The Creator of the Sharper Image Wants to Make You a Sharper Investor

He created one of the largest magazine and in shop sales businesses of consumer electronics. Now Richard Thalheimer wants to teach you how to make outsized equity returns with options investing. Should we listen as index investors?

Show Transcript

Doc G (00:00):

Hey everybody. This is Doc G. And just a disclaimer, before we get into this episode, we are going to talk about options trading from The Sharper Investor. We'll get into it in more detail during the episode, but in full disclosure, I am an index investor. I've always been an index investor. This episode is not meant to be financial advice. It is just opening your eyes to how different people invest. I think if we want to assess what our best investment options are, we have to be aware of what else is out there. So again, this is not a suggestion for you to invest in this way.

Doc G (00:34):

This is just the story of one man, and how he invests. I hope you like the show.

Richard Thalheimer (00:41):

I'm Richard Thalheimer, and this is The Earn & Invest Podcast.

Doc G (00:52):

I remember telling my financial advisor that I would be happy with 6% annual returns. Someone had planted in my mind that no matter what you did, that was the best the market would bear. I was blind to my own limiting beliefs. A few years later, I decided to do the work and quickly realized that the annualized home market returns were far better than my 6%, yet still many said that there was a limit. You can't beat the market, they said, and pointed to the abysmal returns of the average Wall Street fund manager. Were they right?

Doc G (01:29):

My guest today thinks we are aiming far too low. Why not 70% annual returns? Why not a hundred percent? I know you're skeptical. We've heard these claims before. Are outsize returns impossible, or are we trapped by our own limiting beliefs?

Doc G (01:48):

Today we'll talk to someone who aims much higher. His goal is to turn you into a Sharper Investor. Richard Thalheimer is an entrepreneur and investor. He's the founder and former CEO of the US based consumer brand, The Sharper Image. He established The Sharper Image in 1977 and led as CEO till 2006. Richard's recent book, The Sharper Investor, outlines his stock trading philosophies and strategies. Richard Thalheimer, welcome to Earn & Invest. Tell me, what does being a successful business person and entrepreneur have to do with understanding the equities market? Why should we take your advice on stock trade?

Richard Thalheimer (02:29):

Great question. Well, first of all, let me mention, the last five years for me in my private fund, annualized rate of return was 90% per year. So I would first say, I don't know if my strategy is open to criticism, or a more professional trader might make fun of it, but hey, 90% a year for five years, annualized rate of return, it's hard to argue with that. The reason I'm good at it is because of two things. One is I choose the stocks that are going to go up, and I've done that based on my experience of 40 years of being a retailer at The Sharper Image. I've seen product concepts come and go. And we could say the same thing about companies today, and whether it's Tesla or Chipotle or Amazon, we can evaluate these concepts just as I might have evaluated a product for 40 years. And I think the strategy that I'm using is designed to enhance your returns if you pick the right stocks.

Doc G (03:27):

I want to get into the specific strategies in a moment, but tell us a little about your history. It's pretty unique. You started The Sharper Image in 1977. Tell us out how you got into that business and how the business took off.

Richard Thalheimer (03:44):

I was 23 years old. I got out of college. I had moved to San Francisco, joined a running club, and everyone wanted a new digital chronograph. That's a watch on your wrist, that told you what your times were. Seiko had one for $300. And I was so lucky at the time, I happened to go to the Consumer Electronics Show on a whim. And I saw a product from Taiwan that was a duplicate of the Seiko functions, but I could sell it for $70, not 300. So I created an ad myself, put the full page ad in Runner's World magazine. And within a few years had made my first million dollars. And that got me inspired to try some other products. And they all seemed to work. And eventually that became a catalog, 200 stores and an online business. That was quite a fun career for 40 years.

Doc G (04:39):

You were in the midst of building a business. Were you interested in equities at the same time? As a young man, 23 years old, were you also looking at the stock market?

Richard Thalheimer (04:48):

In my book, The Sharper Investor, I do briefly mention that in college, I tried trading some things doing what a lot of people do, which is just watch the flow decide, oh, I think crypto's going to go up this week, or I think gold's going to go down and up this week. And I managed to lose about $60,000 pretty quick. And back then, gee, that would be losing millions today for me at that time, I had no money. Yes, I tried a few things even in college.

Doc G (05:17):

So you go on to have this amazing career. You get out of The Sharper Image, what? In about 2006. Eventually you end up where you are today, which is an active and avid investor and trader. Tell me who were some of your influences early on? Who did you learn about trading from?

