What to do with big WDDG winners now... Something different... $25,000/month in options trades... Doc's gig at Goldman... Most people will never even try this (but they should)... Our No. 1 goal at S&A...
If you've been following what I (Dan Ferris) have been saying about the world's best businesses, you've made a ton of money in the past year.
It's OK to be happy about that, but it's probably not a good idea to chase the momentum in those stocks. For long-term investors, buying more because you feel good about upward price momentum is a bad idea. It raises your average cost... and that lowers your return.
Consider a small business that makes $100,000 a year in net profit. Suppose you buy the business for $1 million, or 10 times earnings. Every year, you take $100,000 in net profit out of the business. So you're earning a 10% yield on your original investment. It would only take you 10 years to recoup your initial investment. Now suppose you paid $2 million for the same business. You'd only earn a 5% yield. And it would take you 20 years to get your initial money back out of it.
I'm not saying it'll take 20 years to get your money back out of World Dominators at these levels. But the earnings yield is certainly lower.
World Dominating Dividend Growers (WDDG) in The 12% Letter have produced an average total return of almost 18% over the last 12 months... compared to just 5% for the S&P 500. Altria Group has returned about 43%. Wal-Mart has returned about 42%. Abbott Labs has returned 34%. A handful of other WDDGs are up 9%-17%.
It feels good to make money. Unfortunately, that feeling can be the start of real trouble. People tend to want to buy and buy when they feel that good. But that's not the right thing to do. As we saw with our ultra-simple business ownership scenario above, paying higher prices lowers your return.
The thing to do with WDDG stocks that have risen sharply over the past year is the same thing you should do with most good investments most of the time: not a darn thing. Just let them sit there and compound. If you own great stocks, you own pieces of great businesses. Just because everybody else suddenly sees 40% more value in the business you own than they did a year ago is no reason to buy it or sell it. You don't own it because of what somebody else thinks of it. You own it because of what you think of it.
We normally save reader feedback for the end of the Digest... But today, we're doing something a bit different. What you're about to read – a personal e-mail from one of our subscribers – could change your life... At the very least, it will help you make more money in the markets every month.
For years, we've urged readers to get out of their comfort zones when it comes to the markets... to learn new strategies like selling stocks short, selling puts, or buying discounted corporate bonds. We know most of you will never do anything but buy equities. And it's a shame...
Don't get me wrong, you can make lots of money only buying equities. (Just look at the long-term track record of Extreme Value and The 12% Letter for proof.) After all, we've built a large, respected business recommending equities.
But if you're not open to trying other strategies, you're missing out on some of the easiest ways to make safe, consistent money in the market every month.
Before I go on, please read this e-mail from our subscriber Rick (emphasis added is our own):
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Let me start by saying that I've considered myself a very experienced "trader" of options. I have traded the OEX naked put/calls for several years, and have basically done nothing more than lose money, always trying to get it back. |
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I've studied options trading, subscribed to several trading platforms... and continued to lose money. I was lucky enough to subscribe to Stansberry in 2008... but had already lost a great deal of money and was afraid to follow his advice, instead, thinking I knew best about my own trading skills... and continued to lose money... but less now. |
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The continued solicitations of the various newsletters from Stansberry Publications was annoying, but one day I decided to pay more attention to Doc Eifrig's solicitations for his options business. The newsletter was expensive, but after losing more money, I decided to jump in and listen to a guy who once traded for Government Sachs, figuring he must know how to beat the system. |
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Having years of experience in options... I had a good scope of the arena, but upon studying and following his trades... it just clicked. You see, I am in the insurance business... and I am very successful at what I do... I sell protection... but technically I sell insurance. The insurance companies I sell for collect the premiums and they pay out about 3% in claims for the lives they insure. What an amazing business. Tie that to options, and I was always on the wrong side of the trade... buying options is for the gamblers… but selling options is nothing more than being the insurance company and collecting the premiums. |
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My trading today is built almost entirely of selling puts and calls on a daily basis, combing the 6 different Stansberry newsletters that I subscribe to in search of stocks to option. My previous experience prepared me for what I am doing today... taking the new knowledge and exploiting the arena to my very profitable trading. |
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I've gone from losing money to making $25,000 a month in net earning... and growing, and I've done this safely without overextending myself, taking very little risk in my opinion. I don't however take possession of any stock, rather I buy to close the day before expiration. |
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I have no desire to own stocks anymore, and I am so delighted to have learned from your newsletter, it has truly changed my life! – Paid-up subscriber Rick F. |
Rick is talking about Dr. David Eifrig's Retirement Trader advisory service. We write about Dr. Eifrig, or "Doc" as we call him around the office, a lot in these pages. He's probably made readers more money than any other editor in the past two years. But in case you don't know Doc, here's a quick refresher...
