Banjo Smyth

Does the idea of a high risk high reward investment strategy excite you or make you scared?  It is the general perception amongst most people that in order to make spectacular gains you must take spectacular risks.  This is definitely a myth as there are plenty of investment strategies that allow you to make massive profits with very little risk.  Today I would like to have a look at some of the emotional and decision making processes that take place when using high risk high reward investment strategies.

Am I saying that high risk investment strategies are bad?  No definitely not, high risk strategies have a time and place but they must be one of many strategies that you use - not your main investment strategy.  I would also like to mention that there are plenty of ways to make high rewards without necessarily taking high risks.

If your broker suggested that you have a look at a particular trade that required $1000 that would double to $2000 if it was successful or you would loose half ($500) if it was unsuccessful - what would you do?

In my experience most people are pretty happy to accept the challenge and take a small risk for the prospect of a very good profit.

Would your decision change if your broker offered you the same trade but instead of $1000 you had to put $100,000 o the line.  So if successful your profit would be $100,000 or your loss would be $50,000.

Suddenly most people aren’t too keen to take on the trade - Even thought the odds are EXACTLY the same.  Obviously the prospect of loosing $500 is much less frightening than losing $50,000 but I believe that it shouldn’t make any difference to your decision making process.  A high risk high reward investment strategy is exactly that - an investment strategy that that has the potential to loose or win you a lot of money.  I prefer to look at all investment strategies as a percentage rather than in dollar terms.

This has two main benefits that are vital to developing a strong mindset that is vital when trading (especially if you are using high risk high reward strategies).

1.  It makes you look at the trade in relation to the actual value of the trade.  The above example is the exact reason why this is beneficial.  Should you place a trade that has the ability gain a profit of $100,000 or a loss of $50,000?  There is no right or wrong answer but if you start looking at the percentages of the trade you will be able to make a much clearer decision.  Always make sure the numbers stack up no matter how big or small the trade is and especially when you are using high risk high reward investment strategies.

2.  The best thing about looking at your trades in terms of a percentage is that it stops you from getting to emotionally attached to the profits and losses that you will inevitable have.  For instance if you were to make a $5,000 profit on one particular trade it is very easy to start getting ahead of yourself and spending the money on flights around the world, cars, boats etc.  If you keep focused on the Percentages you can be extremely happy with your trade but not get to over the top.

Using percentages is even more important when you have a loss on the stock market.  When you lose money is very easy to start thinking about how many hours of ‘normal’ work you have just lost and very quickly you are so depressed that you never want to trade again.  It is quite common for new traders to want to quit after their first loss on the market - even if they have still made a profit over all!  Using percentages gets you away from this mindset and makes you analyze your profits and gains in a much less emotional state.

So does this mean that high risk high reward investment strategies are a thing of the past?  No, it just means that you should really think about the pro’s and con’s of every investment that you make.  One of the main reasons why people love using high risk high rewards investment strategies is because they love the feeling of taking risks.  You only need to go to the casino to see that many people are addicted to the rush of gambling with their money.  The question you need to ask yourself when you are placing a trade is - are you Gambling or are you Trading?

How many times have you heard someone say “I want to be rich”? Unfortunately 99% of people who I hear talking about how they want to be rich will NEVER achieve their goal. Why?

When most people say ‘I want to be rich’ they don’t actually believe that they can ever achieve this goal. Let’s face it, if they don’t believe in themselves then what hope do they have of ever achieving anything.

Another reason why ‘I want to be rich’ prayers are rarely answered is because most people don’t actually know what being rich is? This may sound like a weird concept but have you ever taken the time to clearly define what being rich is? Well if you are serious about becoming rich then it is time that you sat down and figured out what being rich actually means to you.

What are your reasons for wanting to be rich?

- Don’t have to work

- Get to spend your time exactly how you want to

- Travel the World

- Help others

- Spend more time with your family

- Not have to worry about money

- Never have to say “I can’t afford that” again

All of these answers are very typical for someone who has just proclaimed “I want to be rich” but how come most people never get close to achieving any of these goals?

The reason most people never actually become rich is the exact same reason why most people never achieve any of their big goals. First of all they don’t ever define what their goals actually are and second of all they don’t believe that they can achieve them. One of my all time favorite quotes sums this up perfectly

“Whether you think you can or can’t, either way you are right”

Henry Ford

Most people overestimate how much money you need to retire from your job You don’t actually need 10 million dollars to live your dreams, unless of course your dreams include a private Learjet. So next time you say ‘I want to be rich’ don’t leave it at that - instead follow these steps below and who knows one day you might even become rich.

