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Posted by Martin January 12, 2020
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Going into 2020, is there too much optimism in the stock market?


In fact, there is not too much optimism despite markets moving higher. Too many people are sitting aside expecting a crash, too many investors are pulling money out of the market (check equity funds outflows), too many pundits are speculating and competing in predictions who would nail the coming crash and recession.

All this is in fact a bullish behavior. At some point, these people who are now scared and pulling out of the market lamenting that they have missed the rally and they start chasing it coming back in. That will be the time when even a plumber in a small rural town in midwest America becomes a stock analyst and investing guru. Then you should start being worried.

However, I am talking about a major bull trend for which I expect additional +/- 18 years to last. But, that doesn’t mean it will be a straight run up. No, there will be pullbacks (up to 5%) corrections (up to 20%) and sideways moves along the way.

Too many people miss the big picture, many do not even look at the big picture, and then lose money (like those who are now pulling their money out of the markets expecting crash. Not only they will miss the rally, but they will enter back at the very wrong time when the market rolls over and crash and they lose again.

Here is a picture from 2016 where everybody predicted end of the bull market saying that it cannot go any higher. It must crash again. The market was going up for too long. This is not normal. Brace yourself… Well, look where we are today.
 

Here is a top

 
Because of the lack of the big picture, people tend to be trapped in their recency bias. All they know and remember id the previous crashes and tops. and there fore they are expecting crash and predicting a top as people did before them, just look at the picture above. When this recency bias end and is replaced with complacency, they you should be worried. But we are not there. if you keep monitoring news headlines, all you will see is who is predicting a crash and when, trade wars worries, economic slowdown and subsequent recession, slowing this and that… just watch it daily and you will get frustrated of how much pessimism is in fact out there.

Here is a big picture indicating that we are in a secular bull market which will last for some time:
 

Here is a top

Here is a top
 




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Posted by Martin January 11, 2020
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How do I select good trend stocks?


Well, you don’t (sort of). No one can predict what the future would look like. And past performance… you know that cliche.

So, it is not about whether the stock is good trend stock or not but about the quality of underlying business. If you know the company you know what to expect.

So, although there is no way to pick a stock which will be trending in the future, there is a guidance which can help you to at least get an idea if the stock is good or bad.

Just look at the long term chart and you will see the big picture.

Look at the two charts below and you can easily recognize which stock is a trending stock and which is not.
 

Trending stocks

Trending stocks
 

Which is a trending stock?

Well, if you picked one, you may expect the same behavior (or similar) in the future. And unless you are a day trader or swing trader, you should have picked Nike chart in those examples above.




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Posted by Martin January 10, 2020
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What are some great stocks to buy? I’m 18 and I have around $2,000 to invest. I want to be extremely risky as I am young and have time in my future to save


If you want to be risky (which at your age is a great approach, because as you said, you have time on your side to make mistakes and repair them).

In this case, individual stocks are the way to go. Forget mutual funds or ETFs. These are average and many do not even beat the market. On top of that, they will charge you fees while stocks will charge you nothing.

Then your stock selection will depend on your strategy.

Are you planning to buy stocks and hold them until retirement?

Or are you planing to play a bit and buy and sell (note, excessive trading will however lead to losses over time)?

If you want to build a portfolio which will bring you income and allow you to retire early, then you need to choose stocks which have a great potential to grow steady, slowly, and safely. You need to look at stocks which will be around 20 years or 30 years later.

I would recommend you to open a margin account and start slowly buying dividend growth stocks. These do not require much work on your part and you can afford to buy them and forget about them and while waiting, collect dividends which can be re-invested back to grow your portfolio.

In this case, I would look into dividend aristocrats. They are relatively safe and grow and will most likely grow. You just need to monitor your holdings time to time to check that the stocks you have still meet the criteria for investing in them. If not, get rid of them.

Now, when I mentioned margin account, do not use margin at this phase. Your account is too small and if you leverage your account using margin, interest rates would not only offset the dividends and capital gains but may even eat your principal.

