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Sol Palha is the head financial analyst at Tactical Investor. He is a self-taught Student of the Markets, having widely read conventional and non-conventional texts on all aspects of technical analysis, Mass Psychology and philosophy (as he believes it can be quite useful in terms of market... More
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  • The Art Of Contrarian Investing

    Given a sufficient number of people and an adequate amount of time, you can create insurmountable opposition to the most inconsequential idea.

    Contrarian investing is a vibrant sports ground and not an inert one. The hypothesis that it's an immobile field is held by the new breed of fashion contrarians, whose only role has been to glamorize it and warp the true notion of being a contrarian investor. These fashion contrarians are no different from those investors whose main driving force is raw emotions. These investors with the mass mindset only imagine that they are doing things differently, but the moment panic or doubt is in the air, they take flight like bandits being chased by the hounds of hell. A real contrarian is generally familiar with the basic concept of mass psychology. If you are not familiar with these rules, you ought to take the time to get acquainted with them. The central tenet of mass psychology and contrarian investing is to be happy when the masses are fearful and wary when they are not. For example, if the market is in a bullish phase, you should not bail out just because the masses have jumped on the bandwagon. Instead, you should wait for them to move from the cautious to the euphoric phase before heading for the exits.

    While we embrace the concept of contrarian investing our true focus is on the joining the key rules of contrarian investing with the powerful concept of mass psychology. The combination of the two methodologies creates an extremely robust system. Psychology is the key driving force behind almost every human action and understanding it could significantly improve your overall experience and results as an investor. To this winning combo, we add technical analysis.

    The rules laid out below will provide both the beginner and seasoned investor with ideas that ought to improve his or her trading skills if implemented properly. Discipline and patience are the keys to successful investing; nothing comes easily, for if it did, everyone would be able to do it.

    • Popular media (magazines, news outlets, newspapers, TV stations, etc) should be viewed in the same light as rubbish. Use these outlets to determine what the masses are frothing about and what you should avoid or start getting out off or into. Emotions should be at a boiling point before you make any move. You do not oppose the masses just because they have jumped on the bandwagon; it's only when the bandwagon is overloaded and about to buckle under its load that you should look for an exit and vice versa.
    • Technical analysis plays a key part when it comes to investing, regardless of whether you choose to be a contrarian investor or not. Consider taking the time to understand the basic tenets of this very useful but misunderstood field. Try not to follow or focus only on the most popularly used Technical analysis indicators. You will be amazed at how effective some of the lesser known indicators are once you get to understand how they function and operate. Simply understanding how to draw trend lines and spotting support and resistance points could make a big difference in terms of your investment returns.
    • Spend time understanding the markets you are going to target or the sectors of the stock market you intend to play. There are many free resources on the net that can help you can create custom scans to spot strong sectors, value stocks, etc, etc.
    • Formulate a sound plan. Don't be an imbecile and sit there wishing and hoping to catch a home run. Those that adopt such notions, always catch a falling dagger, a process that is fraught with pain and misery. The plan should include profit targets on each and every trade, and, an exit plan, in case the trade does not work out.
    • Do not foolishly embrace Options until you grasp the key concepts of buying and selling stocks. In other words, understand when to buy and when to sell……… Make some money first and then attempt your hand at trading options.
    • Learn to relax; if you don't relax it's really hard to win. Disease is a body not at ease, so if you are not at ease, you will most certainly perform dismally in the markets.
    • Paper trade for before you put your hard-earned money to work. Paper trading while not perfect gives you the chance to understand how the markets operate in real time. Keep detailed records so that you can go over these trades at a future date. This data could provide useful insights on how to improve your trading style.


    A genuine contrarian only jumps into the investment as the asset is trading at mouth-watering levels, and blood is flowing liberally in the streets……….. Buy when the crowd is paralyzed with terror and panic and sell when the masses are jubilantly buying. When you are feeling ecstatic, flee for the exits.

    Overconfidence is a sign that you are treading on thin ground. Even the best traders can and suffer setbacks; the key is not being too confident or arrogant, as it is very difficult to pick yourself after a fall. Always utilize stops as the markets are currently very volatile.

    Contrarian investing is really about emotions. You are overcoming your emotions and preying on the emotions (trepidation or gluttony) of the crowd by taking a far-reaching position that is usually in opposition to that of the crowd.

    When you take a position and people look at you with contempt or disbelief, you know you are doing the right thing. When people pat you on the back and agree with you, it's usually time to head for the exits.

    Sep 14 2:05 PM | Link | Comment!
  • Our Suggested Guidelines When Searching For New Investment Ideas”

    Suggested guidelines for spotting new investment ideas

    We generally base our choice on the following factors.

    Net income - It should be generally trending upwards for the past 3-4 years.

    Cash flow per share - It should be trending upwards for the past three years.

    Total cash flow from operating activities - It should be trending upwards for the past 3-4 years.

    Current ratio - Should be above 1.

    Interest coverage ratio - When available, any value above 1.5 is OK, but we would aim for 2.5-3.00 as our starting range. The higher the number the better.

    Sales - They should generally be trending upwards for the past 3-4 years.

    Levered free cash flow - This is the icing on the cake. If a company meets most of the above requirements and also has a positive levered free cash flow, it can generally be viewed as a good long term buy. Two examples are Leggett & Platt (NYSE:LEG) and Procter & Gamble (NYSE:PG).

