Warren Buffett’s Secret to Making 100% a Year
by Phil - February 26th, 2011 10:51 am
I love the Berkshire Hathaway annual report!
Especially Warren Buffett’s letter to shareholders. The report gives us a great view of the overall economy from a man who has his finger in every pot and his letter to investors gives us a very good insight as to how things are going in the various sectors his operations cover. Most importantly, what I have learned in my own 40 years or reading Mr. Buffett’s reports (my Grandfather was a shareholder) is what should shape any long-term investing strategy: Patience and performance.
I often preach to members the joys of letting gains compound and our $25,000-$100,000 Portfolio, which is currently at $27,531 (up 10%) after 4 weeks, is an exercise in how to quickly compound small gains over the course of a year. Primarily, we try to follow Warren Buffett’s Number One Rule of Investing, which is: Don’t Lose Money. Buffett’s Rule #2 is: See Rule #1 and like us, it’s not that nothing Warren Buffett ever buys loses money – it’s just that he doesn’t ever buy things he isn’t willing to stick with UNTIL they make money. Sure we take a few losses along the road but, by being selective in our entries, we don’t discard stocks that we carefully selected just because the market temporarily disagrees with our valuations.
In our $25,000 Portfolio, it’s only been a month so we’ve only closed our winners so far and they were SPWRA with a 100% gain (these are option trades), INTC with a 40% gain, NFLX with a 42% gain, EDZ with a 75% gain, XLF with a 15% gain, VIX with a 50% gain, USO with a 53% gain and XLE with a 5% gain. In 19 trading day we have made 28 virtual portfolio moves (counting each leg) and, as I said, netted a 10% return to date. Interestingly, we’ve been playing it very cautious as we still have over $18,000 of virtual cash on the sidelines, hoping for a sign to get a little more aggressive next week.
How, you may wonder, are we going to get to $100,000 by December with just $27,531 in February? THAT is the lesson Warren Buffett has to give us and that lesson is COMPOUNDING RETURNS! Since 1965, Berkshire Hathaway has returned an overall gain of 490,409% to it’s shareholders. $10,000 handed to Mr. Buffett…
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Technical Thursday – The Needle and the Damage Done
by Phil - February 24th, 2011 6:33 am
I’ve seen the needle
and the damage done
A little part of it in everyone
But every junkie’s
like a settin’ sun. - Neil Young
Come on Bennie, give us another hit!
We’re hurting man, we need the good stuff. The markets love to get high and, just when we thought the trip was never going to end – we crash hard! Big Ben and his Central Banking buddies fed our commodity addiction with a flow of easy money and the speculators got so hooked that they have now overdosed and the price of commodities is now killing the host (the Global Economy).
Gee, who could have ever seen that coming?
Oh yeah, right, it was me. Well, very good then… I guess. There’s nothing like a good correction to make some fast money. In yesterday’s post (and Tuesday’s) I mentioned our TZA and EDZ hedges and thank goodness we dumped XLE as they flew back to $78 on the oil madness (more on that later). In yesterday morning’s Alert to Members we added IWM $83 puts at $3 and they finished the day at $3.93 (up 31%) but we were done with them earlier as we flipped bullish when they pulled back to $3.75 and grabbed the IWM weekly $80 calls at 1:03 at .66 and we flipped out of those at .93 (up 40%) for a nice, quick gain.
We also lost .20 on an SSO trade, trying to catch one more bear wave that didn’t come but, on the whole – Wheeeeeeeeeeeeeee! This is the best ride EVER!!! We love a volatile market, especially when it gooses the VIX (something we were also long on) as that gives us better and better prices for the options we sell to suckers who think they are smarter than the market. Yes, we buy them too – but look how fast we dump them. Options are great for momentum trading and for controlled leverage but the REAL MONEY is made BEING THE HOUSE – not the gambler and what we really love to do is SELL options, not buy them.