Then start saving money, so you can start trading options and that is when you use margin.

I personally use a strategy of selling cash secured puts to buy 100 shares of a stock and do this as long as I get assigned. Once I get assigned, I hold the stock, and then start selling covered calls as long as I get assigned. With this strategy you monetize your positions. You collect premiums when selling puts, you collect dividends when holding a stock, and collect premiums when selling covered calls. And with this strategy it is handy to start using margin.

Example: Let’s say, you want a stock ABC which trades at $60 a share. In a cash account you would need $6,000 to buy 100 shares. In a margin account, you will need only about $3,000 initial margin to buy 100 shares.

So, you sell a 55 strike put and collect 0.60 credit (or $60 premium). For this, the broker will collateralize about $1,100 of your buying power. If the stock stays above 55 by expiration, your put expires worthless, your collateral will be returned to you and you will keep the premium you collected. If the stock drops below $55 a share, you will be required to buy 100 shares at $55 a share but your cost basis will be 55 – 0.60 or $54.4 per share and your collateral will be added to the margin of $2,600 (since now you are buying for $55 and not the original $60).

While you hold your 100 shares, you start collecting dividends and start selling covered calls. By selling the calls, you again receive premiums. If the stock stays below your call strike price, the call expires worthless, you keep the premium, and you can sell a new call. If the stock goes above your strike, you will be required to sell your 100 shares (for example, you bought in at $55 a share, so you sell 58 strike covered call and collect 0.25 or $25 premium. If the stock stays below 58 at expiration, the call expires, it the stock goes above, let’s say to $60 a share, you will be forced to sell your 100 shares at $58 a share. Your profit will be premium received + the difference between the stock and strike, in this scenario additional $2 per share).

If your shares are sold, you go back and start selling puts again. Rinse and repeat.

This is as “aggressive” strategy as I would recommend to go. There are riskier strategies of course, but, with those, you can easily wipe out your account (my experience). Later on, as you get proficient, you can use other strategies to generate more income.

However, in order to do this, you will need at least $5,000 or more account and proper options trading approval from your broker. But you can start slowly, invest your first $2,000 and study the strategy until you raise money for more trading.

As far as the stock selection, I recommend using dividend aristocrats, Here is a link to a David’s Fish list of the dividend champions (aristocrats), challengers, and contenders:
Dividend Growth Stocks CCC list This list has enough stocks to pick from and if you study them carefully, you can even pick a real winners.

And what you can expect? Well, I have been trading this strategy (I also traded other strategies not so successfully though) and my average annual return on investment is between 30% and 45%. If you do your work, read, study, pick your stocks carefully, and do not deviate from the plan, you will be able to double your account every 3 years.




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Posted by Martin January 09, 2020
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What are the stock market tips?


What are you looking for? Recommendations? Tips of what to buy (or sell)? Or investing strategies?

My tip is: start thinking what you want to do in the stock market, what you want to achieve, develop a plan, read some books to educate yourself, and then execute the plan.

There is an old adage – plan your trade and trade your plan.

Everything other than that doesn’t work.




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Posted by Martin January 08, 2020
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What 4-5 stocks would you suggest are a good way to start investing in and why? Would you advise long term investment or buying and selling it within what specific period of time?


I do not think we can give you any specific advice on which particular stocks you should buy. However, I personally recommend dividend paying stocks, namely dividend growth stocks which have excellent dividend history. If you look at some of the great candidates then you will see that these were the companies which were increasing the dividend during 2008 recession. What does it tell you about the business which performs well during the recession so they can increase their dividend instead of cutting it? Well, it tells me that if a company does well in recession, it will excel in prosper time even more.

So, go to a dividend aristocrats list, or David Fish CCC list and look for aristocrats or champions, study those stocks and pick those which fit your criteria or you can familiarize with their business and the ways they make money. For example, Michael Baum started buying water stocks. I think it is not a bad idea and since I bought my water stocks, they already doubled in value and keep paying nice and increasing dividends.

