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Posted by Martin January 02, 2014
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My investing Strategy – part 1

My investing Strategy - part 1

I am finally kicking myself into writing this long overdue post about my investing strategy. I started many times and have several drafts but I haven’t liked any of the versions. Most of them became too complicated and I could see that this would be very confusing and boring for my readers to read. So I never got into posting it.

I decided to split the strategy post into a few small parts which would be easier to read and follow. At least I hope. I will be posting this series into one post under Strategy in the main menu where all posts will be combined together.

So what is my investing strategy?

In order to set a proper strategy, an investor needs a clearly defined goal. You need to know what you want to achieve. But that is only a part of the whole picture. Besides the goal, you also need to know what your time horizon is. In other words, how much time you have to build a solid strategy to get to your goal.

What is my goal?

My goal is to build a few retirement accounts capable of generating enough cash to replace my expenses and my wife and I can retire. It is not necessarily the amount of saved money, but ability to generate cash which can be withdrawn without jeopardizing the accounts’ ability to continue generating cash.

What is my time horizon?

Unfortunately, I am no longer in my 20s or 30s anymore. In order to retire in reasonable time I must be aggressive in my investing. I only give my investments 20 more years from now to grow and for me to learn how to generate cash safely. After 20 years, I will be 62 years old and I want to retire.

If I will be able to retire earlier than that, it will be considered a bonus to my effort. But I want to stay realistic.

First 10 years will be dedicated to highly leveraged accumulation of wealth, the second 10 years will be dedicated to deleveraging my accounts. (I will write more about this in money management).

My strategy outline

Over several years of my investing and trading career I tried almost everything possible (some say it was a mistake and I somewhat agree). I was a swing trader, advanced options trader, CAN SLIM trader, buy and do not know what next investor, and now I ended up as a dividend investor combined with basic option strategies.

All my previous endeavors didn’t work for me and didn’t make me money. Except dividend investing and basic options strategies such as covered calls and put selling. These are the strategies I want to base my strategy on.

My strategy is:
 

  1. buying dividend growth stocks, collect and reinvest all dividends
  2. selling covered calls – partial returns strategy
  3. selling covered calls – total return strategy
  4. selling puts
  5. buying high potential growth stocks

To implement the strategy I will be using several accounts and tools:

Accounts:
 

  1. TD Ameritrade account – taxable
  2. TD ROTH IRA account – deferred
  3. Scottrade account – taxable
  4. Motif Investing – taxable
  5. 401k account – deferred

Each account above has its own purpose and strategy. Unlike some investors I like to have different strategies separated so they do not mix and I know which account is profitable and which needs adjustment.

Tools:
 

  1. money management with margin
  2. money management w/o margin
  3. screening and stock picking
  4. options management

Conclusion

In this part I outlined my goal, time horizon and main tools and accounts I have at my disposal for building my wealth. In the next parts I will be writing about each specific account or tool which I will use in my overall investing strategy to achieve my goal.

If you have any question or need clarification, do not hesitate to ask me.

Happy new year!
 




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Posted by Martin December 31, 2013
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Trade adjustment – Safeway (SWY) put selling roll over

Trade adjustment - Safeway (SWY) put selling roll over

In almost a week ago I announced on my Facebook page an intent to roll over my Safeway (SWY) January contract. I felt like this could be a great opportunity to roll the contract to a lower strike and further away in time and make money.

Safeway seems to struggle moving higher as investors see problems in sustaining the company’s growth in the following year. I do not see a problem to be that serious, however I agree that the stock is overpriced and some sort of correction would be welcome in order to open a new position in this dividend paying stock.

What did I do today?

I bought back my original contract at a minor loss; and sold a new contract with a lower strike price with expiration further away in time.

Here is the trade detail:

BTC 1 SWY Jan 18 2013 34 put @ 1.79

I opened this trade @ 1.80 originally, so with commissions, my loss is 17.58 dollars on this trade. Then I opened a new trade:

STO 1 SWY Jun 21 2014 33 put @ 3.21

This trade has been made in TD Ameritrade account using their platform Trade Architect and I opened it as one trade (a diagonal spread) to save on fees, although here it is presented as two trades, it actually is only one trade.

