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To Make More Money, Ask Yourself This One QuestionBy Jeff ClarkTuesday, December 8, 2009 Don't follow the advice of investment newsletter writers. You can do better.
That statement may shock some longtime readers, who know I consider my lifetime subscription to all the newsletters published by Stansberry & Associates the single best investment I've ever made. I've probably earned over 100 times the subscription price by trading on the recommendations.
But I haven't always followed the advice to the letter. And you shouldn't either.
You should find a way to do it better. In fact, before following any newsletter recommendation, you should always ask yourself, "How can I improve this trade?"
Let me explain...
Last month, Frank Curzio – editor of S&A's newest publication, Penny Stock Specialist – recommended buying shares of Sprint. Frank's logic behind the trade was sound, and buying the stock at $3.30 per share made sense.
Sprint closed yesterday at $4.19, and Frank's readers are already up 27% in just over one month. But there was a better trade.
Sprint January 3 call options were trading at just $0.50 at the time of the recommendation. That's a relatively cheap premium for a two-month option. Frank was expecting the stock to move quickly, so there really wasn't any need to buy more time than that.
The options closed at $1.20 yesterday. That's a gain of 140%.
Yes, Frank's readers did well. But they could have done even better.
"Oh sure," you may be thinking, "that idea works fine for short-term traders, but I'm a long-term investor. Trading options doesn't work when you're buying beaten-down value stocks and looking to hold them for years."
Yes, it does. In fact, some of my best returns have come from selling puts on the stocks Dan Ferris calls "World Dominators" in his newsletter, Extreme Value. I've been selling puts on Wal-Mart ever since Dan first recommended the stock in October 2006. Every two or three months, like clockwork, one series of options expires and I pocket additional income by selling another series. Selling puts is a terrific income-producing strategy for slow-moving stocks like Wal-Mart, and it works well on Dan's six other "World Dominator" stocks, too.
My best gains this year, however, have been from following Porter Stansberry's advice in his Investment Advisory.
Porter is having a great year. He told subscribers to buy Burlington Northern in April at $66 per share. It's now at $98. He recommended Visa in June. It's up 21% in just six months. And Porter got subscribers into Bronco Drilling in September. The gains there were over 40% one month later.
In each of these cases, though, you could have done better by using options to create "synthetic" positions. A synthetic stock position involves selling puts on a stock and then using the proceeds to buy a call option on the same stock. Most of the time, it's possible to structure the trade so that you can get into the position for no money down, or even receive a credit to your account for making the trade. This is my favorite kind of trade, and it's one I often recommend in my newsletter, The S&A Short Report.
The point here is no matter how good the advice you follow, your gains can be even larger if you think creatively and ask yourself one simple question...
"How can I improve on this trade?"
Best regards and good trading,
Jeff Clark
Further Reading:
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