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Build A Phantom Portfolio

In the April issue ofGrainews I discussed what to do if you can’t build a critical mass size of farm. My solution was to build a financial system around you that creates the equivalent of a critical size of farm. In my opinion knowing how to make money with stocks should or could be part of that financial system. Getting comfortable buying and selling stocks takes practise. To do that, let’s say I had $200,000 to invest. What would you do? Building a phantom or practise portfolio can help.

I would buy 4,600 shares. The stock I meant to name was Silver Wheaton (SLW). The day I wrote that article SLW was trading at $42 and change which meant my $200,000 would buy 4,600 shares. And if I used my strategy and sold a covered call I could have sold a call for the next month (May) and collected around $15,000 of cash. I likely could repeat that four or five times a year, if I don’t lose the stock, which is a risk each time I sell a covered call.

STRATEGY

As an investment strategy I likely would not invest $200,000 in one stock on one day. Unless you buy a turnkey farm or ranch, odds are you would buy your farmland over time, as well. Well, same here. Most stocks go on sale three times a year — in the spring, in the fall and coming up to February.

So if I was going to own just one stock I would lean towards buying shares over at least two seasons, preferably spring and late summer. I would aim to buy ahead of the next bull run. All it takes is some patience. I wrote an article for readers of my newsletter with the headline: “Oh my, it’s hard to be patient” and it really is hard to be patient but over the years I have seen many times when patience really paid off. If you want the article, let me know by sending an email to [email protected]

I also watch how my favourite stocks behave on three charts: the RSI, MACD and Full Stochastic. Back in early February I patiently waited until shares in SLW bottomed near $29 and I bought as the charts started to rise, just one dollar off the bottom. That was a lot better than buying at $42. And more recently, as silver was rising and SLW was not, I sold two-thirds of my holdings at $42. A week or so later the price of silver dropped and SLW dropped to $35, First Majestic (FR) dropped from $25 to $17 and Silver Corp (SVM) dropped from $14 to under $11. I had let 3,000 shares of SVM get exercised (sold) at $12 plus a premium. Selling SLW and SVM freed up money. Around May 5 I started to buy First Majestic (FR) after the shares had dropped and the charts started to go up. SLW is $35 as I write. I will buy some soon as I get around to it.

Many people fear a drop in the price of shares. We are trying hard to change that feeling and now look forward and even plan for a drop in the price of our favourite stocks so we can buy them when they are on sale. In my opinion copper shares are getting ready to bottom and I plan to buy Quadra (QUX) any day now.

Many investors end up buying shares near tops because they follow the strategy: “This company is doing so well we should buy some shares.” They end up buying near tops. I’m trying to get my head around the slogan: “These shares are so cheap we should buy some.” Mind you, I only do this with stocks I know. Cheap isn’t always good.

Let’s look at the price of SLW over the past year or so.

April 20, 2011

At one time in April, 2011 we had 3,100 shares that cost us $20, $29 and $32. I sold 2,000 for $42 when I was raising cash in April. During the first week of May shares dropped to $34 and change and, as of early May, the price is $35. These shares are on sale.

Shares of silver stock First Majestic (FR) were on sale too so I bought some just as the charts started to turn up. Three days after I bought 1,000 shares several major analysts said silver was a bargain. My thinking isn’t fool proof by any means but, still, buying SLW at $35 or so is a lot safer than at $42. And buying FR at $18.50 was a lot better than at $25.

I write all this to show that stocks do go on sale now and then, and if we are patient and know our stocks we can buy for less and reduce risk.

But let’s get back to my $200,000.

A ONE-STOCK PORTFOLIO

Most investors wouldn’t invest all their money into one stock. They want to diversify. Warren Buffet calls diversification a strategy to offset lack of knowledge. In other words, if I was going to put $200,000 into one stock I had better make sure it is a good one. I don’t have one stock worth $200,000, but I have had precious metal stocks make up 80 per cent of my portfolio. But if I had to choose one stock it would be SLW but I would try to buy it over time and try to buy shares as they were coming off a bottom.