Putting all this together, I added additional $142 premium to the original trade. Now my original trade $180 plus this trade ($321-$179=$142) makes the overall profit be at $322.

Now I need to wait until June 2014 (or roll the trade over again) to claim this premium as definitely mine.

For those who may not be familiar with a nomenclature, STO = sell-to-open, and BTC = buy-to-close.

Happy Trading in a New year!




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Posted by Martin December 30, 2013
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My goals for 2014


Planning goalsThe year 2013 is over. It has been a wonderful year. It passed very quickly and now we have time to reconcile our goals and set new ones.

My last year was a struggle fighting my debt. I could see how much money I was wasting on debt payments and interest. Many times I saw a great opportunity in the market, a great stock on sale, or an option contract offering a juicy premium which I had to let go because of the debt.

My eyes were weeping seeing all those opportunities go. Therefore my primary focus in 2014 will be on eliminating the debt.

This is a quick write down of my goals for 2014:
 

  1. Reduce my debt by 50%
  2. Make $5,000 in options trading
  3. Max. out ROTH IRA account
  4. Reach $300 monthly dividends income in combined accounts (in TD and ROTH IRA accounts).

Reduce debt by 50%

Last year, I was able to reduce my debt by 24%. It was a good achievement, but I know I could do more. For 2014, I will reduce the debt by another 50% from the current level. It is a huge task as it translates into paying down around 11,000 dollars next year. But such an achievement will save me circa $1,500 in annual interest. Definitely worth the money and work. Once I pay this off my family and I can take a decent vacation the following year. And I can increase my savings rate, which it currently is around 22%.

Make $5,000 in options trading

Last year, I made $2,400 selling puts and covered calls against stocks I like to own or I already own. My profit reached 44%. In 2014 I will increase this level and double my gains. I will build an option ladder which means that I will have at least one option contract expiring every month and I will roll them from month to month.

As I’ll have more cash available on hand while paying off the debt, I should be able to invest more into a put selling strategy. I should be able to sell puts against more expensive stocks, collect more expensive premiums, and be protected from volatility as more expensive stocks tend to be more stable.

Also the option ladder will help me buying longer term options (LEAPS) and collect more money in premiums. You can watch my Calendar how I will be progressing in this ladder building effort.

Max. out ROTH IRA account

Achieving this goal will be available only if I take into account my future bonus and tax refund if any. I know I can easily save $3,600 during the new year, so the rest of the savings must come from the refund and bonus. Since these are variables I can’t predict, I will be OK with only 3,600 dollars savings should this help achieving my debt reduction goal.

Reach $300 monthly dividend income in combined accounts

I believe that I should be able to reach this goal in my ROTH IRA account rather than in the TD account as due to my debt reduction and maxing my ROTH account goals I will be contributing to my TD account less as I did in the past if at all. So this achievement will come from the ROTH more likely. I also will be investing in stocks paying larger dividends such as MLP’s or REIT’s. REIT’s are currently under investors’ attack (negative) due to interest rates mess and in my opinion they are providing an excellent entry opportunity for long term investors.

Yet another opportunity can be seen in utilities as they are out of favor too. But that may not last long,so if you have spare cash, check them out.

The reason for allocating more money to higher yield in lieu of higher growth is that I believe this can help me to generate more cash now which I can then invest into stocks with higher growth. Of course I will strive to find stocks with balanced yield and growth, but these first two or three years of my accumulation phase I will prefer yield over the growth. Later I switch the gear and start accumulating more cash (reinvesting high dividends) to more growth oriented stocks. I plan to start investing in such stocks in 2016 and give them 10 or 15 years to grow. Some stocks can easily triple, quadruple or five fold their yield over such period of time.

