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Patience Yields Profits When Investing

One of the best ways to make money when investing is to buy low and sell high.  It doesn’t always need to occur in that order, but it should happen.  Of course, it is possible to invest for income but even when buying for income, buying at lower prices will yield more profit.  That is why patience and the ability to wait for better pricing of investments is an important character trait to possess.  Allow me to share two examples.

The Housing Bubble

It is very apparent in hindsight to everyone that housing prices were ridiculous at the top of the bubble.  The level of affordability for the average individual was at historic lows which meant that demand was unsustainable.  Those who had the ability to recognize this or got priced out of the market involuntarily were able to wait and saw better prices return when demand dried up.  These individuals will have the opportunity to buy at lower prices and stand a much better chance at profit than those who bought at the top.

Anyone who chased prices in housing and bought at the top now find themselves underwater.  They made the classic mistake of buying into the hype, were not patient, and are now paying the price.  They bought high and will be forced to sell low instead of the other way around.  One of the best times to invest in real estate is now that the bubble has burst.

A Personal Example

Another example that is a little closer to home involves my trading in the stock, Silver Wheaton.  Many of you know that I trade options and hold puts in all the stocks that I hold in my retirement account.  Such was the case with Silver Wheaton (SLW).  On option expiration day this month, I was in Honduras with incredibly limited access to the internet.  I could tell that my October $35 strike puts would be exercised since SLW was well below that point when I left on Thursday.  That was the case and so I had a lot of cash in my portfolio.

I wanted to repurchase the stock, but by the time I was able to get on the internet the following Wednesday, SLW had bounced back a little and was showing some strength.  I put in a limit order for the next day at a price that I thought was reasonable but the stock continued to increase and just went up.  The same thing happened to me again the next day such that SLW was trading over $35 by the time I returned home.

I know the price of silver and thus SLW is volatile so I decided to wait and see if I could get a better price.  I had already sold at $35 so any repurchase below that price represents profit in this particular transaction.  I tend to buy in bits and pieces essentially dollar cost averaging over days when entering a position anyway so it isn’t too hard to be somewhat patient.

Well on Monday of this week, I was able to buy back 25% of my original position at $34.50.  Yay!  A sale price.  Even better was Tuesday when I got another quarter of my position back at $32.60.  I even sold some covered calls on that same day for the November $35 strike price on the shares that I had just purchased over those two days for $1.25.

What this means is that I sold at $35 and bought back at a combined price after averaging the purchase prices and subtracting the option premium of $32.30.  Now if I get called out again in two weeks in November at $35 per share, I will earn a profit of $2.70 per share or a little over 8% for the month!  If I don’t get called out, I will sell more calls for December but also be buying more shares with the left over money that I still have from the October sale.  Either way, I will profit.

Lessons Learned

I have been investing in stocks since 1999 and have learned quite a bit over that time.  One of the biggest lessons is patience.  Never chase an asset price whether it be real estate, stocks, gold, or anything else.  Wait for the price to match your assessment of value.  Chances are pretty good that the price will decline at some point in the future, and you can pick up the asset at a much better price.  If not, there is some other opportunity that will present good value.  Don’t get focused on a particular stock or piece of property either.  There are many out there from which to choose.

The goal of investing is to profit.  It is not to say that I own this particular property or that particular stock.  The owners of a landfill can make just as much profit as the owners of a pharmaceutical company.  Be patient, find or create value, and profit.  I have chased stocks in the past, and I can tell you, it always ends poorly.

Readers:  How has lack of patience hurt your investment performance?  Have you had success from being patient?


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4 comments - What do you think?  Posted by Cash Flow Mantra - November 4, 2011 at 7:59 am

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My Investing Strategy for the Next Decade

I try to take a longer term approach to investing and if you read my post on Kondratiev and the follow up post on K-waves, then you know that I give some credence to his theories.  It only makes sense that bubbles arise out of human emotion and the bust that follows would cause those same individuals to swear off investing in that particular asset class for several years.

In fact, I read an article last night about the lack of interest in stock mutual funds following this recent “lost decade” and someone made the comment that investors were leaving the market and not coming back.

Because I believe that K-waves are real and the description of winter corresponds to the situation that is occurring now, then looking toward assets that do well in spring would seem to be the logical choice.  Also because the K-waves are typically 40-60 years in length, it would seem that most of the seasons would be about 10-15 years in length as well.

The gold bull (gold does well in Kondratiev’s winter) started in 2001 so I would estimate that we are more than halfway through the gold bull at this point.  I will be offering further comments about gold in a future post.

