Following on from our last post where we discussed having the “end goal in mind” before starting to invest, today we are going delve more into this topic by plucking out a few examples the market is giving to us at present. Here are strategies and ideas you will be able to fall back upon in due course. Remember we are all different. Some investors/traders can be in front of their screens for many hours every day whereas others only want to invest 10 minutes a week. Some invest for income whereas others invest exclusively for capital gain.
Furthermore you have investors who trade exclusively on fundamentals whereas others may trade solely on technicals. Then you have option traders who either can be buyers or sellers depending again on fundamentals, sentiment or volatility. I haven’t even mentioned forex or futures which again are more options for investors and traders. The list is endless. However this is something you need to iron out. You need to develop your own system and stick to it. Otherwise you will jump from system to system but never really mastering any.
On a side note, I recommend not using your trading account as a means of earning income immediately. You should (especially at the outset) have an alternative income in order to help your business grow at the start. Anyways, here are different set-ups at present (which will suit different trading styles). What would be beneficial for you is to hone in on the strategy that suits you so in time you can become an expert in that particular field. Remember, you will will only need to be excellent at one strategy to make it in this game.
Probably the tried and tested strategy for long term wealth in equity markets would be to invest in dividend aristocrats (or other blue chip stocks with strong competitive advantages). Cash, debt and income are the main metrics to watch out for. Furthermore growing margins and rising revenues over a 5 to 10 year time frame are always also sought after. The trick here is to pick up these stocks at a discount. We do this by tracking valuation metrics (price to earnings, price to book and sales ratios, etc) and monitoring when these ratio’s drop below their historic averages.
One that I have unearthed recently is Roche Holding Ltd (OTCMKTS:RHHBY) which has low debt (debt to equity ratio of 0.89) and a low forward earnings multiple of 14. Furthermore the stock pays out a dividend yield of 3.67% and has strong competitive advantages in oncology and vitro diagnostics. Analysts predict a re-acceleration of 6.3% in its top line next year which looks promising considering the stock is currently trading moons away from its all time highs.
Novartis AG (NYSE:NVS) is another stock with an attractive valuation and strong competitive advantages. This stock pays out almost a 4% yield and is trading well under its all time highs. The company’s patents and balance sheet offer serious downside protection here. Its debt is minuscule as a percentage of its equity and analysts are predicting substantial earnings growth in years to come. Strong patents give companies in this sector strong pricing power and definitely alleviate downside risk to a large extent.
Now many dividend growth investors simply re-invest the dividends back into the stock every quarter which over time reduces the cost basis. Here is another strategy one could employ to reduce cost basis. By simply selling strangles (when implied volatility) is high, one could bring in more income this way every month. Alternatively if capital was an issue with regard to being “put” more stock, one could simply sell covered calls every month to bring in more income. Yes the stock would be at risk of being “called away” from you but if you are investing strictly from income, then I do not see any problem with selling covered calls on your underlyings.
Remember stocks with strong competitive advantages reduce downside risk. If risk management is your primary concern, you should be trading blue chips which are increasing their top and bottom lines plus their dividends consistently over time. The problem is that dividend aristocrats are always in high demand and rarely sell at a discount. However the stocks I’ve mentioned above are approaching $200 billion market caps and are the closest you will get to a blue chip trading at a discount.
Remember to think of other ways to increase your income other than the quarterly dividend. Market timing is the most difficult skill to master in the markets. These stocks should go north – yes. However timing the moves is a whole different equation and usually involves many factors. In the next post, I will go through another investment or trading strategy. The one outlined today definitely doesn’t not need much time and may suit the “hands off” investor who doesn’t want to be engaged with the markets every day.