Minimize Risk

I am a value investor so that means: …much of this info is also in Let Buffett be you Guide

  • I try to keep every investment less than 5% of your portfolio and spread across sectors.
    • Stock selections should be across a spectrum of sectors to maintain diversification. This is a challenge for me as one other consideration is to only buy what you know… and what I know is limited.
    • This means you will have a 20+ universe of stocks. It can be a challenge tracking more than say 30+ stocks.
  • I look for large cap stocks with a “moat” around them - competetive advantage
  • find one with a P/E of less than 15 (which is the market average over time) and I look for a forward P/E that is lower than the current P/E - suggests improving earnings.
  • I buy stocks with a dividend - these are generally stocks that have been around for a while and I want one I expect to be around 10 years from now. I prefer a dividend yield over 1.50.
  • It should be a market leader - again look at the market cap compared to others in the same sector.
  • Return on Equite (ROE) of over 10%/yr.
  • Is this stock “suitable”? Is it in my risk tolerance boundries and am I confortable with management, product, location etc
  • Speaking of management - I look for companies I trust - this is a challenge and it is important

Then I watch it for a period of time to learn how it behaves in good and bad markets. Ultimately I wait for a dip in the price to a comfortable level and then I offer a Cash Secured Put at below Fair Value (15 time earnings per share) with the intent of gaining a return 1% over a 30 day time frame.

Why do I look for a 1% return on the sale of an option? And why the “ask” price?

Because if I could do that every 30 days that would be a return of 12% even if the put never got exercised. Of course that doesn’t happen but it is my guideline.

I make my order for a few “blocks” (100 share lots) and try to still get my 1% after trade fees are deducted.

I also make my order a limit order for over the ask price; on an active stock you can almost always get that over a day long stretch. Making it a day order forces me to watch the option day by day. I use the ask price for my sell target (as opposed to the bid price) for two reasons. It will trigger on large swings in your favor (usually on opn of near the close of the day) and it gives me time to reassess or change my order.

There are other considerations.

Geoff McNamara

"Do not meddle in the affairs of wizards, for they are subtle and quick to anger.” J.R.R Tolkien

Elizabeth City, NC