Tuesday, December 14, 2010
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I have recently been considering the question of investing in real estate with a retired relative of mine who will likely require about 20 years worth of income. Currently, this individual has a fair amount of cash in a savings account. Needless to say, that savings account does not earn a lot of income and would be pretty useless as an income source to supplement social security and pension income.
Rather than allow those savings to languish and get eaten away by inflation while providing essentially zero return, I suggest investing that cash in income producing real estate. The cash could be used to pay for the majority of a duplex which has the potential of generating about $1000 per month of spendable income. Initially, that income could be used to create a fund for repairs for the duplex and pay off any borrowed funds used to complete the purchase. After a few years, the money could then be used to supplement income or to purchase additional real estate if not needed for living expenses.
I am amazed at the amount of cash sitting on the sidelines in savings and money market accounts that will barely keep pace with inflation if even that. It seems to make much more sense to at least purchase real estate with cash and enjoy the cash flow from the property. It really doesn't matter if the property appreciates. The point is that the income produced is much more than could possibly be gained in this period of low interest rates. In this case, there is no need for timing the real estate market. Now is the time.
Until next time--KEEP IT REAL!
Monday, November 1, 2010
To be perfectly honest, I haven't been paying much attention to the silver price and didn't even realize that it was approach the psychologically important $25 per ounce level. I had simply noticed that SLW was increasing dramatically. In fact, I have become worried that the stock has gotten ahead of itself so in the past week I bought some puts to protect my paper profits.
Silver is typically more volatile than gold so when the price of these precious metals begins to decline, I would expect silver to decline much more rapidly. I don't know when that will occur but wanted to be able to protect myself with puts. I also plan on allowing many of the calls that I have sold on SLW to be called out. This will decrease my exposure to the silver price since I think it might be getting a little high in the short term. Longer term I would expect that the fundamentals would argue for a higher silver and gold price. But I want to take some profits now and buy back in again later.
I did this very effectively with Akamai stock (AKAM) using the collars that I trade. I had purchased AKAM at various prices over the summer and had a net basis of $40 per share. As it ran up, I decided to take the opportunity to purchase some $50 puts for October and lock in those profits. As it turns out, AKAM was well below $50 per share so my puts were exercised allowing me $10 profit per share. Then, I bought back the stock at two different price points below $50, namely $46 and $48.82. The end result is that I now have the same number of shares that I owned before along with some extra cash. I own puts on the stock and have sold some covered calls creating a collar.
My current basis in AKAM is $47.94 with the opportunity to be called out in 3 weeks at an average price of $50.25. That would make for a one month profit of 4.8% should AKAM rise just a little farther to $52.50. If not, I will sell some December calls to lower my basis some more.
The point is that I am doing the same thing with my SLW stock. By owning the stock, I gain exposure to the silver price but have the flexibility of easily managing options to take advantage of the price swings and lock in profit using puts and collars. My current basis in SLW is $24.15 per share overall with an average call strike price of $27.31 provided SLW is above $29 per share 3 weeks from now. If not, I will sell calls on the shares I have left although I would expect some to get called out.
Anyway, this is just one example of using stocks to gain exposure to real assets. I suspect real assets and the companies that deal in them will be a profitable investment for the next several years. Until next time--KEEP IT REAL!
Tuesday, September 7, 2010
But, I believe that gold prices will go up. I also believe that they will be increasing to new nominal highs before the end of the year. I don't have a specific target price since it really doesn't matter. I am simply positioned such that gold serves as a hedge to my portfolio. About one-third of my retirement portfolio is in Goldcorp stock (NYSE: GG). It has been by far my best performing stock over the last several years. This year hasn't been quite as good but it is still positive. I create equity collars using the stock and try to sell a little bit when the stock spikes and buy back some when it falls. I don't always hit the highs and the lows but try to trade around a core position in the stock.
I believe that gold prices will go up because of the seasonality of gold. There has been a great deal of writing on gold's seasonality. As I write this on the day after Labor Day, the price of gold is up over $11 per ounce and is clearly within striking distance of new nominal highs. And yet few people outside the financial world are talking about gold as an investment. I remember when the Nasdaq was making new highs, people up and down the hallway at work were constantly talking about tech stocks and getting in on IPOs. And yet I am hearing nothing about gold or silver, which is one of the reasons that I don't believe they are in bubble territory yet. I think that a bubble will occur for sure. But I just don't think now is the time. I think there are several more years yet to go before we get through this portion of Kondratiev's cycle.
