Tax Liens, Stocks and Metals; What’s Best for You?

Thursday and Friday we discussed tax lien certificates and began to compare them to stocks and precious metals. However, when it comes right down to it, there really is no comparison.

Pursuing tax liens is more related to a career decision, or at least a part-time job. Stocks and precious metals, however, are avenues of putting your money to work for you. Making the right decisions wherever we choose to place our confidence certainly requires due diligence. With stocks, depending upon what specific goals and methods employed, the investor can work them daily or make appropriate long term investments and let them sit with very little maintenance.

The purchase of stocks is, in essence, taking ownership of a portion of a company that the investor is convinced will work hard to bring stockholders profit. As an owner with voting privileges, stockholders are dependent upon the management of the company for future profits. How one approaches stocks depends a great deal on goals and whether or not they are long-term holders or short-term players. Both are good ways to work one’s portfolio, but involve a different focus.

For the long-term investor (buy and hold), P/E ratios, dividends, expected growth, the fundamentals of the particular industry and financials all should be investigated before purchasing any given stock. Similar to advise regarding P/E ratios, ome advisors advocate the investigation of the EV/EBITDA ratio, recommending investors find stocks they like and attempt to grab them when the EV/EBITDA is low. This appears to be a safe and very profitable means of investing. There are some excellent newsletters available to aid investors in their research as well, such as those offered by our friends at Casey Research.

Stock options are often considered a day trade or high risk contract. However, many long-term holders use options to control possible losses and/or build upon their positions. One tactic that can help reduce the price on a stock you’re interested in is to sell corresponding puts. You can pocket the contract amount and hoping that the buyer will exercise the contract, in effect resulting in a discount on the current price. It’s an easy tactic that few take advantage of.

Of course, this can be used in medium and short-term stock investing as well, though the contract length will influence what is perceived as “short-term.” For short-to-medium-term stock trading the investor needs to be aware of how markets are moving, have a grasp of investor sentiment and other factors that can influence their positions. Often such investors find a stock that is super low because of an erroneous report, misperception, irrational market move or some other contra-indicator that helps them catch a low. If they can get in at the right time, results can be quite profitable. As you may surmise, this takes considerable effort and knowledge, but can have its place in someone’s portfolio if their goals, abilities and resources are conducive to such strategies.

Then there are options, such as the puts I mentioned earlier. Options are a valuable means to protect stocks you already own. But many use them as a means to acquire quick profits due to the leverage involved. There are complexities we won’t discuss here. However, used well, options are a viable tool for both long-term and short-term investing. Investors need to be aware that attempting to get rich quick through options usually results in resources being depleted quickly.

Day-traders are a different breed. They watch the gyrations of stocks, currencies and commodities on a minute by minute basis, often employing more difficult strategies, or combinations of strategies, such as straddles, saddles and other combinations of options and stock purchases. To be successful in this requires a great deal of research, incredible control of emotions (fear and greed) and in-depth understanding of Wall Street. Though some are successful, most would-be day traders lose their shirts.

Where stocks might be related to the type of fuel you use or how well you take care of your car’s body, acquiring precious metals is akin to changing the oil or making sure your tires are always in good condition. There are vehicles that can be used to day-trade or play with precious metal’s investments short-term, such as SLV (tracks with silver) or GLD (tracks with gold). But precious metals are generally perceived as an underlayment for one’s portfolio.

Tomorrow we’ll wrap up this series with some more considerations in regard to stocks and precious metals. Much depends upon the investor’s frame of mind and resources. But, as we will discuss in greater depth tomorrow, no matter what your goals and resources, a first line of wealth preservation should consist of some form of precious metals ownership.

For your prosperity,
The Gold Informant