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The 1880s will be long remembered as the decade that saw economic prosperity virtually unrivaled in American history.
Now, of course, most investors are
-- if not concerned --certainly filled with questions about the next 10 years. Just what can they do, many of these individuals wonder, to earn significant income while protecting their assets? Opportunities for profits, however, continue to abound -- but only for investors who have the hard information necessary to determine which market sectors and individual investment vehicles are likely to prosper in the years ahead.
Savvy market players and long-term investors, meanwhile, know the mass media are most often sorely lacking in hard advice about what investments offer the highest profit potential coupled with the greatest degree of safety. That information is most often found in the words of market experts who spend much of their time tracking particular market sectors or a handful of individual investments. This investments section you'll find a compilation of investment advice culled from some of the nation's leading experts that could serve as your investment guide for the next several years.
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Double your money portfolio
Not even the smartest PHD, working with the world's biggest computer, can predict exactly what the economy is going to do in the next decade. Still, though, investors have to plan, here is a portfolio designed to double in value in the next 10 years while offering the maximum in safety. This portfolio was predicated on an original investment of $100,000---smaller or larger amounts can also be put into play using the same percentage for each port folio sector.
Here, then, is the portfolio:
Fidelity Magellan Stock Fund
$10,000
10%
Vanguard 500 Portfolio Index Fund
$10,000
10%
Selected individual stocks
$10,000
10%
Brokerage acct. money market fund
$9,000
9%
U.S. Treasury notes (diversified)
$16,000
16%
American Eagle gold coins
$10,000
10%
Carlyle Real Estate LP
$5,000
5%
R.I.C. 17, Ltd. Real Estate LP
$5000
5%
Copley Pension Property (LP)
$5,000
5%
N.Y. Life Oil & Gas Producing Properties III
$5,000
5%
Pru-Bache Energy Income Partnerships, Series VI
$5,000
5%
American Income Partners V
$5,000
5%
Fidelity Leasing Income Fund VI
$5,000
5%
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How To tell when a stock is ready to rise in price!
This system - which we call the "Breakout System" - was uncovered by a world-famous British mathematician and is one of the easiest systems known for timing purchases of individual stock issues.
The buying rule is simplicity itself:
If a stock makes three new highs within a 30 day trading period, buy it!
All you need to put this system to work for you is a copy of a major daily newspaper that includes, in its business coverage, a list of stocks making new highs in the prior business day's trading: a loose-leaf notebook and a pencil: and a few minutes time each day.
All you need do then is keep a running list of stocks which make new highs and the dates on which the new highs were posted. For record-keeping ease, it is best to divide your notebook into sections, with a section devoted to each market sector in which you are interested (e.g. utility stock, automakers, computer manufacturers, etc.).
The more new highs a stock makes, the better it is in terms of strength, so there's no reason not to buy a stock when it makes its 10th new high or 20th - so long as the last three new highs all were posted within the last 30 days.
For every buying rule, of course, there should be a selling rule, and the Breakout System's selling rule is every bit as easy to understand as its buying rule:
If your stock does not go on to post a further new high within a 30-day trading period, sell it!
While this selling system is simplicity itself, you can protect your profits by using a 10-percent moving stop-loss program (which is discussed at some length elsewhere in our site.)
How to use stock options -- safely -- to increase your earnings!
Most ndividual are scared silly of stock options. And, in all honesty, there are reasons why all but the most sophisticated individual should steer well clear of most option strategies. Options, quite simple, can be extremely risky business.
There is, however, one option strategy that's relatively safe and that will enable savvy individual to increase their portfolio income substantially. This strategy - covered call option selling - is so safe, in fact, that it is the only option play that's allowed, by law, to be made by professional pension fund managers and I.R.A. account managers.
What is a covered call?
A "covered call" is, simply stated, your promise to sell shares of stock you own at a certain price and within a certain time limit. When you "write" a covered call, you sell that promise in the open market and receive, in exchange, a "premium" amount.
Let's say for example, that you own 100 shares of XYZ company. The shares, which you purchased for $30 per share, currently are trading for $31 per share. You believe the shares will not gain sharply in the next six months and decide to "write" (sell) a "covered call" ("covered" indicating that you own the shares in question) promising that you will sell those shares for $35 (the striking price) per share at any time within the next six months, no matter what their price, in exchange for a premium of $2 per share. (At the other end of this deal is an individual who believes XYZ will increase in value and who is willing to bet money on that belief.)
Assume, then, that you are right and XYZ does not move above the $35 per share level. In that case, since the shares can be bought on the open market for less than the striking price, your option will "expire" after six months and you get to keep the $2 per share! If you are able to put the same strategy in play twice in a year with the same results, your yield will amount to about 13 percent ($4 per share premium earnings/$30 per share buying price x 100) minus broker commissions.
Assume, on the other hand, that your reading of the market is wrong and that, during the six-month life of the option, XYZ's share move to the $39 per share level. In that case, your shares will be "called" away from you and purchased for $35 per share. You obviously "lose" (miss out on) the profits above the $35 per share. Your net gain, though, amounts to about 23 percent ($5 per share for the stock appreciations and the $2 per share premium/$30 per share purchase price x 100).
What's your risk?