In the late 1980s and early '90s, Doc worked on several of the top trading desks on Wall Street – Goldman Sachs, Chase, and Yamaichi (Japan's version of Goldman). He learned the trading strategies used by the best traders in the world... These banks make tens of billions of dollars in trading profits and can go entire quarters without a single losing trading day.
But Doc grew tired of Wall Street's cutthroat capitalist culture. And he left to become a medical doctor. He took Wall Street's trading secrets with him... and used them to amass a personal fortune.
Through a chance meeting with Porter, Doc came to work for us at Stansberry Research. And when he told us about his trading style, we knew it would help our readers... In particular, Doc described a strategy that was perfect for retired people who need income. This strategy produces small gains quickly and safely.
In Retirement Trader, Doc sells put options. Don't let the word "options" scare you away. This strategy is simple and easy to learn. And we strongly believe it could be the most profitable trading strategy you'll ever try.
In his two years writing Retirement Trader, Doc has recommended 68 winning trades in a row... His track record is unparalleled. Even Porter was blown away by Doc's performance. In his annual report card, where he awarded Retirement Trader an "A++," the highest grade he's ever given, Porter wrote:
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[Retirement Trader] has established what I believe is the best trading track record in the history of the newsletter industry. |
We often write that once you try selling puts, you won't buy stocks again. Before you dismiss this as hyperbole, you must try one trade with Doc...
The beauty of selling puts is that you can collect a large sum of money in a short period of time. And the stock doesn't even have to move for you to make money. We'll take a look at one of Doc's recent trades as an example. But first, what's a put option?
A put option is an option that rises in value as the underlying asset, a stock, falls in price – it's a bearish bet. When you buy a put option, you pay a small premium for the right to sell a stock at a certain price (the "strike price") at a certain date in the future (the "expiration date").
When you sell a put, you're betting a stock will either 1) go up in value or 2) not fall below a certain price (the strike price). And instead of paying the premium, that premium is immediately credited to your account.
With that basic understanding, we'll discuss one of Doc's trades...
On December 22, 2011, Doc told his readers to sell the United Technologies February $72.50 puts. The stock had closed at $72.74 the previous day.
When his readers sold those puts, they sold someone the right to "put" them, or sell them, United Technologies at $72.50 a share any time before option expiration day in February. For that privilege, Doc's readers collected $280 per contract they sold (each contract puts you on the hook for 100 shares).
So as long as United Technologies' stock was trading above $72.50 on option expiration day in February, the options were going to expire worthless. And Doc's readers were going to keep the whole premium.
When the options expired on February 17, United Technologies was trading at $83.25. So the options expired worthless... And Retirement Trader readers made $280 per option contract they sold.
In less than two months, Doc's subscribers made nearly a 20% return on margin. (Margin is simply the money you must set aside to execute these trades.) That's an annualized gain of 123.7%. That's the thing about selling puts... You continuously collect small premiums, doing only the safest trades. And over time, the earnings become significant.
I (Sean Goldsmith) personally sell puts in my brokerage accounts (as do many of S&A's top executives). And I've been generating thousands of dollars every month. It's the best, most consistently profitable strategy I've ever used.
