I won't beat around the bush: If you want to be a better investor, you need to learn how to do two things:
- Make sure that the majority of the investments you choose make you money.
- Stick with your best stock ideas and wring every last penny out of them.
Sounds simple, doesn't it?
Um, yeah ...
Obviously, a simple plan like that works great in theory. But most of us don't really know how to identify the best investment opportunities out there. And even when we do find attractive investment prospects, deciding which ones have the potential to make us truly rich is a tough call to make.
What's clear, though, is that certain types of investments are more likely to produce solid, dependable returns, while others have the sort of blockbuster potential that can make you truly wealthy. Let's take a quick look around the market to identify some of these opportunities.
How to earn decent returns with low risk
You'll find plenty of solid stocks out there that produce good returns year in and year out. Most of them, though, don't see their share prices skyrocket in short periods of time. In order to reap the most rewards from those stocks, adding a simple option-related strategy can improve your odds of ensuring your investment is a winning one.
As an example, let's take a look at four widely held stocks:
|
Stock |
1-Year Return |
Premium From Writing 1-Year Call Option as Percentage of Stock Price |
|---|---|---|
| Wal-Mart (NYSE: WMT) |
3.7% |
5.7% |
| 3M (NYSE: MMM) |
4.9% |
7.1% |
| Microsoft (Nasdaq: MSFT) |
(4.8%) |
7.3% |
| Merck (NYSE: MRK) |
3.4% |
5.1% |
Source: Yahoo! Finance as of Jan. 7, 2011.
Few people would find huge faults with these stocks, although most would also agree that their best days are likely behind them. For many, though, they form a solid foundation for their portfolio.
As you can see, none of these stocks had a particularly good 2010. But by using a covered call strategy, you'll get significant money upfront -- money that could turn a loser into a winner, as Microsoft's example above shows.
To learn more about the covered call strategy, read this guide from Fool contributor Ilan Moscovitz.
Going for broke
Sometimes, though, you'll have truly great ideas -- ideas that no one else seems to be picking up on. When that happens, you have to be ready to pounce -- and be willing to commit enough of your capital to make it worth your while if your ideas are correct.
One example comes from the casino industry. Back in late 2008 and early 2009, casino operators Wynn Resorts (Nasdaq: WYNN), Las Vegas Sands (NYSE: LVS), and MGM Resorts (NYSE: MGM) looked like disasters waiting to happen. In the midst of a capital-intensive building boom both in their Las Vegas home markets as well as abroad in up-and-coming gambling meccas like Macau, plummeting real estate markets and the credit crunch threatened to deliver a one-two punch that many feared would knock the industry out for good.
But brave investors realized that all these companies had to do was survive and they'd deliver once-in-a-lifetime returns. And so far, that's exactly what they've done, as Wynn and Las Vegas Sands now appear solidly out of danger, while MGM has also made great strides toward solving its larger debt problem.
Still, even if you made the right call on casino stocks, you might not have maximized your profit on it. Either by committing too little capital or by taking profits too early, you could easily have missed out on the full potential these stocks offered. Only by investing a significant amount and sticking to your guns throughout the market's ups and downs could you have made the biggest profit possible.
The right mix
Mixing these two strategies -- reaping lots of modest but respectable profits from positions while holding out for truly great investment ideas -- won't just earn you better returns. They'll also give you more confidence as an investor. And with that confidence, you'll feel better about making future investments, creating a virtuous cycle that can last the rest of your life.
At our Motley Fool Pro service, lead advisor Jeff Fischer balances these two strategies to produce strong returns with his $1.4 million real-money portfolio. Using a combination of stocks, ETFs, options, and short positions, Fischer has delivered market-matching performance since the service started investing in October 2008 -- but with a much smoother ride.
To learn more about which investments Fischer is recommending right now -- as well as which category he'd put them in -- just give us your email address in the box below. You'll get Jeff's free report along with an invitation to join Pro when it reopens later this month. If you're interested in becoming a better, happier investor, taking the first step has never been easier.
