around since 1972 and annualized return is about 6%. However, note that the return is not the primary goal of the fund. The primary goal is income. The fund uses no leverage.
 

Eaton Vance Risk-Managed Diversified Equity Income Fund (ETJ) pays 0.91 annual dividend (10.09% yield). The fund invests in the US equities, majority of them pay dividends. It also buys SPX out of the money puts while selling out of the money calls against it (a collar strategy) which provides a cheap downside protection for the fund (note, the price decline, you may see on the chart, is the investors overreaction and not a NV decline. The NAV is protected by the long SPX puts). The fund is also income oriented and trades at discount -3.21% to NAV. The fund uses no leverage.
 




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Posted by Martin May 01, 2020
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How much can you make trading options?


That’s a question people ask often. I did ask that question too. Many times. I still do ask that question. I want to know whether my trading is aligned with others, expectations, and goals of mine. The answer is not simple and results really vary based on your account size, trading strategies, and risk you are taking. So, it is not easy to say a number and call it a day.

But there are new traders and investors who want to know whether it makes sense to spend time and learn trading options despite many so called experts telling them that options are risky and that they should stay away.

So what can you expect?

Before I get to my numbers, let me first ponder on the general expectations.

I browsed the Internet to find out what others say and what other traders told people what to expect from options trading. All I could find was that you should be lucky to see 20% annual growth of your portfolio. Yes, 20% was their number, on average. I didn’t find anything better than that. If you could find others telling a better expectation than that, please, let me know in the comments below.

They also say, that anything above it is unrealistic and if you go and aim toa number larger than 20% then you are assuming a large risk and you will probably lose money.

On this website (and my Facebook group) I have a motto “making 45% annually trading options against dividend growth stocks” and people were telling me that this is a ridiculous claim and not achievable unless I am taking a huge risk. Yes, I was taking a huge risk in the past few years but that was trading SPX options, not dividend growth stocks.

So, is 20% a good number and 45% a bullshit?
 

Let’s take a look at S&P500:
 

Dec 31, 2019 – 29.44%
Dec 31, 2018 – 20.49%
Dec 31, 2017 – 16.21%
Dec 31, 2016 – 9.27%
Dec 31, 2015 – (15.42%)
Dec 31, 2014 – 2.11%
Dec 31, 2013 – 15.82%
Dec 31, 2012 – (0.51%)
Dec 31, 2011 – 12.41%
Dec 31, 2010 – 51.76%
Dec 31, 2009 – 242.54%
Dec 31, 2008 – (77.52%)
Dec 31, 2007 – (18.81%)
Dec 31, 2006 – 16.73%
Dec 31, 2005 – 19.27%
 

Can you see the gains of the SPX per year? Yes, there are a few years with some serious declines, but mostly the growth is around 20%. Some years are 29%, 51%, or even 242% after a recession.

So, if you think, 20% gain trading options is reasonable expectation, and everything above it is a gamble, then I have an advice for you. Save yourself all the hassle, buy SPY index and sit on it for years. You will get more than 20% in many years (yes, you will also see some serious loses, but that’s the nature of the game).

Then let’s get to my numbers. I started diligently recording my trades at the beginning of 2018. I know, it is only 2 years of records and it may not be long enough to claim it relevant. But, unfortunately, before I didn’t keep records of trade by trade results. I wish I did record them but I didn’t know how to do it efficiently.

In the 2 years of options trading, I averaged 8% gain in 15 day long trade (average days in trade). That translates into 16.20% monthly return, and 197.05% annualized return. You can go to check my spreadsheet and see all recorded trades and averages. Check my math, maybe I made some algebraic mistakes. But, if I didn’t make mistakes, you can expect definitely more than 20% annual gains. My 45% annual gains are definitely achievable.
 




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Posted by Martin April 28, 2020
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What would you invest in 2020, growth stocks or dividend stocks?


It all depends on many things – your age, money available, goal or why are you investing, time horizon you want to invest, and so on.

If you are young and want to create a portfolio for your retirement, then I definitely vote for dividend stocks. Why?

