By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2017
April 29, 2017
April 23, 2017 - Since 2009, the collapsed stock market as measured by the DOW JONES Industrials went as low as a little over 5,000. Now the DOW JONES Industrials, 8 years later, is standing at 21,000. Some “professional” financial advisors have been bearish since the DJI rose to 10,000. They have cost their clients billions of dollars. Hopefully, none of my readers were caught in that web. Then there were the “gold experts” who said the metal was going to $5,000 an ounce and oil was going to $150 a barrel. Well, gold is currently $1,275 an ounce and oil is roughly $50 a barrel. I sold my gold holdings at prices ranging from $1,000 to $2,000, with the bulk going out at $1,750. However, I overstayed my oil holdings and continue to be long. The barrel of oil went down from $105 and is now up from $26. It is currently around $50 a barrel.
The point that I am making is that you don’t need to listen to experts. You need to be brave enough to just do it on your own. There are a number of ETF (Exchange Traded Funds) that can be used to represent your thoughts and goals. I keep emphasizing that you must establish a financial goal. Otherwise, you have no idea when you have succeeded or failed. As a teenager, my goal was to create an income in retirement of $100 a week. My answer was to join the army and retire in 20 years and then get another job. When I was in the army, my new goal was to be a millionaire. At 5%, a million dollars would provide me with an income of $50,000 a year, $1,000 a week, a fortune to me at that time. Once I obtained that goal, I raised my aim to $5,000,000. The challenge would be to get a safe 5% and still leave room for growth. At 3%, the $5,000,000 would bring me in $150,000 a year, $3,000 a week. There came a time when the family finally got into the 8 figure class. Then came 2008-2009.
What kept me alive was the fact that I had reached my income goal and by understanding that, was able to keep my sanity and look for opportunities. I continued to buy stocks but I must say, it was hard. GE reduced its dividend, as did Pfizer (PFE). Both of those companies were Aristocrat stocks, meaning the companies had raised their dividend every year for at least 25 years. It just so happens that once the financial crises passed, both of those companies have continued to raise their dividend. Many of the bank stocks got crushed too. I just read an article by Dan Keegan (optionthinker.com) in the May 2017 issue of Modern Trader that Citi traded at $55.70 on Sept. 30, 2006. The stock then traded as low as $2.53 in 2009. Today, the stock trades at $57.75. Did it recover? No! There was a 1 for 10 reverse split on May 9, 2011. That means the current $55.70 stock is worth $5.57. The point, look into the history of the stock before buying it. If you are a bit lazy like me, you can get the benefit of others by researching and buying ETFs. My favorite family of ETFs is managed by Wisdom Tree. They have a lot of highly regarded ETFs that scored well with Morningstar. Also, I can buy shares in their ETFs with no commission. Of course you should set it up as a DRIP as it will help you to accumulate more shares thereby making your financial goal more feasible.
It would be reasonable to expect a decline in the market of say 10%. Hence, I have buy orders placed as GTC (Good Till Cancelled). These orders are good for 90 days. My buy price is adjusted downward if the stock goes ex-dividend during the time the order is open. One of the ETFs that I like is DGRS Wisdom Tree U.S. SmallCap Quality Dividend Growth Fund. The 12-month high is $35.07. So, I keep my buy order at $33.31, which is 5% below the high price. Alas, there are no options to sell. As I make profits in the stock market, I tend to increase the number of shares I want to buy in DGRS. Actually, there are several ETFs that I keep so that I have a guaranteed source of income allowing me to spend freely on others interests I have such as ocean and river cruising as well as land tours.
I know how hard it is to stay patient with your GTC buy orders. If the order expires, it gives you time to get a fresh look and decide your move. Sometimes I move up my buy order and even increase the number of share I intend to buy at that price. Most of the time, I am selling put options at the prices I really want to buy the stock at and so my cash is taking in some extra money above the interest rate that the brokerage firm pays. Conversely, when a stock price passes my strike price on a call I sold, I just let it go. And I may write a put to recover the shares or just look for something else.
Remember the idea of making money in the stock market is so that you have money to spend, some now and some for later in life.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.