Richard Thalheimer (05:37):

Honestly, I can't say that anyone taught me, I think this was trial and error. There's a joke about that you learn from experience, but you get the lesson before you get the experience, or you get the experience before you get the lesson. And in my case, it was the latter. I got the experience before I got the lesson, I lost the money first and then I got the lesson. Trial and error, but over 40 years I figured out something, I'm 73 now. So I've had a lot of time to practice.

Doc G (06:05):

No one sticks out as someone who you looked at as a role model, or someone you started studying early on and said, okay, I should do things the way they do it?

Richard Thalheimer (06:14):

About 20 years ago, a book came out called, One Up on Wall Street by Peter Lynch. That is a Bible for me. A lot of people follow Warren Buffet and Benjamin Grahams' writings, but I follow Peter Lynch. And one of the things Peter Lynch has really emphasized, he achieved a 30% return every year during his 15 years of Magellan Fund. He said, pick good companies that you know, that you understand, that you have a personal experience with. Pick those companies and hold them through thick and thin, and don't sell when the market collapses, which it will. He said every year or two, he said, you'll see a market collapse, just hang tight, buy the right companies. That's coincidental that I mentioned that, because that's what we're living through right this moment, as you and I talk.

Doc G (07:06):

Let's talk about this idea of picking good companies. I'm going to quote you from your book, The Sharper Investor. You say, "We're not going to talk about evaluating financial statements. We're not going to use complicated ratios. We are not going to assess performance charts. And we're not going to predict market movements. I'll leave it to all the other excellent books available to teach you those other things, but we don't need them anyway." So what you're really talking about are all these quantitative measurements. Why are the quantitative measurements not important in picking good stocks? Because I think that's the basis of your strategy, starts with picking the right stocks. Why do the numbers not matter?

Richard Thalheimer (07:45):

Let me use the cliche that there's a lot of ways to skin a cat, meaning those approaches might work for somebody, I'm sure somebody understands those and uses those and makes money with those. But I'm not doing those, I'm doing mine. And it's not necessarily better, it's just one I understand. I don't understand the others. I didn't take physics in college, and I did take sociology and psychology. So I understand market trends, I understand product appeal. I understand good marketing. I understand good customer service. Those are all the traits that helped me make The Sharper Image a success. So I live for companies that have those traits and use them today. For a real life example, we all go to Chipotle Mexican Grill. Chipotle's been extremely successful the last five years since Brian Niccol, the CEO moved from Taco Bell to Chipotle. They got rid of their food poisoning problems.

Richard Thalheimer (08:47):

Nowadays, I think almost everyone can say, it's a pretty successful business. It's real clean. They have a great digital app. They're developing drive through lanes. We like the food well enough. So I can say with certainty, Chipotle is a good company to put my money in as a stock investment. So for me, that's exactly what I do. Let me mention one more real quick. How about Amazon? Have we all not used to Amazon the last five years? Of course, we have. We love Amazon. They do an amazing job of giving you selection, price. And if you pay for the prime membership, they give you free delivery all year. It's unbelievable to me. And by the way, both of those two stocks are way out their highs of last November. Is this a good time to buy into them? Yes.

Doc G (09:40):

It's interesting because I think what you say makes a lot of common sense, on the other hand, I think it flies in the face of the traditional experience and suggestions of financial experts. I think mostly they say, well, you've got to understand the balance sheet. You've got to understand historically how the numbers line up, and why. Has this ever blown up in your face? Have you ever used these kind of criteria to decide on what you think is a good stock and come back later and say, man, you know what? I really wish I had looked at the numbers a little more.

Richard Thalheimer (10:17):

I wish I could say that you got me, but I can't. It hasn't really blown up in that sense. The only thing that has been a problem with my strategy is that I'm in a taxable account. And I think all your readers should just pause for one second and understand. If you're in a taxable account, and especially if you live in New York, California, you've got basically a 50% penalty if you decide to cash out. So you read in the headlines of the newspapers. Oh, so and so fund manager predicts that this spring will be a tough time for the market and they've moved half their investments back to cash. Well, as a private investor in a taxable account, you cannot move half your investments back to cash, unless you want to give up 45% to the government in income tax. So what you do instead is you tend to sit with the position which I do. And then when the market swoons like it has this March, you get hammered. But if I want to lose 45% in taxes, or 40% in a swoon, what's the difference? It's all the same. So to answer your question, no, I don't really worry about the numbers.

