That’s doing things backwards. If you want to successfully invest in the stock market, you must start with a great investing strategy. Only then do you look at how to implement that strategy.

Don’t get me wrong, implementation is just as important as strategy and both are necessary for success, however there is a specific order in which investors must do things if they want the best chance of succeeding in the stock market.

Implementation details are the actions you take that allow you to implement a strategy which in turn lets you achieve a goal. It goes without saying, then, you must have a goal. Most investors don’t have a goal or they have a vague goal such as, “I want to retire in the future.” A proper goal is very specific, such as, “I want to have $1,000,000 in my retirement account in 20 years and six months starting with an account valued at $75,000.”

Think of it like this: hockey players, sticks and goalies are implementation details. Do you need them to win hockey games? Absolutely. However hockey players, sticks and goalies that work together to implement the neutral zone trap are using a strategy (one, incidentally, that won the New Jersey Devils a Stanley Cup) that provides the best opportunity to win.

Similarly, stock software, individual stocks, brokerage accounts and such are implementation details. Using stock software to implement a Value Investing strategy that follows Warren Buffett’s techniques to purchase excellent undervalued stocks with strong economic moats is a strategy. And using that strategy to determine if there’s a high probability you can reach your goal is the proper way to invest.

If you’re currently investing without a goal and/or strategy and simply focusing on the details, you’re probably setting yourself up to fail. You must attack the investing problem strategically, then employ the proper implementation details to give yourself the best chance of success.

For example, it may not be the best strategy to simply purchase stocks you constantly read about on the Internet. Stocks that are in the news are not likely to perform well going forward because so many investors are looking at them.

You might discover that looking at a company’s financial statements and buying those with strong fundamentals that are currently out of favour is the best strategy, so instead of wasting time and money reading news and buying overvalued stocks, you should be taking the time to properly analyze companies.

If you don’t currently have a solid investment goal and strategy, take some time right now to create them. It could be one of the most important things you do today.

The current situation has turned all that on its head. Today, everyone and their child has a computer, the internet is ubiquitous and the average man-on-the-street is invested in the stock market — even if it’s just through a company pension fund.

That means you have all the tools necessary to build your wealth in the stock market without having to rely on anyone else.

But you need to know what you’re doing.

If you learn how to invest correctly, you can have more, do more and eventually spend your time as you like rather than spending it doing what someone else tells you to do.

You see, just because you have access to powerful tools and financial data, doesn’t mean you know how to use them. Consider a well-stocked kitchen with the latest gadgets and the freshest ingredients. You can throw a thousand people into that kitchen and give them access to everything the kitchen offers, but not everyone will be able to make a tasty meal.

Some will not be able to make anything. Most will be able to come up with a satisfactory, yet average, meal. Only a few will be able to combine the ingredients and use the correct gadgets in a way that creates fabulous meals again and again and again.

If these few write down the recipes for their creations, and you’re fortunate enough to get your hands on these recipes, you could also create fabulous meals, even if you’re just an average cook.

The good news is some of these talented investing “chefs” have done exactly that.

Warren Buffett has written down his “recipes” for decades. Charlie Munger too. Benjamin Graham wrote entire books on the subject. So there’s absolutely no reason why someone today can’t invest successfully in the stock market and become wealthy.

The tools are there and the instructions to use these tools properly are widely available.

But can value investing work specifically for you?

Well, consider what you would do if you wanted to become a hockey player or learn a musical instrument. You’d most likely learn the skill and then spend lots of time practicing. Investing is similar. You can learn to invest properly and then spend your time investing, making minor course corrections when necessary and continuing to build your skills in the investing arena.

I’ll repeat, investing correctly is something you can learn. And the advantage is that when you learn to do it the right way, it has the ability to change your life, for the better, to a far greater extent than playing hockey or mastering, say, the guitar can do.

