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Mutual Fund News

ME AND MY MONEY

Special to The Globe and Mail

FRED HERMESMANN

AGE: 71

OCCUPATION: Retired accountant

PORTFOLIO: Invests in options on: Agnico-Eagle Mines Ltd., Barrick Gold Corp., Goldcorp Inc., Bank of America Corp., Dow Chemical Co., Yahoo Inc., Google Inc., Potash Corp. of Saskatchewan Inc., Agrium Inc., Mosaic Group.

INSPIRATION

On a recent trip to Melbourne, Fred Hermesmann was captivated by the slogan on the city's streetcars, "Think + Create," because he says that's exactly what he does. "We live in an information age. Many people do not know how to use the information for their benefits, but that's how you create value."

HIS INVESTING MISSION STATEMENT

"To earn consistently a higher return on invested capital than what is normally available for everyday investors."

HIS APPROACH

Focusing on a handful of stocks, Mr. Hermesmann sells naked puts. In plain English, he sells to others the right to require him to purchase a stock from them at a predetermined price for a set period of time. He sells that option at a strike price - what others could force him to buy their stock for - that is lower than the market price, or "out of the money." If the stock price doesn't hit that level by the time the options expire, the money he received for selling the put options is all profit.

IF HE'S CALLED

If the stock price does fall below the strike price and he's forced to then buy the stock, he'll then sell an out-of-the-money call option. This earns him a fee for agreeing to sell the stock at a price above the current market price.

IT'S ALL BUSINESS

Good accounting controls are vital in a good stock-option strategy, he says. He keeps track of the option premium, margin requirements and profitability for each stock. "The accounting method I use is similar to the ones used in any successful business, and each stock is like its own profit centre to me."

HIS LIMITS

Mr. Hermesmann only puts a small amount into each stock, plays stocks from several different sectors, and overall, "I limit myself to what I can afford to lose."

HOW HE'S FARED

When his approach is working, Mr. Hermesmann says he can make decent single-digit returns in just a matter of weeks, but he needs a flat or a slowly rising market. When the market is volatile, stocks simply fall too far and too fast.

BEST MOVE

With gold stocks following the price of gold up last year, his option strategy worked well with Barrick, Goldcorp, and Agnico-Eagle.

WORST MOVE

Last year he lost money on a number of stocks, including Google Inc. and Potash, when they dropped precipitously. "When a stock like Google drops 30 bucks in a day you have to get out fast."

ADVICE

"A lot of people retire and they're not active any more. Investing keeps you active and keeps you mentally alert and gets your brain exercise."

E-mail tony.martin@sympatico.ca to share your strategies

© 2007 The Globe and Mail. All rights reserved.

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