Conclusion

The above described goals are quite brave and they will require a lot of financial discipline. But I believe these goals are meaningful and achievable. If reached they will get our family closer to financial freedom and possibly to retirement.

With reducing my debt as planned I can get more cash for investing and increasing income from those investments. Then I can stop worrying where can I get more cash for investing. I will be able to generate more cash.

Learning and successfully practicing put selling strategy and covered calls can help me to generate more cash with less initial cash commitment than with the stocks only and reach retirement early with smaller account.

What about your goals for 2014? What is the biggest achievement you want to reach next year?
 




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Posted by Martin December 27, 2013
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Goals for 2013 review

Goals for 2013 review

The old year is almost over, the new one knocks on the door. It’s time to review our goals and set the new ones. The 2013 year has been a great year and very fast as well. I cannot believe it is over.

 
(MORE: Goals for 2013 Review)
 

It was a great year. I am satisfied with my achievements, although not all of them were completed fully. I am still happy for what I have done.

Debt Reduction

SUCCESS

I wanted to be more aggressive in reducing my debt, nevertheless I am satisfied with this goal. I was able to reduce my debt by 24% this year or $7,163.44. It could be better, but considering all other liabilities I have, this is a good result.

Debt Reduction

 
(MORE: My 2014 Market Forecast)
 

Options income

SUCCESS

My goal for 2013 was to be able to generate $100 monthly income from options. I accomplished this goal and exceeded it greatly. In average I was able to generate $203.66 monthly income. I allocated $5,000 for options trading. I was able to make $2,443.88 which is a 44.91% profit for 2013 trading options; (100.52% annualized gain).

Options

Below see a chart of my annual income from options. The red line represents the goal.

Options Chart

 
(MORE: Returns as of Dec 2013)
 

Maximize ROTH Contributions in 2013

SUCCESS

I accomplished this goal, although it was thanks to cancellation of my Lending Club account. I transferred all allowed money to ROTH and the rest to my taxable TD account. One can call this a Pyrrhic victory.

Dividend income goal

FAIL

My goal was to reach at least $100 monthly income in my taxable TD account. I am short a few dollars as my income reached $85.85 a month. My ROTH IRA income jumped from around $600 a month to another $1,046.33 annual income making it a $87.19 monthly income in ROTH.

Both accounts are delivering me $2,125.57 in dividends annually ($177.13 monthly).

Dividends Income

 
(MORE: Investment Tips – Patience is the Most Powerful Ally)
 

Summary

2013 was a successful year investing-wise and also debt reduction-wise. It wasn’t easy as I could see a lot of great opportunities in the market and due to paying off my debt I had to pass them. But the market will provide a lot more opportunities in the future.

I still will focus on building my portfolios delivering great results in dividend and options income and I will strive to be more aggressive in saving and paying off my debt.

I hope you had as successful year as mine or even better and I hope you were able to accomplish all your goals too.

Let me know about your achievements and success!
 




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Posted by Martin December 10, 2013
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Trade adjustment AT&T (T) – put selling (building my options ladder)

Trade adjustment AT&T (T) - put selling (building my options ladder)

This trade was inspired by my fellow blogger Integrator from the blog Get financially Integrated! and his latest article at Seeking Alpha “My Dividend Portfolio: Evaluating AT&T“. He is evaluating the AT&T (T) stock in his article concluding that the stock didn’t drop low enough for him to be buying this stock although the recent decline in price made this stock interesting already.

 
(MORE: Will the Phone Company Pay Off Your College Loans?)
 

I commented under his post that he can be selling some puts against T to get a better price. And then it hit me, that I can actually do it as well. I have enough reserves to take this trade and collect some put premiums before I get assigned.

 
(MORE: Dividend Update – November 2013)
 

So this trade was inspired by Integrator and this morning I opened a new trade – AT&T put selling. This trade is also a part of my ladder strategy I decided some time ago to create.

Two types of ladder

There are two types of an option ladder an investor can create. One type is a time ladder and the other is a strike ladder.