Doc G (11:30):

Let's talk about your formula. You break it into a few components, and again, I'm going to quote you, you say the formula has three parts. We're going to choose the right stocks. We're going to sell, put options that are a week or two out, and then we're going to buy call options that are two years out. There's a lot of nuance to discuss there. I think we need to get specifically into what options trading is and what are calls and puts. But I want to stick with the first part just briefly. You talk about the right stocks. We've briefly talked about this idea of stocks that logically make sense to you. Is there a checklist or something you go through when you look at a stock to decide if it's going to be one of the ones you invest in, is there some specific criteria that you enumerate before you buy in?

Richard Thalheimer (12:22):

After being at The Sharper Image for 40 years, I do it so intuitively that I can't say there's a formal checklist, but because you've asked, let's think about it for a second. Apple's a great example. Amazon's a great example. Home Depot is a great example. And what are they? They're all market leaders. They're the number one in their field. Google is the number one in its field, right? Number two, they've had a history of success. So history means something to me. It may not be that I'm looking at the numbers that hard, but I do know that they've been successful in their business. I do know that they've generally grown their earnings and revenues every year. So in that sense, I'm looking for market leaders with a first mover advantage that have a solid history of success. We're not speculating here on marginal players or not even startups, really.

Doc G (13:13):

So you're talking established companies. What about leadership? Does leadership change your opinion of whether you want to buy a company or not?

Richard Thalheimer (13:20):

It's so funny you ask that. One of the things I do every day, Doc, is I watch CNBC on my computer or on television, the financial news channels, CNBC, and all day long, they'll have interviews with CEOs of various companies. And a lot of times I'll get interested in a company like Nvidia, the chip maker, Nvidia. I'll get interested because I see their CEO on an interview. And I think, wow, what an intelligent person who sounds exactly like what he's doing is going to work. And I'll just contrast that real quickly. I can't remember the company. I was listening to one the other day and the CEO was on and he honestly sounded like he was BSing me. I just didn't believe what he was saying. And the company had not done particularly well, but I didn't like his interview. And I immediately went to my portfolio and I've got like 40 positions and one small one was his company, and I immediately sold it, because I wasn't going to hold a position where the CEO sounded like he was dithering on air.

Richard Thalheimer (14:21):

The people matter, let's say Tesla is the most glaring example. I love Tesla. I made up millions of dollars off Tesla, and it's a great example of a product that struck me as being great and then I bought the car and that struck me as being great. Then I bought a second Tesla and that was great. So I love Tesla. I made a lot of money off of it. It's also way off its highs right now. But Elon Musk, the leader is so essential to that company that if Elon, for some reason fell out of the picture, I'd really question whether I'd want to hold the stock anymore.

Doc G (14:58):

All right. So we talked a little bit about what makes up good stocks about the companies, about the first movers, about the leadership, et cetera. I want to get into the actual trades. You suggest mostly options trading. For those of us listening who don't know much about options trading, what exactly is it?

Richard Thalheimer (15:19):

Let's make it real simple. I want to talk about calls not puts for the moment. Puts are more complicated. Calls are very simple. You are buying the right to buy a hundred shares of stock and you're paying a premium. And it's exactly the same as if you drove past a vacant piece of ground, a lot near your house, and there's a sign on it, that lot says for sale a million dollars and you decide, I don't need to put up a million right now. I don't even have a million dollars, you might say. I'll just put up a hundred thousand dollars for the option to buy it in two years. So I'm in control. No one else can take it. I can think about it for two years. And then when the two years is beginning to come around, you can decide if you want to exercise that option or not. That's so simple. So understandable. There's plenty of fancy option trades. This is the simple one, the easiest to understand, and anyone can do it.

Richard Thalheimer (16:23):

You look up options for that stock. You go two years out, and you pick a price about 10% higher than what it is right now. So instead of a million for that piece of land, say 1,000,001, that's called your strike price. And now you've got two years to decide if you want to buy it for 1,000,001. You could pick a million dollars for the strike price. Doesn't matter. Just the option's a little bit cheaper if you pick a price that's about 10% higher than the current price. So there's an option right there. And let me give you one quick math example. This is fun. Let's say the price of that lot doubles over two years. If you had put up a million dollars at the beginning, you can now exercise your option and sell it for two million. And you've made hundred percent. You put up a million, you sold it for two million. You doubled your money. You made a hundred percent.

Richard Thalheimer (17:15):

But if you had only put up a hundred thousand dollars for the option, and you exercise it in two years, and you sell it for two million. Well, I think you've made about a million $900,000 because you got the two million, but you paid a hundred thousand for the option. So you netted 1,000,009, but you only put up a hundred thousand dollars. So you made 19 your money. I can hardly even compute that percentage. I think it's 1900% on your money instead of a hundred percent. Wow. And can I just add in one more quick math example.