When the VIX is low, selling options is much less fun but, when the VIX goes up, so does the amount of money people will pay us…
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Will We Hold It Wednesday – Doubles in Trouble
by Phil - February 23rd, 2011 8:29 am
We’re watching our 100% lines.
While we did follow our plan and bought the F’ing dips yesterday – we did so cautiously as 3 of our 5 100% lines fell during the worst one-day drop since August 11th of last year. Not shown on this chart, the NYSE fell 2.1% to 8,325 and the Russell landed down 1.9% at 812. That means, other than the Nas – all of our indices bounced off and held their 2.5% lines and we can forgive the Nas because it was dragged down by AAPL, who was a BUYBUYBUY for us on the $340 line.
The 100% (off the March 9 lows) levels were discussed, along with the chart for the S&P showing our critical ranges, in this weekend’s "Fibonacci Rules – Sometimes, the Old Ways Are the Best!" so I’m not going to waste any time going over that but, for a quick reference, our 100% levels are: Dow 12,938, S&P 1,332, Nasdaq 2,530, NYSE 8,362 and Russell 800 (100% was 685). With the RUT so far over their 100% line, we used them as a key index hedge and the TZA’s banged right up to our target $13.50 into yesterday’s close and we took that money and ran ahead of the reverse split in our favorite Ultra-ETF this evening.
Clearly from the above chart, you can see how our logic pays off. Also, we chose the Dow for our long index for the same reason as they were lagging the others by a wide margin so we played the pair of Dow up and Russell down to cover some of our trades. Another place we took the money and ran was XLE, which was a $25,000 Portfolio trade in yesterday’s morning Alert to Members. We added 10 of the XLE March $75 puts at .85 and that could not have gone better as they ran straight up to $1.30, where we got out of dodge (you can see our volume enter and exit below) as it was enough to get us out of a previous XLE position that had hurt us all even, leaving our virtual $25,000 Portfolio nicely balanced at $27,511, up just over 10% in 15 trading days and on track for our goal of $100,000 by the year’s end. We just need to make more trades like this and we’ll be…
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Technical Tuesday – Charting our Future
by Phil - February 1st, 2011 6:58 am
Fundamentals don’t matter so let’s look at the technicals.
As you can see from David Fry’s chart, there’s a good reason that XLF was my Trade of the Year in December 25th’s "Secret Santa’s Inflation Hedges." The full force of the US Government is backstopping this play, in which we took the Jan $12/13 bull call spread at .80 and sold the Jan $11 puts for .40 for net .40 on the $1 spread. I said, just 37 days ago, that this could be the easiest 150% you ever make.
Just 5 weeks later, the bull call spread is .90 and the short puts are .30 for a net .60 – up 50% in 5 weeks. That SHOULD help keep us ahead of inflation, right? Keep in mind this was a trade, among others, that I published for free to the General Public on both our subscription site as well as Seeking Alpha and then it was syndicated on Yahoo Finance, Google Finance, MarketWatch, AOL, etc. I’m told that about 250,000 people read my free public posts when I make them available, so it’s not like these trades were so secret.
Yet, however many people decided these were good trade ideas and followed them – it didn’t matter because our counter-party wants to lose! Yes, that’s right, we are riding on the coat-tails of the Banksters, who are taking our future tax dollars from the Federal Reserve and betting them on rising commodity prices and monetary inflation. In order for us to bet on that, we need some idiotic counter-party to take the other side of that bet – one that assumes falling commodity prices and no inflation.
Even in under-educated America, who would be foolish enough to take such a bet? Why it’s us, of course! Well, it’s the Federal Reserve Bank of the United States of America who are spending $100Bn a month buying Treasury Bills at the lowest rates every (assuming no inflation) while trying to justify their misuse of our money with BS statistics that we’ve stripped away in "How the US Government Manipulates Inflation Data" along with this helpful video:
The Fed is using YOUR money, through debt, taxation and devaluation, to buy notes that a rational investor wouldn’t touch with a 10-foot pole and the ONLY way you can prevent yourself from getting screwed…
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Monday – Mubarak’s Mood May Move Morning Markets
by Phil - January 31st, 2011 8:21 am
Is it safe?