Step One: Think about why you want to be rich

Step Two: Think about how much money/equity you would need to live these dreams

Step Three: Decide what is the best way to achieve this equity - Business, Shares, Property?

Step Four: Knowledge, Knowledge, Knowledge - Research your chosen field

Step Five: Create a plan - Saying I want to be rich is NOT a plan

Step Six: Follow the plan

Like most things that you do, becoming rich is 90% in your mind. Rather than looking for miracles I recommend that you start by following the above steps and working on your mind. Next time you hear someone say “I want to be rich” why don’t you ask them why? And what do they consider the definition of being rich? So before you start yelling ’show me the money’ I recommend that you start thinking about exactly why you want to be rich..

One of the questions I hear every single day is “Where should I invest my money”? When you are just beginning your investment journey this is a very important question as it is vital that you get off to a good start. Too many people have one bad experience with investing and then turn their back on it for the rest of their lives. When you are learning where to invest your money the most common problem is that you have too many options.

I like to call this problem - “Option Anxiety”

The definition of option anxiety is when you have so many options to choose from that you start getting anxious about which one you are going to choose. Pretty soon you are incredibly stressed about which option you are going to take. All of the options start to look pretty good but you just can’t make up your mind. In the end you decide that all these options are simple too stressful and its much easier to do nothing. Does this sound familiar? It really is quite a bizarre thing but I’m sure everybody has experienced it at some stage.

When I first began my investing career I used to always get option anxiety when deciding where to invest my money. Should I invest my money in the stock market, should I invest my money in real estate, should invest my money in the bank – quite simply WHERE should I invest my money.

If you too suffer from option anxiety then don’t worry, it is an easy problem to solve. There are two main reasons why most people get anxious when they are investing their money for the first time.

1. The most obvious reason is because they have worked extremely hard for their money and they don’t want to loose it. This is a very natural emotion as nobody likes loosing money. If you come from a family that didn’t encourage investing then deciding that you want to invest can be an incredibly big accomplishment in itself.

2. When we are doing things that we don’t really understand we get scared. This is totally normal and in fact a very sensible thing to feel. If humans didn’t get a little bit scared when we were doing foreign things then we might get ourselves into a lot of trouble very quickly. In saying this it is very important that we don’t let this natural fear hold us back form doing anything.

So how did I overcome these problems and decide where to invest my money. I picked an investment strategy that I was comfortable with and then I built up my knowledge and got some expert advice. Pretty soon after that I was addicted to investing. So you are probably asking “how can I learn where to invest my money”.

Well the first thing to do is to decide which kind of investment you think you are most suited to. The obvious two choices are Property & Shares. As a general rule you will need more money to get into the property market (although this is not always the case) so it is often a good idea to start with the stock market. Once you have decided what option you would like to take I recommend that you start building your knowledge in that area and then once you have a general idea of what you want to achieve you can start looking for an expert to help you even further.

Don’t feel like you need to do everything on your own. Deciding where to invest your money is a very big choice so there is no harm in asking other people for help. If you wanted to become a dentist I don’t think you would assume that you could learn how to do it without getting an education from somewhere, would you? So what are you waiting for? There are thousands of free investment resources on the internet all you need to do is to find them, use them and then in turn you will begin to break down your fear of investing. Remember to become successful you need to grow and develop and the best way to do this is to increase your knowledge.

The secret to becoming rich is really quite simple.

First of all you must spend less than you earn – Then you must invest the difference.

But don’t stop there – You then need to re-invest the profits that your initial investment created as well as the original investment. In time this will create a big enough resource that you will be able to comfortably live of the income that your investments create.

Does this sound a little bit scary or like too much hard work? Well don’t worry because all you need to do is to create some savings and investment strategies and the rest will fall into place.

The first step is to create a Savings plan that works for you. When it comes to saving money there are generally two different types of people.

The first type are people who are somehow able to save money without any great difficulty. They have good restraint when it comes to purchases and they always have a sock full of money somewhere. When they are ordered around and given strict rules to abide by they tend to want to rebel and do the opposite.

The second type of person needs strict rules and regulations to achieve most things. Left to their own devices they would happily spend all their spare money on a new pair of jeans or car. When these people are given clear rules they seem to be able to save money with much more success.

