More on Stocks - A simple, effective strategy - Part 1.

[JohnHumbert]

Thanks for everybody's kind comments and PM's......Do to many request, I am going to expound on an excellent, very safe trading strategy for small-to-medium investors to make 15% to 25% on your portfolio per year. This is one of the first strategies I put together and I still use it today - falling back on it when there's no other compelling deals or opportunities.

The strategy revolves around REITs (pronounced "reets"). For those you don't know what REITs are - it stands for Real-Estate-Investment-Trust. These are stocks that are based directly or indirectly on real estate - ownership, rental, loans, etc. - a REIT could involve any of these.

The nice thing about REITs is that they are required by law to distribute profits quarterly to the shareholders in the form of dividends. For example, if a REITs pays 6% per year, each quarter you will recieve 1.5% on your money - deposited directly into your brokerage account.

REITs have been around a long time and have been widely accepted as a safe investment that generates income. REITs are good to have in any diverse portfolio. REITs commonly pay anywhere from 2% to 8%, depending on the REITs - some pay as high as 15%. REIT's usually are pretty stable in pricing, and do not make large rises or falls, but are very gradual in their movements (one reason they're considered very safe).

When a REIT gets ready to pay a dividend, they usually make the announcement about 20-45 days ahead of time. There are three important dates associated with dividends. First is called the ex-div date (or ex-dividend date). This is date you must own the stock to receive the dividend. If you purchase after that date, you're out of luck until the next quarter.

The second date is called the date-of-record. This is the date that you are officially recorded as the owner of the stock - it is usually 3 days after the ex-div date, in order to give time for your purchase to "settle(ment)". You must purchase the stock before the ex-div date and hold it through the date-of-record to get the dividend.

The third date is the actual dividend date. This is date the dividend is actually paid to you. On the dividend date, the amount of the dividend is deposited into your account automatically.

Please note that you only have to own the stock for period from the ex-div to the date-of-record to get the dividend. Usually only 3 days. Even if the dividend is paid 30 days later.

That's how REITs and dividends work. In Part 2, I'll go into details on how to leverage this knowledge to safely rack up some nice returns.

[Bay Gal]

Thanks, John. Looking forward to more.

[JohnHumbert]

OK, now you know the mechanics...here's how to make money.

First, while most REITs pay dividends once per quarter, not all REITs figure their accounting on the same calender. Some pay March, June, Sept, Dec - others pay Jan, Apr, July, Nov....and so on, and so on.

With a little research, you can find a REITs that has their ex-div date in every month. With a little more research, you can find 3 REITs - each that pays about 8% per year, and each has their ex-div date in a different month.

For example,

REIT-1 has it's ex-div dates in Jan/Apr/July/Oct.
REIT-2 has it's ex-div dates in Feb/May/Aug/Nov.
REIT-3 has it's ex-div dates in Mar/June/Sep/Dec.

Each month, you purchase the REIT stock before the ex-div date, hold it through the date-of-record, then sell it. This entitles you to get the quarterly dividend. Since each REIT pays 8% annually, the quarterly dividend is 1/4 of that, or 2%.

So each month you are GARANTEED to make 2% on your money. Compounded annually, that's 24% to 28% return on your investing. That's the basic premise of this strategy. It's called "buying dividends" and it works.

Wait, you say - that seems too easy. Well, you're right. There are a few gotcha's to you have to take into account.

First, between when you buy and sell the stock, the price may drop. In fact, it is certain to drop the day after the ex-div date (at least most REITs do). Therfore, you must look for the best opportunity to buy, and the best opportunity to sell.

Generally, about 2 weeks before the ex-div date the stock is at a lower level and the price begins to rise as the ex-div approaches. If you buy well ahead of the ex-div, you can usually find the stock trading at an attractive, lower price. In fact, sometimes the stock rise so much before the ex-div that you can make more than dividend by selling before the ex-div date.

Also, after the stock drops the day after the ex-div date, it will usually rebound pretty quickly - a week or so after the ex-div the stock generally comes back to it's pre ex-div pricing.

