This simple two-step trick can double your returns on safe investments…

Walmart has one of the best-performing stocks of all time.

If you invested in Walmart (and reinvested all your dividends) when it first started trading publicly in 1972, you’d have made a staggering 168,188% return.

Just a $595 position in Walmart in 1972 would’ve made you a millionaire today.

Over that long run, Walmart has returned over 18% per year… but the biggest gains came in the 1980s and ’90s when the company was growing at a breakneck pace.

Today, growth has slowed, and so have the gains. Over the past 10 years, Walmart’s stock only grew 6.6% per year. That’s barely keeping pace with the S&P 500.

That’s what you’d expect from a large, mature company. Walmart is now a behemoth, and there’s not much room for it to expand. It’s become a stable, safe company.

Despite its slow growth, if you bought Walmart just 10 years ago and held on to it, you’d still be up over 90%.

But what if I told you there was a way to more than double those returns… safely?

You see, most investors don’t know there’s a simple trick to churn out even more profits from stable companies like Walmart than just buying and holding them…

It’s called “trading around a position.” And it’s one of my favorite strategies for juicing returns from cash cows…

How to Surf the Market’s Ups and Downs for Profits

When good investors find a great company with long-term potential, they buy it and hold for the long term. There’s nothing wrong with this strategy.

But if you want to make bigger gains, try this two-step method…

  1. Sell your long-term holding when it gets expensive.
  2. Buy it back when it gets cheap.

Let’s see how this strategy works using Walmart as an example.

As I mentioned above, even if you owned WMT over the past decade, you would have made 90% gains. Again, that’s not bad… but you could have more than doubled your returns by following the two steps above.

Here’s how…

First, you need to find out whether your position has become too expensive. To do that, you’ll look at its price-to-earnings (P/E) ratio. (The P/E ratio is a metric investors use to determine the value of a stock.)

Let’s say you bought WMT 10 years ago. By 2008, its P/E ratio had risen to over 17. That signaled the time to sell all or part of your position.

In 2010, WMT’s P/E ratio dropped below 13. That would have been a good time to swoop in and pick up shares again.

If you followed that strategy, you would have avoided the first of WMT’s two biggest drops over past decade (see chart below).

As you can see above, there are three more transactions you could have made to boost your profits (sell again in 2014, buy the dip in 2015, and sell again in 2016). By selling in 2014, you would have also avoided the second big drop.

The beauty of this system is its simplicity: All you have to do is check your portfolio at the end of each quarter—or four times per year.

If WMT’s P/E ratio was above 17 at any time during the past quarter, you’d sell your position. If you’re out of the position, wait until the end of the quarter to see if it dipped below 13 the past three months… If it did, buy it back.

By doing this, you would have made 205% on your money… and that’s assuming you made nothing on your cash when you were out of the position.

That crushes the 90% return earned by buy-and-hold investors.

You can see how this strategy would have worked in the table below, using an initial $10,000 position in WMT (gains and returns include dividends).

Date
Bought

Amount
Invested

Date
Sold

Amount
Received

Amount
Gained

Cumulative
Return

12/31/2006

$10,000

6/30/2008

$12,537

$2,537

25.4%

6/30/2010

$12,537

12/31/2014

$25,374

$12,837

153.7%

12/31/2015

$25,374

9/30/2016

$30,513

$5,139

205.1%

As you can see, if you started with $10,000 and reinvested your entire proceeds after each time you sold, you would have made $30,513. That’s a 205.1% gain.

This strategy doesn’t only work for Walmart. You could use it for other large companies with predictable P/E ranges, like Apple, Wells Fargo, and Verizon.

Remember, not every stock will trade as neatly off its P/E ratio as these companies do. So you may have to use another valuation metric.

Bottom line: Trading around a position is one way you can increase the profits of large, stable companies when they get expensive.

Regards,


Nick Rokke, CFA
Analyst, The Palm Beach Daily

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