Which type of person are you? Do you need strict Savings and Investment Strategies to save money or are you at your best when you are given more freedom. To be completely honest I think that everybody could become a better at saving money if they applied a few simple ideas.

One of the best savings and investment strategies that I have come across is this.

Reward Based Savings System

The first step of this system is to actually create a savings plan. For instance you need to focus on some areas in your life where you think you could save some money eg.

Bring your lunch from home

Quit smoking

Less alcohol from expensive bars

Cook your own meals

Public transport

Cut down on snacks

Isn’t it fumy how most of the things that I have just mentioned would be beneficial to your life in more ways than just saving you money? The problem is that all of the above things are actions and pastimes that you really enjoy.

So is it realistic to try and cut these activities out of your life and expect to be happy just because you are saving some money?

No, I don’t think it is. What about if every time you saved money you simply rewarded yourself? Then you might actually enjoy saving money rather than growing to resent it.

For example if you were to give up smoking then I would suggest that you keep a tally of the money that you are saving and use a portion of it to reward yourself with something that you love but don’t usually get, for instance a massage or a night at the movies. This way you are creating a savings plan that will actually work. Why? Because you want it to work so that you can get your rewards. Too many people create Savings and Investment strategies that don’t have inbuilt reward systems. The best thing about a reward based saving system is that you really enjoy the feeling of saving money. Then if you are smart enough to invest the extra money that you are saving you will have begum your journey towards financial freedom.

Trying to find a good and ‘up to date’ property investment book can be quite a challenge. There is nothing worse than reading a property investing book that refers to property prices that are half what the current day values are. In my experience I have found that sometimes a good general investment book can be of just as much use as a specialist property investment book. Most real estate investors are actively investing in other areas so having a book that discusses real estate investing in relation to the stock market etc. can be very beneficial.

What to look for in a property investing book?

The best property investment books should be written in an easy to follow – step by step fashion. It is no good if the reader finishes the book but still doesn’t feel like they have the confidence to start building their property portfolio. At times the facts and figures involved with property can become quite tiresome so it is also vital that the writer can deliver the information in a fun and entertaining way. Let’s have a closer look at three of my favourite property investment books.

More Wealth from Residential Property – Jan Somers

A fantastic property investing book that covers all aspects of how to purchase residential property. It literally covers every stage and detail that you need to know when buying your first (or 10^th) investment property. Jan Somers writes in an honest and fun way and she doesn’t forget that most of the people reading her book probably haven’t ever bought an investment property before. There is a chapter that talks about renting vs. buying the house you live in and Jan mentions the fact that living in your own house can have great mental advantages that don’t come into consideration when you only look at the figures. This is a refreshing view point from a property investing professional as I often find that the writers of these property investing books can loose touch with reality but definitely not Jan Somers.

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What I Didn’t Learn at School but Wish I Had – Jamie McIntyre

This book is a more general investing book but it covers some great real estate strategies. The first half of Jamie McIntyre’s book concentrates on the mental aspects of becoming a successful investor. He calls it developing the mindset of a millionaire. It is easy to want to skip over this section of the book but I promise you that if you haven’t developed your mental investing muscles then no matter how many great strategies you have you will find it hard to succeed. Whilst Jan Somers book goes into the real ‘nuts and bolts’ of Real estate investing this book covers some more elaborate and interesting strategies.

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Go For Your Life – Chris Grey

This is a very underestimated book that didn’t receive anywhere near as many accolades as it deserved. It is basically a combination of the above two property investing books. It shows how Chris slowly bought the 6 investment properties that he currently owns. You might be saying “6 properties – that’s not enough to write a book!” But this is the exact reason why it is such a great book. He explains how you don’t need to own 100 houses to be a successful real estate investor and enjoy the luxuries of life. By owning a handful of properties he has been able to obtain his dream lifestyle.

So there you have it 3 great property investment books that you should definitely read before or after you start building your property empire. All of them are filled with great property investing tips and secrets that will help you achieve your goals.

The only thing missing from these books and form every property investing book ever written is the magic ingredient that makes you actually put the strategies into action. You will need to find that yourself! You can read as many books as you like but if you don’t ever take some action then you won’t ever achieve the success that you would like. So what are you waiting for? Start taking action today by reading one of these books and then when you are armed with the required knowledge take the next step and start your investing career.

