I'm sure we can all remember how we felt when we were young, impressionable and invincible. Our motto was live for the moment; only when the moment was over would we deal with the consequences. There was little, if any, thought about the potential impact on tomorrow -- let alone five, 10, or 20 years down the line.
But thinking about the future is critical to your financial health. Unfortunately, most of us are not adequately prepared to properly manage our finances. Furthermore, many of us are oblivious to the importance of saving and allowing our money to make money. I am particularly concerned about our children's generation; it seems as if it's in a prolonged instant gratification phase, which impacts negatively on building for the future.
Moreover, with the uncertain status of Social Security, a relied-upon source of retirement income may be significantly reduced or potentially eliminated. This will create even greater demands on our children to successfully manage their money and build wealth moving forward.
The fact is, a sliver of the instant gratification phase remains in most of us. We often create debt with purchases houses and automobiles. We have a tendency to believe that our incomes will continue to rise or at worst, remain the same. So as our incomes accelerate, we presumably will gradually reduce and ultimately eradicate our debt. This mentality allows us to purchase and enjoy things that may stretch us to the limit or beyond.
Unfortunately, if we err in our calculations or assumptions, we can be left without the things we cherish the most. Hence, I believe it is imperative that all of us approach our finances in a disciplined, consistent, strategic and healthy manner. We should realize that precious few occupations guarantee an ongoing income stream. More likely, perhaps, many of us will be victims of downsizing.
While we can do little to prevent becoming a victim of corporate downsizing, we can better appreciate the need to resist spending money we do not possess, or making the assumption that the money will continue to flow downstream. Failure to recognize these seemingly simple ideas can result in devastating consequences that I saw all too frequently in my previous profession.
Granted, professional baseball players can earn millions upon millions of dollars. But don't lose sight of the fact that even a hugely successful baseball career ends at the young age of about 35. Unlike most other professions, there is a guaranteed endpoint to your baseball career. Most of us become comfortable with our lifestyle, particularly when it is good. But if there is no consistent cash flow coming in, eventually there will be a lifestyle change. Translation: no more robes and room service.
Downgrading one's lifestyle is difficult at best; yet, some of us are forced to do so because of lack of knowledge, poor decisions and sometimes just bad luck. Nevertheless, I would like to provide information which hopefully will increase your knowledge base and allow for more informed decisions. To that end, I spoke about
in-the-money calls strategy last week, something I will continue to discuss in the coming weeks.
This week, the strategy leads us to
With a forward price-to-earnings ratio of 8 and a return on equity over 35%, this high-quality chemical company is a bargain at its current price of $43.17.
Again, my strategy for in-the-money calls is to employ them when companies with solid fundamentals are being (in my eyes) overly punished by Wall Street for one transgression or another. My theory is that this overreaction will eventually be corrected as the value of the company reasserts itself. Remember, we are only investing in rock-solid companies. We are putting ourselves in position to capitalize on a bounce, then we lock in our profit;
being a good recent example.
Dow Chemical is a perfect example of such a company.
I did a little research on the history of Dow Chemical; it turned out to be quite fascinating. Here are some facts: Midland, Mich.-based Dow Chemical was formed in 1897 and sells over 2,000 chemical-related products worldwide. Dow Chemical is currently organized into 15 major businesses and is engaged in more than 40 joint ventures. Half of its revenues come from international markets. Dow, which considers itself technology-driven, employs about 4000 R&D people and spends $30 million a year maintaining and supporting its patent portfolio.
In 2005, Dow Chemical had over $45 billion in revenue and produced free cash flow of over $360 million. It has over $3.2 billion in cash on the books.
Bottom line: This company is a monster! That is why I bought 10 June $35 calls Friday for $8.70.
I now control 1000 shares of Dow Chemical all the way until the third Friday in June, which is approximately five months from now. I paid $8,700 for the options vs. $43,170 to buy 1000 shares of common stock. The premium paid (based off of Friday's closing price) to control 1,000 shares of a high-quality stock was only 53 cents. Plus,
no matter what happens
, the most I can lose is limited to the $8700 dollars I paid for the call option.
That is the definition of what I will be writing about every week: limited risk -- high reward.
Before moving on: The June $40
calls that I paid $6.70 for last week are trading near the same price. But don't be surprised to see Wal-Mart bounce this week: On Saturday, the retailer reiterated its forecast for January same-store sales growth of 3% to 5%.
In closing, I'm happy to announce that soon I will be addressing your emails in a new column here on
. Staying focused on my main goal -- to help you become a winning investor -- I will also soon be participating in a live conference call to discuss deep in-the-money calls. This winning strategy is a consistent way to participate in the thrill of the kill that I call the stock market.
Stay tuned for details and remember: Life is a journey, enjoy the ride!
At the time of publication, Dykstra was long Dow Chemical and Wal-Mart calls.
Nicknamed "Nails" for his tough style of play during his Major League Baseball career, Lenny Dykstra was an integral member of the powerful Mets of the mid-1980s, including the world champion 1986 squad, and the Phillies in the early 1990s.
Today, Dykstra manages his own stock portfolio and serves as president of several of his privately held companies, including car washes; a partnership with Castrol in "Team Dykstra" Quick Lube Centers; a state-of-the-art ConocoPhillips fueling facility; a real estate development company; and a new venture to develop several "I Sold It on eBay" stores throughout high-demographic areas of Southern California.