If you time your purchase and sell well, you can make money on the sale as a additional bonus to the dividend. However, even if you sell at a small loss, if the loss is less than the dividend paid, you're still making money (and you can use the loss as a tax-deduction).

So, in reality, this strategy usually pays a little less than the actual dividend. Instead of making 2% per month, you'll end up making about 1.5% per month. Compounded over the year - that's still 18% to 20% on your money!

I have used this strategy for years - and averaged about 21% each year! First couple of years I used it, I made about 18% and the last few years I made about 23%.

The nice, safe thing about this strategy is that REITs are so inherently safe, if you time your buy poorly, or the stock doesn't come back to your purchase price - you simply hang on to it. Because a REIT paying 8% annually isn't bad in itself. So if you didn't trade every month, and held on to it for a year - you'd get 8% cash paid to as dividend, plus what the rise in price of the stock - typically 2%-3%, for annually gain of 10%-11% - with minimal risk.

Don't get me wrong - these mechanics are easy and safe - but you will still work for the money. It will take time and effort to track down REITs that pay a full 8% per year. Initially you may only find one at 8%, and the others at 6%-7%. (It's pretty easy to find those that pay 6%). You will have to watch your REITs every day to find the best entry and exit prices, and you will have to manage all the information.

That's the basics. Try it on paper for a year and see how you do. There are other finer points to this strategy that allows to make a little more here and there (can't give away all my secrets).

[JohnHumbert]

Here is a page from my trading log showing this strategy in action.

Stock : FR - First Industrial Realty Trust Inc.
A REIT specializing in commercial real estate that pays an annual dividend of $2.80 per share, or about 7.0% at that time.

This stock has been on one of my watch list for years. This fall the ex-div was published to be 12/28/05, and I began to watch the stock close about month in advance, right after Thanksgivng.

On 12/15, I saw the stock drop slightly in price to $39.45 at which time I bought 1000 shares in my margin account. A few days later, on 12/19, the stock dropped a little further to $39.19, and I used my margin to purchase another 1000 shares. I now had 2000 shares at an average price of $39.32.

Between 12/20 and the ex-div date of 12/28, the stock began to increase in price ahead of the ex-div, which is typical. It rose above $40 (all the way to 40.54 on 12/23) and I could have sold and make more than the dividend, but I missed the opportunity (I was busy with Xmas shopping).

On the ex-div date, the stock dropped to $38.85 and came back a little to close at $39.07. You should note that the drop on ex-div date is close the the amount of the dividend to be paid, in this case $0.70 ($2.80 divided by 4). This is the way is it supposed to work.

Three days later, on the date of record (1/3/2006) the stock rose back to $39.50 and closed at $39.42.

I waited a couple of more days 1/6/2006 (friday of the same week) and the stock rose to $40.08 - I sold that day at $40.00 even.

Since I had bought before the ex-div, and held the stock past the date-of-record, I was entitled to the dividend of $0.70 per share. The dividend was paid to my brokerage account on 1/23/2006 (note that the actual dividend pay date was almost a month after the ex-div date and three weeks after I had sold it.

Results : bought 2000 shares averaged at $39.32 on (12/15, 12/19)
sold 2000 shares at $40.00 on (1/6)

made $0.68 per share on the stock trade itself for $1360.00
dividend paid $0.70 per share for $1400.00

gross total = $2760.00
brokerage fees
+SEC fees
+margin interest for 17 days came to $98 total

total net profit = $2572
investment capital used = $39450.00
(the first 1000 shares,
the second 1000 were margin - borrowed money)

Result : 6.51% gain on investment in 21 days!!!



This was a nice trade and not typical, as I made a nice profit on the stock buy/sell itself - almost as much as the dividend. But even if you take that money out of the results, there's still over a 3% gain in 21 days. Notice the use of margin to double the "standard" expect result of 1.5%.

I went out and bought myself a new MinnKota AutoPilot troll motor with part of the profits.

