I still remember the first stock I ever bought...
I (Jeff Havenstein) was 22 years old and fresh out of college when I plopped a few hundred bucks into a brokerage account.
I was eager to buy my first stock, but also nervous. I heard about all the money you can make in the stock market... and the investing horror stories following the financial crisis.
When it came time to choose a stock to buy, I did what a lot of first investors do: I read an article about some stock I had never heard of that could – supposedly – quickly double my money. And I bought it without much research at all. (We've all been there, right?)
That led me to a company called Himax Technologies (HIMX). If you've never heard of Himax, you're not alone. Today, the Taiwanese semiconductor company has a market cap of just around $1 billion. At the time, I knew nothing about the company... but I was caught up in the promise of a 100% gain in a few months.
You won't be surprised to hear the stock didn't double. I sold my shares later for a huge profit of $11 after fees – after many tiring days of watching the share price whip around. If I still held HIMX, I'd be sitting on a loss.
I've made plenty more common investing mistakes, too...
I've sold great companies too early. (This mistake isn't limited to novice investors – even the most experienced investors do this all the time.) I'm still grinding my teeth about selling cloud-communications company Twilio (TWLO) too soon...
If you buy a stock whose business you understand and numbers you know, do yourself a favor and give it a chance to play out.
I've also made the mistake of not diversifying properly. A portfolio that consists entirely of a few tech stocks might sound like a good idea, but it's not.
And I've even dug in my heels and doubled down on losing stocks... like my ill-fated experience with social media company Twitter(now known as X). In behavioral finance, this is known as the "backfire effect."
Everybody makes mistakes early in their investing careers. It's an expensive tuition, but it's how we all learn.
Fortunately, there's one rookie investing mistake I haven't made...
And I never will, thanks to my professional mentor, Dr. David "Doc" Eifrig.
Most investing careers start like mine. You buy a couple of "get rich quick" stocks and you either get bored or get burned. Then, you move to stocks you know and have researched, but you sell too soon. Finally, you experience some success and think you have it all figured out.
Then you hear about options...
Inexperienced investors usually do one of two things: Options sound too complicated and too scary so these people never learn about them... Or the promises of outsized gains suck them in, and they dive right in without taking the time to learn the basics.
The second group typically gravitates to out-of-the-money ("OTM") call options. This simply means that they're purchasing the right to buy a stock at a price higher – sometimes much higher – than where it's currently trading.
If they're right, OTM call options offer a chance for investors to double, triple, or quadruple their money quickly. These options are cheap, you can buy one for just a couple hundred bucks. They're essentially the stock market's version of a scratch-off lottery ticket.
Although this sounds tempting, OTM call options are usually a terrible idea.
They're a bad gamble for one specific reason...
They lose value every day.
Regardless of whether the underlying stock rises, moves sideways, or falls... an option still loses what's called "time value." This is built into the structure of how options are priced.
You can see in the following chart how time value erodes over the life of a four-month option...
If an option is going to become less valuable every day, why on Earth would you ever buy one? You really have to see a stock soar higher to make money buying OTM calls. (This should only be done with play money.)
Again, I was never lured into buying calls and losing money, thanks to Doc...
Instead of buying options, he talked about the benefits of selling options.
Whereas time value costs the option-buyer money every day, the option-seller is making pure profits.
Again, no matter what happens to the underlying stock or the broader economy, time value ends up at $0 at expiration.
For my first-ever options trade, I bought shares of mining company Freeport-McMoRan (FCX) and sold a two-month call against my shares.
I made about 10% from that trade. The return wasn't anything to brag about at the next family cookout. It didn't make me rich. But I quickly learned that selling options is one of the greatest – and if done right, the safest – income-producing strategies available to investors.
Over the past several years, after learning options from Doc, I've been helping him with his Retirement Trader service. Retirement Trader is a trading service that focuses on selling options on some of the best stocks in the world.
It's incredibly safe. Even better, it doesn't take much time at all for subscribers to make and monitor their trades.
To show you how safe and profitable selling options can be, Doc and the rest of his team have strung together a winning streak of 188 consecutive winning trades. This is a streak that is unlikely to ever be broken as it has spanned nearly three years – a period including a nasty bear market.
If you have ever thought about learning options, I strongly encourage you to check out Retirement Trader.
Doc has taught thousands of folks, including myself, how to sell options and safely collect hundreds, even thousands of dollars in income month after month. His "Master Course" is designed to take anyone – folks even with no trading experience – and turn them into option experts.
As Doc has been writing about over the past week, our publisher is offering a tremendous discount to Retirement Trader. If you haven't watched Doc's most recent video explaining the offer, click here.
Here's to our health, wealth, and a great retirement,
December 28, 2023