Richard Thalheimer (17:49):

Let's say it dropped in half at the end of two years. Now, the lot was only worth $500,000. You paid a hundred thousand for the option. You don't exercise it in two years because why would you? It's dropped. You don't buy it for a million when it's only worth 500,000. So, what did you lose? You lost the $100,000 you put up for the option. What if you had paid a million dollars up front? Now the lot's worth $500,000 at the end of two years, how much did you lose? You lost $500,000. So if it loses a lot, you'd rather have the option. If it makes a lot, you'd rather have the option. Not bad.

Doc G (18:29):

Sounds like a win-win. So let me get this straight then. So the option is a legal agreement to buy or sell something in the future at an already pre-specified price. And in order to buy that option, or legal agreement, you have to put up some amount of money, which is less than the thing it's costs. Is that explain it?

Richard Thalheimer (18:52):

It's exactly right. But in the case of the call, it's only one way, you have the legal right to buy it, you don't have any right to sell it. You've got the legal right to buy it at any time, at any time, any day, now you don't have to wait two years, any day for up to two years at a specified strike price, which we decided that lot was a 1,000,001. And for that, you put up that premium at the beginning. And the neat thing is, that's all you can lose. You put up the hundred thousand dollars option, let's just say, that's all you could lose. Now, if you bought the lot at the beginning for a million dollars, you could lose a hundred thousand, you could lose 200,000, you could lose 300,000. With a stock, you could lose everything. The stock could go to zero. It could go bankrupt. They don't usually go to zero, but there's a lot of stocks right now that have fallen 75% since November some of these high flyers. So when you buy an option, you fix your loss upfront. One big advantage.

Doc G (19:50):

When it comes to your formula, it's pick good stocks, buy calls that are two years out and sell puts that are a few weeks out. I want to get into the difference between a call and a put, and why those timelines. Let's start with the calls. Why a two year timeline for the call. Let's get a little more granular again. I think we have to repeat this a few times. So this is going to sound like you've said it already, but I think for people to understand it, me included, we have to hear it a few times. Why a call two years out?

Richard Thalheimer (20:22):

It's funny. Most people I talk to about options that have tried doing it. They always go for a call option that's two weeks out, or a month out, or three months out. So in other words, they're betting that they can guess that the stock will go up in the next two weeks, or the next month. But why would you give yourself such a short timeframe? Why not take advantage of the longest out option you can buy? Which happens to be two years. And the answer, I'll just give it to our readers, is that, our listeners, the answer is that a two year out option will not reward you quite as richly as if you could guess the movement in two weeks, just happens to work out that way. But it's impossible to guess the movement in two weeks, I can guess the movement in two years, I think, I'm optimistic, but I don't think I can guess the movement in two weeks.

Richard Thalheimer (21:16):

Let's take Chipotle right now. The stock is a great stock. It's a great company. It's beaten down right now. It's fallen a third from its highs in November. Can I tell you it'll go up in the next two weeks? No, that depends on oil, interest rates, the war on Ukraine. It depends on way too many things in the next two weeks, but can I guess that it'll go up in two years? If it's a third off its highs from six months ago, do I think oil, Ukraine, interest rates will become less of a crisis two years from today? You bet. I may be wrong, but I'm willing to put my money on it.

Doc G (21:58):

So let's make up some numbers. Let's say Chipotle is trading for a hundred dollars, because it's a nice even number. And let's say that is down, as you say, from what it's been, you can buy an option and say I'm willing to pay a $110 in the future, up to two years in the future for it. And in order to have that right, you're going to have to put some amount of money down. Let's say 10 to $20 down, say here's my 10 to $20. This gives me the option to buy Chipotle at 110, although it's only a hundred right now, sometime in the next two years. We wait six months, Chipotle goes up to 150. It was at a hundred, it went up to 150, we have the option to buy it at 110. What happens then? What are your different options of what you can can do with that option?

Richard Thalheimer (22:52):

One of the great things is that you have a choice in this situation that you've identified. One is you could just cash out. If it had gone to 150 and you paid $15 to the option, you've made 10 times your money. If you had bought it for a hundred and it had gone to 150, you made 50% on your money. I'd much rather buy for 15 and have it go to 150 and make 10 times my money.

Doc G (23:22):

Can I interrupt you for one second? When you say cash out, help me understand for people who've never done this before. Does that mean you are selling the option, or does that mean you are exercising the option, getting the stock and then selling the stock?

