In my previous post, I discussed and linked an article about following the rich’s lead to hold cash and buy bond when rates rise.  However, I am still suspect to when rates rise given the amount of cash already held and the enormous amount printed in the last couple of years as I also mention in my previous article.

But, to continue on with the idea of holding cash, a couple of sayings have come up.  First, with the drought and wild fires in Texas, April showers bring May flowers doesn’t look so possible at this point.  Next, with May approaching, the other saying in the world of finance is sell in May and go away.

Today, I was reading another article from Seeking Alpha called “Sell in May and Go Away?  Yes“  The idea is to protect your positions, using several strategies but doesn’t mention ways to increase cash by using money sitting in money markets for example.  Sitting on cash, but waiting to buy is not a bad idea, but the returns could be enhanced by selling naked puts.

Selling naked puts are simply collecting cash for selling an option at a particular price.  If the price of the underlying asset meets the target price, you buy the stock, ETF or whatever at the strike price.  If the price does not go to the target price, a nice premium (cash) is collected for money sitting in a money account earning virtually nothing right now.  (Thanks, low interest rates.)

Whether or not to use option strategies such as selling naked puts, renting stocks (i.e. covered calls), dividend funds, or selling in May and going away, the point is having cash and creating income allows the ability to take advantage of opportunities – and that’s why following the rich is better might just allow us all to stop and smell the roses a little more often.

I like getting paid; who doesn’t. As I written and talked about time and again, I use strategies such as selling naked puts and covered calls to get cash.

I’ve also have dividend paying funds.

When looking for ways to get paid, it’s important to see the money is coming from earnings the fund is producing, or if the funds are simply a return of principal.

While looking for sources paying nice dividends, I came across the following article discussing an important ratio and thought it would be worth sharing. The article is easy to read, and the ratio is easy to understand. Take a look at the payout ratio.

Goldman’s high net worth client’s get access to Facebook shares.

In my previous post, How To Make Money Going Naked, I described selling put options. Selling put options is a very safe and conservative way to make money and potentially own a stock or fund at a specific price versus the market price.

The price of the particular exchanged traded fund I wanted to own was around $28 per share last month. However, I was willing to purchase the fund at $25 per share, so I sold a put option set to expire in January 2011 and received a premium. (As a reminder, one option contract controls 100 shares.) Therefore, the net premium I received was the dollar amount of the option x 100, for each share. The net premium was $1.38, or $138 per contract. Three contracts mean I would receive $414 cash.

For every contract (option), I had $2,500 set aside in my money market funds to purchase the appropriate number of shares in the event the option exercises in the future. If I had one contract exercised, I would pay $2,500 and receive 100 shares of XYZ. If I had three contracts, I would pay $7,500 and receive 300 shares, and so on.

Rather than wait to see if I would purchase the shares six months from now or if the contracts would expire worthless in January, meaning I would keep the premium and not own the fund, I decided to close my position. By closing my position, I simply bought the option back.

Buying the option cost a net amount of $65, but I sold the option originally for $138, which resulted in a $73 net profit per contract. Taking $73 and dividing the amount by the money set aside ($2,500), I earned 2.92% on my money in one month. Further calculating the return, 2.92% x 12 (months), my return on investment, or money sitting in a money market fund, was 35.04% annualized!

Although the return is annualized and by stopping after only one month and potentially sitting on the money for a while, the investment beats many long term CD rates.

One last note on the option strategy; selling naked puts can be done in an IRA.

Talk has surfaced again about nationalizing retirement accounts.

With the government’s out of control spending and promises for entitlements which it can’t pay, one way to borrow money is through retirement accounts.

Obama and company want government retirement accounts, formally known as IRA’s and 401k’s, to fund the pensions, etc. We already have Social Security, but that isn’t good enough and is broke too.

The way to fund their obligations is by nationalizing private citizen’s accounts and paying paltry returns on our money. One way the government borrows money is by issuing Treasuries. Would our retirement accounts, containing stocks, mutual funds, exchange traded funds, etc., be reduced to containing low yielding Treasuries?

Take a look at my previous article, “How to double your money – slowly“. Only this time substitute the word bank with government. Or better yet, you can read Chapter 44 “Failure By Design”; it’s online HERE.

While driving to work yesterday and enjoying the nice spring morning, I was channel surfing the radio and landed on NPR. The topic on the radio had commentaries about health care reform.