It doesn’t matter if you’ve had investing disasters in the past or you’ve vowed never to put another dime into the stock market. The only question you should be asking yourself is, “am I willing to learn the correct way to invest?”

If you master Buffett’s value investing strategies and put them into practice, you’ll most likely retire rich.

Of course not everyone is suited for value investing. Some people simply want action. They NEED to be in and out of the market, they’re addicted to the adrenaline rush that comes with having lots of money on the line. These folks aren’t investors. They’re speculators. And value investing will never be something that will make them happy. They’ll also end up losing most of their money in the stock market, but the buzz they receive along the way will ensure they keep doing the same thing over and over again.

So which are you? Are you an investor? Or are you a speculator?

Once you’ve answered that question you need to determine if you really have the desire to be wealthy. Most people don’t understand this at first, if ever. “Of course I want to be wealthy!” they’ll say. However the desire to be wealthy means looking at what you’re doing and changing your actions to follow paths that will lead to great wealth.

It’s about taking smart, coordinated and well-planned-out actions. Actions that might be uncomfortable at times. Actions that might go against your nature. But if you really desire to be wealthy, you’ll take these actions nonetheless. If you don’t, regardless of what you might say, you’ll bail out at the first sign of trouble or of something that makes you uncomfortable.

At the end of the day, if you’re going spend time and effort investing your money in the stock market, you might as well become wealthy doing it. Otherwise, what’s the point?

For a solid overview on the steps you need to take to invest correctly, see my book, “The Pragmatic Investor.”

Are you glued to your desk following the ticker for hours at a time?

Honestly, that’s not the way to make money in the stock market. You have a choice: spend your time doing unproductive things or make a conscious decision to learn what has worked well in the past and use it to become a stock market millionaire.

However in order to achieve this goal you need to do something radically different from what the average (or even above-average) investor is currently doing. The best advice I’ve ever heard about winning is simply, “If someone is doing something better than you are, learn what they’re doing and do the same thing.”

So rather than spending your time randomly following advice from people who have never achieved real success, it’s far better to devote your time analyzing the strategies and tactics of super-investors such as Warren Buffett, Charlie Munger and Peter Lynch.

If you do that, you have the greatest chance of uber-success, because these investors have actually accomplished what most can only dream about. Just about anyone who follows a proven value investing strategy ends up wealthy. Of course not many people do this because it is a strategy that takes time, requires patience and goes against the grain of what most people are doing.

And since human nature likes to be part of the crowd, and shuns going against the crowd, it also takes a great deal of discipline to successfully implement value investing ideas.

But if you think about it, it makes no sense to follow the crowd in this particular endeavour because the crowd is not successful at investing. If the crowd were all stock market millionaires and billionaires, then following the crowd would be a superb idea. But they’re not. They’re not even close. So why would you want to do what is obviously not working.

On the other hand, investors who follow the ideas of Warren Buffett are millionaires and billionaires. Warren Buffett himself used exactly what he teaches to make many billions of dollars. That’s why it makes sense to piggyback on Buffett’s teachings and implement his ideas in your personal portfolios.

Value investing has been hailed as a money miracle for thousands of people and it can work for you too. But first you have to learn what it is and how to implement it correctly.

Then you have to be so confident that it will get you where you want to be, that you simply follow it regardless of what your emotions (and your well-meaning friends) are telling you to do.

Perhaps the biggest cause of failure for most investors is their lack of discipline. They allow their emotions, particularly fear and greed, to affect their investment decisions and that usually leads to large losses.

However if you believe in your value investing system, that will determine your actions. And your actions will be based on a proven strategy that works rather than ad-hoc, emotion-driven actions that have been shown over and over again to produce continual losses over time.

Of course there’s quite a bit of skepticism about making lots of money in the stock market. Many think it can’t be done or that it’s gambling or that only those with the right connections can do it.

Nothing could be further from the truth.

