Ask Doc Everyone loves a great deal...
For example, so many people flock to second-hand stores because of the low prices. People think they're going to pay $2 for a watch that's really worth $50... But that $2 watch is usually just a $2 watch. It's the illusion of a bargain.
Cheap stocks have a similar pull. Here's what I mean...
A couple years ago, I surveyed members of our Stansberry Research support staff. I told them that Stock A costs $25 per share while Stock B costs $500 per share and asked which one they'd rather buy with a $1,000 investment. With $1,000 to spend, you could either buy 40 shares of Stock A or two shares of Stock B.
The overwhelming majority of them picked Stock A.
As one employee put it, "As a beginner investor, I would select Stock A. More shares the better!"
This is how most of us think... It sounds like a better deal to own 40 shares of something rather than just two.
I call this mental bias – thinking something is a better value just because it costs less – the "Thrift Shop Fallacy."
And the Thrift Shop Fallacy causes newbie investors to throw money into the wrong stocks. It leads to missed opportunities... and, even worse, money down the drain.
A company's true cost is measured by its total market capitalization (the share price multiplied by the number of shares), not its price per share. And experienced investors determine whether a stock is cheap or expensive by studying its valuation.
There are various ways to measure valuation. I like to gauge a company's price against how much profit it generates, and I generally prefer a ratio of less than 25 times earnings.
Another approach looks at the company's cost against the value of its assets.
According to my friend Joel Litman, there's a rare opportunity right now to buy companies trading for less than the value of the cash and other assets they have on hand.
These companies' shares are trading so low that their current assets – cash in hand, receivables, inventory, minus all their debts – are worth more than the company's total market value.
It's as if someone was selling a $30,000 car with $10,000 cash in the glovebox, a Rolex watch in the center console, and a set of Callaway golf clubs in the trunk... for $35,000.
That's a much better deal than a $2 watch at the thrift shop.
Today, this opportunity exists in one specific industry.
Joel and his team have used their forensic accounting system to create a shortlist of the most promising upside moneymaking plays with the least amount of risk.
Next Tuesday, Joel – alongside our founder Porter Stansberry – will reveal everything you need to know about this extraordinary "market anomaly."
Click here to claim your spot now.
Now, let's dig into the Q&A... As always, keep sending your comments, questions, and topic suggestions to [email protected]. My team and I really do read every e-mail.
Q: Hi Doc. Love reading your e-mails. I can always find something useful and informative.
On more than one occasion you mention trading options inside a retirement account. Does this mean transferring funds out of my [Roth] 401(k) into an IRA, or transferring into a brokerage account? Please explain thoroughly. – M.F.
A: For folks who don't know, all of the trades I officially recommend in Retirement Trader are allowed in an IRA... both cash-secured puts and covered calls. With a cash-secured put, you maintain enough cash on hand that you can buy shares if your put's buyer exercises their option. With a covered call, you buy the shares in advance so that you're ready if the call buyer decides to buy them from you. These strategies have nearly identical returns.
The only restriction is selling naked puts in an IRA. A naked put is sold on margin, in which you don't have all the cash on hand to buy shares. That's a popular way to juice your returns... But it's also riskier because you're less prepared if the trade doesn't go your way. That's why I only recommend selling on margin to experienced options sellers. But if you're trading in an IRA, you still must back up your puts' obligations with cash.
Another caveat: Not every broker will let you trade options in an IRA. We can't recommend specific brokers, but some that do allow options in an IRA include TD Ameritrade, Merrill Edge, and Ally Invest.
(It's unlikely to find a 401(k) plan that allows options trading.)
Unfortunately, if you have a 401(k) plan, you might not be able to transfer those funds to an IRA. Unless you're leaving your employer, the employer is discontinuing the plan, or you're getting ready to retire, you can't move the money to an IRA without incurring serious fees or penalties.
For anyone who wants to trade in an IRA, the best way to do that is to fund one yourself. For 2024, individuals under 50 years old can contribute $7,000 to an IRA. If you're 50 or older, you can contribute $8,000.
This will limit the amount of trading you can do to start, but depending on your age and situation, it's the easiest way to fund your IRA. And it won't take long for the account to grow... as you continue to add more funds and collect premium from selling options.
What We're Reading...
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 22, 2024