The Bull Hunters Guide

Hello fellow Bullhunters

This post will be the final excerpt from The Bullhunters Guide to the US Stock Market so I would like to hear your thoughts and what you have learned from this experience. I know for myself that it has been very helpful in understanding the stock market in a bit more depth. Although the ebook is a summary of the goings on of how the stock market works and how a share is valued, this tool is useful for the newbies starting out in the stock market and wanting to develop a trading system that will work for them. So let’s look at Intrinsic Value and Time Value and how that factors in to trading options…


Intrinsic Value and Time Value

Options are valued based on intrinsic value and time value. Intrinsic value is the positive difference between the stock’s current price and the option’s strike price. Since the strike price in the above example (previous post - Trading Options) is higher than the underlying stock, the options have no intrinsic value (intrinsic value cannot be negative). Therefore all $0.10 of the option’s value is time value.

As options get nearer to expiration, their time value erodes. Its like making a bet that you will run a marathon in the next 365 days. By day 100, it is less likely you will do so, but not entirely impossible. By day 364, the odds are you are not going to do it. The same is true of stock options, so as the expiration draws nearer, investors are willing to pay less and less for the time value.

But imagine Microsoft hit $35 a share on December 26. Now the $32.50 calls would have $2.50 of intrinsic value plus some time value. Instead of exercising your options - which would require you to buy 3,500 shares of stock - you could simply sell your option to a market for $250-plus per contract.


Options Go the Other Way Too

In addition to calls, there are also puts. Puts give you the right to sell a stock at a specified price within a specified period of time. This way, you can make money when a stock goes down, without taking on the risk of shorting.

For a real mindbender, you can short a put contract. This means you are selling the right to sell a stock at a certain price within a certain period of time. Confused yet? Don’t worry. In this book, I only want to cover the basics of the stock market. We can talk about derivatives in more detail in another book. Stay posted.

More Bullhunter on the Way

So there it is. The Bullhunters Guide to the US Stock Market first installment. While boring at first glance, following the financial markets can be the most entertaining hobby in the world. Once you understand the basics and begin to dig in, it is like following a sport that has no off-season.

I wouldn’t mind some feedback just to know how you are traveling and how you are getting along with the stock market and whether you are trading. How have we helped you with this blog and the ebook download. The reason I ask is because in order to give you what you want specifically, I need to know what it is.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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Hello fellow Bullhunters

The Bullhunters Guide to the US Stock Market has certainly been an eye opener for me and I think we got more than what we bargained for when Sean wrote this eBook and offered us a free download of it.  Although the information provided us is short and sweet, it is all very useful information which gives us a look behind the scenes at the goings on of the US Stock Market.

Today we will be discussing some other ways that you can make money from the stock market so here is the next excerpt…

Conservative stock investors like to buy undervalued stocks and hold them until they are fairly valued (or even overvalued).  Many times, these investors concentrate on dividend-paying stocks. 

Buy and hold proponents feel that the market is often irrational in the short-term.  Good stocks can go down; bad stocks can go up.  But in the long run, they believe that the cream rises to the top.  Buy and holders aren’t concerned with the day-to-day fluctuations of their portfolio.  They take their time before buying a stock and by the time they pull the trigger, they’re confident that they’ve made the right decision.  When their stocks suffer substantial losses, they often buy more.  This is called buying on the dips.

By buying on the dips, investors lower their cost basis.  For example, if an investor bought 100 shares of Ford for $10 and then bought another 100 at $9, his basis would be $9.50 per share - ((100*$10)+(100*$9)) / 200.  When the stock hit $11 he would have a profit of $1.50 per share instead of just $1.00 per share.

Not everyone agrees with the buy and hold strategy.  Aggressive investors think that they can maximize their profits by trading more frequently.   They see no reason to hold a stock when they think it is going to go down.  Why not just sell it, and then buy it back when it has bottomed.