Obviously the investing realm is filled with the dreamers, the greedy and the scam artists. But the fact is, there are quite a few people who have become rich by investing correctly in the stock market. And right now is, with the technology and vast amounts of quickly accessible information available to anyone with a computer and an internet connection, the greatest opportunity in history to create huge amounts of wealth in the stock market over your investing lifetime.

Today, more people are making more money in the stock market than at any other time. Unfortunately more people are also losing more money than at any other time.

The world has changed dramatically in the past few decades and it will continue to change as we move forward. However the basic concepts built into value investing don’t change. The methods we now have to implement these concepts change rapidly, but the actual concepts are timeless.

So remember this: Technological change will continue at an ever-increasing pace and you must harness this change to better implement the unchanging concepts that have been proven to build substantial wealth in the stock market.

The sooner you start, the better off you and your family will be in the future.

You don’t have to be a brain surgeon to realize that method doesn’t work and never did.

How do you think mutual fund companies and investment banks are able to pay their employees so much money each year? Where does the money come from to pay their top executives tens of millions of dollars every year?

It comes from all those “investors” who believe handing over their money to others is the right way to go. It isn’t. And if you’re in that boat, you’re losing out on millions of dollars that should be yours over your investing lifetime.

In fact, over 80% of actively managed mutual funds underperform the markets. And investors pay high fees for that dubious record.

You’ve probably noticed by now the vast majority of people never become rich by the time they retire. There’s a reason for that and it involves these people not taking responsibility for their own investments.

You have to position your portfolio correctly to achieve solid, long-term wealth. It just doesn’t happen by accident.

Dreaming about having a multi-million dollar portfolio, when you retire, by following conventional wisdom is like being in a strange place trying to find your way in the dark. You just don’t know what to do next. However when you turn on the lights, everything becomes clear. You know the next step to take, you see what needs to be done.

If you’re one of the few people who invests their own money rather than relying on others who don’t have your best interests at heart, that’s good, but probably not good enough. Unless you’re following a proven plan that allows you to outperform the markets, you’re falling behind and will most likely never be wealthy.

On the other hand, investing properly and following the proven Warren Buffett value investing strategy positions you to be one of the relative few who build their wealth efficiently, effectively and as quickly as possible.

That’s how Buffett did it and that’s how you can do it too. The sooner you get started following Buffett’s value investing plan, and stop trying anything and everything, the sooner you’ll be successful.

Fortunately, this is easy to do because ultra-successful investing is something you can learn. You don’t have to be blessed with a special “investing” gene or have parents who were super-investors. You don’t even have to have a college degree or need to be an accomplished mathematician.

All you need is the correct information and the discipline and perseverance to see it through.

The more you learn and the more experience you build, the more money your investments will make and the less risks you’ll take.

There are lots of great books available that discuss value investing. In fact, you can obtain a wealth of information for free directly from the main man himself. Warren Buffett’s Berkshire Hathaway website is a treasure trove of top-notch information free for the taking. Visit www.berkshirehathaway.com and spend a few hours going through the information there.

If you want a shortcut to investing success, I’ve written a book called, “The Pragmatic Investor,” which gives you a head start to implementing a profitable Value Investing strategy.

There are a number of ways to get started quickly. All you need to do is decide to get started and then take the appropriate action. It can pay off like nothing else you do in your lifetime.

As you know, there are literally thousands of stock market systems bombarding you with ideas of getting rich quickly and living the Hollywood lifestyle. However the majority of them don’t work. And what’s more telling is the people promoting them don’t actually use them with their own money. So if someone doesn’t have enough confidence in a system they’re promoting to use it to manage their own money, what does that tell you?

It tells me you shouldn’t listen to them.

So, you might be asking yourself, “why should I listen to you?”

Well, you shouldn’t. But you should listen to a man who has made tens of Billions (that’s Billions with a capital “B”) of dollars in the stock market. In fact, he’s one of only a handful of investors you should listen to.

And in case you haven’t guessed, his name is Warren Buffett and his system is a very specific version of Value Investing.

