Investing Strategies StockCVRz › 101_eBooks › Investing... · Investing Strategies That Work Every Time Investment 2: Stocks Let’s take a look at investing in stocks. We are

INVESTINGSTRATEGIESThat Work Every Time:

STOCKSA Step-By-Step Guide to Making Your Money Grow

J A M E S S K I N N E RM A R K V I C T O R H A N S E N

R O I C E K R U E G E R

© 2007, James Skinner, Mark Victor Hansen, and Roice Krueger, All rights reserved. 1

Ideas That Can Change Your Life™ in Wealth

Investing Strategies That

Work Every Time: Stocks A Step-By-Step Guide to Making Your Money Grow

James Skinner, Mark Victor Hansen, and Roice Krueger

“Investing Strategies That Work Every Time”

shows you what the best investors know—how to

use time-proven strategies to multiply your wealth

in real estate, stocks, private equity, and running

your own business.

___________________________________________



Investing Strategies That Work Every Time

The Authors

JAMES SKINNER is the founder of two global financial

groups that manage billions of dollars of assets. He is

also recognized as one of the world’s foremost business

thinkers and appears regularly on Japanese television.

MARK VICTOR HANSEN is the co-creator of the Chicken

Soup for the Soul empire and is the best-selling nonfiction

author of all time. His goal is to make the planet work

for all humanity!

ROICE KRUEGER co-founded Franklin Covey, the

world’s largest training company, and has supervised

consulting projects for 80 percent of the Fortune 500.

NOTE: Ideas That Can Change Your Life™ is a

collaboration of three of the world’s most amazing

authors, speakers, and thinkers. The first person “I” may

refer to any of the authors.




Foreword

There are many, many ways that we can invest in the

world. We live in a phenomenal time in human history

when there are literally thousands of investment vehicles

available to us. Many of them are confusing and hard to

understand.

We want to get back to some of the basic

investment strategies that have been proven over time,

location, and destination to work again and again for

many people who may not be spending 100 percent of

their time trying to understand investing.

The secret to investment success is the

consistent application of time-proven strategies, not

the use of complex, hard-to-understand investment

vehicles created by investment bankers out to take

your money!

When most of us invest, we do not have the leisure

of spending 24 hours investing and doing nothing else.

But we still have to have investing strategies that work.




If you look at the world as a whole, most people

make their money by doing what?

They do it by working.

They have a job and earn money.

But even if you are working for a living, you still

need to invest that money to grow it, because if you

want to master wealth, you need to be able to create,

grow, and protect your wealth.

The mastery of wealth requires you to create,

grow, and protect your wealth.

Investment is the primary means of growing your

wealth.

Investment is the primary means of expanding

your wealth!

Through investment, you are going to turn your

money into something bigger than it was before.




Investing Strategies That Work Every Time looks at four

categories of investments, four questions to ask anyone

who asks for your money, and five vital lessons we’ve

learned about business.

All of them have been shown to work consistently

over time, and you can use them to increase your own

wealth.

This book will show you proven strategies for

investing in Stocks.

James Skinner, Mark Victor Hansen, Roice Krueger




Investment 2: Stocks

Let’s take a look at investing in stocks. We are going to

look at stocks from a couple of different perspectives.

The stocks that we are talking about right now are

stocks that are traded on a public exchange. It could be

the Stock Exchange of Singapore, the New York Stock

Exchange, or the exchange in San Francisco, London,

Tokyo, Korea, or even Hong Kong.

It doesn’t matter. These are stocks that anyone can

buy. To put it simply, they are available for purchase by

anybody, including you.

The really great thing about the stock exchange is

that it is a very level playing field. Everybody can buy.

Everybody can sell. You can buy and sell when you

want. You can buy and sell at the same price as anybody

else.

The only thing that you have to know is how to

choose.




To win at stocks, the only thing you have to

know is how to choose!

I want to give you some strategies for selecting

stocks when you buy a publicly-traded company.

Strategy 1: Buy the Leading Edge Not the Cutting

Edge

Everything in the world has a life cycle.

Animals have life cycles. We are born, grow, wane,

and die.

Companies have a life cycle. Products have a life

cycle. Technologies have a life cycle.

Now some of these life cycles are quite predictable.

For example, in the area of technology, it typically

takes some 20 years to move from cutting edge to

leading edge.




It simply takes this amount of time to move from

basic research to a product that a significant number of

people are buying and using.

It typically takes 20 to 30 years for any new

technology to move from basic research to well

accepted product.

When cell phones came out, how many people had

them? It isn’t a difficult question, by the way. None.

That is why they were first coming out.

When TVs came out, how many people had them?

None. When cars first came out, how many people had

them? None.

My father used to work at the Central Research

Laboratories of RCA. RCA is the company that

invented color televisions, just in case some of you are

not familiar with them.