If you want to invest for the next 20, 30, or 40 years and build a portfolio for your retirement, how would you cash out your investments once you retire?

If you invest in growth stocks, the only way to cash out is to sell some of your investments (4% rule).

If you invest in dividend stocks, you will be cashing out dividends only and not selling your assets.

Then what happens if a market goes into a bear market selloff or recession and you have to cash out?

If you create $1,000,000 worth portfolio then growth stocks will pay you (usually) nothing in dividends. Dividend stocks will pay you $150,000 annually in dividends (15% YOC after 25 years of dividend growth). If the stock market crashes 68% (like it did in 2008) than your portfolio will shrink to $320,000.

If you have to sell 4% of your portfolio to cash money for living, with growth stocks (now valued at $320,000) you will sell 0.04 and receive $12,800 instead of $40,000 (4% rule). Will you be able to live on $12,800 that year? Probably not. I suppose, you will have to go back to work. Or you will sell out $40,000 and hope, your even more shrank portfolio (now $280,000) recovers. And fast! If however the recession takes 3 years (like the one in 2008), you will be doomed. The second year, you take our $40k (down to $240,000) and third year another $40,000 (down to $200,000). And even if the market starts recovering at the same rate as 2009 to 2020 (399%) your account will be up to only $799,000 in 10 years (2019 – 2009) and that is if you do not take any money out of it for the next 10 years. And that is a very bleak outlook I personally do not like much. What can you do? Well, save even more than $1,000,000 account. Maybe $3 million account will do the trick. But, that means, you will have to be saving a lot, every year! For the next 25 years or more. Or?

Or, invest in dividend stocks. Because, even if the market slumps and crashes 68% like it did in 2008, and it will be $320,000 value only, it still will pay you $150,000 annual dividends. If you think it’s not true, go and check how the high quality dividend stocks behaved during 2007, 2008, and 2009 years. ALL of them not only paid their dividend, but also INCREASED the dividend. And those are the companies you want in your portfolio.

If you want some excitement and rapid growth, you may use, let’s say 20% of your capital and put it into growth technology stocks. The rest should go to dividend stocks.




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Posted by Martin April 25, 2020
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Creating passive and semi-passive income


This week, I continued building my passive income (accumulating dividend stocks) and a semi-passive income (trading options). But, when reviewing my portfolios I realized one thing – I had my positions all over the place dispersed among many shares. There was nothing wrong with it, those are all stocks I want to hold. But, in order to monetize those positions, I need to be more concentrated than having a few shares here and there. I know, I can hear all diversification gurus yelling now. But, I take investing probably quite differently than many investors. If you pick good stocks, you do not have to be diversified. And that is something even Warren Buffett would agree with me… and William O’Neil too.

So, this week, I decided to focus on concentrating my holdings. Here is a brief view.

I have 92 shares of HP (Helmerich and Payne). Can I monetize this position (selling covered calls)? No, I cannot. I do not have enough shares. I can trade naked, but that would require margin I currently do not have. So, the only thing, instead of investing into other positions (which I was doing) is to put all my effort and raise this holding to 100 shares. But, there is a problem.

Helmerich and Payne is a company involved in oil. It manufactures rigs and oil drilling equipment, so not involved directly in drilling, though. Well, they do the drilling but they do it on contractual basis, they do not drill for the oil itself but for a company who buys their drilling service. But if all the drilling companies stop drilling and extracting oil because of the oil slump, they will also stop buying the equipment or companies hiring them for drilling would stop. And that would impact HP.

HP was a dividend aristocrat increasing dividends for 47 years. It is amazing how this company could sustain all oil crisis in the past, until this one. After 47 years of consecutive dividend increases, HP cut the dividend. And I have 92 shares.

I was accumulating this stock way before this self imposed, hysteria driven crisis. Maybe I could have foreseen this coming but I am not that smart to foresee everything. As a dividend investor, I should close this position and move on. But, I decided not to. I decided to increase the position to 100 shares and start selling covered calls to lower my cost basis and then eventually sell. Not exactly what a dividend growth investor would do, but I was accumulating this stock when it was trading at $40 – $45 a share. Today, it trades in a $15 – $19 a share range. The price drop from $45 a share happened way before they announced the dividend cut.