I’ll be very clear upfront and say that over 99% of the things I’ve learned over my more than 20 years investing in the stock market have been from other people. I haven’t come up with anything groundbreaking or new myself and I don’t expect to in the future.

The reason is that sound investing in the stock market is conceptually very simple. So most of the really good strategies have already been discovered and tested. What I’ve been able to do, however, is distil the myriad advice and separate what works from what doesn’t and explain it in plain English. So that’s my contribution to the field.

I’ve also been able to build software based on the ideas that work and harness the power of technology to make the, often tedious but necessary, tasks required to invest successfully easy to do. That’s my other contribution.

But the actual ideas behind what I’m telling you were developed by others with proven track records and major investing success.

Let me warn you, however, if you’re expecting complex ideas and complicated formulas, you’re in for a pleasant surprise. Value Investing methods are conceptually simple to understand and they are also easy to implement when you have the appropriate tools.

And they make people rich over time.

Value Investing is for people who are tired of the “get rich quick” hype so often associated with investing. It doesn’t involve fancy derivatives or Forex markets, it abhors day trading strategies and positively stays away from penny stocks and the latest “hot stocks” so often discussed at cocktail parties.

It’s really for anyone who knows they have to invest for their future and wants to become financially free in the safest, easiest and most highly probable manner.

When it comes to investing, conventional wisdom doesn’t work. Handing your money over to the big banks and mutual fund companies never worked, and will never work in the future, if you measure success by outperforming the markets.

However listening to someone who has consistently outperformed the markets for decades does work. And it will continue to work for the foreseeable future.

If you’re interested in what Warren Buffett can teach you, get the free report, “Stock Market Investing for Maximum Profits,” and follow what it says.

With that in mind, I’ve come up with some easy answers to some of the most potentially volatile questions your wife might ask you. Memorize the answers. They will keep you in good stead throughout your long, happy and successful marriage.

Q: You don’t mind if my mother comes to visit
for 2 weeks do you?

Answer: “Of course not.”

This one is very tricky and amateurs are tempted to say, “Yes, I mind very much!” or try to negotiate a lesser visit. However this will only lead to resentment and there’s a high probability the mother-in-law will visit for 2 weeks anyways.

Listen, the idea here is to minimize the damage. So be positive. Then retreat to your office/room/cave and plan a full 2-week agenda that will have you out of the house early in the morning and getting back after mommy-in-law is fast asleep. Ideal? No. But given the alternative it’s the best you can expect.

A more advanced strategy is to use the response, “only 2 weeks? Wouldn’t you like her to stay longer.” This can give you a very large and quick inflow of husband points, but be very careful. Before using this advanced strategy ensure you know mother-in-law’s schedule and are certain she has something pressing back home that will force her to leave in 2 weeks.

Q: Do these jeans make me look fat?

A: “Of course not.”

Amateur husbands sometimes try to get funny with answers such as, “it’s not the jeans that make you look fat,” and “there’s just more of you for me to love,” or the more straight-forward, “yes, they do.” These are never good answers. Keep the witticism for the boys at work and the brutal honesty for your accountant and doctor. The only correct answer here, and I repeat, the ONLY correct answer is, “of course not.” Period.

Q: Do you think that girl is prettier than me?

A: “Of course not.”

This is not rocket science guys. It doesn’t matter whether “that girl” is Nicole Kidman, Jennifer Connolly and Bo Derek (in her prime) all rolled into one. The answer is, “of course not.”

Q: Do these gray hairs make me look old?

A: “Of course not.”

Most women have a hang up with anything that makes them look old. But hey, aging is a fact of life. So unless you want to foot the bill for expensive weekly hairdresser trips (or worse, monthly Botox injections), then it’s in your best interest to make her feel anything but old. Gray hairs notwithstanding.

Q: Shouldn’t we be putting our money into mutual funds?

A: “Of course not.”

