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How I Invest (And Why You Shouldn’t Copy It)

By Keith Kaplan, CEO, TradeSmith

I get asked all the time, “How do you invest?”

The answer is complicated… and shouldn’t be taken as gospel.

In fact, I’d be happiest if nobody reading this decided to invest the exact same way I do.

Is it because I’m not confident in my strategy? Absolutely not.

It’s just that it works for me. My goals… my specific financial situation… and how I like to spend my time. These things may be entirely different for you.

You may be starting with something smaller than I have. You may have many millions more.

You may have a goal to live in a penthouse overlooking Central Park with an infinity pool and a helicopter pad. Or maybe it’s to live on a sailboat, going where the wind takes you and catching your dinner each day.

You may love trading the markets and don’t mind spending a lot of time doing the research and monitoring your portfolio. Or you might want to set it, forget it, and only check in come retirement time.

I very likely don’t have the exact same goals, capital, or interests as anyone else. Thus, my technique cannot apply to everyone. (And to be honest… who needs the pressure of everyone following their exact strategy, and potentially having it not work?)

That’s why my first thought when someone asks me this question is, “We’re different… so please don’t copy me!” Copying me takes away your power as an investor to reach your own goals in your own way. Remember that.

Nonetheless, I get the question. A lot.

So with everything I just said in mind, let me go ahead and tell you my overall strategy.

It’s evolved over my investing life, as I’m sure yours will, as well. It’s also robust – not just one simple thing.

Above all, I hope it inspires you to step back, set goals, and build a plan that you can execute.

Before You Begin

I’ve said many times before that any good investment strategy doesn’t actually start with investing. It starts by getting your house in order and figuring out your goals.

If you recall from my piece on Debt, Savings, and Investments, this will sound familiar… but here’s a refresher.

1. Get out of debt. That’s the biggest investment you can make in your future self. And the most important one. Pay off any high-interest debt and don’t carry a balance, period. 
2. Then, get that rainy-day savings going. Imagine you can’t work for a year. What’s the number you could live off of for that time, and maybe more? Sock away at least that into a place where your money can generate a decent yield.
3. And lastly, create an investing plan that suits your goals and execute it. Today, we focus here… with my own investment strategy.

My strategy can best be summed up in three time frames: long-term, medium-term, and short-term.

Let’s start with my long-term plan.

The Long-Term Plan: Selling Options on Great Stocks

My long-term plan all lies in my retirement accounts. I want them to grow over time with the least amount of risk possible. So, in my retirement accounts, I focus on buying the biggest and best businesses in the world. But I do it differently from most people.

You probably know by now I love selling options for income. With this, I essentially get paid to put a low-ball offer on a stock I’d love to buy. If the stock hits my offer price by a certain date, I buy it at that price and keep the income for selling the option.

My strategy in my retirement accounts is to sell a put option to do this, then get put a world-class company at a discount. If it doesn’t hit that low-ball offer price by the date I pick, I just take the income and do it again.

I typically want that company to be high-quality and sustainable. Companies like this have a high Business Quality Score (BQS) in our system.

Take McDonald’s (MCD) for example. McDonald’s is a great business. You may think it’s a hamburger business, but it’s really a real estate business that uses fast food to make the land they buy go up in value over time.

In our system, MCD is an 85 on the BQS. That’s very high-quality. And it’s been a high-quality business for a very long time.

Our system dings McDonald’s on its growth and dividend payout. But it’s at the top of its class for profitability and safety – two things I care deeply about for the long term.

It’s also a business that survives recessions and depressions. Some would say that’s when it truly thrives!

Now, my strategy for a stock like McDonald’s is to, simultaneously, own it for a long time and collect three types of income payments on it during that time.

Let me explain…

First, I sell a put to get put the stock “at a discount.” I either get paid, or I also get put the stock and I own it.

Then, I sell covered calls against the stock to generate income. When I do this, I’m selling the right for other investors to buy my stock at a higher price by a certain date. If the stock doesn’t hit that price, I keep the income.