I asked that question at the end of November in "Timid Tuesday – Is It Safe" and here we are, 60 days later and up 7.5% and, on the whole, feeling less safe than we did back then, when the Market Oracle and I seemed to be the only people concerned global inflation and sovereign default risks rising rapidly. Although we were playing the market bullishly, with our aggressive $10,000 Portfolio (and make sure you check out our brand new $25,000 Virtual Portfolio that begins today with a $100,000 goal by December 31st) we decided to try to take from $26,000 to $50,000 by Jan 21st (we only made $35,000), our Breakout Defense Plays (5,000% in 5 Trades or Less) and our Secret Santa’s Inflation Hedges – it was with one hand on the exit door at all times. As I said at the close of Timid Tuesday’s article: "This house of cards is teetering folks – please be careful out there!"
That was 60 days ago. We’re a lot older now and have learned a lot about the World since then. We learned that China, Japan and the IMF are all ready, willing and able to buy the bonds of various EU nations. We learned that the Dollar can still fall 5% (was 81.44 on November 30th) further down despite Europe’s very obvious problems and Japan’s MASSIVE 200% Debt to GDP ratio. We learned that Uncle Ben will never stop printing money (until forced) and we learned that commodities can rise much faster than even our aggressive "Secret Santa" plays anticipated, with every one of our hedges (XHB, XLE, DBA and XLF) already over our year-end targets, all on track for gains well over 100%.
After watching our Alpha 2 pattern break (as I predicted it would on Monday morning) for the week, we went a lot more bearish on Thursday when I said in that morning post:
Keep in mind that gold and silver are our defensive plays. In Member Chat yesterday, Jromeha mentioned he’s 80% in cash and 85% short the market on the 20% in play and I said I thought that was an excellent way to play what I felt was a blow-off top after the Fed. We added 2 disaster hedges yesterday, a TZA spread that pays 500% if we get to $17 by April and
…
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Friday Fizzle – Week Ends with a Whimper
by Phil - December 10th, 2010 7:07 am
"Woke up this morning, what did i see
A big black cloud hanging over me
I switched on the radio and nearly dropped dead
The news was so bad that i fell out of bed
There was a gas strike, oil strike, lorry strike, bread strike
Got to be a superman to survive
Gas bills, rent bills, tax bills, phone bills
I’m such a wreck but i’m staying alive" – Kinks
I thought some uplifting music might help today as the markets have not been turning in a super performance this week despite a $1Tn tax cut/stimulus package pumped into it just 3 days ago. That morning, I posted Chris Kimble’s charts from our Chart School and we were looking at key resistance at S&P 1,224, Nasdaq 2,600 (NDX 2,191), NYSE 7,751 and Russell 756. We’re above all those this morning but what we’re not above is my 11,500 level on the Dow. In fact, if you look at the Dow over the past 6 sessions, you’ll notice we hit quite a wall at about 11,375.
What’s it going to take to punch through that wall and get us up over our 11,500 breakout target? We had this same problem in early November, when the Dow just couldn’t close the deal over 11,450 and fell sharply after 3 days of trying despite the fact that the Dow Transports are up significantly (but also flatlining) since then (how now Dow theory?).
I had said we would wait PATIENTLY for confirmation at 11,500 but it’s already getting tedious. Our picks from Tuesday’s post were C at $4.56 and BAC at $11.79, with BAC outpacing C but both positions much more exciting with option plays than straight stock picks, of course. By Wednesday morning I had done the math on the Obama Tax Cut and concluded that, for 95% of America, all we could say was "Thanks for the Gas Money, Mr. President" and I’m not even sure we’ll get that as oil once again tests $89 this morning, which is fine for us as that’s our shorting spot on the Futures and has paid us for many, many tanks of gas this week.