The majority of mutual funds charge high fees and underperform the markets. Less expensive index funds don’t beat the market. Get her the Pragmatic Investor book and show her how to invest correctly. Alright, alright, I snuck this blatant advertisement in here. But it’s still true. Check it out now!

Q: There’s a funny smell in my car…
Can I take your Porsche to meet Jenny?

A: “Of course not.”

Hey, you’ve got to draw the line somewhere. Pick your battles wisely, but some things just might be worth a night or two on the couch.

And that strategy is selling puts.

Normally options traders sell puts when they feel the stock will rise. If it does, the put expires worthless and the trader pockets the premium. That’s not a bad strategy in and of itself, however when combined with a sound Value Investing strategy, the synergy can help wring out extra profits while adding a dose of discipline to the mix.

Before I outline the combined strategy, let’s take a step back and analyze the risk profile of some options trading strategies. Regardless of the investing strategy you use, it is vitally important to look not only at returns, but also at risk. The majority of investors don’t do this. If you don’t believe me, ask someone you know, who invests in the stock market, what their returns were last year. They’ll most likely be able to tell you, especially if they made money.

Next ask them what their risk was like. Nine times out of ten you’ll receive a blank stare.

Unfortunately this lack of knowledge ends up costing oblivious investors lots of money over their investing lifetimes. Since we don’t want to end up in that category, we need to focus on the risk part of the investing equation as well as the returns part.

Options Trading Strategies Risk Profiles

So, what are the risk profiles of the various options strategies?

Since I only recommend two options strategies, those are the two I’ll look at. Be aware there are many other strategies out there and you should look at the associated risks before using any of them.

For example, if you decided to sell uncovered calls, that strategy would be extremely risky because the underlying stock could, theoretically, rise indefinitely and therefore expose you to unlimited risk. That’s the sort of analyses you need to do before investing your money.

However, let’s move on to the two strategies I recommend for Value Investors. As we discussed in part one, writing covered calls can be very profitable. Of course there is the risk of potential lost future profits if the stock price rises above the striking price and keeps going up. However if you follow the rules I outlined in part one, your investment will always be profitable, so you forgo potentially greater profits for limited, but fairly certain profits.

Selling puts, on the other hand, is completely different. As a put seller you’re banking on the underlying stock’s price rising. As the stock’s price goes up, the put’s value goes down — and since you’re a seller, you make money when the put’s value declines.

If the stock’s price falls, the put’s value will increase and you, as a put seller, could face a loss. However, unlike an uncovered call, the loss is not unlimited. A stock’s price can only fall, theoretically, to zero, however it’s a rare stock that goes to zero. Usually stocks, especially well-selected stocks, decline to some value that’s greater than zero.

The other factor to consider is that short puts are always uncovered, but the risk is always limited because the underlying stock’s price can only fall so far.

Theoretically the price should fall no lower than the underlying stock’s intrinsic value, however since we are dealing with relatively short time periods, intrinsic value is probably not a good indicator to rely upon.

Intrinsic value works reasonably well in the long term, but the markets have proven that short-term pricing is based on emotions far more often than logic and therefore prices can, and do, fall below intrinsic value over short periods of time.

Keep these things in mind if you decide to sell puts.

Always use Fundamentally Strong Stocks
in any Options Trading Strategy

As with the covered call strategy, the key is to select fundamentally strong stocks. Whether you’re writing covered calls or selling puts, you must start with a fundamentally solid underlying stock. Doing otherwise will only increase your risk and turn you into a speculator rather than an investor.

Now that we’ve covered risk, let’s move on to the actual strategy. As a value investor you look for strong stocks that are undervalued. However it’s not always possible to find lots of strong, undervalued stocks. In strong bull markets it might not be possible to find any undervalued stocks.

However since we know that markets are irrational in the short term, we can use that to our advantage. First you must decide which stocks you like. Again, and I can’t stress this point enough, only look for stocks that have very strong fundamentals and strong economic moats.

