We are working to double our money. In the time we have to do it.
In my efforts to double my money as many times as possible, in the time that I have to do it, I tend to focus more on singles and doubles rather than home runs. Follow me here.
I am the batter — picking out the pitch that I want and taking a swing. And the pitcher, well, is the entire universe of investment options along with all potential market forces. I’m a pretty darned good batter, but even the best don’t get a hit every time.
When I played baseball however, and as I coach my boys now, the most likely scenario to win at the game is to take the pressure solely off the batter, and share the work with the base runners. Good base running and an occasional steal will attribute significantly to a win — along with the occasional error — and the only way to take advantage of these attributes for winning is to get batters on base.
Statistically speaking, a batter that slows down and focuses on accuracy in making a solid connection between bat and ball has more likelihood to get on base — though it may reduce his chances at that elusive home run. So we’re foregoing the proverbial “swinging for the fences,” and rather we are batting for singles and doubles here.
The way I think about incremental income and gains, what I call those singles and doubles, likely makes my thinking and strategy different than other portfolio managers. While they are focused on capital appreciation, with some help from dividends, I focus on additional ways to make incremental income and predictable investment gains by selling calls against my holdings and selling puts on positions I want to own at the right price. The more sources for incremental income in my book, the better.
Want to join my community of investors working to double their money as many times as possible, in the time they have to do it? Check it out here.
Now let’s take a look at the most basic differences between target returns for a traditional portfolio, like, your mutual fund portfolio or your 401k portfolio. And let’s compare it to what we are doing in the Pearly Pig’s investment community.
Traditional Portfolio Management Target Return Example
Annual Capital Appreciation 8.00%
Target Annual Dividend 2.00%
Target Annual Total Return 10.00%
My Portfolio Management Target Returns (ACTUAL)
Annual Capital Appreciation 8.00%
Target Annual Dividend 1.50%
Target Annual Covered Call Premium 18.00%
Target Put Sale Premium 1.00%
Target Annual Total Return 28.50%
In my strategy, I am not providing alpha by assuming I can hit better than the market or other portfolio managers, though I guess I think that I do. Let me explain this further.
Want to dig in a little deeper?
Sweet!
(If not, I’d love to see you take advantage of our two week trail and join the Pearly Pig investment community at Seeking Alpha!)
Let’s get our hands dirty.
As seen in my analysis of Yahoo over the past few weeks (NASDAQ:YHOO), I love event-driven scenarios that provide inconsistencies between what the stock is experiencing now and what we are convicted to be true in the future. To clarify, this can be said, to some degree, about traditional fundamental analysis of a stock and is the foundation to value investing. But this takes it up a notch, or three, and adds further predictability to where the stock is likely to go.
In Yahoo’s example, today becoming Altaba (AABA), we can see that the discount to the share price from net asset value is steeper than the worse case scenario for its deferred tax liability on its underlying assets. Before Monday, there was also likely some discount to YHOO providing any risk remaining to the Verizon (NYSE:VZ) deal and then, to the company’s conversion to a closed-ended investment fund (AABA) on Monday. As this execution risk fades, the market corrects and more accurately values the stock.
Yahoo still trades at a significant discount to the sum of its parts, and risk to owning it/AABA is in the performance of it’s underlying assets (NYSE:BABA) (OTCPK:YAHOY) and how long the market will take to normalize, given it’s deferred tax liability (6 months? 12 months? longer?).
If my annual capital appreciation target is 8.00%, Altaba (formerly Yahoo) is a perfect candidate to own in this portfolio. It provides me some level of comfort that their is a systematic and predictable way that this stock can achieve this goal.
It doesn’t meet my annual dividend rate target, but I believe it will outperform my annual capital appreciation target as well as beat my targets for selling call options against my long holding and selling put options to increase my position.
Back to Earth, Ryan.
If you’re still with me, I want to discuss a few more attributes to this portfolio strategy that make sense to me, and is the reason I’ve been deploying this strategy for nearly twenty years.
But if you’re ready to join and wade into the shallow waters, we’d love to have you. If you’re ready to jump into the deep end, then we’re ready for you. But if you’d feel more comfortable with strapping on some water wings, then well, I’m dedicated to your personal success at growing wealth. It’s why I built the Pearly Pig. Give us a shot today.
Though there are more nuances to this strategy than will be outlined here, along with the goal of adding incremental income to my portfolio to boost performance of the portfolio, the basic principal to hedging is at the foundation of this strategy also.
The success of my efforts to add income to my portfolio through the premium on the sale of calls and puts is not contingent on positive price appreciation to the underlying stocks, and in fact almost always increases in downward markets, due to increased volatility.
As outlined in my table above, 20.5% of the value of my portfolio is my target for dividends + call option premiums + put option premiums. This boosts my portfolio and stacks the odds in my favor in my goal of doubling my money. But this also provides a significant hedge to downside risk of owning stocks.
