When Everyone's a Market Genius, No One Is

By | March 24, 2016 Leave a Comment

Everyone's a Genius In a Bull Market

When the stock market's doing great, everyone's a genius. Everyone and their dog is making money with their wealth, simply because they clicked the "buy" button in the midst of a booming market.

In times like these, you love your wealth adviser. He's the financial "Ghandi" of financial gurus. You're a genius for choosing him, and your second cousin's a genius for recommending his services. You show your account balance to your significant other, and suddenly there are additional unforeseen benefits to having such genius. Your future looks bright, and your prosperity seems assured.

In good times, you don't mind the 1% of total assets you're paying the guru, and you don't mind paying him the additional fees for executing trades on your account. Why? Because you're making money hand over fist! It's the cost of doing business.

But what about when the market's... not doing so hot?

Suddenly, you're not such a genius, are you? Your dog's back out in the doghouse, you're cussing out your second cousin, and you're sleeping on the couch.

And yet... your financial "guru" still gets his 1% cut. He still gets his fees when he has to close out investments on your account which are losing you money. And at the end of the day, he's still his wife's greatest hero, and he has a fat paycheck.

What if that were you?

What if you could always be the hero, even if everyone else is a loser in the markets? What if you knew of a way to make money when the market wasn't going anywhere, or when it was in the gutter? What if you could still grow your wealth without having to pay exorbitant fees to a wealth adviser?

Let's talk about this.

Making Money in Any Market

The average person makes money investing in these two ways:

#1. Capital gains. You buy an investment, and sell it when it's worth more than you bought it for. The gains are the difference between your buy and sell price, minus commissions paid to your broker. If you buy an investment and the price goes nowhere, you make no money. If you buy and the prices goes down, you lose money when you sell.

#2. Dividends. You buy an investment, pay a fee or commission, and that investment pays you a set amount of money (a % of your total investment) on an annual basis.

What many people don't know is, there are additional, SIMPLE ways to make money when #1 above isn't likely to play out, or when you buy an investment which doesn't pay a dividend:

#3. Short selling. You "borrow" an investment from your broker when it's at a set price, and "sell" it to someone else, and when the price goes lower, you then actually "buy" it, and pocket the difference. Yes, this is legal, encouraged, and there's nothing immoral about it. You do this when you think an investment's price is going lower.

#4. Stock Options--Covered Calls. You buy shares of stock in increments of 100. You agree to sell these shares at a price called the "strike" if the price is above the strike on the date you choose. You are paid an amount upfront for making this agreement, called an option premium. If you have to sell the shares on that date, you make some more money. Your gain is Option Premium + Capital Gains - Commission.

I use #1, #2, and #4 regularly. I have never explicitly used #3. 

What is my preference? And what should yours be?

Ask yourself this question: For any given investment, would I like to make money in just one way, in two ways, or in three ways?

And, would you prefer a guaranteed payout on the investment, or just to hope for a payout?

Unless you're completely not following what I'm saying, you should choose the three-way option. By the way, it includes a guaranteed payout as a bonus. Why make money in only one way when you can make it in three ways, with one or two of them guaranteed?

My obvious preference is #4, because it combines the elements of #1 and #2, and adds in the additional gains encapsulated in concept #4, while also addressing the nuance of #3 (potentially lower stock prices).

Let me show you how I used this method earlier this week in three ways to lock in guaranteed gains of at least 4.3% over the next month.

What Investment Goes Up When the Stock Market Goes Down?

Understand this one thing: Not everything in the financial markets move in tandem. When one thing goes up, something else goes down, and vice-versa.

This year, the markets have been swinging wildly. At present the general market is up only about half a percent year to date, but it was down as much as 9% in February. That's a HUGE swing.

When the stock market's freaking out, there's one industry that generally does very well: gold mining. 

Gold stocks have been roaring this year, basically doing the opposite of what the broader market has. If we think the stock market's not going to do well, we can invest in gold stocks to make sure that if much of our value-based and market-correlated portfolio isn't doing so well, we can at least be making some good money somewhere.

The long-term prospects for gold mining stocks are very good. The industry is coming off of a 5-year low, and has potential to run much higher, even if in the short-term (the next month or so) it might cool off, or go slightly lower.

If you're looking to hold a company's stock longer-term (a few months to a year), but short-term you think you could see a collapse (sometimes in the next month), the best thing to do is use a covered-call option strategy.

You buy 100 shares of a company's stock, so you can collect the company's dividend, and you sell a covered call. Doing this gives you some dividend income and some premium income. Also, if the stock does happen to increase in value in the short term above a certain point instead of decline like we think, we'll also make money on capital gains. We have a guaranteed win in two ways, and possibly a third.

Three companies I like in this industry are Barrick Gold Corp (ABX), Seabridge Gold (SA), and Silver Wheaton Corp (SLW). These are three companies in the precious-metals industry with solid financials (good fundamentals) and promising technical formations (good short-term chart setups).

This week, I bought 100 shares of each company, and sold 1 call option with and April 15 expiry for each of the sets of 100 shares. 

The call options I sold obligate me to sell the shares at a price higher than I bought them for on April 15 if the market price of the shares is above the strike price I agreed to. I got paid $60, $65, and $65 respectively for each of the options on these stocks, $190, or 4.3% of the price I paid for all of these shares.

As I alluded to, if the shares I bought are above the strike price, I'll earn even more. I could earn an additional $32 in capital gains on ABX, $11 on SA, and $20 on SLW, for a potential total of $253, or 5.8% in just 26 days. That's a minimum of 61.4% annualized, 81.8% maximum. Plus, I'll get $5 in dividends on SLW.  Thank you, stock market, for the lunch money!

Departing from the Norm

The trades I made will only remain open for about 25 days. A guaranteed profit of 61.4% in such a short time is amazing. If you don't think so, just ask your bank what it will pay you in the same amount during the next 25 days.

You wealth adviser will also never give you gains like this. He probably doesn't even know how a stock option works. If you want more information on how to execute this strategy, send me an email and I'll be glad to answer any general questions you have about the process. But I can't give individualized investment advice.

In the past, I've mostly written about doing call options on value stocks like Cisco and Intel. However, since I already have some positions in those stocks, and like the setup for gold this year, I'm willing to put some money into these gold stocks as a hedge against the market experiencing a downturn this year, especially this spring.

What could cause that downturn? The biggest threat we have to the stock market is the burgeoning issues which commodities producers are experiencing in the face of low oil and other commodity prices. The bust in prices is going to wreak havoc in the coming months as we see smaller oil-related companies begin to declare bankruptcy as they're unable to service their debts owed to banks in the face of the devaluation of their assets and credit ratings.

In my opinion, this will lead to a "contagion" of sorts in junk bonds--which are bonds issued by companies with lower credit ratings. This contagion will lead to a semi-serious rout in other corporate bonds, and certainly the stock prices of these companies which have investment in or exposure to these industries. Great news, right?

Happy sailing in these crazy markets!


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