BTW, note that the current price of this stock, FR, has once again dropped to $38.90. If I had just kept it, I would be down. You can bet I will continue to watch the price of this stock, as another ex-div date will be coming up the end of next month (March) sometime.

[-JAW-]

John, I made a post earlier that somehow got lost.

I hope Mont picks up the suggestion from another poster and creates a board dedicated to economics and investing. If this happens I hope that you become its moderator. - As I have PM'ed you previously, I always read what you write. You are knowledgeable, erudite, and kind. You and Walkin' Jack are two 2Cool members that are "must reads".



GBY - :Rybka:

[TOOEXTREME]

Sounds like a good stratragy. Do you have a list of REIT'S that this stratragy can be used on? If you use an IRA or a 401K account you can not use the losses from trading activity, if you have a loss to offset gains. I try to do most of my trading in my IRA account so I do not have to pay taxes on my gains if I have any.

[austinag]

John, your strategy is nice but one thing you failed to mention. Your $1360 in trading profits will be taxed as Short Term Profits because you did not hold it for a year or more. So, if you are in a high tax bracket you will pay 39% in taxes. Thus $1360 - $530.40 = $829.60

Also you owe 15% on the dividend. Moral of the story is don't go out and spend all your profits right away, you'll need them come tax time.

[Super Dave]

austinag, correctomundo! Plus there is no guarantee that a REIT is going to do anything, much less always go up. And that strategy of using Margin to double up can get you in big doo doo fast. John, your strategy is essentially gambling, with the odds slightly more favorable than at the casino. You know essentially nothing about the underlying financial status of the REIT. If it was that easy to make money, everyone would be doing it and it would be programmed into trading computers. Obviously, you have been lucky so far(in an advancing market), or call it genius if you care to. Advising others to do this is another matter.

[JohnHumbert]

I'm glad you two brought up these issues. Every time I train folks on this strategy someone who wants to bash always brings up these points, and they should be addressed. They're some good points, and I applaud y'all for seeing them, but they're not totally valid - at least not to the point to invalidate the strategy. Let me address them one at a time.

AustinAg - you are 100% correct. The profits are taxable, and they are taxable as income and not capital gains. For folks who are clear what AustinAg points out, let me explain. Normally, long term investments such as real estate, stocks, etc. are treated as capital gains or losses. Capital Gains are taxed on a different schedule than income, like your paycheck. If you sold the house you lived in for years and got more than you paid for it, the profit would be taxable as capital gain - at a lower rate than your paycheck. However, if you had a business which "flipped" houses - buy 'em, fix 'em up, and sell 'em. Those profits would be taxed as INCOME, just like your paycheck. The same holds true for stocks when you TRADE stocks, and not long-term invest. The profits are treated as INCOME, just like your paycheck. The rate of your taxes is based upon your total income, not just stocks. I think some people might read your post and think that profits from stock (treated as income) are taxed at 39% all the time - and that's simple not true. It's going to be taxed at the same rate as your regular income, from your paycheck or selling lemonade - based upon your total income.

Moreover, even though profits from short-term trading are (in most cases) treated/taxes as income, you can still use any capital losses for the year to reduce the amount that would be taxes. Pretty neat, huh?

You make an EXCELLENT point about taxes and folks need to make sure they understand that any income is taxable (be it from trading stocks or selling lemonade on the corner) - but that in no way invalidates the strategy of making money. No matter what do you to make money in stocks, it's going to be taxed, one way or another - at some point.

To lead people to believe they shouldn't make money with stocks because they are going to get taxed is silly - it's like saying "Don't take that higher paying job because you are going to pay more in tax".

Furthermore, every single taxpayers situation is different. There are many ways to reduce tax liability - too many to discuss here. I am pointing out ways to MAKE MONEY - how to pay your taxes is a completely different topic and in no way reduces the validity of the strategy. Having to pay tax means you are MAKING MONEY - and, IMHO...that's a nice problem to have (wink!).