For the 91 years ended December 31, 2016, as reported by ICMARC, 24 years were negative while 67 were positive. Lets dig into this a bit further.
Of the negative years, 13 years were -10% to 0%, and 5 years were -20% to -10%, making up 79% of all down markets, leaving only 6 years out of the last 91 years that were down worse than -20%. Since my target income producing goal is 20.5%, reaching my goal would leave me with only 6 negative years in the past 91.
This takes a little work. But it gets the job done. And when it comes to growing your wealth — is it more important to just hand your money over to someone hoping that everything will work out all right? Or is it more important to invest in yourself and join a community of like-minded investors working to double, double, and then double again?
“Convince Me, Ryan.”
I’ll do my best.
Let’s say you have a modest starting point of $10,000 to invest. From your checking account. An old 401k you can rollover. Because you are simply going to decide to save it and get there as soon as possible.
What if we can average 15%, 20% or even 25%/year? If you haven’t already learned it, let’s learn a very simple lesson right now.
The Rule of 72 simply allows you to take your projected growth rate (or interest rate or dividend rate or any other rate you want to calculate), divide into the number 72, and the result is how many times it will take your money to double.
Read this again. The Rule of 72 allows us to project how many times we can double our money if we have an idea of what type of investment returns we may experience. PREDICTABILITY. See why I love singles and doubles? Because now I can make some projections. And plan for my family. And my retirement. And traveling the world. And an RV.
What are YOUR dreams???
If I can grow my money at 18%/year — which is well under my portfolio target return goals, I can double my money every 4 years.
72/18% = 4.
Now. Let’s see just how powerful that is. I’m 42 years old, and I have a bunch of friends that, to my dismay, haven’t started investing yet or are still waiting for the right “time” to take it upon themselves to start growing their wealth. Makes my heart hurt. But it’s the reality in America.
So here’s my lesson for anyone that things its too late to start or continues to put off doing something about it because you don’t know where to start.
START TODAY.
If you have $10,000, or $20,000, or $50,000; it doesn’t matter — just get going. Don’t have $10,000 yet? No problem. Just figure out how to get there.
Am I selling anything here? Yes and no. I’m not an advisor (any more), and I’m not suggesting you invest your money in any one place. Granted, if you want to use the same platform I do, hit me up. I’ll get a reward and so you will.
I AM selling you on getting started. That’s it. And it really is that simple.
What’s the best way to get started? By choosing education and accountability. Join the Pearly Pig community at Seeking Alpha.
Now for the punchline.
What are your goals (maybe start with your primary goal — likely retirement), and how many years do you have to reach your goal?
For me, I am 42 and I want to “retire” at the age social security kicks in (whether it’s still around or not). So I guess that’s age 67. I have 25 years to save for retirement.
Let’s say I was like most of America and hardly had anything in savings, or had just a start to my 401k. But I manage to scrape up $10,000 so I:
- Join the Pearly Pig Community at Seeking Alpha,
- Open an Account at Ryan’s favorite investment company (and get some free money doing it),
- Start spending a couple of hours each week to follow along with Ryan’s moves as he manages his own family’s money.
That’s it. Just 3 steps to start experiencing significant progress in growing your family’s wealth.
Now back to me. I have 25 years between now and when I plan to retire, and I’m going to start with $10,000. How many times will my money double, if I can double it every 4 years? 6.25 times. You can follow along with me and do the math.
Starting Point $10,000
Double 1 $20,000
Double 2 $40,000
Double 3 $80,000
Double 4 $160,000
Double 5 $320,000
Double 6 $640,000
Double .25 $800,000
Now that’s pretty awesome. Take a minute and plug in your own numbers. Not comfortable with projecting you’ll double your money every 4 years? Then do your own projects with your own current nest egg size. Want some accountability? Join our Pearly Pig community and let me know 1) how many double periods you believe you need in the time you have to do it, and 2) how much you think you’ll have when you need it in the future. Or email me. I’ll reach out to you occasionally to see how you’re doing.
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The Ramifications of Implementing This Reasonable & Rational Portfolio Strategy
You’ve done the calculations and you are likely thinking now, “can I really do this?” That’s a great question, and one to not ponder lightly. Investing is hard work, and it will test your personal psychology and emotions, to be sure. One of my favorite examples of this is from one of my favorite sitcoms, King of Queens. Want a good laugh? Check it out here. But don’t laugh too hard — this is a pretty good example of how investing can get upside down for many investors.
There are many sources for financial education out there, and the Pearly Pig community is one of them. I encourage you to bookmark your favorite sites and to join our Facebook community — it is dedicated to financial education.
Ready to go? So are we. Join today and don’t miss another call.
Questions? Hit me up at ryan@thepearlypig.com.
