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How to Control the Gnu in You

This is a particularly important topic in the Make Your Family Rich System. In this article we will describe how the MYFR system will help you control the gnu inside you. Remember that Peter Lynch quote “the most important body part in investing is the stomach not the brain”. No truer words. What’s this about gnus? Those are the strange looking African antelopes also called wilderbeests. I remember seeing a video of a huge herd of gnus somewhere out on the African plain probably the Serengeti. It seems gnu is a staple in a lion’s diet and once a pride of lions show up the word goes out and the herd starts to stampede. They all continue to boogey in one direction until they fall into the Zanbezi River, fall off a cliff to their death or end up on the lion buffet. It never seems to work out well for the gnus once the lions show up. When you manage your investments in the conventional way keeping score of your performance by the value of your portfolio there is a strong incentive to act like a gnu. You probably have seen it many times. Once the stock market declines by 10% or 20% investors start to panic and the temptation to sell to stem further losses can become compelling. That’s not what the investment wise men and women tell you to do. We have all heard the old saw attributed to Baron Rothschild, the 18th Century British noblemen and member of the Rothschild banking family, that “the time to buy is when there’s blood in the streets”. Easy to say. Find someone with the Peter Lynch-style stomach that actually does that. Once a market goes down a lot folks tend to act more like the gnus than the lions. The MYFR system helps you act more like a lion than the gnus. Let me recount some of the features of the MYFR system that encourages lion like behavior in a steep down market: 1. You are mostly limiting acquisitions to Dividend Champions. Remember, Dividend Champions are those higher quality businesses that have paid increasing dividends for at least 25 years. The relatively dependable income generated by the Champions tends to limit their volatility. That is, the increasing dividend flow has the effect of calming the passions that drive investors to sell when markets drop. The tendency of a stock to perform relative to the market is measured as the stock’s beta. A beta of 1.0 means the stock is likely to rise or fall in synch with the market. A beta lower than 1.0 say .7 means the stock can be expected to rise or fall at a rate of 70% of the market. A beta of 1.3 indicates a more volatile stock rising or falling at a rate of 30% higher or lower than the market. 2.With the MYFR system you are not directly buying the Dividend Champions but selling out of the money put options. That’s an important difference because you are being paid to buy into the bloody street. Even more importantly, as the market drops out of the money put option premiums seem to increase so that the incentive to sell puts logically increases. Let me expand on that idea using the insurance analogy for put options. When you sell a put you are committing to buy the underlying stock if it declines below the strike price on a future date. In a down market the put buyer or the other side of the transaction is getting a guarantee that you the put seller will buy his stock at the reduced price if the stock continues to decline. That is, you the put seller are providing the put seller an insurance policy to buy his interest if the value declines to the strike price. Think of it as a guy with a nice cabin on top of a mountain in California. The cabin is fully paid for so there is no mortgage company requiring property loss coverage. But you, the owner, are getting increasingly concerned as forest fires become more prevalent in the area and the greater the incident of fires the higher the premium that you are likely willing to pay. That’s the way puts work. The market is declining so stock owners want to make sure they are covered against catastrophic loss and you the put seller of Dividend Champions have your side out of the money put selling insurance gig. 3.In a down market if you are selling puts you are offering to buy the stock at a substantially lower price than the current price. Say the market is down 20% and the XYZ company is down 20% to $100 you likely will be selling a put with a strike price of say $85. It is easier to buy into the bloody street when your commitment is at an even lower price than what caused all that blood. 4.This is maybe the most important point. You the MYFR system practitioner keep score of your success by income not value. So when the market declines and even when it declines a lot you don’t care. You know, that’s not true. You will always care when the market declines. But that concern will be mitigated by your confidence that your income will continue to increase regardless of market declines. Why? You know because you own only Dividend Champions and you have confidence in their consistently increasing dividends and if you are DRIPping those dividends you have even turbocharged your constantly increasing dividend income. 5.You get a second bite at the apple. You the out of the money put seller have many opportunities before the option expires to “sell to cancel” which is the expression used to describe the reversing of your put option sale. That is, you can cancel your obligation to buy the stock at the strike price. If you buy to cancel you may sustain a loss depending mostly on whether the price of the underlying stock has risen or fallen since you sold the put. In any event, if a loss is incurred it will usually be significantly less than if you had bought the shares of the stock. The features of the MYFR system not only help the business owner to avoid selling into a down market but encourages precisely the practice recommended by Baron Rothschild those many years ago. Hang In There Approach In my local area we have a regular weekend financial radio show. The host is a fellow who offers financial advisory services around the region. He says he sees rough times coming for the market and advised his clients to reduce their equity exposure. He regularly criticizes other financial advisors who, in a down market, advise their clients to “hang in there”. He condemns what he calls the “hang in there” approach repeatedly during the show. He has apparently made the right sell recommendation on occasion but that also requires he make the right purchase call to get his clients back in at the right time. He’s occasionally proud of the sell call in retrospect but it may only make sense for his clients if he then makes the right purchase call. That’s one of the great problems with keeping score of your success by the value of your portfolio. You almost have to be a good market timer. You have to know when to buy and when to sell. Does anyone really believe they can do that successfully? The MYFR system embraces the Hang In There Approach. When you measure your success by your constantly increasing income why wouldn’t you hang in there when you get a raise every month? That’s one of the great advantages of the MYFR system. We buy our businesses forever or for so long as they continue to give us raises. We are not constantly churning and trying to play the ups and downs of the market. Thinking like that and dealing with our asset management business in that way we are not timing the market. Our time is forever and we have control of our gnu. Patrick J. Keogh is the author of Make Your Family Rich; Why to Replace Retirement Planning with Succession Planning. He also has a book targeted at teen investors titled is Hey Kid! Wanna Own Great American Businesses? His most recent book is Live the FINER Life, Financial Independence Never Ever Retire. You can order the books on

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