Options time ladder

A time ladder means creating a ladder of options contract spread in time. You start selling put options with different expirations. It is a strategy I am going for. I try to sell a put contract with expiration every month and as the options expire (or get assigned) I will just roll the option into the next month. For example if my January 2014 contract expires worthless, I will just open another one in the next free month – which is June 2014. See my Calendar below:

 

Calendar

 

As you can see, my next free month is June 2014. If my Safeway (SWY) trade expires worthless (or gets assigned) in January 2014, I will sell another put with June 2014 expiration.

 
(MORE: Extrapolation of the dividend income in 2014)
 

So I am creating a time ladder. And with this type of a ladder I can use any underlying stock I want which sort of reduces the risk.

Options strike ladder

This is more known type of a ladder. You use one underlying stock but you sell several puts with different strike prices. If for example AT&T currently trades at $34.40 a share you can sell 10 contracts at 34, 10 contracts at 33, 10 contracts at 32, and 10 contracts at 31 strikes:

 

Options chain

 

Ideally you want to sell those strikes circa 1 – 3 months expiration, but no longer so you have time available for rolling the ladder. As the underlying stock rises up in price you start buying back the lowest strikes as their price declines to a very minimum. The reason for buying them back is that you want to release the lowest ladder rungs in case the stock drops back down, so you can sell new puts there.

If the stock starts declining you want to be closing the upper rungs and selling the lowest rungs to offset the closing price of the upper rungs (and of course you want to start selling longer expiration time in this case as the lower rungs will be less expensive than the higher rungs.

 
(MORE: $5 Starbucks Gift Card for AT&T and Verizon Wireless Customers)
 

This type of a ladder is financially extensive. You need enough free capital in order to create this ladder. You will be selling multiple contracts and you need enough cash for maintenance. Thus I am not interested in this type of ladder at this time. Maybe in the future when my account grows and I have more available cash.

AT&T new put selling trade

So today I opened a new trade:

12/10/2013 10:31:41 Sold 1 T Apr 19 2014 34.0 Put @ 1.39

With this trade I received a nice premium of $130.21 (after commissions) and my cost basis for AT&T holding dropped to $32.16 a share. That makes my position 6.35% in profit although the stock was declining recently.

If you want to mirror this trade, you still can open it as well. You will probably collect a better premium than mine. You would probably collect $154.00 premium before commissions.

 
(MORE: Stock Bought: ARCP)
 

There are three outcomes with this trade:

 

  1. The underlying stock will end above $34 strike price at expiration. In that case the option expires worthless, I keep the premium and will be free to repeat the trade with the same money.
  2. The underlying stock will end below the $34 strike price at expiration and I decide to get assigned with 100 shares of AT&T at $34 a share (minus the premium). I will be free to repeat the trade and sell another put contract with a new money.
  3. The underlying stock will end below the $34 strike price at expiration but I might decide not to get assigned with 100 shares and roll the contract further in time and lower strike.

 

If you want to play this trade safely, you can open a contract at 33 strike (receiving 4108 premium) or 32 strike (receiving $75 premium) to avoid assignment.

 
(MORE: Early Upgrade Plans – What Your Wireless Company Doesn’t Want You To Know)
 

Or you can just enjoy reading this post and opening no trade.

Do you use options in combination with dividend investing to boost your income and lower your cost basis or you believe this is an extremely dangerous strategy and stay aside? Share your thoughts as I like to learn from it.




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Posted by Martin December 05, 2013
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How dividends (and options) protect my portfolio

How dividends (and options) protect my portfolio

It is well known to all dividend investors that dividend paying stocks outperform non-dividend payers big way over time. Many studies also proved that dividends generally contributed 50% to overall market returns.

Yet many times people need a proof in real life in order to believe it – myself included. In the past I under-estimated dividends. They weren’t appealing to me at all. I hoped for a big run – a home run with growth stocks.

 
(MORE: Serious Motivation for Buy and Hold Investors: Bigger Pockets Podcast #6)
 

Of course it never happened.

