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The secret of Marlin's magic

When Marlin Travel was bought by Thomas Cook, founder Ken Marlin had time and money to play with, and used the Internet for advice, TONY MARTIN writes

It's likely Ken Marlin's name rings a bell, since it used to be emblazoned across the front of some 320 travel agent outlets across the country.

But in 1998, Marlin Travel was bought by Thomas Cook. Mr. Marlin was left with a lot of time -- and a good deal of money -- to play with. So the now-80-year-old, who operates with the energy and enthusiasm of someone half his age, turned his attention to investing, thanks to the Internet.

"You suddenly had the ability to analyze vast amounts of information," he says. "I started studying on-line investing, not so much from a desire to make more money, but because what drives me is that I really like to understand things."

He signed up and took the courses at http://www.Investortoolbox.com. Knowledge acquired, he was soon was helping others, and now about two dozen people gather weekly for meetings of the informal Marlin Mentoring Group.

"The last three years have been an excellent time for learning because it's been unpredictable and so you get to learn and read what's about to happen."

He typically insists most learning is done using play money. "The only way you really learn is to play the game, and if you use real money you won't make enough trades to learn."

One of his best bits of advice?

"I caution them against the attitude if 'If I'd done that I would have made this much money'."

A self-described Saskatchewan farm boy, Mr. Marlin learned early on what having -- and not having -- money meant. Raised in the Dirty Thirties, his father died when Mr. Marlin was just 14, and the next year his mother lost the family farm. "Obviously there were rich people who were always in a position to take advantage of opportunities, and poor people who couldn't get their head above water."

He left the farm and landed a job with the railway station greeting trains. In his off hours, Mr. Marlin soon was selling vacuum cleaners as well as savings plans, and, with a goal of becoming a millionaire by the time he turned 40, he was putting away 25 to 30 per cent of every dollar.

He joined First Investors Group in 1955, and later the executive team of the 1966 Principal Group, which was set up in 1966 and oversaw First Investors Corp. and Associated Investors of Canada. It was all part of Donald Cormie's Edmonton-based $1.2-billion financial empire, which crashed in 1987, leaving thousands of investors holding pieces of worthless paper.

How he does it

"The key thing is to realize that the market is uncertain and volatile and there is no pat answer," says Mr. Marlin, who has quickly moved from being a long-term investor to a swing trader who regularly uses options instead of stocks to play the market. The strategy he says, is one that makes sense given the times. "You can have a position and if you're uncertain about where the market is heading you can buy options. It's like an insurance policy."

Recently, for example, with many of the stocks he owned, he sold covered call options. For a premium, these give the buyer the right to purchase the stock from him up to a specified date at a set price, typically higher than the current stock price. If the stock rose to that predetermined price, Mr. Marlin had to sell the stock, but still enjoyed the capital appreciation. If the stock didn't rise past the set price, he kept the stock. The key, though, is that in either case, the premium he received for selling the call options was his to keep.

If he finds a stock he likes, he'll often approach it by selling put options. For a premium, he enters into a contract to buy a stock from another investor at a set price -- usually below its current price. If the stock doesn't get that low, there's no upside for the stockholder to enforce the contract and exercise his option to buy the shares, and Mr. Marlin keeps his premium. If the stock price does fall, he's usually happy to buy the stock at that lower level anyway.

But not always, as in the case of Nortel Networks Corp. When the stock was at $40 and John Roth was still telling the world all was fine with the company, Mr. Marlin felt he could take the former chief executive at his word and that $40 was a good price, so he sold some puts at $37.50, meaning he shortly was required to buy the shares at that price. His big mistake, he says, was taking the company's word, and ignoring the technical indicators, which were screaming "Get out!" he says. "I ignored them because everybody was saying 'Business is good'."

More recently, he's been riding the ups and downs of mainly large-cap U.S. stocks, including Dell, eBay, Peoplesoft, General Electric, and Amazon.com. "These stocks usually follow a trend, and I don't invest until they show which way they are going."

To figure out trends, every morning he taps the on-line tools at Investortoolbox.com. available to workshop students. "What I like is they make it easy to keep things simple, and that's one of the biggest challenges you face because it can get beyond what you can comprehend," he says. "Stock analysis can lead to paralysis."

He then moves on to shortlist stocks with strong fundamentals, meaning they are well-capitalized, have a good track record, and have a price-to-earning ratio in line with their industry peers. If he finds a stock that meets the above criteria, he's happy to find it dead in the water with no volume. When the volume and the price start to move up, he'll jump in and by call options.

Best move

Playing straddles this past spring paid off on stocks such as Oracle Corp. and Cisco Systems Inc. A straddle involves buying both a put and a call on the same stock at the same strike price, expiring at the same time. At its worst, you pay two premiums and two commissions, and stand to gain nothing.

However, regardless of which way the stock moves, if it moves enough, you can make back your commissions, replace the premium on the option that becomes worthless (the call if the stocks falls, and the put if the stock rises), and pocket some profits. For instance, he put a straddle on Microsoft Corp. and from early April to early May, earned a 65-per-cent return.

Straddles made sense, he says because "The volatility was low, and the market was moving sideways."

Worst move

"Thinking I was more diversified than I was," he says, something he only discovered when the Principal Group went under. "I found out I wasn't as smart as I thought I was. I had to fight to keep smiling but I didn't let it stop me. I just thought, 'Okay it's a new game, how do I win here?' ''

That explains why Mr. Marlin is a big believer in diversification. He has real estate through his home and a limited partnership in a hotel, and also owns a few funds.

Advice

"Invest the time and money it takes to really understand investing, or let someone else manage it for you. Don't think you can get rich if you don't understand it."

THE INVESTOR

Ken Marlin

Age

80

Occupation

Retired financial institution executive.

Investment personality

Conservative

Portfolio

TD Energy index funds, TD Precious Metals Fund, Fogg and Suds Restaurants, Templeton Fund, Trimark Fund, Sun Life Financial.

Portfolio size

Seven figures

Rate of return

"In last three years, 30 per cent over all."

© 2007 The Globe and Mail. All rights reserved.

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