One of the key comments made had to do with limiting excess profits. The idea is for companies to make enough profits to pay claims, doctors, etc., but eliminate excess profits.

What a sinking feeling.

No, I’m not talking about reducing my health care cost, which would be nice (but not likely even after reform). In reality, we will pay in some shape, form or fashion for this reform – both monetarily and our in our freedoms – of choice and time for example. Instead, what I’m referring to are things like mutual funds, exchange traded funds, retirement accounts, insurance policies, etc.

That’s right, these excess profits go to shareholders, such as you and me, not just the demonized Wall Street suits we only hear about. Why invest our money if we won’t get a return on our money?

How do insurance companies pay for life insurance for example? The companies use money to make profits to pay the policies. Have you ever looked at a prospectus to see where the money goes and which companies are invested in?

Yes, Obama has made it clear he does not like profits (for everyone else in my opinion). However, he made $5.5 million last year. Obama has mentioned, there is a time for profit, but it is not now. That’s just plain wrong – there is always a time to profit. As well, he has labeled bankers as fat cats, yet has not reduced earmarks for pork projects.

Barney Frank made comments about eliminating profits going to shareholders as well.

The ironic thing about socialism and capitalism is that the Socialist are Capitalist themselves.

The elites, who put their pants on one leg at a time just like the average Joe, are really capitalizing by taking from everyone else. Therefore, capitalism works, socialism doesn’t. And why should one man or a small group of people determine what everyone else makes – or limit individual potential?

To finish, I saw a bumper sticker that read “I’ll keep my guns, money and freedom…You keep the change”. When all of the new changes that have been occurring over the last year and in the years to come, I hope we are not simply left with pocket change.

In my previous post, Top 10 Reasons ETF and not mutual funds, I mentioned why I do not like mutual funds, such as:

1.  Transparency of the portfolio – what companies are in the fund on a daily basis

2.  Liquidity – meaning I can sell an ETF during the day just like a stock

3.  Fees and taxes are high on mutual funds

4.  No options – selling covered calls or naked puts is how I generate additional income, which mutual funds do not have.

Exchange Traded Funds are similar to mutual funds because you can get a pool of companies in the fund.

Today, I found a great article, “The Death of Mutual Funds”.  It’s a little long (15 pages), but worth reading and sharing especially if you are the type of person to take control of your finances instead of “just being told what to do”.

Death_of_Mutual_Funds

I was asked if I understood beta when dealing with stocks. My answer was pretty simple.

To begin, I really do not care about the complex calculations in determining the beta value, I’m more interested in what beta means. Understanding beta is easy and important.

What makes beta something worth noting is beta has to do with profits and losses. When looking stocks, beta gives an idea about how the particular equity moves in relation to the overall market.

If beta is greater than 1.0, the stock will move either positive or negative at a larger rate. If beta is 1.0, the stock will move proportionally. And, if beta is less than 1.0, the stock will move at slower rate.

To put beta in perspective, if beta on a stock is 1.16 and the stock market moves 3%, the stock should move 3.48% (3 x 1.16), or 16% more. If beta is 2.0 on a stock is 2.0 and the market moves 3%, the stock should move 6%, and so on.

Beta gives a bit of information about the volatility, or risk, of a stock and can be used with other factors in determining whether or not to purchase the equity.

One last note on beta; the previous examples have to do with stocks. Beta on options is different. (More on that later.)

The reason I like exchange traded funds vs. mutual funds is the first reason on the list.

The other reason I ETFs is because some Exchange Traded Funds have options, and I like options – getting paid is fun!

I’ve mentioned how I generate additional income, which you can do with ETF and not mutual funds, in How To Make Money Renting – Stocks and How To Make Money Going Naked.

I was looking at reasons for having Exchange Traded Funds, so I thought I would put the list on my website.

Why ETF’s?