It is also proved that dividend paying companies outperform nonpaying companies in EPS. The reason is that companies which pay dividends are very sober in how they use their cash. They give some cash away and must operate with what’s left. Time proved that their R&D expenses were a lot better and profitable to those companies which weren’t restrained by paying out the dividends.

I started investing in dividend stocks about a year and a half ago. So my dividend portfolio is quite young compared to my fellow investors and yet it started showing the power of dividends.

 
(MORE: Do You Tend to Notice the Companies You Own?)
 

I keep track of every dividend I receive as well as every option premium I get when I sell puts or calls. When I receive a dividend or an option premium I assign it to the stock which paid it. Then I use that income towards my cost basis.

Here is a spreadsheet I use to do the job:

Trader
Click to enlarge

Every dividend received is added to my cost basis which is then decreased. I do the same with my options income as I wrote in my previous post “How to buy stocks cheap in today’s expensive market” to lower my cost basis.

 
(MORE: Stocks for the (Really) Long Term)
 

Since my portfolio is still a “young dividend achiever” the results are not yet that evident but the results of dividend power is already shaping out. These days markets are falling due to a fear of too good economic results to be true (can you see how crazy the markets are by the way?) so the FED may taper (and thus all the great economic results collapse) so investors run to exit.

 
(MORE: Tweaking my dividend growth strategy in my taxable account)
 

When I check my trading account with TD Ameritrade, sometimes all my holdings are all in red. And such a quick look at those numbers can scare a novice investor to death and even push you into emotional selling. Check it out:

TD Account
Click to enlarge

As you can see, the day gain is scary – all red and total gains are also pointing to mediocre results. But these results do not contain income I have received in dividends and options. When I add that income the results look like this:

Td Account

Compare the results with dividends and options premium received. The picture is a lot better and very optimistic. At least to me. I can see that investing into dividend paying stocks I can protect my portfolio and the decline in markets is not something you should fear. It is now my friend because I can be buying stocks cheap. And that would add to this dividend effect as a portfolio shield.

 
(MORE: Do It Yourself? How I Learned The Value of DIY)
 

And this is only one reason why I fell in love with dividends! Wait when the compounding effect of reinvested dividends starts gaining speed. The portfolio will be growing faster than ever before.

What about you, do you have a similar experience seeing your stocks down on day-to-day basis while in fact they are up? Do you track or edit cost basis according to received dividends?
 




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Posted by Martin December 02, 2013
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FED’s taper, no-taper talks will push markets higher with nice dips in 2014


Anytime FED says it may probably taper if the economy shows some improvement, investors run for cover, panicking and selling everything they have.

A few days later the FED says that the economy hasn’t improved enough to taper and backs off.

 
(MORE: mREITs Would Love an End to the Fed’s Free Money)
 

A pattern we see since Ben Bernanke mentioned tapering for the first time. When actually was it? I don’t even remember, as we are on this tapering Marry-Go-Round and I stopped counting the circles.

If you lived in the US recently (and not on Mars for example) you could see yourselves that the US economy isn’t really that brilliant as the government or FED wants us to believe.

It still is heavily supported be the QE stimulus and if we take it out, all recovery will collapse. Or will it sustain? The inflation is not that obvious as FED is quite successful hiding it (but just go to a grocery store to buy a gallon of milk and compare the price two years ago, if you still remember it).

 
(MORE: Safe Dividends)
 

But trillions of dollars are sitting in banks reserves (while FED is paying the banks a hefty interest to keep the money in reserves, source: Motley Fool). Once this ends we will see inflation surface and maybe turn into a hyperinflation. If FED chairman or chairwoman finds courage to end the stimulus. And that is the problem. Will they be willing to end it?

Or just talking about it? Maybe all this talking is about to prepare investors for the real tapering. When they say it again and the market will not head down, that’s when we get hit by tapering. Maybe not. That’s a pure speculation.