Richard Thalheimer (23:34):

Okay. So I would never exercise the option. All I would ever do is cash out, or in other words, sell the position entirely. So a year goes by, the stock goes to 150. I sell it for a 150. I'd only put up 15. I made 10 times my money and I'm thrilled, but I'm in a taxable account. It's a short term taxable gain. In California that's a 50% tax bite. So what do I do instead? I just sit on it if it's in the green, and wait for the two years. And what happens at the end of the two years, the expiration strike date, what happens? It automatically rolls into the stock, tax free. And now I own that number of shares as stock instead of calls.

Doc G (24:22):

And you paid 110 for it, even if it's worth 200, 250, 300, now it doesn't matter because you have an agreement to buy it for 110.

Richard Thalheimer (24:28):

Glad you mentioned that. So I bought it for 110. It's worth 150. It shows an immediate green profit in my portfolio of $40 per share. I paid no tax at all until I decide to sell.

Doc G (24:41):

So if you were doing this in a Roth IRA, or if you were doing it in a 401k, you may decide to just sell the option because you're not worried about the tax consequences. But since you yourself tend to do most of your investing in a taxable account, it makes more sense to wait out and then eventually exercise the option because you believe in this company, it's a great stock. You now own this great stock. You got it at a huge premium. And then you have the choice to sell it whenever you want to and decide to take those profits when it's time.

Richard Thalheimer (25:13):

Let's pause and just reflect on the thought I read in The Motley Fool once, which I think I've mentioned it somewhere in the book, "The best holding period is forever." I love that. If you have a great company, you have no reason to sell, people get antsy, they want to take their profit and prove to themselves they have a profit, and they do [inaudible 00:25:36] it. And there's nothing wrong with taking a profit. Jim Cramer says, you never go broke taking a profit, but if you had put $10,000 into Walmart when it started, Walmart the store, after all these years you'd have $70 million. So the best holding period is forever if it's a good company and you still believe in the strategy, if you don't believe in it anymore, if it's changed, then you might want to consider selling.

New Speaker (26:06):

The other part of your strategy is selling puts that are a week, or two out. I find the understanding puts is much more difficult for me than understanding calls. So tell me about why this strategy and what that means. What does it mean to sell a put?

Richard Thalheimer (29:23):

I can't blame you for being a little bit confused by puts, that's the part of the option world that people have trouble with. So let's try and make it as simple as possible. The stock is a hundred dollars today. I'm selling you, someone out there, on E*Trade or Ameritrade, I'm selling someone the right to put it to me, or to sell it to me in a week for $90. And what do I get for that? I get a premium. Say they give me a dollar a share. So you hand me a dollar and I give you the privilege, the right to sell it to me or put it to me in a week or two for 90.

Richard Thalheimer (30:08):

Now the next question should be why in the world would you do that? Why would you sell me the stock for 90 if it's a hundred dollars today? You'd lose $10. But evidently you think that in two weeks, it's going to drop to 90. You must think that. You must know something or you have a hunch. So I would not do this in a declining market like we are facing today as we're taping this, this is the middle of March 2022 and the markets have gone down steadily for three months. Never sell puts in a declining market. You get burned. It might go to 90 in a week or two.

Richard Thalheimer (30:47):

However, in a market that's relatively stable, meaning it's hasn't changed that much over the past month or two, or it's even going up like it did the last two years. Generally you could guess that it probably will not drop from a hundred to 90 in a week. Why would it do that? So you collect this dollar, two weeks comes by, it's over, you just made a dollar a share and you didn't do anything except bet. And the last PS on that thought is, wow, what if it drops to 90 on the last day? And you sell it to me for 90, not bad. I just got the stock at 10% off. It's one of my favorite stocks. Love it.

Doc G (31:29):

It seems to me that dealing with puts is a little bit more risky, especially than dealing with these long term calls. Tell us about some of the risks with puts. And I think you have to put a little more money up too. Where's the call? You put up maybe 10% of the strike price. It's a little different with puts.

Richard Thalheimer (31:46):

Yeah. And thank you Doc, for having read the books, you understand this already. So real quick, you have to realize this important fact, when you buy a call, your loss is limited to the money you put up that day. You put up your thousand dollars, that's all you can lose. When you sell a put, you're obligated to buy it in a week or two. And if it dropped from a hundred to 60, which it probably won't, you're going to lose a lot of money because gosh, it just lost 40% of the stock value. So we don't even need to look at the numbers. I can just tell you.

Richard Thalheimer (32:22):

When you sell a put, your loss is unlimited in theory. When you buy a call, your loss is limited to what you put up. So for the beginner investor, it's a lot simple to say, hey, I'll put $500 or a thousand dollars into this call position betting that it'll go up over two years. And I got two years to wait it out. That's all I can lose. I could never lose more than that. Put, your loss is unlimited. So that's a bit riskier.

