Friday, September 21, 2007

Developing Your Investing 'Themes'

Each month during the week of options expiration, which is actually right now for Sept ’07 expirations, this advisor develops a short list of ‘Themes’. These themes are the Big Picture ideas that aid in maintaining a broad perspective when making decisions regarding which types of investments are most likely to outperform in the near-term future.

Now, for positions being established for future expiration months, the five themes of the Covered Calls Advisor are:
1. Sector Weightings:
· Overweight – Energy; Healthcare; Industrials
· Marketweight – Materials; Technology
· Underweight – Consumer Discretionary; Consumer Staples; Finance; Telecom; Utilities

2. Emphasize large-cap companies.

3. Emphasize companies with a large international exposure.

4. Emphasize companies that will benefit directly from high energy costs; especially in the oil services industry.

5. Mitigate risk caused by the slowdown in the U.S. economy:
· Focus on companies less exposed to the effects caused by high energy and other high commodity costs.
· Identify companies with more defensively-oriented characteristics (such as healthcare) and that are less dependent on increases in consumer spending.

In looking at the 11 positions in the current CCAP, you will notice that these themes are reflected in the Oct ’07 portfolio selections. The first two themes listed above relate directly to the topics of sector diversification and asset allocation respectively. Additional information and details related to the importance of these tools and how to use them in developing your own portfolio will be discussed further in subsequent posts on this site.

It is very important to commit your themes to writing each month (via either pen and paper or typing them into your computer). The source for your beliefs about what your investing themes should be is a culmination of all the information you have read, heard, and analyzed about current economic and political conditions. They will guide your decision making when it comes down to making choices between specific investment alternatives. And this statement is critically important: ‘Don’t expect to be correct all the time with your themes’ – learn to accept the fact that you will often be wrong. The good news here is that you can still be a market-beating covered calls investor without also having to be a great economic prognosicator. But don’t let errors you make in your written themes discourage you or deter you from continuing to write down your themes each month. The simple fact that you are taking the time to write down your themes every month will force you to think, … and then think again, … and then to think some more about what you believe about the market and, more importantly, why you believe it to be true at that particular moment in time. Writing down your monthly themes is not necessarily a ‘fun’ thing to do. Hmmmm... on second thought, it really is a 'fun' thing because it provides you an opportunity to make your own predictions of the near-term future (excuse this rather weak analogy, but it's somewhat similar in concept to filling out your weekly picks for the football pool). Nevertheless, rather than 'fun' it is actually a ‘discipline’ that will help you to gradually become a more informed, thoughtful, perceptive, and ultimately more successful covered calls investor.

Regards and Godspeed

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