[Monarchy]

John,

That's a cool strategy and certainly worth looking at for a portion of folks portfolio. I also think a couple comments are warranted....

1) REITs, like stocks, can be pretty volatile. For example, your example REIT, FR lost 10% of it's value in 4 days last summer. It also has given up around 30% of it's value on a couple of occasions in 8 months or less. This isn't a "don't do it" message, just a gut check of the risk associated with 20%+ returns.

2) Your return on capital didn't include your notional capital. The cash or securities you need to have on hand to cover you arse if you get a margin call because the REIT pukes. That takes your r.o.c.e. down a bit.....

I'll be taking a look at this in more depth. I would compare it to writing covered calls or selling bull fences around stocks in terms of it's risk/reward. At the least, it would be a great conversation over a bunch of beer.....what other REITs do you watch?

[JohnHumbert]

Super Dave - Dave, Dave, Dave...where do I begin with your comments? I guess you just wanted to bash me or the idea. Hmmm.....Let's take it sentence a time.

(1) "Plus there is no guarantee that a REIT is going to do anything, much less always go up.Plus there is no guarantee that a REIT is going to do anything, much less always go up". You've missed the point entirely with this strategy, go back and read it again slowly this time. It doesn't matter if the stock goes up, down, or stays level - that's the beauty of this strategy for beginning traders. No matter what the price of the stock, REITs will pay the dividend. Even if the stock goes down, as long as it doesn't fall below the dividend pay quarterly, YOU STILL MAKE MONEY. Even if it DOES fall below the price you paid more than the dividend - you simply DON'T SELL IT - and you haven't lost a thing. EVENTUALLY, the price will rise back to your purchase price, even if it takes years - each year you STILL MAKE the dividend.

Let take WORSE-CASE scenario : the stock drops rapidly, significantly after you buy it (which is almost unheard for REITs, but it does happen rarely). You minimize the risk and loss by setting a stop-loss point to sell the stock - and move on to the next trade. Percentage wise, the way REITs work, it would be EXTREMELY RARE to have that happen twice in a year (heck, in a decade of using this strategy, it has happened twice to me out of over 150 trades!).

Now, you touch a point but didn't verbalize - so allow me. It DOES INDEED make a difference in the REIT you pick - not all REITs are created equal. Pick ones that are solid companies, that have years of solid growth and steady upward trends. I'll elaborate in another part on how to choose a REIT for this strategy.
(2) "And that strategy of using Margin to double up can get you in big doo doo fast.". In my other post I talked about margin, and the dangers of margin, you should read that first. Your comment is a perfect example of what I was talking about before on "margin-phobia" from those you don't understand how to use and therefore scared.

While I agree that improper use of margin and get folks into trouble quickly, this use of margin has hardly any risk at all. The ONLY thing the use of margin does here is either double your earnings on the buy/sell, or double your losses. That risk is offset by the garantee doubling of the dividend profit. Since this strategy is based not on stock price, exactly HOW do you think it would get someone into doo-doo fast? Look at REITs - over 95% they are SLOW MOVING - up or down. But I explain all that in my other post/thread on margin.

Use margin, or don't use it - the strategy doesn't have anything to do with margin, and works well in cash accounts too! It's just the real-world example from my own trading I happened to use margin.

(3) "John, your strategy is essentially gambling, with the odds slightly more favorable than at the casino.". I'm sorry you think that, but your comment has no basis. First, gambling is based purely on chance - stock strategies, especially this stock strategy is based upon KNOWN events and PREDICITABLE behavior - that's the exact opposite of gambling. I don't know where you get the second part about odds slightly more favorable than at the casino - How do you figure odds on stocks for a comparision? If you mean track history, I can show you that this works successfully 89% (made money 32 of 36 trades) last year for me, and even higher previous years. Furthermore, I have two friends who are doing the same thing - one of them was 24 for 24 last year (100%) for a profit of 24% and the other was 85% (12 for 14) for a profit of 28% last year. Please tell me a casino game that has 90%, or even 75% of a win. Casino games are based upon low-percentage of wins, but higher percentage returns. Your comment sounds like it means something, but it's just B.S.

