- Proven strategy - think Warren Buffet
- Lower trading costs or brokerage fees
- Dividends
- Pick great companies
- Ability to ride the up and down price wave
- Very long term perspective - not affected by short term price swings financially
So, I had to devise a strategy that works with my limitations. In this post I went in more details of various ways I could invest into companies. In my experience a short term trading strategy makes lot more sense.
If I do become convinced that a company is a good long term holding prospect then absolutely I am more than willing to buy and hold either LEAPS or the stocks outright. In fact I did buy LEAPS on Nokia Corporation (NOK) last month.
Another reason is flexibility and versatility of using Stock Options compared to stocks. Options offer me many more choices that can be used in a down market while owning stocks works only in rising market conditions. More on this topic in another post.
I would love to hear your trading strategies.
3 comments:
The crux of the problem is your outlandish goals for returns. 26% returns per annum, compounded over 10 years.
It is possible to get this, but not without a lot of luck. Since you'd have to be lucky, the more you trade, the less likely you are to make your goal, because more rolls of the dice will have to come out in your favor.
So, if you agree that you're just trying to get lucky, probablity theory tells us it's easier to win big by betting big once, rather than with lots of small bets.
So your best chance of acheiving your goal is to make one incrediby risky bet that has the potential to pay off ten times within ten years. For that, you should probably buy LEAPS in a single company with all your capital.
Clearly, there is a high chance (well over 50%) you'll lose all your money by doing this, but it is the way that gives you the highest probability of a 10x return within 10 years.
For example, if you now buy GE Jan 09 $45 LEAPS for $1 (so you could buy 1000 contracts for $100,000 (this is not actually possible to do, because you would move the price of GE LEAPs if you tried... you'd have to do a more complex purchase of all sorts of GE LEAPs with differnet maturities and execution prices, but the same principle would hold), and GE goes to $55 in the next 2 years (unlikely, but not out of the question... I'd give it a 1/20 chance), you would have accomplished your goal in 2 years.... you'd "just" have a 95% chance of losing everything.
How does skill play into this? Picking the right stock that actually has a higher chance of going up (or down, for puts) than the market is currently predicting.
I focus all my attention on choosing quality companies to invest in.
It's possible to earn 27% returns annually, if you commit yourself to limited trading and only investing in companies that surpass your standards.
By setting high standards, you'll force yourself to learn more about your investments, thus reducing risk.
Tom - had to think a bit about your comment before replying. First of all thanks. Appreciate the insight.
I think you are pointing towards to the heart of why this blog. Yes the prevailing wisdom says that what i am trying to do can't be done. This is THE reason why I am trying to do it.
One of the take away from your comment I am taking is that a larger share of call options could be helpful.
Once again thanks for the note.
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