In 1969, in the Central Laboratories of RCA, they

were doing communication between the buildings by




laser for fun. How long did it take before fiber optic

communication became a part of your life? You are

talking 20 to 30 years later. This is consistent from

technology to technology.

Take cell phones. My father had one in 1978; when

did you get your first cell phone? Think about it. You

are trying to imagine a time when you didn’t have one,

but you realize that it hasn’t been all that long, right?

So, if you buy a company at the very beginning of

the curve working on cutting edge technologies for

products that nobody has, how long are you going to

have to wait before you start getting rewarded? You will

wait 20 years.

It is a long, long wait.

This is not where you want to be choosing

companies. You don’t want to be choosing companies

that are at the cutting edge of technology, you want to

be buying companies that are leading the markets on the

edge of product implementation.




Don’t buy at the cutting edge, but at the leading

edge!

Most technologies, by the way, never get to

implementation at all. They die in the laboratory as great

ideas that don’t happen. A lot of people have bought

those companies and never made any money.

Most great ideas and technologies never get

implemented, and their shareholders get nothing!

As a smart investor, this is not where you want to be

investing. You want to wait until we see that this

technology has some legs. Is this going to be something

that human beings around the world really want to buy?

How will we know that they really want to buy it?

This is not a difficult question. Don’t think too hard.

We will know that they want to buy it because will be

buying it! It is not difficult to figure out.




As they buy it, the potential population of people

who can use that product will start to grow, and you will

get to a point where around 10-15 percent of the

potential market for this product will actually be buying

it. Now you know that it has some legs.

The sweet spot is at the time when 10%-15% of

the possible users for that product or technology

have actually purchased!

You know that this technology is important to

people because people are buying it. You start to see

around you about ten percent of your friends and work

associates carrying a cell phone and you know that cell

phones are starting to be important to people. It is an

idea whose time has come!

Nothing is as powerful as investing in an idea

whose time has come!

How many of your working colleagues have a cell

phone now? They all have one. This is well down the

road in product and technology life cycle.




Do you want to be buying into that now? It’s too

late. Now, what is the competition in the cell phone

space like? It is phenomenally intense.

How hard is it to pick a winner now? It is really

hard, right?

It is easy to pick a winner early in the game.

So, you go down here when people are starting to

buy it, when about ten to fifteen percent of the possible

users have actually purchased and you buy the number

one company in that space.

Buying number one is a winning strategy!

How difficult is that to figure out? You call up your

stockbroker and say, “Who is the market leader in the

following technology?” He will tell you.

Your stockbroker is not in the business of giving

you advice. If your stockbrokers knew the answer to the




question that you want to ask them, he would not be

your stockbroker. He would be making the investment.

He wouldn’t be telling you about it until after he’d had

done it.

Your stockbroker is in the business of giving you

information so you can give yourself advice.

So getting back to our discussion, why do you buy

number one?

You choose the leader in the market, because the

leader in the market has a tendency to remain a leader in

the market.

Leaders have a tendency to remain leaders!

I am just going to give you half a dozen examples or

so of this, so you can see how powerful this process is

and how it can be used by anyone.

We will start with an old example. When ten percent

of the people who were going to buy an automobile had




bought one, who was the market leader in cars? Ford

was the leader. How many would have liked to buy Ford

stock at that time? That is an absolute no-brainer, right?

Let’s go to a more modern example. When ten

percent of companies had implemented computers,

which company was the market leader in computers?

IBM was the market leader. How many of you would

have liked to buy IBM stock at that point and time?

At that time, who was the market leader in software?

Microsoft was the leader. How many of you would have

liked to buy Microsoft stock at that point?

When ten percent of the people that you know had

access to the Internet, who was the world leader in

Internet equipment? Cisco Systems. How many of you

would have liked to buy Cisco Systems stock at that

time? It is not complicated.

When ten percent of the people who were ever

going to shop on the Internet had actually purchased

something on the Internet, who was the leader in




Internet shopping? Amazon was the leader. How many

of you would have liked to have bought Amazon stock

at that point and time?

When ten percent of people knew what a Net

auction was, who was the world leader in Net auctions?

eBay was the leader. How many of you would have liked

to have bought stocks at that time? The list goes on and

on. It is not complicated.

The point I want to make is that you only need to

buy one great stock to become rich.

When ten percent of the population in the United

States had ever shopped at a discount store, who was

the market leader in discount stores? Wal-Mart was the

leader.

When ten percent of all people had ever had fast

food, which was the market leader in fast food?

McDonald’s was the leader. How hard is it?




Strategy 2: Volatility in a Range

I run a financial service company. We have a hedge fund

and manage about $2 billion of other people’s money. I

have a business partner who is really a bright guy.

People ask him, “What do you predict the markets will

do in the future?”