I also know several subscribers who have generated hundreds of thousands of dollars – subscriber Rick F. included – using this strategy.
Most people will never try this strategy. Trading options is simply too foreign a concept. It's unfortunate because learning to sell puts will likely be the most profitable strategy you discover in the financial markets. Even if you don't consider yourself a trader, you should try a subscription to Doc Eifrig's Retirement Trader. Considering today's 0% interest rates, his income-generating trading is more important than ever.
And for those who do decide to try selling puts, Doc Eifrig has prepared a series of instructional videos to walk you through exactly how these transactions work.
Retirement Trader is one of the most expensive services we sell... It normally costs $4,000 a year. But our goal at S&A is to educate our readers and make them more profitable traders and investors. And Doc's strategy is too important to keep from you.
That's why, until midnight tonight, you can try Retirement Trader for just $99. Again, it normally costs $4,000 a year. Try it for 30 days. Go through Doc's huge educational archive of reports and videos. And make sure to review the videos. You'll find incredible value in them. Allow Dr. Eifrig to personally walk you through the basics of selling puts. You'll find it's one of the safest, most profitable transactions in the world. You'll learn why many professional traders exclusively sell puts in their own accounts. If you don't like the idea, go ahead and cancel.
But I assure you, once you execute your first few trades with Doc – and when you start seeing hundreds of dollars appear in your brokerage account – you'll be hooked, just like I was. Again, this strategy is so safe, and it's probability of success is so high, Doc has closed 68 series of trades out of 68 for winners. That's why it's an ideal retirement income generator. Click here to learn how to get started...
Editor's note: In yesterday's Digest, we mistakenly wrote the price of bonds has gone down for 30 years. The price of bonds has gone up for 30 years – yields have gone down. We also wrote companies are substituting coal for natural gas due to the latter's low price. They are using natural gas in lieu of coal.
New 52-week highs (as of 7/18/12): iShares Nasdaq Biotechnology Fund (IBB), ProShares Ultra Health Care Fund (RXL), Utilities Select Sector SPDR Fund (XLU), Constellation Brands (STZ), Johnson & Johnson (JNJ), Eli Lilly (LLY), Monsanto (MON), Integrys Energy Group (TEG), Enterprise Products Partners (EPD), 1st United Bancorp (FUBC), CVS Caremark (CVS), and Altria Group (MO).
In today's mailbag, a question about dividends answered by our dividend expert, Dan Ferris. Send your questions to feedback@stansberryresearch.com.
"Can you explain why it is more important that a company should grow its dividend than that a company should pay a higher dividend in the first place?" – Paid-up subscriber Philip Hallett
Ferris comment: Investors today are obsessed with high current yield. But current yield is practically meaningless... unless you're desperate, in which case you shouldn't be anywhere near the stock market. The stock market is not for the needy and desperate. It's for the prudent and patient.
What counts most in investing success is finding wonderful businesses that can compound your money over the long term. These businesses pay small yields – because they're so high-quality, investors won't let their yields get too large. They'll simply pay a higher price for shares, driving the yield back down.
But if these dividends are growing, they can raise your income at inflation-beating rates year after year, for decades on end. That's all you need. If you invest in a strong, stable company that has a consistently growing dividend, your income will increase every year. Keeping your money safe and beating inflation are your primary jobs as an investor.
Perhaps the very best way to do that is by owning the world's greatest businesses, which I've dubbed the "World Dominating Dividend Growers." These companies grow their dividends relentlessly, year after year, for decades on end, and usually at inflation-beating rates. You can't ask for more than that.
(As an aside, the newest issue of The 12% Letter is due out today after market close. In it, I detail the three WDDG stocks currently trading under my "buy up to" price. Click here to learn how to gain immediate access to The 12% Letter and this brand-new issue.)
Regards,
Sean Goldsmith and Dan Ferris
New York, New York and Medford, Oregon
July 19, 2012