As far as investment strategy and time horizon, well, people always over estimate their short term ability of investing and under estimate their long term achievements. The fact is, that people who tend to go in and out of the positions lose money in the end or significantly under-perform the market. More over, the high quality dividend stocks are turtles. They are huge and move slowly (you can look at their annual dividend growth which usually equals to the stock price annual growth, so if you see a stock which increases their dividend at 3% annually (average) you may expect 3% price increase annually (yes, there may be times when they may speed up, but also slow down). So trading in and out will not get you anywhere. Thus definitely, long term investment.

Consider your stock holdings as a money making vehicle, or a rental property. You buy a rental property and then rent it out. You do not buy and sell it next month, right? Well, why should you do the same with your stocks? Use your stocks as a rental property and rent it out, or in other words, monetize your holdings. How can you monetize your stock holdings?
 

There are three possible ways:
 

  1. collect dividends
  2. sell cash secured puts to buy the stock and collect premiums
  3. sell covered calls (overwrite your account) ideally to prevent assignment, and collect premiums
     

If you do it right, you may be able to collect about $20 to $30 every three months on dividends (depending on a stock and amount you hold), plus about $20 to $40 dollars every month selling options around your positions monetizing them. My account where I do this averages about 30% to 45% annual returns doubling my account every 3 years…




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Posted by Martin January 07, 2020
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How can I invest in dividend stocks to get a monthly income which also should be safe or less risky?


Yes and sort of. You can invest in dividend stocks to generate monthly income. There are a few monthly payers but most of them are risky. There is only one or two monthly paying stocks I would recommend to invest in for monthly income.

For the rest, you would have to buy stocks which pay dividends in different month, for example, buy a stock which pays dividends in January, April, July, and November, then another stock which pays dividends in February, May, August, and December, etc.

To mitigate risk you want to choose high quality dividend growth stocks (dividend aristocrats) which are stocks which have a great and log history of paying the dividends and increasing the dividends. For example Johnson & Johnson stock increased the dividend in 2008 and there were many others who did the same. Yes, the stock dipped a lot in value, but the income it paid to me was consistent, steady, and rising. So while others were panicking and selling, I was buying. And I bought JNJ for $45 a share when everybody else was predicting end of the world. Look where JNJ trades today. And my 3% income back then grew to 15% today.

So, it is doable. You have to look at your investment as income machine, not speculation and you must be OK to hold and buy more when the stock goes lower. Dividend aristocrats are well established and reliable companies which you can trust and do not have to worry much. Of course, there will be stocks, time to time, which were once aristocrats but later on screwed up (like GE). But, if you know how to invest in dividend stocks properly, you will see early warning signals to get rid of a stock before it is too late (many experienced dividend growth investors could foresee the GEs problems and got out before the stock cut the dividend and subsequently tanked to $4 a share. To learn more, I would recommend a book “The Single Best Investment” by Lowell Miller.




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Posted by Martin January 06, 2020
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What do stock market investors need to know about intensifying the U.S.-Iran tensions?


We have seen news saying that the markets are tanking because of Middle East tensions and Trump waging a war against Iran.
Well, it may have been an excuse for people to unload some gaining positions. But it apparently is not enough to stop this bull market.
 

If we review the economic data we have seen recently coming:
 

  • consumer confidence slipped down to 126.5
  • jobless claims flat at 222k
  • ISM manufacturing down from 48.1 to 47.2 indicating that manufacturing is in recession.
     

we can see that investors in fact, didn’t care. On top of that, we can see that they pretty much didn’t care about the tension in the Middle East either; despite media bombarding us with bad news.
 

If the tensions was such a bad thing, and it would plunge the entire world in a WWIII the markets would already collapsed. We saw the markets to drop by 1.2% on Friday (and recovered as high as 0.55% closing down 0.72%) and today although we opened down 0.44% we are already up 0.20%.
 