(4) "You know essentially nothing about the underlying financial status of the REIT." I don't know where you get off making that comment, YOU know essentially nothing about what I know. In fact, in choosing a REIT you must do your homework. Even so, if the REIT is paying a dividend, it doesn't matter what the underlying financial status of the REIT is - you just don't get the strategy. The FACT is, if the REIT is paying a divendend of 6%-8% regular, the company is - by definition - on solid financial status. Understand what a REIT is before you make accusory comment like that.

(5) "If it was that easy to make money, everyone would be doing it and it would be programmed into trading computers." I hear this one a lot...the FACT is that there ARE a lot of people doing it, and several large fund managers are indeed doing it. As a matter a fact, that's where I learned it from. There books written about this strategy, so it is nothing new. However, I will point out one thing - as I mentioned in the first post, this is a strategy for SMALL-TO-MEDIUM traders. It does NOT work for large sums of money and a massive scale. It is perfect for traders who have $25,000 to $250,000 to trade - more money than that and the purchases tend to skew the price (you yourself begin to drive the price of the stock). In the same manner, you don't want to pick REITs that have a low average volume.

I think most people make this comment because they believe that picking stocks or stock trading is some mojo or based upon luck - so they have a hard time believing that the professionals use strategies like this every day and pretty much KNOW what is going to happen.

(6) "Obviously, you have been lucky so far(in an advancing market), or call it genius if you care to. ". Lucky is doing it once or twice. Having consistant success over 10 years, and having others doing it with similar success rate is not luck. It's not genius either - it's just being knowledgable and smart. And once again, advancing or declining market has no bearing on this strategy. We all had pretty much the same success rate in late 2001 (after 9/11) and 2002 (when a lot of people were losing their shirts in IT).

(7) "Advising others to do this is another matter." Whew, it took the final sentence of your post to say something valid. I am NOT advising people to trade stocks. I am simply outlining a very safe trading strategy for those who are beginning to trade. Both these threads came about because the chat of folking online investing, and opening new accounts to online trade. As I said in that thread initially, I don't advise ANYONE to do this if they think they are going to make some easy money. Trading stocks is inherently risky, and most folks have NO IDEA of what they are getting into. The "mechanics" of online trading is very easy - too easy. It so easy that too many folks think they can open an online account, do it themselves, start trading and compete with the big boys - and they usually get eaten alive. Some of the most common reasons are they are emotional, do not have a thorough knowledge of all the rules and techniques, are too scared/not knowledge of things like margin and shorting so they miss opportunities...well, the list goes on and on.


HOWEVER, if you ARE comtemplating online trading (and I'm not talking about INVESTING long term) to generate some INCOME....I wanted to give someone an idea of a strategy that pays a decent return and minimizes their risk. It also allows them to LEARN without following the invariable "hot tip". Following my strategy here does more than make money - it makes the newbie investor develop diciplines for research, realistic expectations (making 2% here and there rather than chase the tip to make 50% or 100% - that's more like gambling!), self-control, and build confidence.

[JohnHumbert]

Thanks for the reply....

Absolutely, a REIT can tank just like any other stock....beside FR, another REIT that is on my watch list was NLY, which had a MAJOR correction last year.

It DOES happen, but I would disagree with the comment that REITs are pretty volatile. While there are always exceptions every year, I think the opposite is more true - REITs are usually pretty stable. I would be willing bet that if you consulted any number of knowledge brokers or investment advisors, they would tell you that REITs are pretty safe and agree on them being stable. The are sometimes called "old people's stocks" because they commonly recommended for retirees as a way of generating a safe amount of income.

HOWEVER, in picking REITs for using this strategy, one MUST do their homework and pick REITs that are solid producers with solid financials. There are REITs out there, like FICC, that pay a whopping 17.50% per year - but have volatile quarters.

