Making Money 201? Whoohoo … time to have some fun!

I’ve just loaded 14 new videos into the Vault (click on this link, or check the VodPod Widget on the right hand side of this page for the latest) …

Now for today’s post: Part 2 of a 3 part series on weathering the current financial storm …

OK, so we’re all panicking … at least that’s what the media seems to be telling us as 180 year old investing firms crumble, banks crash and the financial markets are in turmoil, even after a $700 Billion ‘rescue package’.

Time to run for the hills?

Well, if meeting average market returns over a long period is enough to satisfy your needs, read yesterday’s post … click the close button on this page NOW (and, also on every personal finance page / news source hot tip / etc. /etc.) … and, live happy my friend: by the time that you retire, the events of today (and, the two or three more ‘meltdowns’ that you will no doubt live through) will be distant memory and you can only hurt your financial prospects by paying any attention to current events … and, I mean any given set of ‘current events’ between now and the day that you sign-off for ever.

But, that’s not you, is it?

You want – nay, need – extraordinary returns, extraordinarily soon … right?!

In that case, maybe it’s time to listen to our good friend Warren Buffett – The World’s Greatest Investor:

“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

– Warren Buffett, 2001.

So, does this seem like a time to be fearful to you … or a time to be greedy?

According to Warren, it’s a time to be … greedy: how?

Well, in the current market, everybody knows that cash is king … so, let’s go and make lots more of it!

Before we take off, let’s do a quick ‘pre-flight’ check; do you have your financial house in order?

Let’s see: your 401k has taken a hit, your house has devalued …

… but, you have little credit card or consumer debt, and you are socking away money regularly. So, CHECK.


Welcome to Making Money 201, which is all about increasing your income through some combination of hard work and risk-taking – the combination that you choose is entirely up to you (and, how ‘steep’ your Number/Date ‘mountain’ will be to climb).

Why do we need more income (besides the obvious!)?

Because, everything financial is on sale right now: stocks, real-estate, loans … the whole box ‘n dice … so, we want to be ‘cashed up’ to take advantage of all the bargains coming our way.

The only problem is ‘market timing’ … take a look at this chart from the Wall Street Journal:

It shows the stock market from 1900 to today, every year across the bottom … but, the right hand side shows a logarithmic (i.e. exponential) scale.

This means that the next move in the market, over a (say) 20 year bull market, will take the Dow Jones from 1,000 to 10,000 … sounds HUGE (and, it is: 10 times your money in 20 years!) … but is ‘only’ an annual compound growth rate of 12%.

The problem, though, is in the RED areas of the chart:

These show the Super Bear Markets – which can be described as FLAT periods in the market that can last 10 to 20 years (if history is any guide) interspersed with volatile short-term up/down movements.

So, I see two possible strategies:

1. Build up CASH

… to be positioned to take advantage of the Next Great Bull Run. Or, maybe we invest in property – I’m sure that we could produce a similar chart.

Here’s what to do: tighten your belt … resign yourself to very limited increase in lifestyle for now … and, take all of your excess income from your full-time business, part-time business, 2nd job, lottery winnings, inheritances, whatever and, buy stocks (and/or real-estate) whenever you can.

Look for bargains in the market (you know, great companies paying good dividends and/or growing profits even now, that have been beaten down to less than 12 to 15 P/E … better is 8 to 10 P/E) and start buying into 4 or 5 of these … and, keep buying! Don’t stop … ever.

This will create your own mini-Berkshire Hathaway, making you a mini-Warren Buffet: you have a ‘cash machine’ (job/s, business/es) and you use it to buy good businesses cheap; then you hold forever. If the price goes down, so what? You simply buy more at the cheaper price as soon as you can afford it. And, if the price of the stock goes up, good fer you, Son … now and go an’ buy yerself some more!

When the market does ride the next wave (one that you will only see in hindsight) you will really see how cheap you got in …

2. Ride the volatility

The first is the ‘safe’ strategy, but will net us closer to 0% growth over the life of the Bear Market than the greater-than-market returns that we need … we need time to ride the downturn and pop out the other end with a basket of great stocks/real-estate assets bought at relatively cheap prices.

But, if you are able to accept some significant risk, there is another way …

Now just might be the time to take a business / trading approach to the market!

In a volatile market, we don’t know from one day/week/month to the next whether stocks will be significantly up or down … but we do know that they will change: often significantly.

This can be an ideal time to speculate with options … but, only with money that you are prepared to lose in the hope that the upside justifies the risk.

Sounds a lot like a business, doesn’t it? Which is why this is an ideal Making Money 201 Income Building Strategy for those who can stomach the ride.

What do I do?

Pick a stock that you like, but that has great volatility … ‘tech’ stocks are ideal for this (AAPL, RIMM, etc., etc.) and buy an equal quantity of PUTS and CALLS at the smallest gap around the current stock price. Sometime during the month, in a volatile market like this, it’s a reasonable bet (at least, I like to think so) that the price will change. If it does – by enough of a margin to pay for the cost of the options – you win!

Of course, you could flip/trade houses, if you prefer real-estate … but, the strategy is essentially the same: add value from volatility and/or sweat to ‘create’ returns in an otherwise generally flat market.

So, if you’re in Making Money 201, why don’t you share with us what you are you doing to not only weather the storm, but profit from it?

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6 thoughts on “Making Money 201? Whoohoo … time to have some fun!

  1. I agree this is a great time to buy stocks but in Buffets case, it’s important to buy stocks which have a monopoly of some sort and are just down because scared people took their money out of their retirement accounts and went into cash, forcing fund managers to liquidate. (it’s time to get in before the fearful start to get greedy again)
    Taking the Peter Lynch prospective could be interesting as well. He appreciated bad economic times because the week companies would likely go out of business and the strong companies would survive and gain a greater market share. Now you just have to identify those strong companies that will out weather the weak.

    p.s. – trading in and out of stocks as you see them under and over valued is an insane amount of fun (hence the title of this post). Assuming your on the money making side of course.

  2. @ Josh – LOL. Yep, WB calls it a ‘Moat’ … a competitive strength of some sort: strong brand, secret formula, monopoly etc.

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  4. Reading your writings about what to do when your suddenly hit with markets like we’re currently experiencing. I see you advise an annuity !!!!
    Sorry, but I have always felt that these are the worst place to put your money. Only put your money there if your looking to make an Insurance Company rich. Would never advise these instruments even for someone I don’t like.

  5. @ Steve – Thanks, but it’s a kind of grudging ‘advice’ …. and, I do say: “Buy a Fixed Annuity – costs suck, but if you can’t do 2. or 3., what’s really left for you besides TIPS or this?” as a bottom-of-the-barrel choice.

    But, look at the bright side: if you are flush with funds and are just concerned about a fixed annual income (that can even be correlated with inflation) an annuity is as close to a guaranteed way to get that, as I can see … aside from TIPS (my preferred choice).

    BTW: for our other readers, the post you are referring to is this one:

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