Once you have a list of stocks, the next step is to decide what you’re willing to pay for the stock. Usually you would calculate a stock’s intrinsic value and then build in a reasonable margin of safety. Once you’ve calculated that price, you’re ready to implement the options trading strategy.

To do so, simply sell puts with striking prices at the price you just calculated. The lower the price, the lower your risk. For example, if you sell puts with striking prices of 10, your maximum loss is $1000 per contract (recall that one options contract controls 100 shares). On the other hand if you sell puts with striking prices of 20, your maximum loss is $2,000.

Of course, as I mentioned earlier, stock prices rarely go to zero, so your potential loss is more likely to be the gap between the striking price and the underlying stock’s book value.

By selling puts with striking prices at your calculated intrinsic value less the margin of safety, you’re essentially saying that you would have no issue with purchasing the underlying stock at that price. And if exercise occurs, that’s exactly what will happen.

In essence, you’ve now removed the decision of when to purchase the underlying stock from your control (at least until the put expires). If exercise occurs, you’ll buy the stock. If not, you won’t. And anytime you can remove emotions from your investing decisions, that’s a huge plus.

The Payoff from Trading Options

Now once you sell a put, you’ll collect the premium. This is cash in your pocket you would not otherwise have. If the put expires, the premium is pure profit. If exercise occurs, the premium will essentially discount your basis in the stock, so your cost basis will actually be a bit less than the striking price.

And since you feel the long-term prospects of the stock warrant purchasing at the price you calculated, if exercise occurs, you’ll be getting into the stock at a favourable price. Of course you may have to hold the stock for some time in order to realize a profit, so you can see why I’m so adamant the underlying stock have strong fundamentals and a wide economic moat.

The downside to this strategy is that if exercise occurs, you’ll end up paying a higher price for the stock than you would on the open market at that particular time. However the higher price you end up paying still includes a reasonable margin of safety and gets you into an undervalued stock that should perform well over the long term.

In fact, this is exactly what Warren Buffett does when he likes a stock that is currently trading at a price he’s not willing to pay. He simply sells puts at a striking price he’s happy to pay and waits. If the stock gets put to him, he happily buys it, knowing he’s just purchased an undervalued stock at a great price with a built-in margin of safety.

As I mentioned at the beginning of part one, there are many different options strategies available. However I feel the two we’ve just discussed are the safest and most profitable to use with a sound value investing strategy.

If you’d like to include options in your investing toolbox, writing covered calls and selling puts are the best way to get started. Just remember to ensure the underlying stock has exceptionally strong fundamentals and a wide economic moat.

Answer: Value Stock Selector lists the highest number of high-quality undervalued stocks in Bear markets. So if you purchase when stocks are cheap, that’s usually when you have the most choice of what to buy.

As markets rise, less high-quality stocks are undervalued and so your choices decrease. Your current holdings might also become overvalued, at which point you might consider selling and reallocating the funds to the current crop of undervalued companies.

So Bear markets are best if you have cash to buy, but Bull markets are best if you have already made purchases of undervalued stocks and can sell them at a good profit.

Answer: Yes, the stock software has 2 indicators to help determine whether a stock is overvalued. Before purchasing, the maximum buy price indicates whether the stock is currently overvalued. If the current price is greater than the maximum buy price, then the software is indicating the stock is overvalued.

After purchase, the estimated sell price indicates the price at which the software feels the stock is overvalued. If the price rises above the estimated sell price, that indicates the stock may be overvalued.

Answer: No, there is no problem with VSS. I was actually surprised by this myself as I’ve never seen only 2 stocks returned in over 6 years of using VSS. I think some companies have had their ratings go down (probably because they did worse during the past year or two due to the economic problems) and others have had their prices rise very quickly over the past year.

These two things appear to have combined to reduce the number of great, undervalued stocks.

Lowering the minimum rating to 63 returned 7 pretty good stocks.