 
(MORE: Cyber Monday: Investment Books You Should Read)
 

Apparently the economy isn’t ready for tapering – as investors are still worried and selling their positions. If they were not worried but satisfied and convinced about the US economy, there would be no sell off whenever data improve in such extend that FED would stop the stimulus.

So what can you do as a dividend investor?

I think a good approach in this market would be, as my friend blogger from Passive Income Pursuit is suggesting, – “pile cash reserves”. He sees the market overpriced and he keeps cash in reserves in anticipation of a major decline or correction which would return stock prices to a better valuation level.

The cash reserves gives you a great power when that happens. It will protect you against portfolio decline as well.

 
(MORE: I need your help)
 

That’s what I will be doing. My intent now is to start increasing my cash reserves. But my reason is a bit different. As I trade my taxable account using margin, I need to increase my reserves to protect myself against margin calls in case a major decline should occur.

Since FED will not probably taper as many expect, it will push the market higher in 2014. But the road higher will be bumpy with many declines. People will fear the tapering for some time before they realize it is actually good for us and not bad.

 
(MORE: Why I Don’t Compare My Portfolio’s Performance To The S&P 500 )
 

And the dips on this road will create nice opportunities to buy more shares cheap. Or at least cheaper than what they cost today. And for this reason it is worth saving some cash and invest wisely and not everything all at once.

Sleeping inflation giant

Here is another point of view why I believe FED wants to preserve the existing situation as is and not to taper. Let me borrow a chart from Motley Fools showing bank reserve depository. In plain English, the chart below shows money supply held by all US banks in FED reserve depository:
 

Depository

 

And now explain to me what do you think will happen when those reserves will be thrown to the monetary market in the US economy once FED ends the stimulus?

 




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Posted by Martin November 29, 2013
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New trade – Monthly Dividend Income Motif purchase (Motif Investing)


Today I opened a new trade. I bought a motif I created some time ago – Monthly Dividend Income Motif. The intent of this motif is to deliver high dividend yield every month and reinvest it.

I believe I will be able to grow my account faster by strengthening and promoting monthly compounding power of monthly dividends. For this purpose I am OK taking a higher risk involved in BDCs (Business development company) and MLPs.

I would like to thank my readers who opened their account with Motif Investing via this blog this year. Your support helped this blog greatly.

If you are considering opening an IRA, ROTH IRA or taxable account, consider Motif Investing
which will allow you creating a portfolio of 30 stocks of your own and invest by buying the whole portfolio as one piece keeping you highly diversified from the beginning. By using the banner below for opening your new account, you will receive $150 bonus and help this blog:

 

 

 




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Posted by Martin November 27, 2013
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Thanksgiving Day

Thanksgiving Day

U.S. equity, options and futures markets will be closed on Thursday, November 28, 2013 and will close early on Friday, November 29, 2013. This is in observation of the Thanksgiving Holiday.

Happy Thanksgiving Day



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Posted by Martin November 27, 2013
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Why Motif Investing is a revolutionary trading platform since ETF invention


 

Pay attention to the reporter’s question in the video:

I want to get an understanding, who do you think is going to buy into this?

Hardeep: So far we’ve got ultra-high net worth investors buying into this, we’ve got newbie investors, we’ve got money managers, a lot of financial advisors are using us right now because we are a cheaper alternative to mutual funds or ETFs. They can build their own portfolio, offer it to their own clients…

Reporter: That’s fascinating!…

Investing with Motif Investing is easy. And if you are not sure which stocks to use you can use a Motif built by an experienced investor, professional, or a financial advisor.

I am not a financial advisor and cannot provide you with advise which stocks to buy, but I am presenting my investing and results on this blog. If you like my approach, dividend investing strategy and mainly results, you can invest in stocks I own myself.

My current account Value:


 

My personal rate of return with Motif is +1.62%, but I have started investing with Motif Investing recently and invested small money, so my results are small yet.

Go to Motif Investing website, open an account and get up to $150 when you start trading at Motif Investing now. Learn more.

Then you can choose from two of my Motifs I created:

 
Monthly Dividend Income
 

Dividend Income
 

 




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