Mr. Moneymaker

When you reach out to clients its important to read their file first.

When I got to Wall Street I was shocked what I saw in these accounts.

Shocked by how similar they were. Some of their portfolios looked identical. Same % in each asset class, same tickers… buys/sells around the same dates. That was interesting.

Often there was a large position in a single name, usually a place they worked currently (or previously) and a handful of smaller items…. but it was clear they all read the same newspapers or received the same advice.

They all basically looked the same:

1. Vanilla dividend stocks

2. REITs

3. MLPs

4. Preferred stocks

5. Bonds

6. Funds

They all performed largely the same.

Except one. The biggest growth rate I ever witnessed came from a client with a very different looking portfolio. Everything was constructed in layers inside Mr. Moneymaker’s account. There was a genius to it.

He had a basket of dividend paying stocks generating yield. I noted his list of stock tickers had monthly and quarterly paying names, so his account was seemingly always being credited with fresh investable capital.

Then he was writing options (covered calls, straddles, puts, etc…) atop these positions to generate extra yield. More capital coming in regularly. Every week from selling weekly options.

Then he was making loans to companies and getting paid in shares, and doing a ton of stuff that which (back then) seemed like magic.

Now, I see it all as a wealth system.

Wealth System - Aggressive Growth Mode

All the copycat accounts I talked about at the top were focused on wealth preservation, they gobbled up the advice from their financial advisors and favorite talking heads.

Playing “not to lose" is no way to get ahead. It's barely a way to stay ahead.

Let’s look at the wealth system of someone attempting to grow their capital base rapidly.

Mine.

A View Into a Real Wealth System

A tiny digital chirp rings out from my phone sitting face down on the table.

Chirp.

Most people would think it’s a text message, a social media notification, a reminder to pick up milk. But I don't.

I know exactly what it is. It’s money. Not the abstract, theoretical money of a stock price ticking up a few cents. This is real, tangible cash being deposited into my account. A few minutes later, another chirp. Then another. It’s a Tuesday. By lunchtime, I’ve had four.

Chirp.

Chirp.

Chirp.

Chirp.

This is the bedrock, the base layer of a financial machine so ornate and yet so logical that it feels less like an investment portfolio and more like a self-sustaining ecosystem of money.

I see my wealth system as a series of engines, layered one on top of the other, each one humming at its own frequency, each one feeding and being fed by the others.

I got the idea from Mr. Moneymaker.

Wealth Engineering

It wasn't always this way.

There was a time, not long ago, when my portfolio looked like a collector’s garage gone mad. I owned over two hundred different dividend-paying investments. Two hundred.

It was a sprawling, chaotic mess of a thing. I had industrials, REITs, utilities, banks from six different nations, obscure master limited partnerships dedicated to rare earths and other resources. The idea, common to so many investors, was diversification through accumulation. If you own a little bit of everything, you can’t get hurt too badly by any one thing.

But the problem with owning everything is that you don’t really own anything.

You’re a zookeeper, not a rancher.

I spent all my time running from cage to cage, checking on the animals, making sure none expired overnight. The paperwork was a nightmare. The mental bandwidth it consumed was a tax in itself. The chirps were there, but they were an undifferentiated noise of nickels and dimes from companies I barely remembered buying.

I had become a flashlight instead of a laser. I lacked focus.

Then came the great pruning.

I came to a realization that felt both heretical and profoundly simple: true diversification isn't about the number of tickers you own. It's about the number of strategies you employ. I needed more strategies working for me and fewer investments to watch after. I took a metaphorical machete to my portfolio. The criteria were brutal.

1. Did I understand the business inside and out?

2. Was the management team exceptional?

3. Did the company have a "moat," a durable competitive advantage that would protect it from the barbarians at the gate?

4. Was the dividend not just stable, but likely to grow for the next 5-years?

Out went the mediocre, the speculative, the "good enough." I sold off nearly 80% of my holdings. I put that capital to work building other wealth engines, we’ll talk about those soon.

When the dust settled, I was left with just forty or so names. Forty companies that I felt I could own forever. The sprawling zoo had become a stable of thoroughbreds.

The result was counterintuitive.

The chirps didn't become less important, they became more meaningful. Much larger checks.

I was averaging several distributions a week, not from a random shotgun blast of stocks, but from a curated list of elite businesses.

This machine was simple, reliable, and it produced a steady, ever-growing stream of cash.

The machine’s primary power source was now online.

But what to do with that cash? Most people would let it pile up, or maybe reinvest it back into the same stocks. That’s the sensible, Sunday school answer. But that’s not how you build a machine designed to secure the financial future of your family for generations.

To do that, you use the output of one engine to power the next.

Engine #2: The Yield Generator

This is where things get interesting, where the passive act of collecting dividends transforms into the active business of generating income. I started selling options. For many, the word "options" conjures images of reckless gambling, of fortunes won and lost in the blink of an eye. But I wasn't using them to gamble.

I was using them as a landlord uses a lease agreement or an insurance company uses a policy.

Meaning: I was selling time and probability.

I’d look at one of my stocks, say, a company trading at $100 a share. I was happy to own it for the long haul.

So, I’d sell a covered call option, giving someone the right to buy my shares from me at $105 within the next 30 days. For this privilege, the buyer paid me a premium, cash upfront.

Chirp.

If the stock stayed below $105, the option expired worthless, and I kept the premium, having effectively rented out my stock. If the stock shot past $105, my shares were "called away" and I was forced to sell. But so what? I sold at a profit and had collected a premium on top. It was a win-win.

Then I’d look at the cash sitting in my account from the dividends and the call premiums. I’d find another thoroughbred stock I wanted to own, one that was trading at, say, $50. But I thought it was a bit expensive. So I’d sell a "cash-secured put," giving someone the right to sell their shares to me at $45 within the next 30 days. For this, I was paid a premium.

Chirp.

If the stock stayed above $45, the option expired, and I kept the cash, having been paid to simply state my intention to buy a great company at a discount. If the stock dropped below $45, I was forced to buy the shares at my predetermined price. But again, so what? I was now the owner of a company I wanted anyway, and I’d gotten it at a cheaper price, with my effective cost basis lowered by the premium I’d received.

I combined these two strategies into a loop, a perpetual motion machine of income I thought I had invented. I called this “the machine” and all sorts of things. Eventually, I learned this was known as "the wheel" and it’s pretty darn common.

The wheel can spin up pretty fast. Sell puts until you get assigned shares, then sell calls on those shares until they get called away. Either way, the premiums keep flowing in. The chirps were now coming not just from the companies I owned, but from the very mechanics of the market itself. Engine #2 was humming, taking the fuel from Engine #1 and multiplying its output.

This alone would be a remarkable system for most. A steady flow of dividends, amplified by a steady flow of options premiums. It was safe, it was consistent, it was powerful. But I wasn't finished. The first two engines were for defense and income.

It was time to build an engine for offense.

Engine #3: The Capital Appreciation Engine