The 2 Secrets of Investing Success

This article is part of our series on options investing, in which The Motley Fool is sharing a number of strategies you can use to get better results from your investment portfolio.

No matter whether you've been investing all your life or are just starting out, you can always find ways to improve your investment results. To become the best investor you can be, all you have to do is this:

  1. Take advantage of your best stock ideas when they work.
  2. Make sure that most of the investments you make turn out to be profitable.

Nothing could be simpler, could it?

Yeah, sure, but how?
Everyone wants a get-fast-rich strategy, and for most people, the simpler it is, the better. But there's such a thing as being too simple. Most investors don't know how to weed out the top investment opportunities from the thousands of stocks that you can buy. And even if you're fortunate enough to pick great stocks, figuring out how long you can ride their coattails until the profits run out is an even tougher decision.

But one thing that is pretty simple to do is to separate out all the potential investments you can make into two categories. Some investments are likely to give you solid and dependable -- if somewhat boring -- returns over time. Others have a lot more risk, but a few will turn out to be the superstar stocks of tomorrow. And by adding options to your arsenal of investing techniques, you can make the most of each type of investment you find.

Make more from your low-risk stocks
Even with the market's ups and downs in recent years, many stocks still give shareholders good returns year in and year out. What they don't do, though, is produce big returns in short periods of time. To make the most of these stocks, you have to look for ways to enhance modest gains -- and using a simple covered-call strategy can improve your odds of earning profits from them.

For instance, the following large-cap stocks combine stock price stability with mature businesses that aren't likely to see immense growth in the future:

Stock

1-Year Total Return

Premium From Writing at-the-Money January 2013 Call Options, as Percentage of Stock Price

Amgen (Nasdaq: AMGN  )

(1%)

11.7%

AT&T (NYSE: T  )

4.8%

10.1%

Wal-Mart (NYSE: WMT  )

(0.1%)

8.5%

Abbott Labs (NYSE: ABT  )

0.8%

10.6%

Source: Yahoo! Finance.

These stocks generally carry good reputations among investors, but few would argue that their best days aren't already behind them. As a core for your portfolio, though, they work well. And although none of these stocks has performed all that well in the past year, writing long-term calls can greatly boost your income from these stocks -- and in some cases will make what would have been a losing investment into a winner.

Making a big bet
On the other hand, some stocks have huge potential. And when you find one that no one else seems to like, you have a chance to make a truly special investment.

For instance, gold has been one of the best-performing assets over the past decade. Along with the price of the metal itself, small producers such as Primero Mining (NYSE: PPP  ) and Northgate Minerals (AMEX: NXG  ) have seen immense gains as gold prices rose. But with a recent drop in precious metals prices, the SPDR Gold ETF (NYSE: GLD  ) has fallen precipitously and taken many gold mining stocks along with it.

If you think gold is poised to rebound, then buying call options can help you maximize your gains. Buying calls can give you multibagger returns in short periods of time if your investing thesis turns out to be correct. Granted, those stellar returns have to make up for the times that you're wrong, because it's easy to lose your entire investment buying calls. It all depends on how confident you are about what's going to happen.

Be the next success story
Options don't guarantee investment success, but they do make it easier to achieve. With the right options strategies at your disposal, you can go a long way toward improving your returns and getting yourself the investing success you want.

Stay tuned throughout our options investing series and get the strategies you need to earn more from your investments. Click back to the series intro for links to the entire series.

Fool contributor Dan Caplinger links success secrets to that old Michael J. Fox movie and living 25 hours a day. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Abbott Labs and Wal-Mart. Motley Fool newsletter services have recommended buying shares of AT&T, Wal-Mart, and Abbott Labs, as well as creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy helps you keep all your options open.


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