Preparing for Spring

Since it is a little late to really be thinking about winter, I think the best thing is to begin thinking about spring.  So what investments do well in spring?  Well, think about the bubbles that burst in the last decade.  Stocks and real estate come to mind.  These are the investments that should do well as the business cycle begins to spring to life and gather momentum.

Personally, I think I have about 4-7 more years before these investment classes begin to take off.  So I plan to pay off as much debt as possible as quickly as possible to improve my balance sheet in order to purchase more real estate when prices are low.  I already have some rental houses from the past decade and would like to own several more but credit is tight so I will need to have a pristine balance sheet when credit begins to loosen up.

In my area, there is still quite a bit of real estate supply available so I think it will take some time to work through it all.  If interest rates increase, that will only make it more difficult for those who would marginally be able to afford to purchase in the first place.  My market will always have renters so I don’t think it will be a big issue.  I just want to make sure that the real estate I purchase will have positive cash flow.

As far as stocks go, I will continue to invest in stocks through my retirement plans since I have a long term horizon of almost 30 more years.  I suppose there isn’t anything fancy of magical about my investment thesis over the next decade.  My plan is to continue to save as much as possible in order to pay off some debt and add to my real estate holdings while continuing to invest in stocks through the 401(k).

I do not, however, plan on investing in bonds since interest rates have almost nowhere to go but up.  Bonds have done well for 20 years so it is time for their season to end.  Will it be this year or next or maybe 2013?  I can’t be sure but I do know that when interest rates start to rise, bonds will fall and the $1 trillion that have flooded bond funds over the last decade will begin to leave and need a home.  I believe that home will be stocks and real estate.  And spring will be just warming up.

22 comments - What do you think?  Posted by Cash Flow Mantra - August 29, 2011 at 7:34 am

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Some Big Support Levels That You Should Watch Out For

This guest post was written by Tony Chou at Investorz’ Blog.

It looks to me like the financial markets are ready to tank, so like any investor, I’m looking to make some money when prices fall. But as we all know, the stock market doesn’t just fall in one straight line. It’s never that easy.  A bear market has it’s zig-zags. But now, let me get to the meat of this post. Do you know what support levels are?

“Supports are the lows of the market. Supports are where the demand side (buys) are strong enough that they stop the price from going any further down. As a result, prices go back up. Sometimes, the support level can be predicted from past resistance levels and support levels.” Head on over to my blog post if you’re interested in learning more about support and resistance.

If the market turns into a bearish trend (which I predict will happen at least for the next half year), then it’s time to do some shorts. But the key to doing a short is knowing when to get out of the way. When shorting a stock, the time to close your position is right before the price hits a support area.

Now I’m going to tell you what will probably be 3 of the really strong support levels if the stock market comes down. I’ll use the Dow Jones in my explanation.

  • The 10,000 barrier for the Dow Jones is a HUGE barrier. This support area is purely investor psychology. The difference between Dow 10,001 and 9,999 feels way bigger than the difference between Dow 11,613 and 11,475. So if the Dow falls to the 10,000 area, expect a lot of buying and an temporary upward movement of prices. Also, many investors bought into the market around this area in 2009. Another big reason is that around here, the Fed will probably initiate QE3. The Fed’s goal is to make the stock market look nice for next year’s election. If they let the stock market fall right now, it will be easier to force the stock market to move up next year when stocks are at a lower price.
  • The 200 day moving average. In case you don’t know what the 200 day moving average is, “The 200 day moving average is a key support or resistance level. In a downtrend (when the prices are moving down), the 200 day moving average becomes a big resistance level. That means in a downtrend, if the price tries to break above the 200 day moving average (which becomes a resistance level), the price most likely will not allow the price to break through the barrier.” So in the beginning of a downtrend, why is the 200 day moving average such a big support area? Because when the price first falls below the 200 day moving average, it really implies that the trend has changed from bullish to bearish.
  • The 9000 will also be a big support area. Why? Because it was around that level that in 2008, prices held their ground for 3 whole months. Also, it was at that level that in 2009, a lot of big investors bought a lot of stocks. 9000 has been a big support area of the past, hence, according to technical analysis, it will be a big support area of prices fall now.


CFM comment:  Support and resistance levels are basic to understanding technical analysis and are rooted in investor psychology.  Personally, I think that the market will be breaking down as the economy slips into negative growth and the DOW will end up in 4 digits again.

Readers:  What do you think of technical analysis?  Where do you think the DOW is headed?  How is this impacting your investment strategy?


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9 comments - What do you think?  Posted by Cash Flow Mantra - August 5, 2011 at 4:20 am

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