    The following criteria apply only to dividend paying stocks and not to growth stocks that might not payout dividends:

    Payout ratio - It should generally be below 100%, but a ratio below 70% is optimal. Payout ratios are not that important when it comes to MLPs/REITs as they generally pay a majority of their cash flow as distributions. In the case of REITs by law they have to pay out 90% of their Taxable income as dividends. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs and REITs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution/dividend declared per unit/share.

    Dividend growth rate - It should be at 5% or higher. A high yield with a low dividend growth rate is not good in the long run, but neither is a low dividend yield with a high growth rate; one needs to find an equilibrium here. And there are exceptions to this rule, some stocks appreciate rather rapidly and so a low dividend could be offset by the capital gains.

    Five year dividend average - We generally aim for stocks that have a yield of 4.5% or higher. There are exceptions to this rule. Some stocks appreciate very fast, so even though the yield might be low, one can more than make up the difference through capital gains. One example is Jarden (NYSE:JAH).

    An early warning signal that the company could be in trouble is when the total cash flow generated from operating expenses is not enough to meet the dividend payments. This information can be gleaned by looking at the cash flow statement. This is readily available at Yahoo Finance. In the example below we used LEG and the data was obtained from Yahoo Finance.

    The cash flow in this case was more than enough to easily cover all the dividend payments for all the above years; in this the time period was from 2008-2010.

    Many traders use other metrics and that is fine; we are just trying to provide a guideline. As you get better handle of the ratios explained below you can create your own list of criteria. If you would liked to kept abreast of any new developments consider joining our free newsletter

    Tags: AAPL, C, BAC, EPD, AA
    Jul 12 5:44 PM | Link | Comment!
  • Benefits Of A Covered Write Strategy

    The covered call strategy is a great way to open a second stream of income and minimize the impact of volatile gyrations on one's portfolio.

    What are covered calls?

    An investor basically writes a call option (sells calls) that is backed by with the equivalent number of shares, hence the name covered call. If the stock is purchased at the same time a call contract is sold it's often referred to as a "buy write". On the other hand, if the shares are already from a previous purchase, it is referred to as "overwrite." This is the most basic and widely used strategy, which combines the litheness of options with stock ownership.

    When you write a covered call income is generated in the form of the premium paid by the option buyer. If the stock trades above the strike price, then the owner will have to sell the shares at that price, if not the owner of the stock gets to keep the premium. The risk of stock ownership is not eliminated. If the stock drops significantly, then the net position will likely lose money, however, using this strategy would reduce the loss factor by the amount in premiums the owner of the shares received for each call he sold. The main risk of a covered call strategy is that the stock might decline significantly in value; in other words, the same risk any share holder bears but with the added benefit of receiving a premium for the calls you sold.

    Let us look at an example

    Let's say you own 300 shares in SDRL, which is currently trading at 38, and you think that there is little chance that the stock is going to hit 45 in the next six months. You can then sell calls with a strike of 45; the premium you receive is yours to keep. If in the next six months SDRL does not trade above 45 (usually the stock has to trade above the strike price on the last trading day), then you hold onto the shares as well as the premium.

    Benefits of employing this strategy

    Income generation

    Each contract trades at a premium (the higher the beta the higher the premium), and the buyer of the contract pays you that premium for the right to purchase 100 shares of the stock at the strike price. The premium is deposited immediately into your brokerage account.

    1) Downside protection and reduction in Portfolio volatility

    If the stock drops in value, the premium collected at least some type of return, and it can offset all or part of the loss depending on how severely the stock has pulled back. For example; if you sold a covered call against a stock when it was trading $20 for a premium of $2.50, then as long as the stock does not drop below $17.50 you are okay. In essence, you have reduced your entry price to $17.50. If this strategy is actively employed, then you could in general significantly reduce the volatility your portfolio is subjected to.

    2) Predetermined rate of Return

    This strategy gives you a decent idea of your rate of return on your investment will be. Regardless of what takes place you still get to keep the premium. If your shares are called away from you at the strike price, it is easy to figure your profit; this is the difference from what you paid for the stock and the strike price you sold the option, plus the premium you collected. So let's take the above example. If SDRL trades above 45, your shares are called, and you are out at 45. So your profit is 7 plus the 2.50 which you received in premium for a total gain of 25%.

    If the stock starts to drop in price, you lose money on paper (much like any other share holder) when price of the stock falls in excess of the premium you received.

    3) Converts a common stock into a dividend paying stock

    The moment you sell the call option, the stock you own, in essence, has turned into a dividend paying-stock; if it already pays a dividend you have turbo charged your gains.

    4) Repeat the process all over again

    If your shares have not been called away from you, you can repeat the whole process again with the same shares of stock you own. Utilized properly this strategy can produce an income stream that can surpass the dividend paid out by that specific stock. If the stock does not pay out a dividend, you have just converted into one that does. If the stock is called, there is nothing to prevent you from buying another good stock and repeating the whole process again.

    5) Buy back the call

    If you sold the call for a premium of 2.50 and the call is now trading at 1.00, you could buy the call back, and you still get to keep the difference, which in this case amounts to $1.50. You could take things one step further and start the whole process again by selling calls that are fetching higher premiums. For example, you sold calls on stock X when it was trading at 37 with a strike at 40 for a premium of $2.50. The stock is now trading at 34, so you buy the call back and sell new calls with a strike at 37.50.

    Tags: APL, EPD, KMR, AFL, PRU
    Apr 02 5:53 AM | Link | Comment!
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