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-OT-Response to qwerty911. Since it is a quiet holiday period, hopefully OT won't be to much of a problem. Never buying them back has worked well for you and each of us must go with what works. Here is the potential problem. Many of us have stocks [like SFE or TLAB] with a cost basis of $2 or $3 that we consider core-long term holdings. Getting them called away makes the IRS VERY happy. Now, while it is true that most of the time we could buy them back much cheaper, there are many pitfalls from here to there. Lets say SFE got called away at $105 in the example cited. If patient, we could have bought SFE back at $70. Sometimes it is not so clear [except in retrospect] where to buy it back. Maybe next time it only pulls back to $95, we are waiting for $85, miss it, and it is gone to the upside and we are still waiting. Or while waiting, we see something else that appears even better and buy it. In 4 years we look back when SFE is $220 and wonder why we let our our $3 cost basis SFE get called away for $105. I am not so much disagreeing, but just explaining to others who may not be so familiar, that getting it called away causes a number of subsequent decisions to made, any one of which can disturb our long term plan. Not everyone has the desire or ability to be engaged in that type of activity. Many true long term holders should not engage in call writing at all as it can disturb well laid, long term plans if not executed correctly. For others, it may be worth considering, as it brings in substantial income -especially at times when the market "goes goofy" and speculators pay generously for the right to take our stock away at much higher prices. Option selling is one of those things that seems excessively easy and low risk, but requires a fair amount knowledge to do correctly. That brings up a related topic [still -OT-] Money management: Many think the key to great profit lies in being a great stock picker. While important, money management is at least as important. I've maintained, [but not empirically tested] that great returns could be generated by being assigned a random portfolio of 10 stocks and using well known management techniques. The premise, [which I've personally found true and the experience with former clients], is that out of 10 stocks we pick, it is 1 or 2 stocks that will provide over 50% of our eventual rate of return. When we pick 10, we think they all have great potential. Some obviously don't live up to the potential we feel they are capable of when picked. It is what we do after we pick them [or even if we were randomly assigned them] that makes the difference. It goes back to let the winners run and cut the losers. Very simple in theory, but hard to execute. Lets say out of those 10, one year later:, 1stock down a lot, 2 are down a little, 5 are up a little, 1 is up 50% and one is up 100%. What commonly is done, sell the one up 100% or the 50% gainer, and recycle those $ into another stock [usually one thought to be "cheaper"]. What should be done is take the $ in those 2 or 3 down the most and put it into the ones up the most. Think of it as a horse race. 10 horses. At the start we put bets on all equally. Half way around the track, we get to magically stop the action and re-arrange our bets. Are we going to take our bet off the leading horses and put it on those trailing furthest behind? That is what many do with stocks. The nags in the rear could catch up and pass the leaders, and occasionally do, but what are the odds? It is a poor bet. It would be far better to take action when the first stock doubles. At that point, shoot the losers, take the residual $ from them and put that money on the two winners. Ex. If I may from a personal standpoint. I got Coherent from SFE-now Tellabs. Received rights that allowed me to buy $2,000 worth. Current value $78,912. What if it had been sold at a quick double or triple [and it was quick] because it was "overpriced" or because I adhered to the useless adage "won't go broke taking a profit". What are the odds I could have picked another stock that subsequently did as well? Not great. Now what if I had been smarter and immediately doubled up when it doubled. Cost basis would be $6,000 with current value $157,824. Alas, was not that astute. Yes, this is hindsight cherry picking, and sometimes the stock is like Compucom, where if bought at $3 and doubled up on at $6 one would now be sitting on a dog at $4. [Even then, proper money management should have one out earlier, as the company started having problems long before it got back to $4 and company problems are a potential reason to consider bailing.] Tellabs went through at least 2 years frustrating years of sideways trading after the initial run-up, before finally breaking out again. During those years, the company had no problems, earnings continued to grow. Another example done partially wrong. I loaded up on SFE just as it broke out of a multi year trading range at the then high price of $19 3/8[adjusted for splits, $3.30] in "93. Having seen it trade between $9 and $18 for years, I started selling at a double, then a little more higher etc. Each sell not very much, but adjusted for the split each 100 sh. sell became the equivalent of a 600 sh. sell on todays stock. The result: If I had just gotten Altzheimers, forgot I owned it, I would now have 9,600 sh [19,200 if doubled up on it, when it doubled]. As you know, woulda, shoulda, coulda, was thinking about, mean one thing only...Didn't! Won't embarrass myself by revealing how much is left, but you can safely conclude, well less than half. Even with this gross violation of proper money management SFE and a few other special 1 out of 10 ers. still have accounted for probably well over 1/2 of annual rate of return for me this decade. Last decade, forget it. My philosophy was Don't let a profit get away-sell that overpriced double and get something cheap. The result was a portfolio of "good values" that wheezed and coughed and sulked in the stable while those stupid "overpriced stocks" like Microsoft kept going up. Luckily, I had a decent paying day job-not the case this decade. Sorry to have made this personal, but felt this was the best way to bring the point home. It is those rare 10 and 20 baggers that really bring home the bacon. This is why selling calls on those low cost core holding winners should be approached with some of the guidelines stated in the earlier post, or not at all. I'm sure the reader can find all kinds of exceptions and arguments with all or parts of this discussion. Some do very well with short term timing, never keeping a stock long enough to triple, and trading into another stock at the start of its elevator ride. The skill level and costs involved are daunting but not insurmountable. The experience of screaming high tech and especially internet stocks the past 2 years make short term trading seem easier than it is. That will change-possibly has already. But, whatever works...Just some thoughts on a lazy Memorial day, hope you are enjoying it. Thanks, Mike |