Buy and holders think this sort of philosophy is conceited.  They say that frequent traders are trying to outsmart the market which is something that cannot be done on a consistent basis.  Buy and holders also point out that the commissions associated with frequent trading can take a big bite out of profits.  But aggressive investors still say that their way produces better results.

These two strategies are from one end of the scale to the other.  They speak for themselves.  So whether you want to make a quick profit or be on the conservative side and buy and hold, there are pro and cons for both.  It also depends on if you are building a portfolio or trading for cashflow.  This is something that only you can consider and also be aware of whether these strategies fit into your trading system.  They may or may not and there are other strategies to consider like renting shares for cashflow which is more conservative than day to day trading.

We are not done with the Bullhunters Guide yet.  There is more on the way so keep an eye out until next time.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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Hello fellow Bullhunters

Okay… so we have discussed how a corporation works.  We have taken a look at how to determine the value of a stock and if a stock is just a piece of paper.  We have even considered the components of the DJIA and how they cycle.  Now it is time to look at HOW we are going to make money on the stock market by weighing up growth as opposed to value of stocks.  More of The Bullhunters Guide to the US Stock Market.

The name of the game in investing is maximizing your returns.  Simply put, you want to buy stocks that are going to make you money.  There are two ways that this can be done - capital gains and dividends. 

We’ve already discussed dividends.  They are distributors of company earnings to shareholders on a per share basis.  But most of the 13,000 publicly traded stocks don’t pay any dividends at all - does this mean that they are worthless… of course not.

You realize capital gains when you sell a stock for more than you paid for it.  Gains in a stock that you have not yet sold are said to be unrealized capital gains.

Stocks go up because people want to buy them - it’s all about supply and demand.  People decide they want to buy a given stock because they think that it offers them a good chance of maximizing their future.  Institutional investors (banks, pension funds, etc.) who purchase the bulk of shares are looking further ahead - 5, 10 or even 20 years (or longer).  The question they ask themselves is At what rate will this stock grow its earnings into the future.  Once they answer that question they ask How much am I willing to pay today for those future earnings.

One way to evaluate a stock is by looking at its price-to-earnings ratio  (P/E ratio or just P/E).  A stock’s P/E ratio compares its current selling price to its earnings share (EPS)  If Wal-Mart’s most recent selling price were $48.32 and its most recent EPS number were $2.56, then its trailing P/E ratio would be $18.88 (48.32/2.56 = 18.88).  If Wal-Mart expected EPS of $2.80 next year, then its forward P/E ratio would be $17.26 (48.32/2.80 = 17.26).  Some people like to look at the trailing P/E because it is a historical fact and not a projection.  Others like to look at the forward P/E because what happened in the past is irrelevant - it’s the future that’s important.

Who’s good at maths because that was a lesson and a half.  Well Sean really worked on this and all the links go to his Stock Market Glossary of course so you can follow those in to see what they all mean just in case you are not quite clear on all the terminology.

It’s all a science that must be studied to know the ins and outs of the stock market and know what you are trading and how much you could potentially make.  So whether you think the trailing P/E ratio is the marker or the forward P/E ratio is the marker is entirely up to you.  As long as it follows your trading system is what is important.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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Hello Fellow Bullhunters

I hope you all got to read Seans post yesterday regarding the success of a couple of graduates of the 21st Century Academy homestudy.  I personally know Maria and Pierre and I have to say that they are a great example of what you can achieve when you put yourself into action and go after your dreams.  Congratulations again on your retirement from your day job and now making a living from trading.

I don’t know about you but I am certainly getting more out of The Bull Hunters Guide to the US Stock Market by breaking it down into small chunks and analysing it.  It’s becoming clearer to me each time I write a post and bringing it all together.  Let’s continue…

The Dow financials are cyclicals as well, but they don’t always follow the same cycle as the industrials.  American Express is the most cyclical of this group.  It performs best when the economy is strong and thus consumer spending is strong.