Doc G (32:47):

And don't you, because your loss can be unlimited, don't you have to put a lot more money down even to make that bet in the first place?

Richard Thalheimer (32:55):

Another good point. Thank you for mentioning that. Selling puts requires more cash upfront than buying a call. So if you're starting with not too much money to risk, or you just want to do a small amount and not lose too much to start. When you do calls, when you buy calls, you can do it with less cash by far. Puts might take up five, 10 times as much cash. And why is that? And why is that still a good to deal? Because betting that a stock will not drop 10% in a week is a pretty safe bet in general, in a stable or rising market, you could feel confident. Apple's not going to drop 10% in a week.

Richard Thalheimer (33:34):

So therefore if you work out the numbers, and we show you in the book how to actually do the mathematical computation, what you'll find is the return on your investment is still a 90% return on your investment, even though you're putting up more cash. It works out mathematically, partly because you're only doing it for a week or two. So you may get a low rate of return, but you got it in a week. When you buy a call, you may get a higher rate of return, but you had to put your money in for two years perhaps to get it.

Doc G (34:02):

So with the put you make money in one of two ways. If you have a stock that's at a hundred dollars and you sell the put at $90 strike price and it doesn't make it to $90, you get that upfront premium, in this case, a dollar for each lot or share, what have you, or the other way is maybe it does go to 90 and you allow the stock to be put on you because you think this is a great stock, and I would love to own it at 10% down from what it is today. And then you eventually wait it out. So it goes back up and have the ability to sell it or trade it at that point.

Richard Thalheimer (34:38):

And that is exactly correct with the small exception, it will get put to you at 90. You're not allowing it, the seller has the right to do it and they will do it. When I say the seller I mean, selling the stock, I'm the seller of the put. So let's get the terminology straight. He bought the put from me. He bought the right to sell it to me and he is going to sell it to me, because if the stock drops to 89 and I have to buy it at 90, he's going to make a dollar on every share. The stock [inaudible 00:35:08] to 80, he's going to, or she is going to sell it to me because they're going to take an $80 stock and sell it to me at 90, they'll make $10 in every share.

Richard Thalheimer (35:17):

And we can't forget the fun adage that Jim Cramer always says. He says, the funny thing about investing is that you buy a stock you love, you love the company. You love the price you bought the stock at. Now it hits a downdraft in the market and the stock is off 20%. Should you buy more? He says, of course you should. It's like you went in the department store and everything's on sale for 20% off. Why wouldn't you buy a little more? You should be happy to get it at 20% off. You should be happy it got put to you at 90.

Doc G (35:50):

So tell me why this mixture of long calls and short puts is good to use together? Why have you found that you get better returns if you do them in concert with each other, as opposed to just sticking, let's say with only long calls?

Richard Thalheimer (36:05):

For this one simple reason, buying a call requires that the stock go up. If the stock was still a hundred dollars in two years, you paid a premium, let's say $15. And in two years, you're not going to exercise your option to buy it for 115, because it's still a hundred. So all you did was lose your $15. So you could lose your entire investment if the stock was more or less the same. With a put on the other hand, if the stock is more or less the same in two weeks, you made and kept the premium that you got when you sold the privilege to someone else to put it to you in two weeks, if the stock drops enough to move it all. So two different bets. The put is betting that the stock won't drop too much in two weeks. The call is betting that the stock will go up at some point in the next few years.

Richard Thalheimer (37:04):

I like both bets. They're just a little different, and they're both fun. And investing has got to be fun. We sit at our computers, we click, we make money and these are two different, it's like playing cards, there's just two different games. Both are tremendously satisfying when they work.

Doc G (37:20):

And at minimum, what I get out of this conversation, reading the book, is that calls tend to be safer and you should definitely not sell puts in a environment in which prices are dropping. Are those two good rules. Because I think I took those very big rules out of reading the book.

Richard Thalheimer (37:39):

Good summary.

Doc G (37:41):

So you said investing should be fun. Let's have a little fun here. Tell me an audacious story of a win and a loss using this strategy. Tell me one of the big wins and then tell me one of the big losses you've had by using this strategy.

Richard Thalheimer (37:56):

Well, let me start with the losses first, because the losses have been so dramatic. Most stocks hit their high of the past year, the end of November. So that capped about a two or three year run in the market, which was truly amazing. And the success was easy to get whether you were selling puts or buying calls, both tended to work really well. And let me just remind everyone, you don't have to wait till the end of a two year expiration to feel you made a good trade, a call. Every single day, that call will track the stock. So when the stock goes up 1%, the call option will go up almost 1%. It may not track exactly 1%, but pretty close. So every day you're seeing your call positions go up, your account's getting flushed, you're getting greener. And for me, this happened dramatically, is I saw, gee, from five years ago, I saw this 60 million turn into 300 million just from watching things grow, selling puts and buying calls.

