Note: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “Two Investing Strategies That Could Make You Enormous Returns” serves as educational content, not investing advice.
Today we have Wade from Better Options Investing collaborating with us to explain briefly what options investing is. Wade operates his own website dedicate to investing and may offer classes soon. Be sure to check out his website for more information relating to investing through his blog.
I’ll allow him to discuss more about this type of investing below:
What if you can see how value investing can help you, but you feel like buying and holding onto stocks long term is boring or too slow for your goals?
What if you could take this powerful strategy and safely make even more money?
Stock options can be used in many ways, and one of the best ways is along with buy and hold or value investing.
If you do your research to start value investing, and buy shares of a company that you want to hold onto and watch grow long term, you can use stock options to make more money while you wait.
You can boost your short term gains by selling calls on this stock. This would be called selling “covered calls”.
This is called selling a “covered” call because you are selling a call against stock that you own.
When you sell a call, you are getting paid to agree to sell shares of stock, up to a certain date, at a certain price.
Think of it like an insurance policy which you are selling.
You would sell these covered calls at prices higher than the current stock price (prices that you do not think the stock will reach by the agreed on date).
If the stock does not go higher than the price you agreed on by that date, then you make extra money while holding onto your stock.
This is a slightly simplified explanation, but you can see how using value investing along with just this one form of stock options can greatly increase how much money you are making from your investments, both short term and long term.
Value investing is a popular investment style among those looking to purchase great companies when they are cheap. It would fit the traditional definition of “buying low and selling high.”
Yet when this is very exciting, it isn’t necessarily all fun and games. It’s never easy to find these companies on the down low and may take a significant amount of time until someone finds just one company that fits their requirements.
Being ideal for those who have patience and are willing to wait for the long-term can undoubtedly provide excellent returns to those who follow a guideline.
The father of value investing, Benjamin Graham, has a prevalent value investing book called The Intelligent Investor: The Definitive Book of Value Investing. I have had the privilege of reading this book recently and can say that it’s a must-read for anyone looking to pursue the value investing style of investing.
Here are some of the things I’ve learned and takeaways from the book:
Criteria for Selecting Stocks:
Of course, one can try to pick stocks based on intuition alone and not look at many performance measures or very few. I am not aware of how well that may work out for these individuals. But rest assured, we don’t need to look for some of the criteria we should have in mind for finding these stocks.
Benjamin Graham has laid out some of his own:
Adequate size of the company
He states that a company should not have less than $100 million in sales and not less than $50 million in total assets. It seems that he favoured investing in companies that have had some success or growth in terms of these assets and sales. Not to say one couldn’t find companies that don’t nearly have as much in sales and assets, but simply, there would be more risk the stock falls to $0.
A Sufficiently Strong Financial Condition
If one is going to invest in a company, they simply do not want to invest in a sinking ship. Therefore, it is very vital to review the financial statements of each company. It is also recommended that the company has a 2 to 1 current ratio, a sign that it can pay off its current obligations if needed.
According to the book itself, a company must earn some earnings over the past 10 years. But then again, why would anyone want to invest in a company that has consistently been reporting losses year after year? More losses could potentially lead to more debt needed because of negative cash flows, and that all could signal disaster. Therefore, review a company’s earnings for the past 10 years to view how consistent earnings have been.
Who doesn’t love a nice dividend payment? You’re being rewarded for holding stock! But, with that said, the book recommends the company have uninterrupted dividend payments for the past 20 years.
The minimum increase of at least 1/3 in per-share earnings in the last ten years uses three-year averages at the beginning and end. A growing company signals a better potential for an increased share price and, more importantly, a chance to continue to operate going forward. Plus, more earnings could mean more dividend payments!
Moderate P/E Ratio:
In the book, it’s been recommended that you should invest in a company that has no more than 15 times the average earnings of the past three years. Yet, in some of the commentary, it’s been recommended this 15 be changed to 25 times.
A P/E ratio is the share price divided by earnings per share for those who don’t know. It’s meant to represent how willing investors are to pay for a company’s profits.
Now, are there more criteria that should be followed? I would argue yes, but these listed above are just some of the general criteria laid out. It should also be noted that there may be very few stocks that meet all of these criteria themselves. Hence why it’s essential to use this criterion as a guide and one’s own judgment.
That is the most critical factor amongst value investing, I may argue. That your judgment really matters. Even if a public company has met all of the criteria listed above, is there any potential to be hiding something within the balance sheets? Is their management competent enough to operate the business? How likely are they to cover their interest expenses on the debt they borrow?
These are all valid questions that should be answered. So indeed, I would recommend reading more than just this blog post. Preview the Intelligent Investor and other investing or value investing books in learning more about the subject itself.
And just remember, I’m not a financial advisor. You should consult a financial advisor and/or tax advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only.