There is no follow through, no panic, no mass selloff. And a market which refuses to go down has only one way to go.




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Posted by Martin January 06, 2020
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Is there any value in investing in individual stocks if you have less than $500 to invest?


If you pick a broker who will charge you zero commissions so you can buy even 1 share of a stock and pay nothing to do so, then yes, you can still do it. Choose high quality dividend growth stocks (dividend aristocrats), 3 to 5 companies, buy few shares (choose stocks in the $40 – $50 range), set dividend reinvestment (DRIP) plan, and let it go. You won’t make much (meaning that in 20 years you still will not be able to retire on it) but you will still make more than in a savings account. Note that investing in stocks is a long run. So if you plan to buy today and plan on selling in a few months or even a year or two, then this will not work and you will lose money. This will work if you buy now and let it sit there for 5 to 10 years. A good example would be Mastercard (MA). I bought the stock a few years ago for $75 a share. Today, it sells for $303 a share. Do not worry about diversification. I agree with IBD and Warren Buffett on this matter who both consider diversification a myth. You can be very well diversified with 5 stocks too. If you do your homework, study the companies you plan on buying and know their business (for example, know how Mastercard make money – and it is not in lending money to people) then you will be safe.




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Posted by Martin January 06, 2020
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Is this investment strategy good:


Is this investment strategy good: allocate 75% in savings account with high APY(~2%), 20% in long term re-investing dividend stocks and 5% in short to mid term high risk stocks (kind of a swing trade)?

 
 

How old are you? If you are close to retirement or retired, and inherited a large sum of money, this may be acceptable (although not for me either). If you had saved enough throughout your life, it still would be a bad idea.

If you are young, let’s say 20’s then this is an incredibly bad idea. If you can invest money for the next 40 years then there is no better allocation than stocks. On top of that, if you have really 40 years time frame, you should go extremely aggressive (use leverage and as you age start deleveraging your account). A good book on this topic is Lifecycle investing by Ayres & Nalebuff.

So, if you have time, invest 100% in high quality dividend growth stocks, reinvest dividends, and use options to leverage your investments (as described in the book for example, or use a “Wheel strategy” – sell puts as long as you get assigned, then hold the stock, collect dividends, and sell covered calls as long as you get assigned).

Just look at the 40 years S&P performance and compare it to a 40 years savings account performance and try to convince me again why would you waste 75% of your money in savings accounts for the next 40 years.




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Posted by Martin January 05, 2020
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How should I invest $100 per month in stocks?


I bet many people will tell you that you can’t because of diversification and other myths and misconceptions what all sorts of advisers tell general public to cover their backs and lack of deeper knowledge.

I started like that myself and built up a nice portfolio. It is difficult at first but doable, mainly today when you can trade commission free. That is a key. You must choose a broker which will allow you to buy a single share and charge you nothing for it.

The next thing is to choose a high quality dividend growth stocks (dividend aristocrats) to boost your income from your holdings, and reinvest that income. At first, use DRIP, later on I would recommend buying more stocks different than those which generated the income.

At first, choose only about 5 to 10 stocks and start buying them and accumulate.

Here is my portfolio I opened in April 2019 to do exactly what I preach. As you can see, even though the portfolio is small and generates small income, but it is growing. And given the size of the portfolio it is still sufficiently diversified as the point is not in owning hundreds and thousands of stocks but stocks which can hedge each other. So you can have only 5 stocks and achieve the exact same or even better diversification than someone who is buying hundreds of stocks.

 
Holdings
 

Note, the stocks above are my holdings and not a recommendation or solicitation. If you decide to buy them, do so on your own risk and you must do your own due diligence and be aware that you may lose money.

Also, my broker charges me zero commissions so I can buy a single share and it cost me nothing. Before, when the brokers charged commissions I first had to save at least $600 dollars to buy a few shares to mitigate impact of the commissions so I was buying shares every 6 months. Today, you do not have to wait and you can start buying a few shares every month and slowly accumulate.




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