 
HP dividend cut
 

The market actually looked at the cut positively and I agree. The company decided to protect its cash flow until the economy stabilizes. Although, this was good for the company, it is not good for me as an investor. Not only I am under water now, but also, my passive income has been compromised.

I am not also much eager to close the position at a loss (at my current cost basis of $40.96 a share, I would be closing with 56.61% loss). This is a reason for me to hold the position, increase shares to 100, and start selling covered calls, lowering my cost basis. Although, this feature is more psychological, than real, but, at least, you have a good feeling that the position didn’t come in vain.

Of course, I would use this income to start increasing my positions in other stocks I own so I can also use them to sell covered calls. My next holdings will be:
 

PPL – currently holding 72 shares
O – currently holding 53 shares
ADM – currently holding 28 shares
KMI – currently holding 46 shares
VLO – currently holding 18 shares
 

All dividends and income from options will be used to purchase those shares so I can start selling covered calls.
 




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Posted by Martin April 24, 2020
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How much should I invest in the stock market as a teenager?


As much as you can. Every penny you get and can call “yours” should be invested in the stock market – 100% or more in stocks. Forget any defensive safe investing. You are young, you have time on your side so you can go aggressive as you will be able to fix any mistake. Leverage your investments. If you want to know more of what I am taking about, read a book “Lifecycle Investing

Learn as much about investing as possible, set a goal which will tell you how you want to invest, what stocks, how much money, for how long, when you will be buying, when selling, etc. and then stick to the plan for decades. 20 or 30 years later, you will retire financially free.

Learn to use options to boost your returns. For example, if you buy 100 shares of a stock and it appreciates a lot, you can convert your stock holdings into a long call option which will allow you to keep profits and release cash for more purchases (safe leveraging, read the book above). Sell cash secured puts to buy shares, sell covered calls to monetize your holdings. Be aggressive.

Study the market, ignore suckers who are scared to death whenever the market goes up (claiming it is overvalued) and scared anytime it goes down a bit (claiming end of the world and a crash), they have no clue. If you study the market, you will be able to identify when the market is in corrective or bearish mode (which should be respected) and when it is just a dip (to be ignored and bought more). No crisis takes longer than about 3 years (usually 1 to 3 years) so you can be buying more during recessions when you are young and in accumulation phase and be defensive when you are older and closer to retirement. You will hear people claiming that “if you bought on top of 1930 it would take you 25 years to get even”. That is a nonsense, ignoring that the market wasn’t down all the time for 25 years. It went up and down in waves. So, yes in that period it went nowhere but, if you started investing, buying high quality dividends stocks (for example), reinvesting dividends, you would be buying more and more cheaper shares anytime the market would go lower, and anytime it would be going higher, the recovery would be faster and cumulative. In your 20s, this wouldn’t matter at all and if you were in your 50s, it wouldn’t matter either as you would be living off your dividends, options premiums, and maybe some selling. The market (stocks) prices will eventually go to a price which will be beyond any crash level (unrepeatable price) so you can ignore any gloomers and doomers scared of any decline or recession. What do I mean by “unrepeatable price? It is a price the stock or market will probably never revisit. Example: JNJ stock. I bought it at $38 a share. Today, it trades at $140 a share. If the stock market loses 70%. The price would be $42 a share. It is still above my cost basis, so even if everyone panicked all around and kept selling and screaming, I still would be in green and buying more shares. And even if that happens, how long would it take before the market recovers? 2008 took 2.5 years to get back to pre-crash level. And imagine, that you would be buying more at $42 level. so when the stock goes back up you will be riding great recovery even if the market recovers partially only.

So, do not be afraid and look for long term perspective, long term investing. Many people are long term only until the next correction, don’t be like them. Have 20 or 30 year time frame in mind (even if you trade short term products such as options, you still must be aware of the long term results). Believe, me, you will reach great results.




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