In addition, one MUST keep track of your REIT every day and monitor it for news, events, results. With FR and NLY that tanked - it wasn't an out-of-the-blue event. Most folks who followed these stocks saw it coming. There were real events, like the Feds adjusting rates, that made NLY's correction absolutely foreseeable (I actually shorted that one and made some dough).

I track 300 REITs on a daily basis using some software I wrote. This reduces the effort for me to pick REITs when the times comes.

As with any strategy, it's not a get-rich-quick scheme that requires no effort. In order to really do this strategy, you will end up spending a lot of time and effort into tracking and evaluate REITs and determining entry and exit points - YOU WILL EARN THE MONEY, believe me.

For me, it was an excellent starting strategy that made me some money, allowed me to learn a lot, and develop some dicipline. I still use it in a portion of my portfolio, but I now trade a few other strategies mostly that are higher-risk, and much higher reward - and take more effort and sophistication. I've already made almost 20% since Jan 1 in one account!!!

Over the years, I've been writing a stock price modeler program using linear programming methods. It shows short-term price targets, in terms of percentages, based upon history, chart patterns, events, and a few other factors. The last tweak I made to the program in May as resulted in a 85% accuracy rate on highly volatile stocks. I've been cleaning up the past few months in the retail clothing sector. It's hard to settle now for 20%-25% per year now when I can make 15% per month!

I am also into the Indian markets big time. Their economy is booming, and Indian ADR's like TTM, WIT, RDY, INFY, and SAY have all been posting solid numbers and will continue to do so for 2007.

[dirtracer1]

i'm gettin' one heck of an education here.....keep it coming for us newbies. i'm all ears.....

[REELSINGER]

Please respond to the scathing rebuttle SuperDave, I want, no, NEED to hear it!

[Fish]

John,
This is the most interesting post I've read in a long time. Please keep'm coming as I really enjoy you sharing your knowledge.

Thanks,
Fish

[RedXCross]

WOW !!,I could, but I won't because it is (FUTILITY) that comes into play when you can't look a PERSON in the face and readily talk or SELL, and I know a little about that, soooo I think there or valid points across the board after reading all of them.. Good Luck with any STRATEGY.

[Spiderweb]

Could you point a newbie toward any books or sites where I can learn more?

Spiderweb

[austinag]

Here is where newbies should start if they are going to start "dividend trading REITS"

http://www.dummies.com/WileyCDA/DummiesTitle/productCd-0764554107.html

[Naterator]

well, I said that when I returned to this website, it would only be to discuss fishing, so I am violating my promise to self with this reply....but, just wanted to say, thanks for the input John.

As for the naysayers, I would offer them the following advice: If someone is so simpleminded that they begin immediately implementing a trading strategy they read about on a Texas fishing website, without researching the risks and fully understanding the fundamentals of the strategy, then they deserve what they have coming. The risks are self evident. There is no need to bash someone for offering an OPINION on how to profitably trade securities.

[adpostel]

Great post John. I just wanted to comment on the earlier statement that "If it was that easy, everyone, or a bunch of people would be doing it" Well, that statement is a sweeping assumption. The fact of the matter is there are many things that are easy to do that not everyone is doing, LIKE WORKING! for one. If it is not already apparent to you that 20% of the people in this country own 80% of the wealth, then you are sorely mislead. I have come to understand how and why this is true. People are frikkin LAZY, and they don't want to put in the required work to make things like this happen. Hence, the more than over 800 views to this post and only 20 replies or so. That just goes to show you that the reality is that this is not easy, as a matter of fact, for the (no offense here) average person, this is downright difficult. Moreover, the average american household has less than 1000 dollars in savings, were talking about tens of thousands of dollars here to make a few percentage points. So when you think that EVERYONE would be doing it, your prolly wrong. So, take it as a sign of opportunity and make yourself part of the elite 20%, and stop bashing the rest of us who are. Good Luck!

[stargazer]

Please share all you can, inquiring minds want to know;) .

