I hope you had a Merry Christmas and here’s hoping you and your family has a happy, healthy and prosperous New Year.
For many, the past two years have been rough, tough and hard to handle. Many have lost their jobs here in Canada, the price of their homes has dropped, the value of their investments has dropped and they are two years older. Maybe it felt like four. My thoughts today turn to the years ahead. Every once in a while readers ask me for an opinion on how to pass along assets, such as the farm, a business, money, and so on. Interestingly enough, no one has ever asked me what knowledge they as parents should pass along or bequest to their children. So I ask you today: What good positive knowledge are you passing or will you be passing along to your children? Or are you passing along a bunch of negative stuff because your life isn’t much fun or you aren’t making enough money and so on?
You and I both know farming hasn’t been so great lately for many. The higher Canadian dollar, U. S. restrictions and higher fuel prices have been game changers for pretty well all sectors in farming. I wouldn’t be surprised if the words “supply management” show up in talks among hog producers. I know that might not make me popular, but if the hog business shrinks to 60 or 50 per cent of what it used to be, then the numbers might already be getting close to what supply management might control. Sure we can talk exports, but how come the hog business hasn’t developed them over the years? The dairy and feather industries have been good to individual farmers under supply management, even if there are barriers to entry.
GOING BACK TO 1986
I started writing about off farm investments in 1986. And perhaps I even helped the investment industry expand because I encouraged farmers to invest some money off the farm. Many farmers weren’t ready to manage that money and financial advisors were. I never had a financial advisor, partly because no one called on me and I didn’t feel like looking for one. I wanted to learn investing for myself. One reason was that I followed about six investment newsletters for 10 years and over that time about a dozen stocks stood out. You know them: the Canadian banks, Imperial Oil, Canadian Pacific, maybe a gold company or two and a few others. But many stocks either died or disappeared during that time and it was very hard to find the word “sell” in the newsletters.
So we saved money when we could and 14-per cent interest rates helped us build wealth. I did try the good old beaten up real estate companies, I tried momentum techies, and I even have some buy and hold, like Fortis. But there was always conflicting stuff floating across the airwaves and print media: One side would say buy and hold wins. Another would say buy low and sell high. One side would say own dividend stocks. Another said growth was important. One side would say buy good stocks and hold them forever, but when the market crashed in 1987, 1990, 2000, and of course 2007, money would disappear.
Then it seemed like there were two languages. One side would say options are dangerous. Then I find out that Warren Buffet sells puts. Buffet gets a lot of press for being a great investor and he is, but then I find out that his holdings lost 35 per cent of their value in 2008. My significant account was down one per cent at the end of 2008. Buffet apparently has recovered 17 per cent. My significant account was up 26 per cent at year end — after losing only one per cent the year before. You can do the math.
Maybe Buffet could afford such a loss, but for a new investor or for one who planned to retire on that money, losing a third wasn’t much fun. So through all that we made a lot of money, gave some of it back, made more, gave back and got older. And I studied and thought.
A STRATEGY DEVELOPED
How do I see things now? Sadly, I was over 60 when things started to fall into place for me in such a way that they made more and more sense over time. And of course it’s one thing to see or hear of a strategy. It’s another to do it successfully time after time.
But I could see that most stocks dropped to a bargain price three times a year. I also saw that those big bad bear markets were opportunities if we were ready for them. And in 2008, I beat the bear by selling covered calls. I learned that big money seemed to run the show, and we had to figure out how to work with it. But how?
And the big question always was how can a person lead a more or less normal life, with family, farm, business, job and sanity and still manage money? And for some people the question was how does a person manage a big wad of money that somehow appeared in the family while for other people the question was how to strip off some cash from everyday life and put it to work and make it grow?
I’m not going to bore you with the details of how we accumulated some cash on one paycheque while we raised five kids. Most Grainews readers know our family drove old cars, and still does, which has saved us big bucks. And I owned cars I could fix myself. Of course if my wife and children had had to drive long country miles my drive-old-cars strategy would not have worked so well. But it did for us.
Slowly and I do mean slowly I learned. A strategy fell into place for me, and it isn’t complicated so I believe my children could manage it if something happened to me.
BACK TO PASSING ALONG INFORMATION
One of the best things parents can pass along to their children is how to set up a five-legged stool financial plan. The next best thing is how to set up a Tax Free Savings Account and learn how to make money by selling covered calls in that account. And then use the sell covered calls strategy in a trading account and RRSP.
Now the whole strategy of investing is very clear to me. I built my five-legged stool. I learned how to read charts which have helped me to not buy stocks at a bad time and buy good stocks at a good time. We can even learn how to sell at tops if we want to work a bit more. Now I sell covered calls so my stocks bring in cash income from selling calls, dividends and some capital gain. And I know how to sell puts, but most people can’t do that.
I also decided that I didn’t need to “make as much money as possible.” After all, if I can make $5,000 to $10,000 a month with my strategy, who cares if I could make $15,000. Those last few thousand dollars may not be worth the work. Just like farming that last quarter section or section may not be worth it either. Of course each of us has to peg that amount for ourselves.
WHAT TO DO?
With around $300,000 invested, I run eight to 10 stocks. I use three indicators mostly, which are CCI, MACD and RSI on a chart on www.stockcharts.com,which is free. I own mostly Canadian stocks and the free Montreal site www.m-x.cashows me the premiums my covered calls can bring me. And I spread out my transactions so I don’t have to work as hard as when I sold calls month by month. I don’t sell calls on all my stocks if they’re running up, and once in a while I let some get bought from me, which frees up cash so I can go shopping for another decent stock.
Those charts are pretty accurate. They told me not to buy Wells Fargo (WFC) at $16, but at $9 to $10 it was fine. They told readers to sell some Teck Resources (TCK. B) at $35 a week before the price dropped to $30. They showed me that buying an entry amount of a natural gas stock (GAS) was a decent risk at $4.60 while most people were saying don’t buy natural gas. Of course they might be right, but my first batch of 2,000 shares likely will make me 25 per cent over five months.
And I do all this more or less routinely. If I don’t get it done one day, the stocks will wait for another day. And I can do this from home, from Acapulco, from a hotel room and at night.
Was this information around years ago? Maybe it was and maybe it wasn’t so clear. But it’s here now and it’s clear to me and it’s making us good money. Cattle producers can do this three months out to get past calving time. Grain growers can do this six months out to get past harvest. Busy people can do this every two months. Some people like to sell covered calls every month. It’s a personal choice. We can design investment strategies that fit how much money and time investors have and so can you.
The point is this: What are you going to pass along to your children? Money they can use or squander? Assets that might tie them down or make them wealthy? Or knowledge that can help them wherever they might live or whatever they might do. At one time I sort of figured that if I taught my kids how to fix cars I would do them a favour. Those fixable cars are obsolete now. But the investment knowledge I have taught my kids will not get obsolete. As parents, it is our choice what knowledge we will pass along to our children.
Andy lives in Winnipeg and is more or less retired. Among other things he manages his portfolio and explains what he does in his newsletter called StocksTalk. If you want to read it free for a month Google StocksTalk.net,go to form and fill out five lines and click submit. He also has an essay on his “personal methodology.” If you want it, email him at [email protected]and he can send it to you.