In our accounts, dividends are the smallest source of income. Selling calls is the biggest. Often times the money we make from selling covered calls on a stock is as much in a month as dividends are for a year.
I wish someone had shown me how to build a money machine when I was 20 or 40 or even 50 years old. I don’t know if making money turns your crank. I do know many readers of Grainews have a lot of net worth so they must have made some money along the way. But as usual a lot or all of that money likely is tied up in farmland, machinery, livestock, an RRSP and maybe some in a Tax Free Savings Account.
Unfortunately much of that money is likely committed where it is and if you try to get some of it to spend now, you might have to pay more income tax. Or the money is security on a mortgage or you’re saving it for something you want to buy later on in life.
In our family, we have a house, cars, stuff, RRSPs, LIRA (or something close), some bush country, stocks and cash. I always figured it would be nice to have a money tree or a money machine, but I couldn’t find the blue print to build one. I’m handy with tools, handy with words and can make a decent speech, but none of those helped me build a money machine.
So I sat down and figured out how to make a money machine that spins off cash — preferably cash that’s taxed at preferential rates. Today I will share with you how I did that.
A money machine has parts, just like any other machine. The parts to my money machine are: Cash to buy stocks with. Stocks that pay some dividends and let me sell covered calls.
Those are the parts I would call hard assets. But this machine has some soft assets, and one is called knowledge, mainly learning how to sell covered calls. This is a rare skill that you likely won’t find just anywhere, but I learned it and I teach it all the time to readers of StocksTalk. I learned this skill the hard way, by studying Saturday morning after Saturday morning. Why Saturday mornings? Because I had a busy job with Grainews, five children, cars to keep running and the usual household stuff to keep up with.
Now I can teach this stuff in an hour and a half over the phone if you can run your computer while you talk to me.
The other soft asset is courage. We can’t buy that. I can’t teach it to you. You and I can develop it, but we can’t buy it.
And the last soft asset is belief. If we don’t believe this is possible, then it likely doesn’t matter anyway. Just forget you ever read about Sirski’s money machine.
Most machines need some kind of lubricant. My money machine’s lubricant is time. It’s quite easy for my money machine to make $1,000 a month, even $2,000, of cash. But if I want my machine to make me $8,000 or $10,000 a month — of CASH — I need to do some work. So if you want the smaller income, you can even run this machine low on oil, in other words without much time commitment.
And it could run a long time at this low speed. If you want the higher income, then you’ll need a couple hundred thousand dollars or maybe even $300,000, some knowledge, some time and some courage.
Oh my gosh, I need a skill and time? Sure. Just imagine, if I kept or if you kept $300,000 worth of cows. These days that would be maybe 300 cows. Maybe 400. Do you know how much time you would spend making feed for 400 cows, calving
them, putting them out on pasture, treating them for blackleg, castrating, tagging and so on and so on? Lots. And you wouldn’t bring in any cash for at least four to six months after the cows have the calves. And these days you’d be lucky to make any money.
Meanwhile I can look after my “cows” from Acapulco, from an airport, from home, or any number of other places. So why would you even think that looking after $300,000 worth of stocks shouldn’t take time? It should unless you’re prepared to take what the market gives. But if you want to take in some of that higher income, month after month, year after year, well get ready to learn, work and get paid well.
My money machine has several gears from low to high gear. Lower gears might be where you buy good stocks and generally hold them for months or even years. Your machine should harvest
some capital gain if you get the right stocks, and bring in some dividends if you have the right stocks. Yes people have made a lot of money in this low gear during bull markets. During bear markets they usually gave some back.
In second gear, we become a little more choosey on which stocks to buy, so we might buy stocks that are in rising sectors, increase dividends often, and generally go up in rising markets and don’t drop much in bear markets.
Next gear: sell covered calls. This is like renting out our stocks. We keep the dividends, we might keep some capital gain and we bring in cash eight to 12 times a year on our money. Maybe we’ll make two per cent per month, maybe three or five per cent per month. We’re generating cash that we can spend or reinvest every month.
What about taxes? Well, in a trading account the money we collect from selling covered calls is called capital gain and only half of it will be taxable income. In a sheltered account, that money could be tax free for years until you start to take money out. And in a TFSA, all the money your money makes would be tax free.
To get our money machine into overdrive, we will need skill, courage and some time. The skill would be to know which stocks are rising or at least not dropping, how to sell covered calls on those stocks while we leave some room for capital gain, how to buy calls back if that works to our advantage, how to sell puts, and how to buy naked calls and naked puts.
As you can see, if we want to be in over drive there are a lot more parts to the machine. It’s not wise to think that we can take $300,000, learn as we go and make $100,000 a year. It might be wise to start off in low gear, and move to second and third gear quite quickly but not to try to pop the clutch and be in over drive right away.
There truly is a lot of money out there waiting for someone to take it home, but it won’t come looking for us. We have to go get it. Then we have to learn how to keep it and finally we need to learn how to put that money to work so it gets into over drive. But we don’t have to be in over drive to make a lot of money. We can easily make a lot of cash money in third gear, the gear where we buy good stocks, rent them out by selling covered calls, and just keep doing that.
It might be boring to stay in third gear, but it can still make us a lot of money.
SOME EXAMPLES, SOME RISKS
OK, what’s the risk? Well, we’re dealing with stocks, so that is one risk. We might pick the wrong stocks, we might hold them too long if the price is falling, or we might sell them too soon if the price is going up. If you ever reach the point where you’re approved to sell puts, the risk is that we’re guaranteeing someone a price for his stocks.
Most people can’t be approved to sell puts because they don’t have the knowledge. I can. Some readers of StocksTalk can. The account where I sell puts is up 71 per cent year to date as I write. In that account I sell covered calls, sell puts and hold stocks.
My major account was down one per cent last year while the market dropped 59 per cent and many portfolios dropped 35 to 45 per cent. That account was always one third cash and it’s up 20 per cent. It’s sheltered so I can’t sell puts in that account.
Some investors hold stocks just for dividends. In our accounts, dividends are the smallest source of income. Selling calls is the biggest. Often times the money we make from selling covered calls on a stock is as much in a month as dividends are for a year. Some capital gain is in between. Since we’re restricted on where we can sell puts, that income is quite small. Still an extra $500 or $1,000 a month can build up wealth or create spending money quite nicely.
HOW MUCH WILL A MONEY MACHINE COSTS?
How much you put into your money machine really depends on how much money will keep you interested. If $100 a month will keep you interested then your TFSA can be your money machine.
If you want $1,000 a month, then your money machine likely needs around $50,000. A well tuned $50,000 machine could make you a couple thousand dollars a month, but I wouldn’t count on it. I run a machine with $220,000 to $300,000 in it and over the past 18 months through bear markets and good markets we’ve likely averaged $10,000 a month of income. Last year that $10,000 a month made up for falling stocks. This year it’s building wealth and creating spending money. Selling calls is a rare skill but it is a teachable learnable skill. I teach it all the time.
Andy is retired in Winnipeg. He gardens, plays with his granddaughter, travels a bit, speaks a bit at meetings, manages his own investments and publishes a newsletter called StocksTalk. In the newsletter, he tells what he does pretty well day by day. If you want to read it free for a month, go to Google, type in StocksTalk.netand fill out the five lines on the form. Or send an email to [email protected]