1. Instant Diversification -The purchase of a single ETF gives investors exposure to a basket of stocks creating diversification and eliminating company-specific risk (similar to mutual funds).
2. Tax EfficiencyDue to low turnover, most ETF’s do not have large capital gains that need to be paid out to investors which result in phantom income. Mutual funds on the other hand are known for paying out year-end capital gains even if the mutual fund has lost value.
3. Intraday Pricing – An ETF can be bought and sold throughout the regular trading session in the same manner as a stock. A mutual fund can only be bought or sold at the Net Asset Value, which is computed at the end of the trading session.
4. Low Expense Ratios – The annual expense ratio of ETF’s is lower than that of mutual funds. For example the Vanguard Emerging Markets ETF (VWO) has a low annual expense ratio of 0.3%. The category average for an emerging markets mutual fund is 1.83%. Over time this will eat into your profits.
5. Low Fees – The cost of buying and selling an ETF is the same as an individual stock. Some mutual funds charge loads that can be as high as 5% of the initial investment.
6. Passive Investment Vehicles – ETF’s are passive investments that track a set index and the composition is only changed a couple times per year. Most mutual funds are actively managed and therefore trades are taking place daily. The chance of your mutual fund outperforming the market by trading is approximately 20%.
7. Ability to short and buy on margin – Traders that would like to bet against a specific ETF moving higher can short sell the ETF. Investors also have the ability to leverage their account with margin when buying ETF’s.
8. Convenience – ETF’s can be purchased the same way as a stock through an online brokerage firm. When it is time to sell it can also be done online with the mere cost of making a stock transaction.
9. Exposure to niche sectors – A new advantage of ETF’s is exposure to niche areas in the market that mutual funds do not offer. For example, there is a water infrastructure ETF, an ETF that concentrates solely on Singapore, or an ETF that moves with the price of natural gas futures.
10. Transparency – Nearly all ETF’s track an index that is reallocated wither every quarter or twice per year. Therefore, on any given day you can determine what stocks make up your ETF’s.

To summarize, an ETF acts much like a mutual fund, only with more advantages. Easy to buy and sell – especially during the day, when I want it purchased and sold, and I don’t have to wait while games are being played with my money. I know what companies, for example, make up the fund daily. Options – I can write covered calls or naked puts and generate extra income.

(If you want to read more about them, check out the company Penn Financial Group. I don’t get paid, receive compensation or anything from PFG. I just saw their list and thought it was worth sharing.)

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I remember reading an article once basically stating the buy and hold strategy is a thing of the past.  That may very well be true…especially today.  Look what happened to GM and the shareholders after years and decades of ownership.

I remember that I had written about “Investing In Speculation” a couple of years ago, so I dug out my notes and this is what I found:

Here’s a question to consider.

Do you really invest in a company when you buy the stock on the stock exchange? No. You invest in the speculation of the stock’s price (excluding dividend investments). Yes you have invested your money, but the company you purchased had original investors for start up, etc.

When the early owners needed more money for growth and expansion, they issued stock such as an “IPO”, or initial public offering. Unless you or me purchased stock here, we simply bought out someone else that had already invested in the company.  But, probably the additional investors were the investment banks such as JP Morgan, not you or me. The investment banks simply sold the shares they bought to us as an IPO to the public.

For example, Investment Bank ABC purchased stock in Company XYZ. Then the stock brokers sold the shares to Joe Blow as either an IPO or later when the demand for the company pushed the value of the stock higher. If we didn’t get in here, we simply are buying out other shareholders.

The original owners made money when they sold shares to the investment houses or went public. The original owners may have kept control of the company and/or got a bigger salary for running a larger company.

What new buyers of the stock got is a small dividend depending on profits. But that’s okay, the dividend is what was wanted in addition to price appreciation (which is speculation because the principle amount of money invested is not guaranteed.  The value can go down big time!).

The difference between investing and speculating has to do with protecting the principal amount of money.  The short version is, investing maintains the amount of money spent; whereas, speculation doesn’t have guarantees and the value can decline or potentially lose great amounts of money if not all.

If the company doesn’t perform well, and the demand goes down, so does the share value and the invested amount of money. The company still continues, excluding bankruptcy and closing the doors.

So technically people do own part of the company, but unless it is a huge amount, most shareholders cannot control operations, salaries, board positions, etc.  In simple terms, people buy out other shareholders and invested in speculation.

So why would you or I want to buy and hold a company knowing you have no control over it or the price of the stock?

Income. We can generate income from selling options, which is similar to renting the stock.

Dividend income. If we use the cash that is produced from selling options and dividends, we have the opportunity to buy more shares or reinvest, or build cash.

This can give “growth” to our accounts even if the stock price goes down simply because the costs have been reduced by building cash and/or acquiring more shares; thus allowing the potential to sell more options and receive more dividends and grow the account.

Finally, if the shares are never sold, such as a buy and hold, without income from the sources just mentioned, is there really a gain?  Sure, on paper, but not in the checking account.