A10, Stock Trader Dude

Here’s the objective: turn a hundred thousand dollars into a million in the stock market. I’ll make a couple of unlikely set-ups here, such as the hundred thousand is sitting in a Roth IRA account – that eliminates tax issues. This hundred thousand may only reflect one part of the overall retirement monies – for example, perhaps the other money is invested in an investment grade insurance contract. That way, the person is going to have a guaranteed income for retirement even without the hundred thousand in the Roth IRA.

I’m generally not agreeable to cheap stocks, much less penny stocks as meaningful investments but here we go anyway:

Bought 22,000 shares of RBS at $4.35 (Friday’s closing price)

Risk: 20 cents per share, for stop out around $4.15; total risk is approximately $4400. The Royal Bank of Scotland isn’t being favored by investors but who’s to say things can’t change, and if the stock is high or a value?

And now here is the lottery ticket, 100,000 shares of IFLI at 1.5 cents. That’s right, a penny and a half, for an investment of $1,500. We may never see this money again, yet, if all this talk of the rise of MMA as the next big sport takes off and the IFL benefits, and if luck may have it that the share price goes up ten points we’ve got seven figures just on this position (and therefore our million dollar objective). I would not dare say that buying IFL is like buying the equivalent of an NFL in its infancy. You may recall the XFL, a professional football league in 2001 that only lasted one season. The XFL was intended to be a major professional sports league to complement the off-season of the NFL, but didn’t quickly pick up a large audience and ended after one season. The IFL lacks the same kind of organization that makes the NFL, NBA, MLB, World Wrestling Federation, etc. operate as a powerful force. The more organized you are, the greater your edge, be it, in a personal sense or a corporate one. I would never spend a dollar on a lotto ticket, but a penny and a half or two cents on a dream… well, for some this is going be like taking those annual lotto dollars and putting it to work someplace else.

*Update: RBS went up approximately fifty cents, then down, so at best it brought a small immediate profit, broke even or triggered a small loss depending on timing/exit ability. This bank was caught up in bailout activity and due to reverse stock splits the stock trades approximately from $9 to $19. The best we could have hoped for was this kind of run without a reverse-split. This part of the experiment failed.

*Update: IFLI never made any progress, it held on for a fraction of a cent and in 2010 it sought a reverse stock split of perhaps 200 shares to become one new share. Yikes! This long-shot failed.

Chapter two deals with spending and saving and like many other authors an emergency fund is recommended as the first step, but in this case, it is being called a cushion fund. Have at least three times your monthly expenses. Other tips for putting your financial life on cruise control:

First automatic savings idea: an employer retirement plan

A personal retirement plan you start yourself (IRA or Roth IRA)

Pay off your credit card debt

Reinvest all dividends

Start a college fund

Pay off your mortgage

For retirement, you must put 10 percent to 15 percent away. You must reduce and then eliminate credit card debt. You must create a cushion fund. Start with saving one month of expenses. College savings is next, but it’s just an option. It’s an error to put college ahead of retirement savings, if you can’t afford both. Kids can always get student loans, but banks don’t give retirement loans. Prepaying your mortgage is last. Most of this is fine, in principle, what’s lacking is the critical review of the excessive fees of the investment industry and that over time almost all mutual fund managers fail to exceed the S&P 500 annual returns. So, actively managed funds aren’t a great investment if you want stock market exposure, an index fund will track the S&P 500 at much less cost. Think about it, if you pay a 1 percent management fee for your mutual fund investment over the course of your lifetime you are leaving a lot of money on the table… especially given the statistical certainty that no fund has been able to outperform the S&P 500 or Dow Jones benchmark over long periods of time. It depends on the fund, be it load or no-load, and tax consequences if the fund is held outside of a retirement account but you could still have three to four percent of your assets disappear each year due to investment costs! See the book, the Great Mutual Fund Trap for detailed information on fees and professional money manager lack of performance.

Here’s a funny thing about business and how we spend our time on income producing activities. We can narrow the field and avoid a lot of nonsense by simplifying to three guidelines for making money in business:

Do what makes money now.

Do what makes money soon.

Do what makes money later.

