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COMPOUND YIELD

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Contents

Thanks and Gratitude..........................................................viiYou're at the Threshold.......................................................ixTruths........................................................................xiiiCompound Yield................................................................1Seeing, Believing, Receiving: Results and Implications........................15Back-Test of Compound Yield on SPY............................................21Growing with the Plan and Some Lessons Learned................................25Bottom Line: A Little Rehash from a Different Perspective.....................53Volatility Discussion: Some Surprises.........................................57Maintaining Highway Speed.....................................................61Some Interesting Things.......................................................69Driving This Home.............................................................73Odds, Ends, and Disclaimers...................................................81The Catalyst..................................................................83Calculation Template..........................................................87Resources.....................................................................89

Chapter One

Compound Yield is the term I adapted to crystallize what we are trying to accomplish by this strategy. Effective use of this strategy is straightforward, clear, and truly simple. Even so, it is not appropriate for everyone. It is specifically designed for those who have lost money in the market, have had real skin in the game, and have lost confidence in mutual funds and fund managers. It is for people who have always charted their own course, have gotten kicked in the gut, and have gotten back up again. It is for us, because I am one of those people. For those who expect to be taken care of by the government, unions, or any entity that promises unfair and unreasonable benefits coming off someone else's back, this is not for you. You've not earned the right to be at this table.

Compound Yield, operationally, is a strategy that combines high-yield investing with safe trading to progressively produce increasing income. It is an active strategy that, once clear in the user's mind, can be adjusted to suit individual needs. It is flexible and can be used exclusively or collaboratively with other strategies. For me, the strategy evolved out of my need to secure a retirement that a traditional 401K could not likely produce. This book is a complete description of what I've been able to do in collaboration with my present brokerage firm for my rollover 401K IRA.

Fundamental assumptions of a Compound Yield investor that must be understood:

- We are income investors who focus on yield. Yield is the priority.

- Stock fundamentals are significant to secure confident payment of dividends and much less important in predicting price movement.

- Price movement depends much more on trading/being gamed.

- Yield investing takes advantage of "loans" to companies/ stocks in which neither the principal nor the interest return is fixed. This leads to incredible possibilities as an investor. Because we focus on the relationship between the two, mental paradigm shifting allows maximum return.

- The only thing real is income/dividends paid or capital gain actualized. Changes in dividend payments occur much more slowly than share-price movement. This allows capture of profits in volatility without sacrificing income for profits.

- Allows/provides a plan to enhance yield (income per share price) continually.

- Supercharged process leads to compound yield.

Basic Concept Structure Outline

I hope that what I'm about to discuss will start to change how you look at investing in today's markets. By bringing key elements to attention, we can begin to see how a buy and hold strategy can be optimized to increase income and capitalize on capital gain.

- Find high-yield stocks, preferably with yields greater than 5 percent. Various sources are available. My preferred resources are listed at the end of this book.

- Determine that fundamentals are strong enough to pay the dividend and hopefully increase it over time. These are standard parameters easily available on trading sites. I use a simple E*TRADE account.

- Enter position based on yield and not where the stock price may be in its trading range.

- Trading behavior depends solely on trying to increase yield on the shares held. When shares increase in value, sell enough of that stock to capture profits. The whole position is not sold. By doing this, yield is preserved on the remaining shares held. If the share price drops, yield is increased by buying down into that stock. This dollar cost averages share prices and pushes up yield.

- Size the position. For a million-dollar portfolio, I've chosen $25,000. Where share prices climb, sell enough shares to stay around $25,000. I've chosen this because this was my circumstance. After twenty-three years of sacrifice to save $30,000 to $40,000 annually, my return/growth was a paltry 1 to 2 percent. When share prices go up, sell to stay around $25,000. When they go down, buy to pull back up to $25,000. The $25,000 position amounts to 2.5 percent of the portfolio and is what should be used to guide smaller or larger portfolios.

- Therefore, buy only into declining prices and sell into rising prices. Never (or almost) buy into rising share prices for any given stock. Buying into rising prices reduces yield. We are yield investors. It is important to remember that income/ yield is investing. It is the only thing real. Capital gain/capital loss is trading, not investing. We are income investors first and foremost, and we are special ones at that, because we are Compound Yield investors. Buying into rising stock prices essentially is resetting the position to a lower yield. This is the opposite of being a yield compounder.

- Capital gain is money on the table not being used. It looks good on paper, but it's not doing any work for us. Capital gain can only work for us if we sell it to make income. We use capital gain/profits to buy down into declining price positions to increase yield on that holding. We are supercharging our portfolio by taking profits off the table and putting them to work for us. Capital gain left too long on the table will be taken by traders. On a day-to-day basis, stock prices rise and fall on trading and not fundamentals. Again, fundamentals are to secure that the dividend continues to be paid. We decided what yield we were satisfied with when we entered the position. If the stock price goes up, this is gravy. Sell the profit and put it to work elsewhere. By adhering to these rules, we always preserve or increase yield.

- Buying into rising prices is counterproductive because doing so resets the position to a lower yield. Think twice. Be sure you really want to do that.

- The magic is that we compound our yield by taking profits (free-trade money) to buy more shares of a declined position. The odds should be high that our declined stock continues to pay and hopefully increases its dividend because we bought stocks that met our fundamental criteria.

- We can also use free trades to open new positions in different sectors to broaden our...