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Tip 3 - Never Buy A Mutual Fund

Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)

Why Stock Options are better than Mutual Funds

The Great Myth Of Out-Performing Mutual Funds

Every year, dozens of financial magazines, newspapers, and newsletters dutifully report the top-performing mutual funds, based on 1-, 2-, 5-, or more year time periods. Presumably, the mutual funds that scored the highest in the past are the ones we can expect to continue to outperform in the future. This presumption is a myth.

To me, these scorecards are like reporting the most recent numbers which won at a roulette wheel - they indicate little or nothing about what is likely to happen on the next roll. Every year, we see entirely new mutual funds at the top of the lists. In fact, in many instances, the funds that will perform the best next year can be found at the bottom of last year's list. (Bad luck got them at the bottom last year, just as good luck got the best performers at the top. In both cases, luck, not skill, was the primary determinant of success.)

The Best-Of-The-Best Mutual Fund Managers Make Their Picks

At the beginning of 2001, Business Week magazine selected four experts to invest a hypothetical $100,000 in their 10 favorite stocks. These stock-pickers were good, apparently the best in the business. One manager had earned an average of 20.3% a year for 3 years, placing her in the top 2% of her peers. Two of the fund managers had lost a little during 2000, but their losses were only 1/5 or 1/6 of the average for their kind of mutual funds.

One manager's secret was to "buy improving companies dirt cheap" - he was quoted as saying that "Cisco at $52 was a reasonable valuation" (of course, a year later, it was under $20, but what the heck, it must have been a real bargain then). The fourth manager specialized in small-caps, and had returned 16.6% for the past three years vs. 1.8% for his small-cap peers. So Business Week had identified the cream of the crop of mutual fund managers to make their very best picks for the year.

Of Course, 100% Of The Absolutely Best Fund Managers Can Still Be Wrong

At the end of the year Business Week (December 31, 2001-page 106) sheepishly reported the results. If you had bought all four portfolios (spreading your risk over 40 stocks), you would have lost 26.7% of your investment for the year. Remember, these were the best of the best experts in their field who were making the picks.

Of course, 2001 was not a great year for stocks. Had you bought an S&P 500 Index fund, your loss for the year would have been 13%. But how would you have felt to have paid these "best of the best" experts by buying their mutual funds (and paying them their 3% or so management fee), and experiencing a loss twice as great as the market average? For sure, they were paid hundreds of thousands of dollars each for their work in 2001 (when a dart thrower could presumably have done twice as well).

The On-Going "Experts Challenge The Darts" Contest

For many years, the Wall Street Journal has run a contest between the top stock picks selected by four "experts" and stock choices made by random darts thrown at the financial pages. Six months after the picks are made, the results are tabulated. So far, the experts hold a narrow lead over the darts.

This contest is not fair, however. The darts are handicapped. Millions of investors are introduced to the single best stock pick of four recognized experts. What's more, investors read the expert's reasoning behind his or her choice. This publicity is sufficient for many investors to buy companies they may never have heard about before the contest. I, for one, have bought stocks recommended by these experts on many occasions. All this new buying serves to push the prices higher for the experts' choices. Presumably, not too many investors run out and buy the darts' stock picks.

A fair way to run this contest would be to wait two weeks after the contest was announced, and use those prices as the starting points for both the experts and the darts. Of course, then the experts might be totally humiliated. It's bad enough that they get beat a good share of the time already.

One Of The Great Mysteries Of The Investment World

If portfolio managers really can't outperform the market, why do we pay them so much? Year after year, millions of investors pay mutual fund managers billions of dollars to under perform the market. It's one of the investment world's strangest mysteries to me. Does it make sense to you?

Where To Find The Lowest Cost (Index Or Otherwise) Mutual Funds

You can find any mutual fund's annual percentage cost (and these costs vary unbelievably), at www.personalfund.com. Check it out. No one should buy a mutual fund without going there first. This website could save you thousands of dollars every year.

I don't get paid anything to send you there - it's my way of thanking you for coming to my web site and learning about ways to double your money with just a little effort.

If the investment pros can't beat the index averages, how do you think the ordinary investor can match up? Probably not too well, even with a full-time research effort. I firmly believe that if you want to invest in mutual funds, you should stop trying to guess which one will have the hot hand next year, and content yourself with the lowest-cost index fund instead. In the long run, you will be way ahead.

Make A Little Extra Effort And Multiply Your Returns

I feel even more strongly that instead of being a passive investor in index mutual funds, you should direct at least some of your money into an active investment that might yield you three or seven or ten times as much as the index fund does.