When you are investing on the Stock Market it can be a fine line between trading and gambling.  If anybody knew exactly what the Stock Market was going to do they would make millions of dollars everyday but not even Warren Buffet knows EXACTLY which way the market will go every time.

So how can we decipher between Stock Market Gamblers and Traders? Or do you think there simply isn’t any difference? I would like to look at one basic investment strategy that I believe is the main difference between Stock market traders and stock market gamblers.

Basic Investment Strategies – RULE No.1

‘You must know when you are going to get OUT of a trade BEFORE you get INTO the trade, no matter what happens to the stock eg. It goes UP, DOWN or SIDEWAYS.’

I believe that this basic investment strategy is the main difference between Stock Market Gamblers and Traders.

Why is this rule so important? Investing is about having a great plan or basic investment strategy and sticking to it. The last thing you need is to let your emotions take control of your investing. As soon as you let your emotions get involved you are beginning to gamble with your money. It is vital that you create a set of rules that you will follow no matter what happens.

If you are confused by the idea of knowing when to get out before you get in then I will quickly explain what I mean by this. When you enter a trade you should be aware of every possible outcome eg. The share price will rise, fall, move sideways or a combination of all of these. You need to know exactly what you are going no matter which direction the stock ends up going. This is an incredibly basic Investment strategy but you would be surprised at how many people enter into the market with no idea of what they are trying to do. This is my definition of a Stock Market Gambler.

So my advice is to start creating some rules that will become the basis of your perfect investment strategy. Once you have created the rules you should plot out a plan that you can follow and then most importantly you need to stick to the plan. Best of luck and happy investing.

PART 2: Investment Strategies Using Options - When to buy and When to Sell

Before we start to look at some Investment Strategies Using Options it is vital that we understand the exact functions that each Option has.

Why would you buy a Call Option?

- Buying a call option gives you the right (but not the obligation) to buy a set number of shares on or before a set date at a predetermined price.

- Therefore you would BUY a CALL option if you thought that the Share price was going to rise.

- eg. Lets say the current share price of ABC is 20.00 and you think that it is going to rise. You can buy a call option that will give you the right (but not the obligation) to buy ABC shares at a set price (lets say 21.00) before a certain date (lets say within the next 60 days). No matter what the share price is within the next 60 days you have the right to buy them at 21.00. If the share price goes up to 24.00 then this is fantastic if it goes down to 17.00 then this is useless as it would be cheaper to buy the shares at market price.

- If you thought the share price was going to go up why wouldn’t you just buy the actual shares? Buying the call option will give you more leverage therefore increasing your profits (and losses).

- How much will the call option cost? This will depend on a number of things - the main factors being the strike price and how long the option has until expiry.

Why would you buy a Put Option?

- Buying a PUT option gives you the right (but not the obligation) to SELL a set number of shares on or before a set date at a predetermined price.

- Therefore you would BUY a PUT option if you thought that the Share price was going to fall.

- eg. Lets say the current share price of ABC is 20.00 and you think that it is going to FALL. You can buy a PUT option that will give you the right (but not the obligation) to SELL ABC shares at a set price (lets say 19.00) before a certain date (lets say within the next 60 days). No matter what the share price is within the next 60 days you have the right to SELL them at 19.00. If the share price goes down to 16.00 then this is fantastic  as you will be able to sell shares for $19 that are only worth $16 - if the share price goes up to 24 then your Put option will expire worthless as you won’t sell your shares for 19.00 when the market price is 24.00

Why would you Sell a Call Option?

- The main reason you would SELL a CALL Option is because you will receive a premium.  Selling a CALL option means that you have agreed to SELL a set number of shares on or before a set date at a predetermined price - IF the BUYER of the option decides he wants to exercise his CALL Option.

- You would SELL a CALL Option if you thought the Share Price was going to FALL or remain steady.

- eg. Lets say the current share price of ABC is 20.00 and you think that it is going to FALL. You can SELL a CALL option that will give the BUYER the right (but not the obligation) to BUY a set number of ABC shares from you - at a set price (lets say 21.00) before a certain date (lets say within the next 60 days).

If the share price goes down to 16.00 then this is fantastic as you get to keep the premium and you wont need to sell your shares because it would be cheaper for the BUYER of the CALL Option to purchase the shares on the open market (16.00) - if the share price goes up to 24 then you will be forced to sell your ABC shares at 21.00.  The BUYER of the Shares will be happy because they have brought the shares at a $3 discount and you will be happy because you still get to keep the initial premium that you received.

