Stock Markets Plummet, Do NOTHING!!!

Whenever the stock market is having a tough go of things I always get a kick out of the gloom and doom stories that begin to trend, and all of the wise men of the markets declaring "this is the end," "the sky is falling," and "cash it all in!" It's why I write about it so often. But what gets me more is the well known fact that, well...

We have been down this road time and time and time again.

The fact is, and remains, that the markets will move up and they will move down. And by the way, for anyone who has ever paid attention, they tend to typically go higher than where they left off before they fell when they eventually do go back up. And the markets always do go back up.

Currencies rise and fall. World markets expand and contract and shift. One day it's Japan whose the hottest growing country. Then it's China. Right now it's actually India. Consumer confidence goes up, it goes down, it goes dormant. Wages rise, wages fall. Banks are fantastic, then they are not. Same goes for auto companies, and by the way, every single company that has ever done business and every single market sector for that matter.

Tech is the doll. Then it's the financials. Then it's oil. Then it's durable goods. And then one day they aren't and something else is.

After the Crash of '29, after the recession that hit in the 80's, after Black Tuesday, and after the financial crisis of 2008, all were undeniably the worst markets to deal with obviously, but were also some of the best times to invest. Buy low, sell high might be considered old school to some in the current markets—but I think fundamentally the concept is still very much true.

And the markets are never lower than when they are down.


Wow. That's a brilliant statement, is it not? Of course I am being facetious. But more than buy low, sell high, what is really the point here is staying the course in good times and in bad times. On the averages historically, heedless of what the market does in the short term, you are going to come out ahead in the long term. And since you cannot predict what the market is going to do—ever—there is really no rational reason to try to "time" when you are going to add shares, or even perhaps when the best time to do that is.

It's always painful to see the value of your portfolio go down, and it's even harder sometimes to see the light at the end of the tunnel. What's easy is reacting to it—and it is also a very dangerous and unwise move when it comes to your invested money.

Of course I am speaking not to speculators here, nor traders. I am speaking to investors. Why is that an important distinction to make? Speculators and traders are not investing in companies. These folks are investing in short term movements in the markets. Be they short sellers or day traders buying long hoping to gain a few bucks on a momentum play, the reason they jump ship is because they are riding in a big ocean with heavy waves afoot in a dingy. They can't handle the rougher seas like a bigger boat or yacht can. Investors are the bigger boat, and they can ride out the storm.

This market will fall some more. That's to be sure. All of the indications with oil and a slowing economy in Asia and Europe point to that. But that's a time to buy, not to sell. And since you happen to be an investor invested in companies this just means that those companies, whose fundamentals really haven't changed all that much aside from being kicked around by other falling sectors and stocks, are going to be going on sale. That's when you load up, get more bang for the buck, and enjoy the ride back up eventually.

What's more, if you are invested in dividend paying stocks it's an ever better ride up since the shares you will buy in the downturn will obviously be cheaper, increasing the total yield on your invested dollars.

Sit tight, stand still, do nothing—well, other than buy more stock. The markets will find their current bottom, and then it's bottoms up. The smart money, the investors who ultimately understand the nature of these market dynamics of rising and falling will have won the prize and laughed all the way to the bank.

Mark my words...for the umpteenth time.

Stock Market Correction No Big Deal

Without a doubt there are more than a few investors clutching at their hair and ripping it out in painful clumps at the sight of the DOW which has plummeted more than 800 points in just two days. And of course other indexes are falling handily as well.

For those who have no hair, they may just be tearing their eyeballs out.

I don't mean to make total light of the situation. It is painful for anyone to watch their portfolios lose hard earned cash. I don't like it anymore than anyone else. But these things are also inevitable, especially since the stock market has done extremely well for at least the last four or more years. At some point things simply have to turn back to a bit of reality. And the reality is that the markets are and were largely overbought.

And really, the selloffs in the markets are really due to panic, not necessarily sound financials. Earnings reports have not been that bad folks.

There is the issue with China devaluing their currency. There is the issue of the recent Greek crisis and the question as to whether or not Greece is really out of the woods. There is unrest with regard to Iran, and the entire Middle East. There is an upcoming potential change of characters in the political world. And there was a recent pull back in jobs data, and of course there is talk of the Fed upping interest rates.

So I get the unease.

But time and time again markets have fallen and risen back up, and then some. And I see no reason why this would not be more of the same. This is normal for the markets to do this, and because it does happen I always say it is a good idea to buy into the upswings in the markets, but leave enough cash behind so that when the markets lose their tailwind you can buy into the panic and cash in on the other end of it.