I'm talking about stock options in general, and LEAPS in particular. It doesn't take too much to learn about these little-known instruments, and the returns can be tremendous. Tip #1 - All About Options includes a short primer on stock options.

My program is designed to show you several methods to double your money. Tip #5 - The Lazy Way To Double Your Money Strategy involves only two trades at the beginning of the two-year period, but can't be used in an IRA.

My favorite strategy, Tip #6 - The 10K Strategy, involves a little work and trading every month but can generate superior returns even in a flat market. Sign Up For My Free Options Strategy Report and receive two free reports - "How to Make 70% a Year with Calendar Spreads" and "Case Study - How the Weekly Mesa Portfolio Made Over 100% in 4 Months".

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Terry's Tips Stock Options Trading Blog

April 26, 2016

Last Minute Facebook Earnings Play

Facebook (FB) announces earnings tomorrow, Wednesday the 27th, after the close. There is still time to place what I think will be a dynamite options play. You have until the close tomorrow to get these spreads in place.

Terry

Last Minute Facebook Earnings Play

Over the past few weeks, I have suggested legging into calendar spreads at a price slightly above the current stock price for companies that would be announcing earnings about two or three weeks later. The underlying idea of these spreads is that, 1) in the days leading up to the announcement, the stock tends to drift higher as hope for a positive announcement grows and, 2) implied volatility (IV) of the option series that expires directly after the announcement date almost always soars because big moves in the stock often take place right after results are disclosed.

In my personal account, in the last few weeks, I have both told you about and used this strategy for SBUX, JNJ, and FB. In each case, I bought a slightly out-of-the-money call a few weeks out and . . .

April 20, 2016

How to Play the Upcoming Facebook Earnings Announcement

Over the last 3 weeks, I have suggested a way to leg into calendar spreads at a credit in advance of the earnings announcement for Starbucks (SBUX), Facebook (FB), and Abbvie (ABBV). All three calendars ended up being completed, and all three have already delivered a small profit. Once earnings are announced and the short side of the calendar spread expires, all three spreads are guaranteed to produce a much larger profit as well (depending on how close the stock price is to the strike price).

Today I would like to discuss another Facebook play. While this one does not guarantee profits, I believe it is even more exciting in many ways. It is possible that you could double your money in less than two weeks. I also believe it is extremely unlikely to lose money.

Terry

How to Play the Upcoming Facebook Earnings Announcement

All sorts of articles have been written over the past few weeks about the prospects for FB, some positive and some negative. We will all learn who was right and who was wrong late next week when FB announces earnings on April 27, and the details of the company’s large assortment of new and wondrous initiatives will be disclosed.

The high degree of uncertainty over the announcement has caused implied volatility (IV) of the options to soar, particularly in the series that expires two days after the announcement. Those Apr5-16 options carry an IV of 52. This compares to only 35 for longer-term option series and 32 for the Apr4-16 series which expires this week.

Buying calendar spreads at this time represents one of the best opportunities I have ever seen to buy cheap options and sell expensive options against them. The FB calendar spreads are exceptionally cheap right now, at least to my way of thinking.

I have written an article which was published by TheStreet.com today which describes the actual calendar spreads I have bought yesterday and today (and I have bought a lot of them). The article fully explains my thinking as to which spreads I purchased. Read the full article here.

April 12, 2016

Earnings Season Has Arrived – How to Capitalize on it With Options

For each of the last two Mondays I have told you about an earnings-related trade I made. Today I would like to review my thinking on those trades, update how they are going, and offer you a new idea of a third trade I made his morning.

Terry

Earnings Season Has Arrived – How to Capitalize on it With Options

In the last few weeks leading up to a quarterly earnings announcement, two things usually happen. First of all, the stock often moves higher as the announcement day approaches as some investors start hoping that the company might beat expectations. The second thing is even more likely (and essentially always happens). Implied Volatility (IV) of the option prices moves much high. This means that the prices for options temporarily rise in value across the board. The greatest upward move in IV takes place in the options series which expires just after the announcement date.

The reason that IV becomes greater at this time is that once earnings are announced, the stock is likely to move either up or down by a much larger amount than it does most trading days. When volatility is . . .

Making 36%

Making 36% – A Duffer's Guide to Breaking Par in the Market Every Year in Good Years and Bad

This book may not improve your golf game, but it might change your financial situation so that you will have more time for the greens and fairways (and sometimes the woods).

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