Citigroup and JP Morgan Chase are the most closely related of the stocks in this group as they are both money center banks.  Banks do well when there is a positive disparity between short-term interest rates and long term interest rates, also known as a normal yield curve.  When long-term rates are lower than short-term rates there is an inverted yield curve which is a nightmare for the banks.  The factors influencing the movements of interest rates are beyond the scope of this book but suffice to say that the inverted yield curves are predictors of oncoming recession and therefore money center banks perform best when the economic future looks strong.

American International Group (AIG) is an insurance company.  It benefits from a strong economy because it invests its assets in the financial markets.  But it is the least predictable of the financials because major events like Hurricane Katrina can have a disproportionate impact on insurers.

Market conditions are dependant on many variables so it is wise to determine the value of a stock and then follow your trading system making use of technical analysis to find your entry and exit points.  Remember that a strong economy is when the financials perform the best.  We cannot predict when natural disasters are going to happen or any disaster for that matter that will have an affect on the stock market at any given time.  Writing put options is one way of protecting yourself if you happen to be new to trading and it’s always wise to start with paper trading until you are confident to put your real money into the market.

Yours in prosperity

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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3 years ago, I was inspired by my future mentor Jamie McIntyre, when he said he worked 3 weeks then had 1 week off.  The purpose is that (besides needing the rest) the recharging and relaxation of the 1 week holiday gives him the most inspiration and insight for new ideas and concepts to grow his business and investments. 

I was very inspired by this, and although I didn’t set it as a goal to achieve, it has ingrained itself into my subconscious mind and has lingered until now.  2 weeks ago, I unleashed the holiday beast!  From now on its 1 week off every month.  How will this work, some people will be asking?  How can you just “not attend” to your stock market investments, property portfolio or internet sites?  Won’t you need the cashflow for that week?

Well, that sounds like the questions I would have asked 3 years ago.  Something I have come to realise is this:  When you are doing what you are passionate about, it’s like having time off anyway.  So the first 3 weeks are very enjoyable to start with.  I work with the internet, helping people build a millionaire mindset, creating cashflow strategies, playing with trading systems, looking at potential investment properties, the list goes on… meanwhile, I’m building emotional intelligence.  By now I’m sure you understand the importance of both emotional and financial intelligence.  They are the key to growth and building wealth.

This is what I’m likely to do on my week off and how I will manage my investment cashflow:

Travel to destinations of my dreams, including goals I’ve set 3 years ago.  When I did the 21st Century Academy Homestudy program, one of my goals was to take my 2 sons to every continent in the world by 2017.  I’ve realised since that this goal will be achieved in the next 4 – 5 years.

Spend time at home on my 20 acre riverside property in Western Australia.  This is where I want to spend the rest of my days although my intention is to own many properties throughout Australia and the world.

Access to internet means I can oversee stock market investments almost anywhere in the world.  This is hardly a chore as I enjoy my investment strategies and spending a few minutes a day looking at them doesn’t phase me at all.

Most stock market investment strategies I use are very low key and low maintenance.  In the beginning, I used a more aggressive approach because I needed a higher investment return on my money.  Now the cashflow is there, the rate of return isn’t as important anymore.  Of course, that removes a lot of potential stress in the investment as you could imagine.  $10,000 isn’t as much money to me now as it was 2 or 3 years ago.

I actually make a fraction more every month from my investments (with less effort) than I did in December 2005 when I finally replaced my income and fired my boss.  Other cashflow generators have enabled me to make money at a higher rate while still maintaining a low key, low maintenance investment profile.

So the bottom line is that I am now able to start enjoying life at a higher rate and still grow my investment portfolio while having a growing cashflow as well.  All this has happened in 3 short years.  I hope you can take some of this onboard, inspiring you to take action and break away from the things you don’t want in life.  Now is the time to move towards the grand goals and dreams that inspire you.

Until next time, I wish you Universal Success

Sean Rasmussen
The Bullhunters Stockmarket Guide
Universal Wealth Creation © 2004 - 2007

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