As I promised in the last issue ofGrainewshere is a rundown of how my investments have done in 2010. I will share my thoughts about what I see ahead. I have to say that I am not very good at predicting, but I need some sort of guideline to help me plan my investment moves.
2010 was an interesting year, much like 2009, 2008 and 2007. While my portfolio is worth about as much as 1,000 cows, I’m sure I don’t work as hard as a beef producer so I spend most of my time researching and discussing strategies with people.
My personal methodology is to own good stocks that have options attached to them so most of our stocks have the ability to bring in four types of income: some capital gain; dividends; premiums from selling calls; and a select few bring in premiums from selling puts.
Selling puts is a great way to make money if we do it correctly, but I didn’t on RIM and POT and dropped about $15,000 in a week. That was one set back, but over the year I have made a lot of money selling puts on rising stocks. Then I saw selling signals develop a little late in the middle of April so we gave back most to the profits from February to April. I was busy traveling, doing some taxes and too happy with our profits so I ignored our stocks. I don’t know the total cost of the meltdown but it wasn’t cheap.
Still, I managed to make it all that back and then some. The returns on our accounts ranged from a low of 27 per cent to around 77 per cent for the year. Meanwhile the U.S. indexes rose 10 per cent +/-and the TSX was up around 14 per cent for the year.
Our trading account has been one powerful money machine. With it I bought thousands of dollars worth of flow throughs which cut our taxes, paid for thousands of dollars of donations, paid the children out their share of the family portfolio and still have a lot more than we started with. I have a free essay on how I built a money machine and if you want it send an email to [email protected] I will send it to your free. I will even throw in one free month of our newsletter unless you say you don’t want it.
THE PLAN FOR 2011
I’ll start by saying that this article is all my own opinion; I could be totally wrong. It pays to do your own research and learn enough so you can think for yourself.
Due to high debts and likely higher taxes in the U.S. and EU countries, growth likely will be lucky to reach two to three per cent per year for many years to come. However, in China and India growth could easily be five to nine per cent for years to come. The BRIC (Brazil, Russia, India and China) and CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa) countries expect growth too but their economies are quite small.
I looked at all this sometime in 2009 and decided that I didn’t have the resources or the inclination to find stocks in China, Brazil, and India and so on. So I decided to find and own stocks that sell stuff to China. This has worked out quite well. I call this the China effect.
I started the China effect strategy by buying Tech Resources (TCK. B) at $9, $12.50 and $15. I bought 1,000 shares at each price and sold them at $38 or so for a gain of three to four times in about a year and a half. They sat around $61 at the end of 2010.
Sounds like I sold TCK. B too early, eh? But I took that money and bought a bunch of shares in several other companies. One was Osisko (OSK) and another was Consolidated Mining (CLM). OSK got a permit to build a crushing mill for its open pit gold mine in Quebec in September 2009 and will move from being a developer to a producer early in 2011. Most of our shares have gone from $8.02 to over $14 and we likely collected another two bucks selling covered calls on them in 2010. We had around 6,000 shares at the end of 2010.
CLM was a gift from above. We bought many shares from $5 to $9, sold them at over $8 during the downturn in April and bought back around 6,000 shares at $8 and up when prices stopped falling. This company mines iron ore in Labrador and moved from being a developer to producer in July, 2010. Mostly I did not sell covered calls on these shares. The price was over $14 at the end of 2010. CLM has customers in China.
So while TCK. B moved up 60 per cent the stocks we bought with that money are up 50 to 100 per cent. Good guess, I guess.
SILVER AND GOLD
China is encouraging its people to buy and hold silver and gold. So OSK fits my thinking and has the added potential because it will move from being a developer to producer.
Just the other day statistics came out that China had imported five times as much gold in 10 or 11 months as it had imported in all of 2009. Why? People see owning silver and gold as way to preserve and develop wealth.
Chinese governments can and have raised interest rates which slow down gains in property but it has done nothing to slow down the rising price of gold. I would expect this trend to run until some other sector in the economy becomes so attractive that it entices money away from gold and I would speculate that will be when major stocks around the world are trading at price earnings ratios of seven or so which can attract big value investors. This could take several years.
I think silver has more upside potential than gold so I have been moving money into silver stocks. Silver is a dual purpose mineral. Much is used for technology in such small amounts that it is not recycled. Plus more and more people are buying silver to hold as an investment.
We own Silver Wheaton (SLW) which lends money to silver companies and takes silver back on contract, touches it up and sells it. We paid $20 for a bunch of shares and they were pushing $40 or so at the end of 2010. And we sold some calls.
HOW A COVERED CALL WORKS
I also started to buy Silver Corp (SVM) which is a Chinese silver mine. A reader from StocksTalk reminded me that silver companies are a lot safer than coal mines in China and that there are 1.3 billion potential buyers of silver in China.
Our 1,000 shares cost just under $12 and I sold a call for Dec strike $12, collected 73 cents or $730, bought them back for $0.36 or $360 and sold them for Jan $12 for another 95 cents per share. That’s a total of $1,320 of cash on my $12,000 for two months.
Seems too good to be true? Well if you really want to check it out go to the site www.m-x.ca and check it out. This was not some sort of maybe thing. This was my $12,000 and I have collected $1,320 of cash in two months. Most people who think this is too good to be true haven’t looked at the strategy enough.
With these stocks if prices rise I buy the calls back and sell another one into a later month. This is called rolling over. This could reduce our overall gains for the year but hey, if we make 20 per cent a year, I’m happy. Selling calls helps me make good profits in good and bad years. The trade-off is that sometimes I give up some capital gain but most of the time I bring in cash.
COPPER, URANIUM AND OIL
I think the uranium industry is coming back to life. Russia is going to stop shipping uranium from warheads in 2013, Cameco (CCO) hopes to get its Cigar Lake mine dried out and going by then. We bought 200 shares of CCO late in 2010. China just signed a 10 year deal to buy uranium from CCO. China expects to build a lot of nuclear reactors in the next nine years but worldwide there are 443 nuclear reactors on record and 331 being built or being planned.
My uranium stock of choice has been USU which processes uranium into yellow cake used by nuclear reactors. CCO has one of those plants too. We paid under $6 for our USU shares and to the end of 2010 had picked up 90 cents per share from selling calls in eight months which is about 15 per cent while the stock has not moved up.
We don’t own any oil stocks as such. I owned driller PetroBank (PBG) through the later part of 2010 and sold calls for something over 12 per cent for eight months. Late in the year I started to buy Crescent Point (CPG). The premium on the calls sucks, but the company is paying 23 cents a month for a dividend and I guess we’ll see if this is enough to hold my interest. But CPG earns only 33 cents per share so I don’t know how long it can keep that up or if it can grow earnings rapidly.
All in all, stocks did well for us again in 2010. I still have to remind myself to keep losses small but the big losses seem to be farther and farther apart so maybe we are getting smarter. We will deposit another $5,000 in at least one TFSA for 2011 and maybe both. Tax free gains and income are nice to have especially if we can continue to make 15 to 22 per cent per year. We may not make that much every year, but after just one year the accounts have gained three to five year’s worth so there’s room for some slippage.
Andyismostlyretired.Hemanageshisown investments,travelswithhiswife,playswith histwograndchildren,gardensandstillfixes hisoldcarsiftheyneedit.Andyalsopublishes anewsletterwherehetellsallfrom daytoday.Ifyouwanttoreaditfreefora monthgotoGoogle,typein StocksTalk.net, gotofreemonth,gotoform,filloutafew linesandclicksubmit.