What to do when the stock market goes on sale? A smart option would be to double up on some current positions. 🙂 A couple months ago I bought 50 shares of Avigilon Corp for $25 each. However due to the negative sentiments in the overall financial markets recently AVO’s share price is down. But there’s no need to be alarmed because the company makes high definition security cameras and software. Now is the perfect opportunity for me to turn a current paper loss into a capital gain in the future! I noticed over the last week AVO has bounced around the $13 to $14 range but has never fallen below $13, which to me signals a strong support and a good time to average down. So earlier today I deposited $1,500 of savings into my brokerage account and picked up 100 more shares of AVO.TO. 🙂
Last month I wrote how to make some easy money by selling a put option for Teck Resources. The option expired several days ago and I made $48. Cool beans! Since my trade was successful I decided to do it again. So after the option expired I sold another put option for TCK.B for the strike price of $23, that will expire in August. The most I could potentially make from this trade is $52.76 🙂 By repeating this simple trade on a regular basis I could make a few hundred dollars every year with minimal risk! Not a lot of money, but better than nothing.
Just like before, there are only 2 potential outcomes of this event.
Scenario 1- By August 16th TCK.B shares stay above $23/share. So when the contract expires I keep the $52.76 premium with no strings attached
Scenario 2- By August 16th TCK.B shares fall below $23/share. The contract is exercised and I’m forced to purchase 100 shares, but still keep the $52.76 premium.
Ideally I would like scenario 1 to happen, but scenario 2 isn’t a bad outcome for me either. When I originally bought 61 shares of Teck Resources years ago I purchased the stock at roughly $33 per share. I realize now that I overpaid. Teck is one of the few companies that has under performed in my portfolio 🙁
But investors have a tool at our disposal called dollar cost averaging. This means if our investment falls after we buy it, we can simply buy some more to lower our average purchase price. Since the whole point is to buy low and sell high, by lowering the average price that we buy at we don’t have to wait for the stock to increase as much to make a profit.
So even if my option gets exercised I’ll be happy to pay $23 per share which will lower my adjusted cost bases to about $27 instead of the current $33. Selling options is fun 🙂 Since no leverage is used there are no extra costs like interest. Speaking of interest, I recently wrote an article for mint.com showing how faster credit card payments can save consumers a lot of money.
Random Useless Fact:
The World Cup can perform miracles
Good things come to those who wait. Unfortunately that’s not always the case for investors. I missed out on a good piece of farmland recently because I didn’t act quickly enough 🙁 Saw this posting last week. It’s on the realtor.ca website so anyone could browse all the various agricultural listings on there. This particular land is uber cool though. It’s much better than the one I bought last year. Twice as large, 320 acres instead of 160, and more importantly 95% of its acres is cultivated so almost the entire parcel can be farmed 😀 The seller is willing to rent back the farm at $45/acre. Which translates into $13,680 of passive income a year 😀 Or a 4% return on equity pre-tax, not bad. By comparison my current tenant is only paying me $37.50/acre. That’s barley enough income to cover my interest payments, haha.
Often these kinds of farms get snatched up by buyers with deep pockets very quickly. This one was no different. The listing went public on Friday. I was really digging this land 😀 So I made some preparations and contacted the selling agent the next day. But guess what? Somebody already bought it with no conditions. No freaking conditions! That means they probably paid in cash. Yikes, that’s a lot of capital (O_o) But then I thought maybe it’s a good thing I didn’t buy it. In terms of value it’s about the same $ per acre as the farm I bought last year so it wouldn’t have lowered my ACB anyway, which means it’s not cheaper than the land I have already by area. Keeping track of Adjusted Cost Base will give us a good idea of when to buy low and when to sell high. It’s commonly used for stocks but in accounting it can be used for anything 🙂
When I bought my condo in 2009 I didn’t know whether its price would go up or down. But I can use my ACB to take advantage of either outcome. So far my place is worth more than when I bought it. Will we ever see home prices fall to below 2009 levels? Maybe. But if that happens I’ll just buy another property and lower my ACB. This way, I still won’t miss out on a good buying opportunity. However, in the event that real estate prices never fall back to 2009 levels again then it’s a good thing I bought when I did. Awesome sauce! It’s a win win situation 😀
Many people will say it’s dangerous to buy high. That’s true. But how should we define “high” exactly? Vancouver real estate prices were considered “high” if we asked someone back in 2006 because homes literally appreciated by double digits every year for the previous 5 consecutive years! Understandable why some people called the market a bubble. But when we look back today in 2013, then 2006 prices doesn’t seem so expensive anymore. That’s because prices are relative 🙂 The housing market has certainly cooled recently, but we are still far above 2006 prices. Timing any kind of market can be fun and exciting, but not always easy to do successfully. By thinking about ACB we take the timing factor out of the equation. So here’s what we can do. Start to accumulate a position first. Then buy more if the asset class becomes cheaper. But if prices only climb then just sit back and enjoy the ride 😀 This strategy can be applied to farmland, gold, other commodities, and pretty much any hard asset (^_^) It doesn’t matter if something is overpriced today. What matters is will it be overpriced in the future. And since nobody can know for sure the only thing to do is to begin accumulating a position now and create our own relative cost point.
As prudent investors we must remember that although there is always risk when investing, there is also risk when waiting on the sidelines for the markets to drop, such as the risk of losing money to inflation year after year and the risk of prices never coming back down and missing out on a great investment opportunity. But a sure way to decrease our financial risk is to educate ourselves and invest with purpose and confidence!
Random Useless Fact: This is what researchers spend their time coming up with at M.I.T
The dividend reinvestment plan (drip) offered at most brokers is a tool for investors, it takes company dividends paid to shareholders and automatically buys more shares for them. For example if today you bought 100 shares of Bank of America for $10 per share, you would have 100 x $10 = $1000 worth of stocks in BoA. This means your ACB is $1000. Then let’s say they offered a special dividend of 10 cents per share to shareholders. Since you own 100 shares, you would get $10. This money would then buy you exactly 1 more share of the company, assuming it’s share price is still $10. Congrats, now you have 101 shares at $10 each, so your portfolio is now worth 101 x $10 = $1010.
But wait, if these stocks are held in a non-registered account please don’t forget to adjust your ACB. You should recalculate your ACB as if the share(s) bought with the DRIP was using your own money. In this example, think of it like you bought 1 more share using $10 from your pocket on the same day you received the dividend. So your ACB is now $1010.
Which means if you sold all our holdings, 101 shares. You don’t have to pay any taxes at all, even though it appears like you made $10 in profit, or a 1% return. You already paid taxes on the $10 dividend, don’t make the mistake of paying another tax on a $10 capital gain. Some investors overlook this small detail and pay double tax; once when they receive the dividend, and once more when they sell the equity. Luckily most discount brokerages will do the math for you and adjust your ACB so you don’t have to. If this sounds like too much information then consider only DRIP your RRSP and TFSA accounts, or other tax deferred vehicles like the 401K in the US.
For simplicity’s sake I’ve left out commission fees and any tax liabilities in the above example.