[Super Dave]

John, I am not going to get into a debate with you on investment trading strategies. This is not the place. I've issued my warning to those that may be considering starting to trade REITS or anything else in the stock market. You better know what you are doing and only invest funds you can afford to lose. Long term investing is another matter. To those of you that do not heed this warning, may the force be with you.

[Texan]

John, thank you for sharing this information.

The old adage says it takes money to make money, and adpostel has a good point that most folks have $1,000 in savings and that’s it. Having said that and using that as an example, is this an advisable strategy for someone with a couple thousand to start off with? Or, is there a better place to start?

I’m not ashamed to admit this but I work for the State and we all know what type of salary that entails. Compounding the problem is that I have no real promotional opportunities available to me. Realizing this, I would like to stretch my dollars anyway that I can. I have always thought about investing and just don’t know where to start.

[Angler2407]

I'm sure someone used to knock Buffet too. As long as your offerings are sincere I think you should all post them. Disagreements on strategies shouldn't be (and haven't seemed to be) personal.

I thought about asking for a "money board" months ago but...

(a) I thought I'd be lonely.

(b) I assume you have to watch out for what people post? I know it would be 2cool to have a board where we can take turns posting up a stock or fund we may like and having others with a "thumbs up" too or "what are you smoking?" and why.

Drew

[Naterator]

Texan - this is not a long term savings strategy, and is not an appropriate place to start for someone with limited funds....IMO. The best thing for someone like yourself to do is to ensure that you have a significant cash reserve prior to even considering investing. Something sufficient to cover 4-6 mos. of living expenses should do it. Then, depending on your age, an IRA or Roth IRA that holds a few good mutual funds would be a good start. There are hundreds of books on how to do this, you might be better advised to check one out rather than take your advice from a fishing website.

Peace

John, thank you for sharing this information.

The old adage says it takes money to make money, and adpostel has a good point that most folks have $1,000 in savings and that’s it. Having said that and using that as an example, is this an advisable strategy for someone with a couple thousand to start off with? Or, is there a better place to start?

I’m not ashamed to admit this but I work for the State and we all know what type of salary that entails. Compounding the problem is that I have no real promotional opportunities available to me. Realizing this, I would like to stretch my dollars anyway that I can. I have always thought about investing and just don’t know where to start.

[2COOLICIOUS]

Texan - this is not a long term savings strategy, and is not an appropriate place to start for someone with limited funds....IMO. The best thing for someone like yourself to do is to ensure that you have a significant cash reserve prior to even considering investing. Something sufficient to cover 4-6 mos. of living expenses should do it. Then, depending on your age, an IRA or Roth IRA that holds a few good mutual funds would be a good start. There are hundreds of books on how to do this, you might be better advised to check one out rather than take your advice from a fishing website.

Peace
Good comments, Nate. As for John, well he reminds me of the commercial "try my product". A couple of quotes from John himself tells the tale to me:
"Even if it DOES fall below the price you paid more than the dividend - you simply DON'T SELL IT - and you haven't lost a thing. EVENTUALLY, the price will rise back to your purchase price, even if it takes years "
Of the folks that frequent this board, why would one want to risk their savings on a scheme that could result in their money being tied up for years ?

"While I agree that improper use of margin and(can) get folks into trouble quickly, this use of margin has hardly any risk at all. The ONLY thing the use of margin does here is either double your earnings on the buy/sell, or double your losses".

If I lost double, I think that could be described as deep doo doo. lmao.

"stock strategies, especially this stock strategy is based upon KNOWN events and PREDICITABLE(predictable) behavior"

John, computers and programming is great for matching past performance. It's a no brainer in some cases. However, using the same program to "predict" is another matter entirely. There are people out there a lot smarter than you and me that haven't yet developed that program that will "predict market behavior".

[fchurch1]

Good write up, is there a place you can go and get the dividend dates other than just looking at the stock on yahoo, msn etc. or is it something you just check daily until its posted.

[Monarchy]

John,
Do you track your performance with anything like a Sharpe or Sortino ratio to quantify the risk you're taking for those returns? Your returns look more similar to a good natural gas trader than a securities trader!
Brad

[Porterhouse]

Great post John, I really enjoyed it.