Richard Thalheimer (39:04):

So the biggest success has been across the board, just watching the call strategy and selling puts weekly also and making a lot of money every week, because the market wasn't dropping 10% a week. The biggest losses have occurred that past month or two. And oddly enough, it's across the board. People say, oh, it's these high tech flying stocks that have dropped a lot. That's not true. Amazon hit $4,000 almost last November. And today, what is Amazon today? 2,400 or something. Let's just check while we're talking. It's just amazing how some really good companies have dropped since November. And then we should touch on the subject. Well, what do you do then? Whether it's a call option that's dropped, or a stock that's dropped, what do you do? Amazon today's 2,718. It got up to almost $4,000 last November. So it's lost over 25% of its value. Chipotle got up to 1,900 and now it's 1,300. So it's dropped 600 out of 19. It's dropped about a third. Tesla got up to about 1,300 and is now 800. So it dropped 40%.

Richard Thalheimer (40:18):

And these are really good companies making money. Apple was up to a 190 almost, now it's 157. These are good companies, these are not fly by nighters. RH is my favorite example, formerly Restoration Hardware. I love RH. Got up to about 650 last November when they reported their last earnings. They've continued to have nothing but success in their earnings, their outlook, their revenues, that $650 stock is 325 today. Exactly half of what it was six months ago. And all they've continued to do is demonstrate success. You asked me what are some of my greatest losses, honestly, sitting with these positions during the last two months.

Doc G (40:59):

That's interesting, because we feel based on what you've told us, and certainly it's clear that you feel that those losses most likely will be temporary, most likely these companies, which are good companies, will eventually rise back to the levels they were at before.

Richard Thalheimer (41:17):

That's one of the biggest dilemmas every investor faces, what to do in a declining market. And you get two choices. One choice is you say, I'm running out of cash. This is my retirement fund. If I lose any more, I'm going to be really hurting. So I have no choice. I'm going to sell out at the bottom and take the cash. And people do that. It's a very rational choice when you're getting squeezed. The other choice is to say what, honestly, most smart investors would say, don't sell at the bottom.

Richard Thalheimer (41:51):

Your goal is to buy low and sell high. So if you sell at the bottom, you're doing the opposite, you bought it higher and you're selling lower. Clearly that's not going to make any money. The question really is, do you have the internal fortitude? Do you have the personal disposition? Do you have the emotional stability to hang in there and live through that down market, when your balloon that was so nicely inflated to full has now deflated to where the balloon looks like a birthday balloon three weeks later? And you're feeling so hurt emotionally. And I feel the pain too, but you learn over the years, you will do better to wait. Don't make any sudden moves. If you have to, sell a portion, don't sell it all.

Doc G (42:38):

If you are being a sharper investor, like your book suggests, it's probably a great time to start thinking about buying some of those long term two year out calls.

Richard Thalheimer (42:47):

And in fact, that's exactly what I've been doing. I'm glad you mentioned that. And in fact, some of the positions that got put to me over the years, I kept because I didn't want to pay the tax. So I owned a lot of stock in those companies, or the call was in the money for two years and it eventually expired, and the call automatically rolled into the stock. So in either situation, whether it got put to me at a low price, or whether the call expired and the money and I took the stock. Either way, I've ended up with a big stock position. So what have I done the past month? I've actually cashed out, sold some of those stock positions. I was not happy that they were deflated from what they were three months ago, but I've got a lot of cash, which I've put back into the same number of shares as call options. So now I'm controlling the exact same number of shares I just sold, but I realized a lot of cash because I can buy the call options for 15% of what the stock costs.

Doc G (43:41):

I want to pivot this conversation, we've been talking about your strategies for investing. Really, we've been talking about the how, I want to move to a different subject, the why. So if I'm correct back in 2006, when you left Sharper Image, I imagine at that point you had a certain amount of wealth accumulated, why not be conservative with your money? I find it quite interesting that at that point where you're probably doing pretty well, why decide to double down and do some of these things that cannot be described as conservative.

Richard Thalheimer (44:14):

Right. Yeah. Certainly a lot of advisors have commented to me that I should quit at my age, risking my nest egg in doing this. And I guess the only answer I've got is to me, it's part of being alive. It's so stimulating. It's so much fun. I'm sure there's other people like Warren Buffet who's in his nineties, or Carl Icahn, who's in his late seventies, or early eighties, who could say the exact same thing. Why are they still in the game? And the answer is it's tremendously satisfying and mentally stimulating. And I want to encourage all of us to do something, to keep our brains working as we get older. You're a doctor. You could probably appreciate that.

