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October 15, 2015Invest Like a Bargain Shopper
I love sales.
The wife and I have always been bargain shoppers. When we want to buy something, we try to avoid buying something that's completely new... why?
Absolutely not. There's a "new car premium" attached to vehicles at every car lot in the country. If you read the fine print, you'll find language which translates roughly to to the statement: "you're getting hosed!"
Getting hosed makes my blood boil.
So, when I want to buy something, I start looking at the cheapest places first, and work my way up to "new-ish," if I have to. When I find a deal I'm comfortable with, I pull the trigger.
This way, I always have some value (perceived value, at least) built into my purchase from the get-go. It's like when you buy a house for less than it's worth on the market. You have instant equity ("value") built into your purchase.
Since it's so hard to find good deals on specific things I want, I often wish I was able to put out bids at thrift stores or yard sales for an item I'm looking for, at a price just below what seems to be the market value of what I'm looking to buy, and offering anyone the chance to sell me that item, at that specific price, sometime within the near future.
If there's anyone out there desperate enough to sell me their stuff and get their cash, they'd take me up on that deal--because they need the cash so bad.
This whole bargaining process sounds vaguely familiar....
Oh, that's right... this is how investments should work, in an ideal world.
Most investors simply don't think about investments this way. Buying an investment ought to be like bargain shopping, or browsing a pawn shop. If you know what to look for, and you look hard enough, you'll find a sweet deal, that will really pay off. Sadly, most "investors" look in all the wrong places, for all the wrong things to buy, and have no idea of the difference between price and value, and they get stuck holding things that aren't likely to make them much money--even if the companies they are buying are actually good.
That's a fundamental rule of investing. Even if you're buying a good business, if you buy at the wrong price, it's a bad investment.
With investments, it's actually possible to "throw out bids" on things you want to buy, and get paid for it. It's done using something called a put option.
Real-World Example of How to Bid, and Buy Your Investments Cheaper
I've written recently about put and call options before in several places: here, here, here, and here. Browse these articles for the mechanics, and some more examples to supplement this article.
A great way to get paid for bidding right now is with the company Oracle Corporation.
Oracle's in the bargain-shopping bin right now. It suffered from the selloff in August, and hasn't recovered as well as some of our other blue-chip stocks we can easily and cheaply trade options on. That's a good thing.
The company's stock is down 19% off its highs from nine months ago. It's trading only about 5.5% off support, around $37.50.
That's nearly a 4-to-1 Risk-Reward setup. Four times the upside, compared with the downside.
What this means for us is, the stock doesn't have much lower to go, even if the general market were to move lower from here a bit.
And the good news is, October through December is typically bullish for stocks, so we can count on Oracle moving higher from where it is now, at least in the intermediate-term.
Since volatility is so much higher lately, we can sell a November 20th $37 put option on 100 shares of Oracle stock right now, and get paid $.71 per share, or $71. This obligates us to buy Oracle for $37 per share on November 20th if the stock is trading below $37 on that date.
Getting Oracle at that price would be a 1% discount off its current price, and the $.71 per share builds and additional 2.1% safety cushion into our trade, meaning that the stock could go down 3.1% from where it is now, before we even start losing money.
This means, we've hedged away 3.1% in downside risk as opposed to a simple buy-and-hope strategy that the average investor uses.
And if the stock goes nowhere, we make 1.9% in 35 days, or 19.71% on an annualized basis, meaning that if we repeated the trade every month for a year, our account would grow by 19.71%. That's one and a half times the historical market return.
If we get put the shares next month, we'll own Oracle, and begin collecting its 1.5% dividend. We'll also begin selling monthly covered call options on the stock at higher strikes, in order to get steady yearly returns on this position of around 19%. That doesn't even include the dividends, or the capital gains we might earn if we are forced to sell the stock.
Start Using Options Right Now
Doing what I've described is a great way to earn some extra cash going into the holiday season, if you need it. I recommend not waiting even another minute before learning how it can benefit you. I've mentioned before: If you can learn this skill, it will literally change your financial future, and improve the speed at which your money grows.
Learn more here, here, here, and here.
Live long and invest,
Jeremiah
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