I’m always trying to have those calls expire worthless (meaning they don’t hit the price I pick by that certain date), or I roll them (close the position and reopen it for a later date) to get them “out of the money” so I can retain the stock for the long term and keep earning income.

I really like using our Probability of Profit indicator to sell puts and calls to generate income. It tells you the success rate of these kinds of trades based on our finely tuned algorithms.

Knowing I have a 95% success rate for those options to expire worthless means that I always have a high confidence that I’ll generate income without panic.

And the third income payment I look to get is from its dividends.

I LOVE getting paid to own stocks in my retirement accounts and get the benefit of seeing them rise over the long term. Great stocks are even better when they pay dividends. That’s my long-term plan. But there’s much more to my strategy than this…

The Mid- and Short-Term Gameplan: Using Data to Trade Smarter

Outside my retirement account, I have others set up for short- to medium-term plays.

I do a lot of options selling and some options buying in these accounts. My goal is to generate income and use some of that income for speculative plays in options.

For the speculative plays, I’ll use our Predictive Alpha Options screener to find call options to buy (betting the underlying stock will go up) to get some speculative pops using the income I generated.

I look at that play like this…

I use a portion of the income I get from selling an option to speculate on the buying side of options. If I’m right, I grow my wealth. If I’m wrong, I only lost a portion of my option income (I treat that like free money).

I like to earmark a lot of my investing account to options strategies. (Again, this is a key lifestyle thing to consider. I’m a huge math nerd and have a lot of fun trading. You might be completely different.)

I also like to use Jason Bodner’s Quantum Score to find bullish stocks to invest in over the next 6 to 18 months. And I use a big dip in that score as my selling strategy.

(You should always know when you’ll sell before you buy – this is how I do it for Jason’s system. Our flagship portfolio management software, TradeStops, can also help with this.)

I then focus a portion of my investing on speculative stocks in big, market-moving themes.

Quantum computing, A.I., biotech, and general tiny-tech stock plays. My goal is to chase large pops in these areas with a small portion of my wealth. Maybe 5% maximum goes here – again, this may be different for you depending on where you are in your journey.

My exit strategy on these speculative stocks has nothing to do with how much I’ve made or lost. It’s just about when the thesis changes on that speculative investment – I then get out with a gain or a loss.

Lastly, I look for alternative investments. I have money in cryptos and some outside-of-the-stock-market ventures as well.

I look at my plan as a diversified investment approach that has short-, medium-, and long-term strategies applied.

• Long term… I am primarily a buy-and-hold-stock kind of person with income-generation activity at the same time.
• Medium term… I’m a buyer of stocks with positive momentum, great fundamentals, and great technicals, until these qualities change for the worse. I’m also an options-income generator and speculator.
• Short term… Pure, greedy speculation – but only with a tiny portion of my wealth!

Like I said up top, we’re all different. I wouldn’t just blindly adopt my (or anyone’s) approach.

But if you find this kind of approach fits with your goals, your level of wealth, and your personal interest in investing – please do give it a shot!

In summary: 

1. Get out of debt. Especially high-interest-rate debt.
2. Generate a year or two of rainy-day savings. Find that “I can live on this for a year or more” number and sock it away.
3. Start investing. Open a brokerage or retirement account and fund it.
4. Define your investing goals and then build your plan for the short, medium, and long term. Remember, these will be different for everyone.
5. Always know your exit before you buy. It doesn’t have to be a mechanical trailing stop. But it has to be rational, and you have to be able to execute upon that when your personal exit rule is triggered.
6. Never, ever try to get rich quick. It only works for a fraction of 1% of the people that chase it. This also means be diversified in your investments and never risk too much on a single investment, period.

I hope this helps you and I’d love to hear what you think about my strategy … but please also share yours! Write me at [email protected]. I’d love to share your emails with your fellow readers and show everyone just how different – yet successful – our strategies can be.

All The Best,

Keith Kaplan
CEO, TradeSmith