Doc G (44:57):

Let me turn that around on you though. Someone who's listening to us could criticize and say, well, it's easy for you to say this is stimulating for you, but is this strategy right for people who may not be starting with as much money, or people who really are dealing with the retirement accounts that needs to produce a certain amount to be available so that they can retire and support themselves? Is it a different game per se, for someone in your position than from your average Joe or Jane investor?

Richard Thalheimer (45:27):

It is. You're correct. And I want to make the point clearly. A good guide would be to only invest or to only play with what you can afford to lose. And if you're going to be truly compromised or bankrupt or out of your house, don't do it. Pick the amount of money that you feel comfortable losing.

Doc G (45:49):

Tell me, Richard, as you've been quite successful over the last decade, using this strategy, what does enough look like to you? Is there a point where you'll say, okay, I'm putting my cards down. We're not going to be using these strategies anymore. How do you know when you've gotten "enough?"

Richard Thalheimer (46:11):

So funny you say that, I ask myself that ame question many times. My lifestyle hasn't changed the one I had over the five years, even though my net worth has gone up by hundreds of millions of dollars. And not bragging, I feel very fortunate just to say, hey, I've got a system and it works and I'm trying to share it with everyone else. That's why I wrote the book. How much is enough? For me, it was enough of long time ago. I'm just doing this for the fun of it. There are people who make the mistake that they spend everything they make and more so they go out and they buy a jet airplane, they buy a $50 million house in Beverly Hills. And I don't quite understand that approach, that's not me. So enjoy playing with the part that you can afford to lose if it goes wrong. And if you make a lot, don't spend all of it.

Doc G (47:03):

So tell me, there are a lot of people right now who are considering, are interested in options, buying and selling. Obviously we can push them to take a look at The Sharper Investor, but what are some other resources, if you're interested in investing the way you do that people can look for. What's a good way to learn, not only about how to options invest, but also to start considering what could be a good stock or not.

Richard Thalheimer (47:29):

Let me mention three or four things real quick. One is my website, thesharperinvestor.com. Thesharperinvestor.com has a blog that gives out a little bit of information every week or two. As far as stock picks, you can be good at picking stocks yourself, or you can subscribe to one or two of the best services and probably the two best are Action Alerts PLUS, just google it, Action Alerts PLUS, that's about 400 a year, or The Motley Fool. Everyone's seen advertisements for The Motley Fool. That's actually a very good one also. And then watch CNBC, the satellite newsfeed on your television or computer, it's free, cnbc.com is their website. And they have a pro-section for $70 a year or something, a $120 a year, that's really good. And then on CNBC, Jim Cramer has started a new investing club called the Jim Cramer Investing Club. And that's about $350 a year.

Richard Thalheimer (48:25):

Everything I mentioned is not very expensive, there's newsletters out there for thousands of dollars a year. So when you can get absolutely first rate, stock picks and information for a few hundred dollars a year, gee, you've got it covered. And last but not least, if what I'm talking about is a little confusing, go to investopedia.com, just google it, Investopedia. That's a great source of information like what is a call option? What is a put option? Investopedia. So there you go. There's some quick resources that'll get anybody started.

Doc G (48:59):

Richard, I wanted to thank you for coming on this show. As I mentioned in my introduction, I think we all have limiting beliefs about what we can and can't accomplish in investing. For me, I somehow got this idea in my mind that making more than 6% was impossible, which is preposterous knowing what I know now. I've definitely heard and also believe in a sense that the easiest way is to match or meet the market. But as time goes on, I realize that these limiting belief get in the way of us exploring other opportunities. And so I wanted to have you on to talk about your investment formula, because I think we need to know and learn more about these other opportunities, assess them, and then see if they're right for us. I wanted to end this episode the way I end every episode by asking you, what is up next in your life? And specifically, if people want to buy your book, where they can find it?

Richard Thalheimer (48:59):

New Speaker (49:59):

What is up next in my life? I look forward to traveling and going to dinner again. We've lived through a difficult two years, really crazy. Go to Amazon, put in The Sharper Investor it's there. And the fun part for me was doing the audio book, which I dictated myself. So you actually have my voice talking for however long it is, an hour and a half, whatever. And going through this. It's a really fun audio. Walk your dog, learn how to make some money. (Visit TheSharperInvestor.com for more information or go to amazon.com and type in The Sharper Investor.)

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