They say you can’t have your cake and eat it too… or sit in two chairs… or dance at two weddings.
These proverbs are the rule.
But there is an exception when it comes to the market.
But you have to set your goals at the outset… which seems to be a problem for a lot of people.
When it comes to investing, people tend to prefer simple, understandable strategies.
These are the kinds that are pushed by Wall Street and Madison Avenue.
Today, thanks to increased access to financial education, investors are learning new strategies. Some are confusing. Others are even more confusing.
I’ve been investing for years for both income and capital gains by using a simple strategy that has two potential outcomes…
- I get to buy the shares of a company I want to own at my price
- Or I get paid for trying.
Sounds simple and compelling. After all, wouldn’t you rather buy something for a bargain than have the market dictate what you pay?
For the life of me, I can’t think of a better way to build a portfolio of high-quality stocks or get paid for trying.
Yet, as one of my favorite sayings goes, “It’s not the sea that drowns you; it’s the puddles.”
People often lose sight of the big picture and get bogged down in the details.
If I said you could buy stocks at the price you want and just left it at that, it would be simpler. But when I add in that you get paid whether you end up buying the stock or not, the skepticism sets in.
At the outset, everyone’s for it. Who wouldn’t want to own stocks for their own price or get paid for trying? Then something strange happens. They focus on the second outcome only: the “free money.”
Who doesn’t like free money? Unfortunately, there is no such thing. Even a bank robber has to worry about being caught.
Put selling allows you to buy a stock at your price, get paid for trying or both.
When done properly, you can amass both a fortune in cash and a portfolio of great companies at amazing prices. I’m talking 20% to 50% below what they are trading for right now.
Still, most people focus on the free money. It is “free” most of the time, when you do this right.
That’s the problem too. People get so used to collecting the cash, they forget that every once in a while, they have to buy the stock too.
Let me explain. When done correctly, put sellers have to buy the underlying shares only around 20% or the time (sometimes more if the market encounters a downturn). But downturns affect everyone, stock buyers included.
Because put sellers get put infrequently, they bank “free money” most of the time. They end up believing the strategy is just about free money. They lose sight of the fact that the original goal was to buy stocks at their prices or get paid for trying. It’s one or the other… not just one.
So invariably, when put sellers have to fulfill that obligation and buy the shares, they step back and think something bad is happening – especially since they often have to come up with the cash when the stock has fallen to the level they wanted to buy it at.
A funny thing happens to people when they are obligated to buy something.
They don’t like it.
That “free money” tied them to an obligation to act. They knew that… but weren’t expecting it to happen. People just want the free money.
You see, the problem is not the strategy. It’s used by the likes of Warren Buffet at times to buy stocks on the cheap. The problem is not fully buying in to the whole strategy and just focusing on one element.
If I asked you if you liked to buy clothes, furniture or cars at a discount, you’d respond with a resounding “YES!”
When it comes to buying stocks, most people equate a discount to a bad thing. It’s time to change that view… or you’ll forever be overpaying for your investments.
When I bought my first real sports car, the type that can be used on a track and on the street, I lamented that I should have bought it years ago because it provided me so much enjoyment. That’s the exact sentiment I want you to have after you sell puts correctly. (Don’t worry, I’ll show you how in the weeks ahead.)
You’re going to wish you knew about this years ago!
Good investing,
Karim
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Source: Wealthy Retirement