When I wrote the past article shares were $42 and change, and selling a call at the price of the day for six weeks out would have brought in around $15,000 or 7.5 per cent for not quite two months. As I write, I could have bought around 5×600 shares of SLW and I could sell a call for June at near the price of the day for $2.34 per share or $13,104. Again, I can do this several times a year to generate income, but I risk having the stock bought from me each time.

As you can see the premiums for selling calls on SLW were bringing in over seven per cent for two months when the shares were $42 and $36 which is a very good return. Most stocks don’t pay that well.

By the way, SLW has a unique business model where it lends money to gold companies that produce silver as a byproduct and SLW has been getting paid with silver priced just over $4 per ounce. This is called silver streaming and SLW has around 17 such deals and hints of more coming. The company has just over 20 employees.

A TWO STOCK PORTFOLIO

As soon as I move towards owning more than one stock I have new challenges. Do I buy a second stock in the same silver sector? Do I buy one silver and one gold stock? We own 1,100 shares of Barrick Gold (ABX) which brings about $1 per share per month by selling calls. We own 5,000 shares of Osisko (OSK) which is an up-and-comer gold company that trades for just over $13. Our cost is down around $8 per share and I have collected about $2 to $3 cash by selling covered calls on our shares. I expect those shares to pop up after the company becomes a producer in May, 2011 and have a bigger pop when earnings come out for Quarter 3 in November, 2011. But do think for yourself.

I could buy one silver stock and a stock in another sector and as things stand now my choice for a second stock would be either Canadian Western Bank (CWB) or Finning (FTT). Both appear to have some growth potential and calls for FTT bring in around 50 cents a month from selling covered calls and CWB brings in a little less.

A THREE STOCK PORTFOLIO

If I was building a three stock portfolio I likely would add an energy company like Suncor (SU) or Canadian Natural Resources (CNQ) to my holdings. Both are down from peaks and don’t need $100 oil to make good money.

A FOUR STOCK PORTFOLIO

If I was building a $200,000 portfolio with four stocks I likely would own around $50,000 of ABX, SLW, CNQ and FTT or CWB. The exact number would vary because we need to own shares in board lots (100 shares per board lot) to sell calls.

As I write on May 9, 2011 here is how the four stocks would end up.

Notice the income is $6,730, which is a lot less than if I had bought just SLW. I also sold the calls a dollar or more above the price of the day so I would collect less cash but the shares would have room for some capital gain. With 5,500 shares if I wanted to collect more cash I could have sold closer to the cash cost and easily picked up another $3,000 or more for a total of almost $10,000.

And I sold calls for June so I could do this six times a year. If I collect $6,730 six times the total for the year would be $40.380 (20.19 per cent). If I collected closer to the $10,000 six times a year the total for a year would be $60,000 (30 per cent). I think the 30 per cent is stretching it so I would count on closer to the 20 per cent per year. If the shares got exercised (sold) I would have to buy other shares. Plus, some of the stocks pay a dividend and we get to keep that when we sell covered calls.

Of course owning shares has risk. But don’t tell me you don’t have risk when you put in a crop.

Andyismostlyretired.Alongwithplayingwith hisgrandchildren,gardeningandmanaging hisportfolio,Andypublishesanewsletter calledStocksTalkwherehetellswhathe doeswithhisstocksadayortwoafterhe doesit.Ifyouwanttoreadthenewsletterfree foramonthgotoGoogle,typeinStocksTalk. netclickonfreemonth,clickonformandfill outafewlinesandclicksubmit

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$16 $42

PRICE OF SLW SHARES OVER THE PAST 14 MONTHS DATE PRICE

March, 2010

December 6, 2010

January 25, 2011

May 9, 2011

$29

$45

$35

———

ABX

NAME

TOTAL INCOME

COST PER SHARE $46.00

NUMBER OF SHARES 1100

PREMIUM PER SHARE $1.04

TOTAL INCOME $1144

$6730 PER TRADE

SLW

FTT

CNQ

$35.50

$26.62

$42.14

1400

1800

1200

$1.62

$1.25

$0.89

$2268

$2250

$1068

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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