Investors are on a selling frenzy. As for me, I will be bargain hunting. Now is the time to buy. Not panic. The stock market correction hurts. But really it is no big deal. But it is a potentially big opportunity. Opportunities like this don't come around often. This opportunity has taken four long years to come around. I say pounce on it.

A Lesson In The Value of Covered Call Options

I am going to give you a real time example of how stock options, done right, can make you a significant alternative income. For those of us who invest in the stock market, we call this generating cash on underlying investments that you wish to own, do not wish to sell, but that you wish to continue to earn from.

When I have talked about stock options in the past, I always stress that I do not buy stock options. I sell stock options. Why do I do this? It is simply a matter of this being my strategy. I buy stocks because I believe they are worth more than the price that they are currently trading for.

Pretty simple right?

Therefore I do not wish to sell the stock of a company that I feel is going to continue to make inroads, continue to advance, and continue to provide a great income opportunity over time. You sell your losers. You do not sell your winners. But when you have winners, you make the most out of them. You get every penny out of them that you can. You do not worry about what the rest of the markets are doing, or what the rest of the markets are thinking. You do your homework, you decide a valuation, and you proceed from there. And you keep in mind that everyone invested in a company has a different idea about what the company is doing, what it is going to do, and so this helps to create a vast market of individual investors willing to do all sorts of things depending on where they want to be with the stock.

You will not always be right, but that's okay. That is part of the game.

I said you have to do your homework, and repeat this here because if the idea is that if you do not wish to sell your stock, but want to continue to generate income on your stock, you need to have a good idea where you think the share price is realistically going to go.

I won't get into the math of that. You'll have to figure that out on your own. But there are tons of websites that can provide you valuable information on how to valuate a stock.

I currently own 1,300 shares of Cypress Semiconductor, and that's already great because it is a stock that pays you while you wait. My quarterly dividends on this stock are $143. Even if the stock does nothing at all, I'll earn $572 in a year just because I happen to own it. My cost basis per share is $12.83, and as of the close of today's trading, ($14.95) I am already up $2.12 per share, or have an on paper profit of $2,756.

I have no intention of selling my shares. I think the stock is worth about $17 per share.

But herein lies a part of the fun of this. I do believe I own a $17 stock. I do not believe that my $17 stock is going to trade at $17 within the next 30 days. I made this decision in January. In fact, in January I did not believe the stock would trade much above even $15 within the next 30 days, and moreover, I did not believe that the stock would close trading at $15 or higher 30 days from January.

It did go past $15 briefly. But as I suspected, it did not stick, and the stock took a significant down turn after pushing past $15. The stock broke resistance and people took profits. It's that simple.

Why is this important?

I want to make a monthly income on a stock that is now showing a profit. I want the best of all worlds. I want my $17 stock. I want my dividends. I want to keep on owning it. And I want the other investors in the market who believe the stock is going to go higher sooner to want to buy the right to buy my shares at $15.

I am looking for those individuals who believe in the same valuation I do, but believe that it will reach that valuation before I think it will.

This creates a market of buyers in the options world willing to pay a premium to have the right to buy shares at $15 that they are convinced are worth significantly more. If they can buy an option to buy shares at $15 and the stock goes to $17, they reduce their gain by the amount of the premium they paid for the option, but still win since selling the shares they obtain at $17 still reaps them a good reward.

Remember, the options allow them to buy the shares at $15. In their world, they are up $2 per share minus the premium.

Guys like me love this, and take this to the bank.

The options buyer  says "I can buy the stock, or I can buy the right to buy it at a price that I think is valued less than what I think it is worth. If I buy the stock I lose more than if I buy the right to buy it. If the stock does not do what I think it will do, I am only out what I paid for the right. Not the total loss of buying the stock outright and losing the overall value of my investment."

This is where guys like me come in and make money.

I am more than willing to sell you the right to buy my shares that I have $12.83 invested in that are worth $17 for $15 before they will actually be worth $17. Why? Because I am convinced that my $17 stock will not be worth $17 in the time period you think it will be. You are willing to pay me to buy my shares for less than they are worth thinking they will meet the valuation before I think they will. Even if I am wrong, and the stock does something unpredictable, I still get my premium and sell my shares for more than I paid for them.

Enter charts and technical analysis which is way more than I will get into here, but do your research and you can learn where technical analysis can help to make short term decisions on where a stock is heading based on market sentiment...

And that word I used earlier in this text. Resistance. It is important to know what that is, and how you can decide where to set your strike prices in short term options selling.


...to be continued

READ PART TWO