All strategies involve risk. In this case, though, your risk is limited to missing out on a stock's gain if, contrary to your expectations, your shares start rapidly increasing in value. (In fact, if, after a stock starts moving higher you decide that move is going to continue, you can buy your way out of the deal by "rolling" the option out to a later date at a higher striking price.) At the very least, though, a very well-thought-out, conservative covered call option strategy can turn a ho-hum portfolio into one that consistently outperform the average!
How to pick quality stocks!
According to the experts, the best way to find long-term stock market profits is to search for quality. And these experts say there are some relatively easy-to-spot hallmarks that will help you determine which stocks will add solid quality to your portfolio.
Here, then, is a checklist
Consistent earnings growth. There should be at least six consecutive years of adjusted pretax earnings growth of 10 percent per year or more.
Shareholder diversification. No more than 10 percent of the outstanding common stock should be in the hands of institutional investors. At the same time, corporate management should own a substantial number of shares since that ownership usually means managers will work to enhance share values.
Sufficient working capital. Working capital should exceed market value (the number of outstanding common shares multiplied by the current selling price of the company's shares).
Sufficient liquidity. Long-term debt must be covered by working capital or by cash and equivalents.
Sensible accounting procedures. Avoid companies that use accounting strategies that don't make sense to you ...companies, for example, that count revenues before they are actually realized, count big earnings gains for sales of assets to a subsidiary, or defer current expenses using bookkeeping legerdemain.
Why buy stocks when everyone is bearish!
Bernard Baruch, one of the most successful investors in history, once quipped that the best way to make money as an investor was to "buy straw hats in winter!"
While straw boaters aren't really big sellers these days - either in winter or summer - Baruch's advice still holds true; the best time to buy stocks is when everybody else is running for cover.
The fact of the matter is that most investors are wrong both at market tops (when everybody is bullish and thinks the sky's the limit as far as prices are concerned) and at market bottoms (when everybody thinks the market is going down, down, down!). There's a whole school of investment theory and strategy (Contrarian Investing) built on the fact that most individual investors - acting as a heard - are invariably doing the wrong thing at the wrong time.
One of the stock market indicators most widely used by professional investors and really savvy individual market players is the level of "odd lot short sales." This is, simply, the number of odd lots (blocks of few than 100 shares of a particular stock) sold short. (A stock is sold "short" when a seller who believes a certain issue's price will decline "borrows" shares and then, sells them, intending to repay his loan with lower-priced shares at a later date.) According to experts, a marked increase in this action is an indicator that so-called "small" investors think the market is going down...and that, of course, means the market is headed higher, since the little guy is always wrong.
Why not buy when everybody's bullish!
Just as consensus opinion is usually wrong when it's bearish, so it's usually wrong when it's superbullish.
Consider: Joseph Kennedy, the Patriarch of the Clan, made much of his fortune in 1929 by getting out of stocks just beforethe crash and having cash on hand to buy stocks at bargain-basement prices when everybody else was in a panic!
How to make money in a "down" market!
Talk to most so-called "savvy" investors about making money in bear markets and they'll probably start talking about two strategies investors can adopt when the stock market is headed for the pits: selling stock short (selling "borrowed" shares in the hopes that the market will drop and the borrowed shares can be replaced by lower-priced ones) and buying individual stock options or stock index options (puts) that will increase in value as the market moves lower.
Unfortunately, while these strategies do, indeed, offer profit potential, they are suitable for use only by sophisticated investors who have plenty of time to track short-term market moves (and the ability to weather losses).
There is, however, a little-utilized market strategy that enables even the "unsophisticated" to find attractive total returns. This strategy entails the purchase of convertible bonds.
Convertible bonds are by no means new to the marketplace, but, because of their hybrid nature (part bond and part equity). they're often overlooked by most investors.
A convertible, in the simplest terms possible, is a security that offers investors some of the profit potential of common stock with some of the downside protection provided by the fixed income yield of a "straight" bond. A convertible is a corporate debt instrument (like a straight bond) with a stated interest rate, a definate date of maturity, and call provisions. The major difference is that, with a convertible bond, you have for a stated perion (usually the life of the bond) the added right to exchange the bond for a fixed number of common shares in the issuing company.
During a bear market, when prices in general are headed lower, a convertible bond (which continues to represent at least theoretical, or possible, stock ownership) will resist downward price pressures because its so-called "investment value" - the value of the bond based solely on its fixed income payments - will remain relatively constant.
Because yield serves to prop up the bond's price, in fact, a convertible bond will provide a theoretical "floor" beyond which it will not drop even it its underlying stock drops all the way to the proverbial basement!
In searching for convertibles, always check the credit rating of the company offering the bond and stick with investment-grade companies (rated BBB or higher by such rating groups as Moody's and Standard & Poor's), stick with larger issues ($20 million or more) to avoid liquidity problems in the aftermarket, and choose bonds that have call protection so you'll be protected from redemption if the price of the underlying stock soars.
If convertible bonds sound attractive to you but you're a bit frightened by the complexities involved in convertible investing, consider buying a convertible bond mutual fund. these funds offer wide diversification along with all the advantages of professional management provided by experts. Income in a convertible bond fund is also easily reinvested, boosting tital gains appreciably.