I’m Making Money – What Should I Do?

Sometimes, our brains get stuck when we are losing money - and we are not sure when to cut our losses.

But the bigger pain is this, when we are making money - and we don't know what we can do and sometimes, ended up sabotaging our returns.

In this article, I want to introduce to you the two typical types of investors when it comes to dealing with the stocks that are making us money 🙂

The "Profit-Takers"

The raiders are a group of investors who are always in a hurry to take quick profits. There is a common saying in the investing space known as , "You cannot go broke by taking profits."

Sure, that may be true.

But that is a very one-sided view. The other side of the coin also says, "You can never get rich by taking quick profits."

If we observe the richest and wealthiest people - their main source of wealth did not comes from buying and selling away their equity on a frequent basis. Instead, the wealthiest people on earth became rich and wealthy simply by holding on to equity.

For example, Jeff Bezos did not make his wealth from his salary. His annual salary was only $81,840 in 2020. How did he became one of the richest people in the world?

Well, he held on to his Amazon shares even since he started. The same with Warren Buffett, Bill Gates, Elon Musk, and many other big names out there. You win simply when you hold onto to a fundamentally good stock for the long term.

Many people tend to be obsessed with short-term profits - trying to calculate how much money that they made a monthly basis, thinking that it is profits that will replace our monthly salary. The truth is this - we don't spend money from our profits, we spend money from our cash flow. That's the right mindset to have.

A simple example is this - let's say we bought a house that is worth $500,000 and it is giving us $2,000 in monthly cash flow from net rental. Today, the house is worth $560,000 - a decent $60,000 profit. Would I choose to sell the house and tell myself, I need the $60,000 to pay for my expenses? No, I will use the $2,000 in monthly rental to pay for my expenses and continue holding the house to maximise its profits.

Well, how do we know if the house will continue to appreciate in price? That's why fundamentals come into play. Everything boils back down with buying assets with the right fundamentals and not speculation.

One of the best advice I got from Kevin O'Leary, a Shark Tank Investor is this:

Focus on Equity With Cash Flow

Something that we have to understand when it comes to build our wealth is to build equity that gives us cash flow, and not focus on getting cash.

I cannot emphasize this enough - I never want to keep a surplus of cash in my bank account. I want as much as money to be converted into equity. Why is that so important for me?

Well, cash is a frozen asset. Leaving a $10 note on the table, that $10 note will have the same value for the next 10 years. Of course, after accounting for inflation - that $10 is worth much more lesser in years to come. 

We need to understand that money itself is just a piece of paper that society collectively recognise it for the sole purpose of transaction. Without money, we will still be transacting using eggs, cows, pigs and vegetables, bartering in the old days. The notion of the value of money is just to get rid of the inconvenient 'double coincidence of wants' in the olden days of bartering.

Now, what about equity? Equity is a moving asset. Place that same $10 in a stock, it could grow into $10.50 the next day. Of course, it could also fall in value. But which will you rather place your bet on?

• Leave the $10 in cash, with a guaranteed loss to inflation
• Leave that $10 in equity, with a chance for it to grow into something bigger (or smaller)

Day and night - I will always go for the second option. Because, investing in fundamentally good stock will always pay off in the long term. I never want to leave too much money in cash. Instead, I put that money into equity, and survive on the cash flow that comes from the equity.

For those who have been following me, you will know that I invest my money in stocks and subsequently get cash flow using options.

Okay, so what's the second group of investors when dealing with winning stocks?

The "Wine-Sipper"

So what could we do when dealing with winning stocks?

Well, I do something called "wine-sipping", where I extract a small amount of profit by selling call options. But the key is not to be greedy in chasing premium when selling call options. This is the reason why many people have their call options get exercised and they start to panic.

Now, this applies when we either have:

• 100 shares
• A long call option

I will then sell call options at specific entry rules:

• The stock has stochastics high
• Weekly call option
• Probability OTM more than 85%

By following the above rules, the probability of the sell call being exercised is drastically reduced. And this was how I managed to "sip" profits while waiting for these positions to meet my exit price or rules.

 However, drastically reduced does not mean that it will never be exercised. But there's a way to deal with it.

For the 100 shares, if your sell call gets exercised, it is no big deal - you will simply be forced to sell your 100 shares. You just have to sell a put option to get back the 100 shares at the strike price of your sell call. For example, if I sold a call option at 250 and it got exercised, I will simply sell a put option at 250 to try to get back the 100 shares at the price I sold it at. If the sell put option expires worthless, repeat and sell the put option again.  

For the call option, it is a little trickier. If your sell call gets exercised, then you will end up shorting 100 shares - since you do not have the 100 shares to begin with. Now, please never ever exercise your call option to cover this short position. As a guideline, you should never want to exercise your call option, because you will lose the extrinsic value of your call option. I won't try to dive into the details, but exercising your call option is not a wise choice.

So what happens, when I have 100 shares shorted? Well, I will send a put option to cover back my shorts. But this time, I not necessarily have to sell the put option at the strike price of my sell call. Because, the priority is to get rid of the shorts. So I can sell a slightly in the money put option. The image below shows a good example.

These were the sell call trades I done on my Mastercard call options, and by implementing the entry rules of sell call that I have shared, I have done 11 sell calls. 10 of them expired worthless, the 11th got exercised. Collectively, from the sell calls, I collected $965. I want you to notice that I am not trying to collect huge amount of option premium, I am just "sipping" my profits.

The 11th call option was exercised, and I was shorting 100 shares of MA at $390. Therefore, on 26 Jul 21, I sold a put option at $395 to try to cover the shorts.

Wait wait, I am shorting at $390, and trying to buy them back at $395? Isn't that a loss for $500?

Now, take a good look at the amount of option premium I have collected from the sell put. I collected $975 from the sell put. This means that even if the sell put got exercised, I am still profiting $975 - $500 = $475 from this trade. Eventually, the sell put got exercised, and I got rid of my shorts. Also, by selling the put option at a higher strike price, it increases the chance of the sell put being exercised.

This means that from selling these options, I collected $965 + $475 = $1,440. This is excluding the current profits that my long call is having.

Now, what if my sell put expired worthless? Well, if my sell put expired worthless, that means that the share price was higher than the strike price of $395, so my long call will have been making even more money. And also, I will have collected $975 instead of $500. I will then sell a put option and try to get rid of the shorts again.

Now, these are more advanced and so only do this if you understand what you are doing.

So without selling away my long call option, I have "sipped" an extra $1,440 while waiting for my call option to meet my exit rules.

What's Next?

What if I don't have 100 shares or capital to buy a call option? This is another common question I get. There is no magic bullet here, you will have to start small and focus on contributing money to your portfolio every single time you get a paycheck. That's what I did from the day I started investing back in 2017 as well.

The key idea here is to focus on building your equity and not taking quick profits. By taking profits, you are changing your equity back into cash. And remember that cash is a frozen asset - it does not grow, and yet only loses its value to inflation. As much as possible, my capital tend to always be in equity. Remember the saying, "Never spend the principle, only the interest". Eventually, as you build your equity, it will be big enough such that the cash flow seeping out from your portfolio will be more than enough to pay for your expenses.