I received a Tweet from a well known individual the other day. It was an incidental Tweet following a little banter regarding some other subject that will be forever lost to me.
The individual is probably well known to CNBC and more recently to Bloomberg viewers. I refer to him as the "Man in Black" for his wardrobe preferences, although his fashion sense is easily matched by his market vision. He is highly regarded in the world of venture capital. He may very well be one of the most eclectically and widely read people that I will ever know from a very safe distance.
In order to protect his identity, let's call him Paul K.
What surprised me about his incidental Tweet was that it was in reference to a Direct Message exchange back in November 2011 regarding Microsoft (MSFT). There were no photos attached and certainly nothing embarrassing about those Direct Messages.
At the time, my oldest son had written a guest blog for me. Not only was it his first blog, but the subject matter was about his very recent stock purchase. It was also his very first stock purchase. For a person who personifies a contrarian approach to most everything in life, he gave compelling reasons why he had chosen Microsoft to be that first investment.
In his Direct Message, Paul K. had wished my son good luck with his position in Microsoft. That was extraordinarily gracious, as he held a short position in the very same company. In all likelihood, my son's position in Microsoft represented a greater proportion of his overall wealth than Paul K.'s short position. I have no doubt that Paul K. recognized that fact and sincerely wished him good fortune as he was beginning his investing life.
Now, six months later, with no antecedent trigger to account for it, Paul K. Tweeted to my attention "Btw, still dying on MSFT trade. Feel free to say I told you so, etc."
My response was "Never. Always eschew greed, gloating and regret."
Mostly, I felt sad that six months later he would remember that exchange. "What an empty life," I thought to myself and then proceeded to put onto the inter-web, as Paul K. occasionally refers to it in a Ted Stevens kind of way.
Although I understand that most everything in life, including the stock market must be a "Zero Sum Game," I never get any joy out of knowing that there is someone on the losing end of a trade. In fact, I am greatly bothered by a commercial airing on CNBC with some frequency for a trading academy that has the instructor saying "imagine how the guy on the other end of that trade feels," after congratulating his student for what was presumed to be a successfully profitable trade at someone else's expense.
Poor sportsmanship.
In that regard, I have no regret that I am not currently holding Microsoft shares. in fact, the last time I held shares was right before all of those who had made a career of disparaging Microsoft share ownership had changed their tune and jumped aboard the Microsoft bandwagon. Both my son and I had our final lots of shares assigned away as the $30 barrier was breached.
If one watched enough business TV, you would have been justified in believing that the term "dead money" was a synonym for Microsoft. You would have been very hard pressed to find an analyst or "Talking Head" who referred to the past decade as being a lost opportunity.
It is most certainly true that for an extended period Microsoft traded in a very tight range and was perhaps one of the least exciting shares available. By the same token it's also true that Microsoft was better able to withstand extraneous macroeconomic issues that were devastating to other companies.
A funny thing happened, however, as Microsoft crossed over and beyond the $30 level. Suddenly it became the darling of the "Talking Head" universe. Of course, it wasn't so during its ascendant phase, having moved fairly rapidly and uncharacteristically from about $27. The train got crowded after $30, having missed the big move. What is most surprising is that in the past three months, as Microsoft has again traded in a very tight range, no one has been calling it "dead money."
Instead, for some reason, everyone believes that the introduction of Windows 8 will be a replay of Windows 95. That was truly a Golden Age fueled by Microsoft, but I'm having a hard time seeing the parallels. Yes, tablets are the rage and Windows 8 will be optimized for tablets, yet corporate America, the big pusher behind Windows 95 and related software products isn't going to be rushing into providing a "tablet in every pot" any time soon.
If you read yesterday's (May 14, 2012) SeekingAlpha article that I had written, "This Week Could Offer Bargains and Enhanced Option Peremiums" you may have noted the recommendation to purchase shares of Microsoft, at $31.16, as part of a "Double Dip Dividend" strategy.
Microsoft went ex-dividend today (May 15, 2012) and is now offering a 2.6% annual dividend rate. The Double Dip Dividend strategy is one that I use with my subscribers to attempt to capture both dividend and an option premium.
In this particular case, the May 2012 option premium at Monday's open was $0.37 for the $31 strike price, which happened to be an In the Money strike.
Options are a funny thing, especially when it comes to their assignment prior to expiration. For a rationale investor to decide to exercise the $31 option in order to capture the dividend, with still four days to go until expiration, Microsoft would have had to have closed well past $31.20, since the dividend payable was $0.20.
However, most option buyers would not exercise their option so far in advance of the expiration unless they could flip the shares around very quickly with enough of a profit upon the shares to make it worth the risk of the purchase. For that to occur, share price would have to be well above the strike price plus the dividend. After all, option buyers are loathe to shell out unleveraged money. But even in those cases when shares are assigned, the call seller reaps a very quick return on investment, as result of receiving the option premium while having held the stock for a day or so. The technique can be considered a variant of "Collecting Crumbs."
Microsoft has long been one of my favorite stocks. For me, it is a true "Triple Threat" and there are very few such stocks. Specifically, a triple threat stock is one that is of a solidly stable company with a safe and dependable dividend and an attractive option premium when selling covered calls.
For this two-year period, for example, Microsoft did almost nothing, for which my account was very grateful.
(click to enlarge)
If you know of many others, I'd be more than happy to have you share that information with me.
But what that all means is that Microsoft, during its period of dormancy, when others were scoffing at it, was an incredible vehicle with which to accumulate wealth.
How? Through a very simple formula. Buy shares, sell near the money option premiums and collect dividends. The less the underlying shares moved the better. On those occasions when the narrowly trading shares were assigned, it was just a simple matter of sitting back and waiting for shares to dip below the previous strike price and do it all over again.
Depending upon the gap between the share price and the nearest out of the money or in the money strike price, one could easily generate a 2-4% monthly return, plus a quarterly dividend. With the introduction of weekly options on Microsoft, the opportunities were enhanced.
Granted, that way of accumulating wealth may not be as exciting as when watching your shares appreciate wildly in value, as Microsoft did in the 1990s, but it's not as if there's white powder on the money. The profits are every bit as real.
I certainly understand that it wasn't fashionable to discuss Microsoft in mixed company. I certainly also understand the allure of Apple (AAPL). No doubt that if Microsoft had ever gotten involved with a movie studio, Pixar would not have been the result. More than likely, Microsoft would have come up with a revolutionary way to show black and white high school educational films.
But still, the safety and predictability of an investment in Microsoft, as part of a diversified portfolio was a key to both protecting and advancing that portfolio's value.
Whereas Bill Gates, through his philanthropic efforts attacks malaria in Africa with a decidedly low tech approach, through the use of mosquito netting, it's the eradication of the disease that is exciting and not the process. Sure, no doubt that the fine engineers at Apple could have designed something far more newsworthy, but sometimes the glitz and glamor are unnecessary.
By the same token, do you really care how you enhanced your portfolio's bottom line? I don't; it's just my version of being the "Man in Black."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
