My top 10 Rules in Stock Investing

This is a follow up to my newbie's guide. It is based on what I've learned in the past 5 years and how I invest today.

I started investing in April 2017. At first, I did not know what I was doing, but once I started to learn the ins and outs of picking stocks of solid companies, I started to outperform the S&P 500 by 2018. Since then, I more than doubled S&P 500 total returns. This chart shows my performance without any margin. Once I started using margin in 2021, my results further improved (like over 100% annually). Some smart use of options strategies bring additional returns.

 

1. Company must have wide moat

This could be any sort of competitive advantage, such as a good brand name (like Apple), or having technology that is better than competitors (like Apple). It could also be network effects (like Facebook, Amazon).

2. Must be undervalued, taking into account current valuation and future growth.

Low PEG ratio (1.0 is good), good forward P/E ratio.

PEG = PE/(earnings growth %)

Note different sources will give different earnings growth numbers.

 

Longer Term ROI = OEY + PGR

 

3. Scan what the hedge funds are investing in:

https://www.dataroma.com/m/home.php

https://www.dataroma.com/m/holdings.php?m=AM

 

4. Leverage Hedgefundie method, but with 250% stocks/150% treasuries

Less TMF than Hedgefundie due to having portfolio margin call safety (25%), but if TMF gets cheap it is worth buying on its own. Buy lots of TMF when it’s cheap.

Sell off margin (reduce equities to 100-150%) based on 200 day MA

Absolutely relying on TMF to save portfolio during 20%+ crash.

DCA’ing with salary every month pays down leverage. Then buy again during a correction/crash, max margin after big crash for the big recovery.

 

5. Expected S&P 500 PE = -187(10 year yield) + 31

In era of lower interest rates, higher valuations are sustainable

Govt/Fed injecting money into economy has huge impact too.

 

6. XBI and utilities (XLU ETF) have low correlation to SP500 index fund.

Good diversifiers.

XLU is interest rate sensitive but is a good diversifiers due to low correlation with other stocks.

 

7. For pharmaceutical drugs in pipeline, keep an eye on insider selling vs buying

 

8. Don’t buy into negative momentum. Let it form a new base first. Do buy into sudden big dip from selloff.

 

9. In a market selloff, buy when others are fearful, sell when others are greedy.

 

10. The Wheel

In a sideways market, or very slow stock market, can sell puts for a 25% ROI (higher with margin). There is 94% chance of contract expiring worthless, yet buying the stock cheap is a good deal anyway (company is worth more than what I’m paying, even if stock continues to drop further).

You are getting paid to wait.

Volatility will give better prices. Implied volatility is almost always overestimated, use to get higher premiums without too much extra real risk.

Rolling shorter term contracts gives you potentially
higher annualized returns, where longer term
contracts gives you income certainty.

- Options accelerate in decay at the 45 Days To Expiration (DTE) mark, so sell options that expire in 45 days or less. Selling a further expiry gives you more margin for error, while selling a closer expiry gives you less margin for error.

Take profits early at 50% of contract.

What’s important is the Profit/Loss per Day (aim for $1.75 per day, win rate 89%).

Strategy ties up cash, so if expecting stocks to do well in a bull market, better to just buy the stocks.

You don’t pay margin interest but less margin can be used.

High Delta (Delta 50- sell at 50% or hold till expiration) strategy can outperform the market.

For short days till expiration, better to hold till expiration. If 45 days or longer, better to sell at 50%.