[drfishalot]

this is interesting. I do something similar but don't use REITs, I have traded NLY a few times and another one that I don't remember the name of. I owned some of annaly when it fell so am scared off of this class. I should also say that I have had no training in finance/investing other than experience (self taught day trader), which was very costly at first, and some reading. I was also scared out of reits and the housing stocks due to the presumed fall in the real estate sector- that is supposed to have been coming for about 2 years now and prob hasn't happened yet. I think it is definitely a good idea to do this on paper for a while before jumping in for real. I like to use large cap stocks that are at a good entry level, that pay a nice dividend, buy it, hold it long enough to get the divi and get out. I do feel like this is some sort of gamble, but figure that a large cap, well known stock at a good entry level would be a good hold till the price came back up (DOW was my last transition doing this). I may have to start watching reits to see if they really are more stable, as NLY was the main one I watched, as it seemed to be very well respected and recommended, but it TANKED. things I'm watching: NOK-pays its divi once per year-soon- and am cautiously establishing a position there, BAC-divi soon, but less cautiously.
and lastly, this is just something that I do, but won't advise anyone else to.

[-JAW-]

this is interesting. I do something similar but don't use REITs, I have traded NLY a few times and another one that I don't remember the name of. I owned some of annaly when it fell so am scared off of this class. I should also say that I have had no training in finance/investing other than experience (self taught day trader), which was very costly at first, and some reading. I was also scared out of reits and the housing stocks due to the presumed fall in the real estate sector- that is supposed to have been coming for about 2 years now and prob hasn't happened yet. I think it is definitely a good idea to do this on paper for a while before jumping in for real. I like to use large cap stocks that are at a good entry level, that pay a nice dividend, buy it, hold it long enough to get the divi and get out. I do feel like this is some sort of gamble, but figure that a large cap, well known stock at a good entry level would be a good hold till the price came back up (DOW was my last transition doing this). I may have to start watching reits to see if they really are more stable, as NLY was the main one I watched, as it seemed to be very well respected and recommended, but it TANKED. things I'm watching: NOK-pays its divi once per year-soon- and am cautiously establishing a position there, BAC-divi soon, but less cautiously.
and lastly, this is just something that I do, but won't advise anyone else to.What happened to NLY and is it ever coming back above $17? I still have a couple shares and at least it is still paying dividends - And what about Sears Holding? It is my other bad stock. :(



:rybka:

[JohnHumbert]

Annaly Mortgage REIT (Symbol:NLY) is a mortgage-based REIT. In simplest terms, they make money trading on the difference between short and long term interest rates. Because this difference declined sharply in the past 18-24 months, NLY's ability to generate income declined sharply. For those who understood NLY's business model, the drop in profitability and stock price was predictable last year well in advance (at least 6 months) when the FED began to lower rates.

As long as the difference between short and long term rates is low, NLY will have some tough sledding, although they have made significant changes in the past 6 months to deal with it. I don't think NLY is anyway close to going under - the nature of their business is go through cyclic swings like this.

Will it return to $17-range. Almost certainly - the only question is when. It may be quite a while. However, I suspect the Democrats are going to win the the next election. With that will come tax increases and a rise in inflation, the FED will raise rates and the spread between short and long term will widen and NLY's profits will take an upturn.

[drfishalot]

John, nice description of the NLY crash.
Since on the first page of this thread you gave us an example of your trade of FR and mentioned that the dividend is coming again soon. maybe you can talk us through, give us a play by play, of when you are watching it, if/when you establish a position give us the price you bought at, etc.. No need to tell us how many shares or that sort of specific stuff letting us know how much money you have riding on the transaction, just a.."been watching the price, I think this is my entry at 3X.XX dollars, now lets hold it for this many days, and on that day you may decide to hold it longer" or whatever. just give us an actual play by play without the dollar amounts. not asking for any of your secret stocks/REITS, just use the one you gave us:FR