Why would you Sell a Put Option?

- The main reason you would SELL a PUT Option is because you will receive a premium.  Selling a PUT option means that you have agreed to BUY a set number of shares on or before a set date at a predetermined price - IF the BUYER of the option decides he wants to exercise his PUT Option.

- You would SELL a PUT Option if you thought the Share Price was going to RISE or remain steady.

- eg. Lets say the current share price of ABC is 20.00 and you think that it is going to RISE. You can SELL a PUT option that will give the BUYER the right (but not the obligation) to SELL a set number of ABC shares to you - at a set price (lets say 19.00) before a certain date (lets say within the next 60 days).

If the share price goes up to 24 then this is fantastic as you get to keep the premium and you wont need to BUY any shares because  the BUYER of the PUT Option would prefer to sell the shares on the open market for $24 than sell them to you for $19 - If the share price goes down to 16.00 then you will be forced to BUY the ABC shaes at the agreed strike price of 19.00.  Therefore losing $3 on every share.

PART 1: Investment Strategies Using Options - An Overview

Why would you want to trade options?

Options are an incredibly useful and versatile investing tool. They can be used by everyday investors or large Fund Managers. The main feature of an option is the incredible leverage that they offer - with a relatively small amount of money options will allow you to control a large portion of shares (very similar to using a home loan to buy a house - you are able to control a $300k house by only putting in a $30k deposit).  Options can also be used to help insure portfolios and manage downside risk.

Are Options Risky?

Options are highly leveraged so therefore there can be greater risks involved if used in the wrong way. Investment Strategies using options are generally slightly more advanced than the typical ‘buy and hold strategy’ that will be recommended by your broker. In saying this Investment Strategies using Options seem to have developed a bad name and it is generally believed that Options should only be used by Professional Investors and traders. This is Simply not the case.

What exactly is an Option?

An option gives the holder the right - but not the obligation - to buy or sell a set number of shares, on or before a set date at a predetermined price (strike price).
When you buy an option it is then up to you to decide if you want to use this right. If you are to use this right then you would purchase or sell the set number of shares that you had agreed on in the contract. This is known as exercising the option. Remember it is the buyer or holder of the option that gets to decide whether or not they want to exercise the option. If they choose not to exercise the option it will expire worthless.

When using Options you have potential to make money no matter which way the share price goes - Up or Down. Before we look at some individual Investment Strategies using options lets try and understand the basics.

There are two main types of Stock Option

Call Option - gives you the option to buy shares

Put Option - gives you the option to sell shares

So if the market is going up you want to buy Call options and if the market is going down you want to buy put options.

The easy way to remember this is you ‘PUT DOWN’ something.

PUT = DOWN and CALL = UP
The slightly confusing part about options is that everybody can BUY and SELL them. This means that you could make money by selling a Put in a rising market.

Don’t worry if this is a bit hard to understand.  As you learn more information Options will become easier and easier to understand.  I promise. The most important thing to grasp is that PUT = DOWN and CALL = UP.

In ‘Investment Strategies Using Options’ PART 2 we will look at the 4 Main possibilities that you have when using Options in conjunction with your Investment Strategies.

- BUY a CALL Option

- BUY a PUT Option

- SELL a CALL Option

- SELL a PUT Option

Just letting everyone know about the exciting new ‘Investment Strategies For The Stock Market’ tutorials that are going to be posted right here at BanjoSmyth.com.  These Stock Market Tutorials will teach you simple and easy to use strategies that you can use on any Stock Exchange. The topics will include:

- Basic Investment Strategies

- Investment Strategies Using Options

- Investment Strategies Using CFD’s

- Investment Strategies - Technical Analysis

- Investment Strategies - Fundamental Analysis

- What Your Broker Doesn’t Want you to know

- The Psychology of Trading

plus many more.

I believe that too often Investment Strategies for the Stock Market are hidden from the general public, instead only known by a select few. This means that the general public are forced to simply follow their financial advisers advice and you will soon find out this is not always a good thing. I hope you enjoy the ‘Investment Strategies For The Stock Market’ tutorials and use them to increase your financial education.

Cheers and Happy Investing

Banjo Smyth

“Anyone who says money can’t buy happiness just doesn’t know where to shop”

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