If you are feeling financial pressure, and things are falling to pieces, the combination of these activities may lead to buffering your financial downturn. Of course, a solid savings account specifically for this purpose will bolster financial peace of mind when things aren’t so well. If you want to remain in business, you can’t ignore the logic in doing the thing that makes money first. For traders, this might be an income producing option position, or a covered call play, which can act as a breakeven if the stock declines, etc. Some positions we may build up because we feel they will be valuable later on and at some distant point we cash out with an income from it. The point is, if the bulk of your activities are not spent on income producing activities, you won’t be prepared when less favorable conditions emerge.

Truth creates money, lies destroy it. That is going to be called a law of money? Life is composed of a series of lies we tell ourselves. In my view, the truth is the truth. We keep it from ourselves. Ideas that are implemented have a chance to create money, not the truth. If we are limiting the discussion to responsibly providing for ourselves, then just like all the other gurus, it leads to a discussion on savings. Fine, so think like an investor and not like a consumer. We’ve heard the message in so many books. Living within your means is essential to reducing overall financial stress. If we are not doing that, facing the truth about going in the opposite direction is the first step to addressing the situation. The next law is not to think about where you were at one time with your investments but where you are now. This completely skips over the fundamental reason why people have invested money and lost substantially. They didn’t fully understand the game because they didn’t know all of the appropriate options to hedge their exposure. Why would you expose your entire investment to risk if it is possible to limit risk to an acceptable level and maintain the same upside? Suze Orman told the story of a guy without any stock investment experience that bought 9,000 shares of Cisco in January 2000 after he had watched it continually move up for several months because his friends had bought some many months before at a much lower price. Cisco continued to go up. The fellow had a profit on paper of $130,000 in just a few months. He bought 9,000 additional shares on margin and Cisco went up ten or eleven points from that point before working its way back down over the next few months. The guy had a chance to sell out of all or part of his position, hedge with options or a short position but he wasn’t experienced and he didn’t have anyone to guide him on all the options available to him. It’s not so much his inexperience that led to his loss but his loss of focus because he had no plan for getting out of the investment. He took out a home equity loan to go into the market and buy his original 9,000 shares. The guy needed a stop-loss order placed somewhere above his break even point in order to protect his position of 9,000 or 18,000 shares. Do you think the author has ever been up $200,000 in a few months in one stock? I don’t. Not when she says buy at least 25 stocks or go into a mutual fund. If she’s never been up that amount that quickly, she’s never played the game in the same way he has. I don’t see any story showing how she can relate to being in that position. This guy is my hero, he did the right thing in going for it but because of a fundamental downward shift in technology stocks he didn’t have much time or the clarity of mind to exit the position with a profit. He kept waiting for Cisco to go back up ten points from the last point where he bought it. The real problem was playing the game without a plan. He never would have gotten into serious financial trouble if he had put in an order ahead of time to sell in case the stock price reversed. His focus was on how much profit was on the line instead of protecting his capital. And in the investment world if you are not protecting your capital (and hopefully your potential profit), you’re just gambling.

The stock market is not a business; it’s a marketing tool to shift capital from one set of pockets to another. It provides liquidity to business owners so they can get cash for their ownership stake. The stock market is not a business to investors, or rather, to the average investor. But then again, are you average? Time and ideas may be valuable currency, but something else needs to be mixed in order to provide an income. So, while investing in the stock market probably won’t make you rich, the point is that investing in ourselves is the better choice. If all the stock market represents to an investor is an average of 10% per year, aren’t there better ways, perhaps with less risk to achieve that? I guess that’s why business operators create wealth and investors invest; it represents different lines of thinking.

Avoid placing yourself on hold. Don’t wait to live a passionate life. The timing is never perfect and if you wait to have everything lined up neatly, you just won’t get started. If you are trading, that constant hesitation, born out of fear, will mean you won’t place the trade. Fear is wrong, conduct your trading in a manner that won’t cause you to be afraid all the time; it’s a signal that you haven’t effectively limited your risk. Life is composed of sleeping, working, avoiding work, eating, intercourse, and waiting on lines/searching for a parking spot. That’s about it for most of us. The best days give us that feeling that we can do anything. And we live for that in the trading marketplace. Most people are not working on something they are committed to because they don’t have work to do that they believe in and love. Well then, are you working on something that will lead toward or prepare you for the work you were meant to be doing?