He is always right!

“I predict that markets will continue to be volatile.”

This means that prices will continue to keep going

up and down. He has never been wrong yet.

If you ask me what is going to happen to the price

of any stock, my answer is that it will remain volatile.

You can use that to your advantage.

If you look at a stock and look at the graph of its

price, you will find that some stocks are only volatile in a

certain range.




They go up and they go down, but somehow they

are always up and down in a certain range.

Some stocks exhibit volatility in a fixed range of

pricing.

For example, I once found a stock called Brook

Trout. My apologies to the company, but to this day, I

still do not know what they do.

The one thing that I noticed is that their stock was

volatile between $12 and $14 per share.

That is the only thing to this day that I know about

the company other than their ticket symbol.

Every time the stock was up to $12, what do you

think I did? I bought it. I would put it in a stop loss

order, because I am not so bright that I think that I am

always going to get it right. I told my broker that if the

thing ever falls in value 10 percent below $12, it

obviously means that I don’t know what I am doing, so




he should immediately sell it. You don’t need to call me.

You don’t need to find me. You just sell it.

Stop loss is a very valuable tool.

I was in a place called Tofino at the very far west

end of the Trans Canada highway the day that the

NASDAQ crashed.

I had ten trades on at that time. There was only one

problem. Somebody had run a truck into a telephone

pole, and they had snapped the telephone pole in half.

The city of Tofino, the entire city, was without electric

power, telephones, or Internet access for 16 hours. This

was all because of one telephone pole.

During this time, the NASDAQ was crashing.

I slept very well that night because I had stop loss

on every trade that I had.




Eight of my trades lost money. Two of my trades

went up dramatically during the crash, and I made

money that day.

You always want to invest with insurance.

I buy the stock at $12, put in a stop loss order for

$10.80, and wait.

As soon as the share price hit $14, what would I do?

I would sell it.

Then what would I do? I would go short.

What going short means is that you get your broker

to borrow some of the stock from someone else and

then you sell it. All you have to do is buy it back later to

give it back to the guy you borrowed it from.

Going short means that through your broker

you borrow stock and then sell it.

By buying the stock back at a lower price later on,

you can make money in a falling market.




I would sell somebody else’s stock at $14 and I

would buy it back for them at $12. So, I would make $2

per share on the trade.

I did this over and over, making $2 going up and $2

going down.

This thing happened every two weeks. So, $2 on a

$12 investment is what percent? It is a bunch every two

weeks.

If you can find stocks that are volatile within a

range, you will be well off.

All you have to do is identify a pattern of volatility

within a range.

To find the volatility of a stock, I used Bloomberg. I

went onto www.bloomberg.com and graphed the stock

price. I chose another stock and graphed the stock price,

looking for a trend of volatility within a range. You can

look at it for a month or for six months.




You can also ask a good stockbroker. Let them do

the work for you. They would love to help you do that.

“Show me some stocks that are volatile with in a range

of $X.” They can do it on penny stocks as well as dollar

stocks, so anyone can afford it.

Writing Covered Calls

Covered calls are option strategies that allow you

generate income off of the stocks that you hold while

mitigating the risk of a fall in share price.

To help you understand this strategy, we will have to

first explain what an option is.

An option is the right to either buy or sell

something at a given price at or before a given date.

It is not the obligation to do so, but the right to do

so. You don’t have to, but you can if you want.

For example, say that I have this wonderful coat. We

will do a suit option. For 50 cents, I will give you the




right to buy this coat anytime during the next four days

for $400. By giving me the 50 cents you would acquire

an option to buy my coat. At your option you could

either buy my coat or not buy my coat. The 50 cents is

whose? It is mine. I get to keep that, whether you buy

the coat or not.

The money I get paid for giving you the option is

called the premium, and the premium is mine to keep

whether you exercise your option or not.

Options are easiest to understand if you think about

an option on real estate.

You can go to somebody and say, “How much

would you like to sell this property for?” Maybe they say

that they want to sell it for $100,000. You say, “I will

give you $5,000 if you will give me the right to buy it for

$100,000 at any time during the next 60 days.”

Now, if you are the owner, does that sound like a

good idea? I am going to give you $5,000 for the right to

do what you want me to do anyway. You want to sell it




for $100,000, and I will give you $5,000 to have the right

to buy it for $100,000!

The reason that it might be good for me is the price

of real estate in the neighborhood might go up in the

next 60 days. The $100,000 property might be worth

$120,000, and I would make $20,000 on what is initially

a $5,000 investment. Or, I could find another buyer who

wanted to buy it for $150,000, and I could sell it to him

for $150,000, making $50,000 on a $5,000 investment.

That is what an option is.

Options provide leverage to turn small

investments into big investments.

Now let’s look at stock options.

