25
Nov
2010

Being “paid to wait”…

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I was just flipping through the channels the other day checking the weather on the TV  and as I surfed past the Business News Network I overheard one of the talking heads talking up some blue chip stock with a paltry dividend and punctuating her commentary with “so with the dividend you’re getting paid to wait” and I thought “Waiting for what? exactly?”

The answer of course, is waiting for the stock to go up, because these days, all that matters is the price action of a stock.

Used to be a time, when the main reason people bought stocks was to get a portion of the company’s earnings, paid out as dividends. Investors would think of themselves as partial owners of the company, which is in fact what they are. In fact when you look at historical performance of the stock market, a large chunk of the returns were (until the present age) coming from the reinvestment of the dividends first, and capital gains second.

Today the average holding time for a stock is less than a year and in many cases a lot less. With the advent of High Frequency Trading it’s a few milliseconds.

Warren Buffet once said you shouldn’t buy a stock unless you were comfortable holding it if the market closed for 10 years the next day. Conventional wisdom eschews that approach, but it seemed to work for WEB.

However I did stumble across a bona fide “paid to wait” strategy in Daniel Braem’s Building the Next Berkshire Hathaway which I would have never thought of but it strikes me as pure brilliance:

Basically you take a company you’d love to own but is too expensive, in my case maybe Amazon or Apple. You calculate your fantasy entry price, and then start selling puts at that strike price.

In these days of extremely high volatility and flash crashes, maybe your day comes: the stock price comes down to meet your price and the holders of your PUTs execute their options and sell you their shares at your desired entry price. True: you could also go out into the market and buy those shares, possibly even cheaper. But this way you really have been “paid to wait”, and if this is one of your favorite companies now trading at fantasy prices, you’re probably backing up the truck anyway…..

One response to “Being “paid to wait”…”

  1. […] is because, as mentioned in our previous “paid to wait” post, today’s market participants are concerned primarily with future “price […]

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