Porters second best income idea is to learn the secret of "positive carry.
From Stansberry & Associates
As I noted in my September 2009 issue, "The Seven Real Secrets of the World's Best Investors," most individual investors use margin (borrowing) in the wrong way. The most common way individual investors use margin is through buying put or call options. They want a big leveraged position, and they buy their leverage in the options market. They would get better odds in Vegas. Buying leverage in the options market is extremely expensive and unlikely to lead to success over the long term. Most of the great investors I know never buy options. They only sell them.
Why? Positive carry.
"Carry" refers to the cost of borrowing money. With interest rates this low, most institutional traders can get margin loans for 3%-4% annually. To make money with these loans, they don't have to earn very much. Using conservative strategies – like selling puts on stocks they want to buy anyway (which Dr. David Eifrig does inRetirement Trader) – they can earn 15%-30% per year. These kinds of highly leveraged positions involve some risk. But if you're good at it, you can make incredible profits. You're borrowing money at 4% and earning 20% with it. This is "positive carry."
You can earn positive carry in lots of ways. You can invest in higher-yielding debt obligations, like junk bonds. You can lend money to payday-loan vendors. You can invest in high-yielding stocks, like energy infrastructure master limited partnerships (MLPs). The point is, most of the great investors I know are always involved in carry trades of some kind. They keep 25%-50% of their capital tied up in these kinds of trades, which will earn them around 20% a year. They only take their money out of these trades when they have a unique and profitable opportunity.
Don't use margin to buy speculative positions. Don't use margin because you're not disciplined enough to keep a cash reserve. Only use margin when you can calculate that it will enable you to produce a substantial amount of positive carry.
Why? Positive carry.
"Carry" refers to the cost of borrowing money. With interest rates this low, most institutional traders can get margin loans for 3%-4% annually. To make money with these loans, they don't have to earn very much. Using conservative strategies – like selling puts on stocks they want to buy anyway (which Dr. David Eifrig does inRetirement Trader) – they can earn 15%-30% per year. These kinds of highly leveraged positions involve some risk. But if you're good at it, you can make incredible profits. You're borrowing money at 4% and earning 20% with it. This is "positive carry."
You can earn positive carry in lots of ways. You can invest in higher-yielding debt obligations, like junk bonds. You can lend money to payday-loan vendors. You can invest in high-yielding stocks, like energy infrastructure master limited partnerships (MLPs). The point is, most of the great investors I know are always involved in carry trades of some kind. They keep 25%-50% of their capital tied up in these kinds of trades, which will earn them around 20% a year. They only take their money out of these trades when they have a unique and profitable opportunity.
Don't use margin to buy speculative positions. Don't use margin because you're not disciplined enough to keep a cash reserve. Only use margin when you can calculate that it will enable you to produce a substantial amount of positive carry.
Porter Stansberry
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