Say you buy a stock in the Sentosa Golf Club, which

is trading on the symbol of SGG, and I buy one stock

for $10.

Number one: I want to turn this stock into an

income stream.




Number two: I want to protect myself from risk

from the value of the stock falling.

I sell (“write” in proper industry language) an option

on the stock.

The price of the option will be determined by a

number of things in the market.

The number-one thing that will determine it is the

volatility, how much the stock tends to move up and

down.

The price of an option is determined by the

volatility of the stock.

Say that I sell you the right to by one share of stock

for $10, and based on the current volatility, that option

costs you $1.

When do I get my $1? I get it today. That is cash in

my pocket. I get the cash.




Now, what is the worst thing that can happen? The

worst thing that can happen is that the price of the stock

goes down. So, if the price of the stock goes down to

$9, how much money have I lost? I haven’t lost any

money because I got one dollar from you and I still have

a $9 stock.

So, I am protecting myself from the risk of the price

of the stock going down by the value of the amount I

sold the option for. If the price of the stock goes down

to $9, will you use your option to buy it for $10 if you

can buy it for $9? The option then becomes worthless,

and I get to keep the $1.

The next thing that can happen is that the stock can

stay the same. It would still be how much? It would be

$10. If you can buy a stock on the market for $10 or you

can buy it from me for $10, it doesn’t matter, and your

option is worth how much now? It is worth nothing.




So, let’s assume this is a one-month option. So, one

month from now the price of the stock is $10, and I get

to keep the $1. Does that sound like a good idea?

Everybody else who bought the stock and didn’t

write the option has $10. A month from now, they still

have $10 and I have $11.

Do you see why you want to become financially

literate about the tools that are available to you?

You can be sitting there still having $10 while smart

people are having $11. When you go down to $9, the

smart people are sitting there with $10. This happens

every single month.

Say the stock goes up to $11. How much money do

I get? I get $10 plus $1, and you are now going to buy

the stock from me for $10, and I still have that option

so I still get $11.

Now let’s look at the other two things that can

happen.




What happens if the price of the stock goes down a

lot?

Let’s say the stock goes down to $8. How much

money do I have? I have $9, so I have still mitigated or

reduced the amount of my loss.

What if the price goes up a lot?

If the price goes up to $12, I still get $11. I get $1

for the option, and you buy the stock from me at a price

of $10.

This is a way that you can take any stock and turn it

into an income stream.

That is a reliable strategy that has been used by

many, many people over time to create income streams

and to protect them from downside loss.

You will want to study the whole concept, talk to

your broker, and walk through a couple of variations of




it, because you are able to change the price at which you

are willing to sell. You can sell an option to buy it at

$12.50 instead of $10, depending on if you think the

stock price is going to go up and you want to capture

the up side and get paid a little bit less on the option.

If you sell the option to buy at $12.50, they will pay

you less for the right to buy it at $10, but you can still do

the same thing.

We recommend that you do this on paper for eight

weeks before you invest one real dollar, so you can

make sure you have the formula down and you are

checking it with somebody who is a master at this.

Then I recommend you begin with just a few

dollars; because as much as you do it on paper, the real

learning will come when you actually have some real

money on the table.

When I started trading for my own account and for

my own benefit, for the first two months I did not

understand one word my broker was saying to me. After




two months of trading with my own money, I

understood everything he was saying to me.

A call option is an option to buy. A put option is an

option to sell. That’s the language that is used.

An option to buy something is known as a call.

Since this is an option to buy the stock from me, it is

called a call.

What covered means is that I actually own the stock.

If you write a call on a stock that you don’t own, this

is called going naked. DON’T DO IT! If I give you the

right to buy a stock from me at $10 that I don’t own and

the stock goes up to $100, then I have to go buy stock

for $100 and sell it to you for $10. The amount of your

loss is limited only by your imagination.

Don’t write naked options!




You want to be covered; you want to own the thing

that you are giving somebody the option to buy.

If I give someone an option to buy a house that I

don’t own, I am in deep trouble. What if the guy who

owns it doesn’t want to sell it?

Whenever you give someone the option to buy

something, make sure that it is something you already

own. It is very simple. That is why it is called covered.

Writing call options on stock that you own is

known as “writing a covered call.”

You need to remember that you only need one or

two of these strategies. You do not need to find a large

number of great investments to make you wealthy!

These are the three proven strategies for successful

stock investing:

1. Buy the leading edge, not the cutting edge.

2. Find stocks that exhibit volatility in a range.

3. Writing covered calls.




Make a plan. Work your plan. And may all of your

investments prosper!

With best wishes,

James Skinner, Mark Victor Hansen, Roice Krueger

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Documents

Investing Strategies StockCVRz › 101_eBooks › Investing... · Investing Strategies That Work Every Time Investment 2: Stocks Let’s take a look at investing in stocks. We are