So, I am just simply asking you to pay attention to the price of gold over the next several months and see what happens. You don't have to invest if you don't want to. You can continue to use the excuses that gold is a relic, that it pays no dividends, that you can't really buy anything with it, or whatever excuse you want to use. Just know that I do hold some physical gold and silver and have stock in Goldcorp and Silver Wheaton but that I still hedge my stocks with protective puts and sell some covered calls against them. Know that I try to buy a little more during the off season and sell a bit when the prices rise. And think to yourself whether or not there may actually be something to investing in assets that protect wealth from the eroding purchasing power of fiat currency. Until next time--KEEP IT REAL!
Monday, August 9, 2010
Well, it turns out that I didn't sell any covered calls since the account in which I hold the shares is a margin account and selling calls affects my ability to borrow against them. Unfortunately, I needed to borrow a little to manage some problems with cash flow over the past few months. (When one of your teens takes out the quarter panels of two different cars in your own driveway, you have a cash flow problem.)
However, I did manage to purchase a few additional shares today at $22.07. Since I purchased the puts for $2.45 and can sell those shares for $25, I will make a profit of $0.48 per share in a stock that dropped 10%. Isn't that great! I also purchased some January 2011 puts at the $21 strike to protect the shares that I picked up today. I am hoping that next month I can sell a few calls since I believe the cash flow issue will be improved.
As mentioned in the earlier post, I had no idea which way natural gas prices were headed. It turns out that the hurricane season has been fairly mild so far. Regardless, I did have myself hedged such that I have been able to make a slight profit rather than a loss. It sure makes it easier to sleep at night knowing that I can't lose everything.
It is possible to use the above principles for any stock trade. Simply buy a partial position in a stock and the protective puts to go along with it. Then if the stock drops significantly, you can purchase additional shares that will sell at the strike price of the put making a profit. Of course, be sure to purchase additional puts to protect those other shares in case the stock continues to fall in price. Until next time--KEEP IT REAL!
Monday, June 21, 2010
I then took that same individual and had them purchase the S&P 500 index using $1000 each January. So two investors each spending $1000 each year from 1980 through 2010. You might think that the investor buying stocks would have made a killing compared to someone buying gold. I certainly thought that they might do better.
But in reality the difference was only about 2% total in favor of stocks. I was really surprised given that gold was in a terrible bear market and stocks had the greatest bull run in history.
I mentioned this on another blog in the comments (did not spam with a link) and was criticized for not including dividends of the S&P 500. It is a legitimate concern for sure but one that is not correct. For if you include dividends (which are currently 2%), you need to include inflation as well and figure out the reduced purchasing power of the dollar.
It turns out that the dividends and inflation cancel each other out and doing a simple calculation as I described is in fact legitimate, and the results are valid. When I added in dividends and then adjusted for inflation, the results were incredibly close. The bottom line is that gold does produce income but protects purchasing power. Stocks produce income to make up for the loss of purchasing power.
It really didn't matter if you invested in gold or stocks, you still ended up in the same place with the same wealth at the end of 31 years. The key was investing on a consistent basis and buying whether the price was high or low. So don't be afraid to start investing in gold now. Or don't be afraid to invest in stocks now. Just keep a long term perspective.
Until next time--KEEP IT REAL!
Saturday, June 5, 2010
If the price of the shares is down to $22 or $21 per share, I have an automatic profit on those shares since I have purchased the puts for October and can sell those shares for $25. Granted the puts cost some money, but I will sell some covered calls to ultimately pay some (if not all) the cost of those puts.
If the stock is up from my purchase price, then that is also good. I can sell covered calls at a higher strike, get some immediate cash and then additional profit in the form of capital gains. I think it will turn out to be a good trade.
There are several factors that might impact the price of natural gas over the next several months which will have some bearing on the price of CHK. Natural gas supplies are about 15% higher than normal for this time of year which would tend to push prices lower. Hurricane season in the Gulf of Mexico could push prices higher if a lot of damage is done. A warm summer could push prices higher since electricity generation needed for air conditioning is often provided by natural gas generating plants.
