The next speaker I want to talk about in this series is Steve Sitkowski. He focused on creating wealth using options. I’m familiar with options, but I know that they confuse a lot of people, so part of this post will be a great example to help understand exactly how they work.
First, let’s look at who this guy is. Remember that I’m not endorsing anyone here; I’m passing along what I learned from Mr. Sitkowski, so that you can use it in any way that will help you accomplish your goals!
Steve has spent his life in the financial services industry. He was a Certified Financial Planner (CFP), but he said that that didn’t really mean much. He said you could get that in a few months, and it really just meant that you learned how to sell whatever mutual fund your company had.
He said that’s why he went out on his own: He was sick of people paying money to people who didn’t actually know what they were doing, and he was sick of supporting things like mutual funds that didn’t necessarily get them good returns.
He was a Registered Investment Advisor (RIA), and he ran his own stock brokerage in Florida. He was president of two financial planning organizations. He hosted a nationally syndicated radio talk show, although he didn’t say which one… and he’s author of 30 Day Money Makeover and Trade Like The Pros.
Before I get into my big takeaways from Steve, I want to be clear that stocks aren’t my favorite kind of investment. I’ve learned a lot from Robert Kiyosaki, author of Rich Dad Poor Dad, and he talks about a few reasons why they may not be that great:
- History does not necessarily predict the future. Just because the stock market has had certain average returns does not mean that it must continue. Just like how home prices didn’t only go up, in 2008 we saw what a manipulative government and terrible regulations can do, and we may see it again in the near future as it relates to the stock market.
- When you own a share in a company, you likely have very small overall ownership (<1%), which means that you have no control over the underlying asset. The company is going to succeed or fail based on its management and other factors. Diversification isn’t a bad thing, but if you can control something, it may be worth putting more eggs in that basket.
- Stocks represent ownership in a company. This is great, especially if the company does well. But, there is no inherent value in the asset. You own a piece of paper, or, more likely, digits on a screen that say you own a piece of a company. The point being that if the you-know-what hits the fan, this may not be worth much.
That being said, there are plenty of people who have made millions of dollars by trading with options, so I want to explain exactly how they work:
I pay $1 for an OPTION to buy 1 share of stock A for $100 within a specific time frame. This means that I’ve already paid $1, but I don’t own any stock yet; I just have the option. This investment will result in one of two outcomes:
- In the time-frame, the stock value goes down to $90, so I don’t exercise my option. Why would I want to buy it for $100 with my option, when I can buy it for $90 on the open market? In this case, the option expires, and I lose my $1 investment.
- In the time-frame, the stock value goes up to $110, so I exercise my option, buy the stock for $100, and turn around and sell it for $110. In this case, I make $10 less my investment of $1, so I net $9 profit.
The details can change, obviously, but this is the basic concept of an option. The other important thing to note is that this example describes a “call option.” Call options refer to the right to BUY a share. “Put options” give you the right to SELL a share at a specific price within a specific time-frame. You would want a call option when the price of a stock to go up, and a put option when it goes down.
Now, let’s get into my key takeaways from Steve’s presentation.
- Diversification is key to creating long-term wealth. Again, in general this is a widely-accepted piece of wisdom. In more specific cases, however, it may be wise to put a lot of eggs in one basket that you have a lot of control over.
- Andrew Carnegie famously said “put all your eggs in one basket, and then watch that basket.” If you can focus your attention on that one investment, and you have control over it, it can be better than 10 scattered investments. This is why I’m such a fan of people creating small businesses that they have control over.
- Since World War II, the average large stock has returned ~10% per year. Firstly, inflation cuts into this. Secondly, the indices change all the time, so these metrics get warped: Even the Dow Jones 100 companies change from time to time.
- With options, direction doesn’t matter. What he’s saying here is that you can make money with call options when the stock goes up and put options when the stock goes down. He said that sometimes they even buy both (if they’re confident the stock is going to move, but not confident in which direction).
- Options create leverage. This means that–using our previous example–a $1 investment can see a $10 return. You can invest small amounts of money to create potentially large returns.
Steve had 3 takeaways that were his keys to success. In other words, if you have these, you will be successful:
- A burning desire
- Specialized knowledge
- The ability to act
These are rather intangible, but I agree with them. If you have the motivation, knowledge, and execution, you’ll accomplish what you set out to accomplish.
Finally, Steve talked about how to pick a good stock. Specific indicators follow:
- The company’s earnings are going up
- It’s revenue is going up
- It’s dividends are going up
- Insiders are buying the stock
- Overall company direction is positive
- Moving averages (such as if the 15-day average of the stock is much higher than the 50-day average)
I hope this is useful for you! I’ve shared some of my opinions, but I reserve others, because my goal here is to pass on what I learned from Mr. Sitkowski in hopes that it can help with your future investments and wealth creation.
If you decide that you’d like to invest in an asset you can control, like your own business, then we should talk more. Or, you can head straight to my client application page, where you can get a free consultation, and we’ll see if that’s the right path for you!