It is, of course, all about the Dollar and our poor currency has been brutalized in the past 24-hours, with…
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Monday – Will APPL Earnings Today Keep Bears at Bay?
by Phil - October 18th, 2010 8:21 am
Am I too bullish?
I know I’ve been making a bearish case last week and I know we put out our first bearish list since April this month but, in reviewing October’s Overbought Eight for Members this weekend we reviewed the week’s picks and I realized that, despite all my griping, we had ended up with 21 bullish trade ideas vs. just 10 bearish ones AND, not only that, but half the bearish bets were quickie trades where we played the drops, like Friday’s DIA and QQQQ puts from the morning Alert that didn’t even last an hour (but made 300% and 200% respectively, so worthwhile, nonetheless).
That’s not very bearish. I had said to Members in last Monday’s Morning Alert: "The critical test levels above 7.5% are Dow 10,950, S&P 1,160, Nasdaq 2,400, NYSE 7,450 and Russell 690- all green for day 2 and that does put us technically bullish if we hold it, even though it’s a BS, low-volume day." and we did hold those lines on Tuesday’s dips to we cashed our first set of shorts and ended up flipping more bullish for the ride up to the 10% lines (Dow 11,220, S&P 1,177, Nas 2,420, NYSE 7,500 and Russell 700), despite out misgivings. When the technicals are very strong, you have to switch off the fundamental side of your brain and go with the flow.
It has been ALL about the dollar and, as we mentioned in this week’s Stock World Weekly, Trichet gave us the word we expected on Tuesday that knocked the dollar down to new lows against the Euro, Pound and Yen, with the dollar index bottoming out at 76 which should, in theory be strong technical support.
So, we have strong technical AND fundamental reasons to expect a dollar bounce and we KNOW that a dollar bounce will knock down commodities and we KNOW that a pullback in commodities will knock down the indexes as the energy and metals sector lead us lower. If we KNOW all this, then we MUST be too bullish, right?
Of course we reached that conclusion on Thursday and this is just a recap as 6 of those 10 bearish trade ideas from last week were from Thursday and Friday with EDZ, QID, QQQQ, SQQQ, QID (again), and DIA all picked short as we tested those 10% lines. We like to…
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Trade War Tuesday – China, Japan and US at Odds
by Phil - September 28th, 2010 8:20 am
War does not determine who is right, only who is left. – Bertrand Russell
Just when you thought it was safe to go back in the water, Japan and China are at it again. We discussed the "fishing’ incident last week and Japan has released the Chinese captain who rammed one of their Coast Guard vessels. Now shippers in several Chinese cities said customs officers have stepped up spot inspections of goods being loaded onto ships bound for Japan and being imported from the country. Traders said officers in some cases were taking the highly unusual step of looking at every item in a container instead of following normal practice of examining a small sample. The heavy searches, which can add costly delays to shipments. For it’s part, Tokyo wants China to pay restitution and now China’s navy is moving into disputed waters.
China is fighting a trade war on two fronts as they are threatening to retaliate against US businesses operating in China if Congress passes legislation intended to force a revaluation of the Yuan. The House of Representatives is set to consider legislation this week that would let companies petition for higher duties on imports from China to compensate for the effects of a weak yuan. Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China’s currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.
So we are pressuring China to strengthen their currency, which would make our currency relatively weaker. One would think the dollar couldn’t get much weaker than it is now (see Dave Fry’s chart). We’ve been shorting GLD (buying GLL) and TLT, expecting a dollar bounce off these levels but if we fail here – we’re going to have one very ugly chart.
Of course a 10% drop on the dollar could be just the ticket for the markets – since our stocks are priced in dollars. That makes them look pretty good compared to cash that’s sitting on the sidelines (or tied up in notes) that’s lost over 10% of it’s buying power since June.
That’s right, JUNE! As people who travel to…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(