Truthfully, however, I have no idea what will be happening to prices this summer. That is why I have hedged my position with puts and will also be averaging into a larger position over the next few months. Over time, I believe that inflation and demand will eventually bring down the over supply but that could be a year or several away.
Nonetheless, I still like having exposure to real assets. My house is warmed by natural gas as is my water year round. If my bills start to rise, I want to be able to make money in the process.
Until next time--Keep it REAL!
Friday, April 9, 2010
I find this interesting since the last time investors were concerned about the financial crisis, the dollar was allegedly the beneficiary of the uncertainty. I find it hard to believe that this could be the sole reason. While it may be part of the equation, I think that many investors are setting up for the inflation trade.
I, for one, have felt that the Fed will be late in raising interest rates just as they were late in lowering them and raising them the time before. It would be almost guaranteed that they will do little before November elections. You can bet the political pressure is enormous. For this reason, I see inflation as a potentially huge concern in the next several years. Just look at what the price of oil has done lately also, and you will see that the concern is unlikely limited to the Greek situation.
Have you benefitted from the gold trade? I have seen my holdings in Goldcorp go up in the last several weeks although not as much as I would have expected. My Silver Wheaton stock has done very well over the past week since the price of silver is also doing well. You should definitely consider investing in a little gold and silver since I see several more years (maybe up to 10) left in this commodity super cycle.
Until next time--Keep it real!
Monday, March 8, 2010
Now, I will always advocate holding physical metal but only as a store of value, not as a way to make money. If you want to make money from silver, then you should be trading the silver exchange traded fund (ETF) which has the symbol SLV.
There are several ways to make money using the silver ETF. You can buy SLV when silver is lower in price and sell when silver is higher. This follows the mantra of buy low and sell high. But I want to focus on a different way to make money using SLV that has the potential to produce a monthly income.
I want to focus on the ability to sell covered calls on the silver exchange traded fund. This allows the investor in silver to not only gain some inflation protection, but also to generate some ongoing cash flow while holding a real asset.
Selling a covered call works like this:
Let's say that you have enough money to buy 200 ounces of silver or roughly $3400. Instead of going through the trouble of buying from a dealer, storing the metal, and just watching it sit there, you could purchase 200 shares of SLV through a brokerage account. As of this writing, the silver spot price is $17.26 per ounce and SLV is at $16.94 per share.
You would purchase the shares and could then sell a call option expiring in April at a strike price of $17 per share for $0.61 per share. If SLV closes above $17 in April, those shares will be sold and you would get $17 per share. If not, you keep the shares and can write another call for a May expiration. Either way you would get to keep the option premium.
When the price of silver is down, you can buy some physical silver but while waiting you could be making some money each month using SLV. It is certainly something to consider. Until next time--KEEP IT REAL!
Saturday, February 20, 2010
First let's look at the factors favoring an increase in the price of natural gas:
- It burns cleaner than coal and so is a quick replacement for dirtier fossil fuels while the renewable energy movement takes hold.
- Continued economic recovery will demand more energy (natural gas is used for electricity generation) and chemical feedstock.
- High temperatures and air conditioning use during the summer demands more electricity.
- Shale gas may not get environmental blessings.
- Analysts think the price will rise.
And now the cons:
- Improved technology in the collection of gas out of the shale deposits will increase supply.
- There is already an abundance of natural gas.
- Liquified natural gas from other countries is just going to add to the supply glut.
- A renewed contraction in the economy will suppress all energy prices.
It is easy to make a solid argument in either direction. So honestly, I have no clue. But I am still invested in natural gas through my investment in CHK (Chesapeake Energy). How am I managing this? By using protective put options. Option expiration was today (although they only trade on weekdays) and I had some expiring. I bought some new April 25 puts to cover those shares so that I am guaranteed not to get any less than $25 per share.
I actually sold some March 27 calls to help pay for the puts. Plus I have the ability to participate in any rally with the remainder of the shares. So no matter which way the price of natural gas goes, I can feel secure knowing that I am hedged both ways.