My HELOC Stock Market Investment Strategy

Following several weeks loaded with transactions, I thought I would shed some light on why I am trading my HELOC account in such an aggressive way.

My HELOC Portfolio

I introduced this portfolio back on July 8th of 2010 and have since tracked its performance along side my BTI portfolio on a monthly basis. The HELOC portfolio is built using money borrowed from my Home Equity Line of Credit. This is as if I was trading on 100% margin. The interest rate is prime – 0.25% and is currently being covered comfortably by my dividend stocks DAY/PMT/AVF/AX.UN.

I started this portfolio because I believe the world economy will not be imploding or going anywhere anytime soon. I am not a doom and gloom guy and based on that belief 2010’s market uncertainty is an opportunity to be exploited.

Investment Context

I have a low commission promotion with my bank for a low of $6.95 a trade or a maximum of $9.95 per trade. This promotion will be ending in November and the commission will be back to $29.95 as it is usual of banks. Of course if I had 100k in investments with my bank, I would qualify for the low commissions by default.

I don’t have this kind of money and I doubt I will be able to quintuple my capital in such a short period of time as I am not a day trader and I am risk averse in my investments (relatively speaking to myself when it comes to risk tolerance :) which means I hate to put my money in energy stocks with risky fundamentals.

By the time my low commission bank promotion ends somewhere in November, I would like to be converting my portfolio into a dividend paying one and set it on autopilot which is currently in progress. However, instead of buying into dividend stocks from the onset and setting it on autopilot, I decided to exploit this money as much as possible to give me a head start in paying down the HELOC.

After all, the idea is to use the bank’s money and let Mr. Market pay it back in interest and principal.

Sector Allocation

I know that many amongst you would call me a fool for my sector diversification. Please take note that I am investing in the sector that I understand the most. I follow the energy sector religiously, spending several hours in research every week. This is my playground where I can maneuver into taking advantage of what I perceive to be opportunities for profit in the short or the long term.

Investment Strategy

I am currently leading my HELOC capital the same way a general leads an armored division. Volatility requires flexibility. The strength of an armored division lies in its fighting mobility in offensive and defensive battles. As such, market volatility and uncertainty is viewed as an excellent opportunity for buying and selling. My favorite buying days are when the index is deep in the red with triple digit losses.

You do not engage an armored division in static combat; you will waste its essence by grounding it. I cannot just sit with buy and hold stocks because this is not my money, this is borrowed money and I would like to maximize its earning capacity before settling into a dividend paying portfolio style.

An armored division is used aggressively in mobile attack operations. Once behind enemy lines, the armored combat group wreaks havoc on enemy rear troops and command centers before returning to friendly lines. If the unit fails to break through a sector of the front, you pull it back and throw it against another one. In the same way, my HELOC buy and sell operations aim at capturing profits by investing in what I perceive to be right opportunities for profit. If for whatever reason the profits fail to materialize, I will do my best to pull back my capital from this particular stock and invest in the next opportunity. As you may have noticed I have been very successful in shifting capital in all my accounts at no loss. Mr. Market has been paying all the commissions.

Luck! What Luck?

Although taking a hit every now and then is to be expected, so far I can proudly declare that I have not registered a single loss yet in my HELOC account. I must be doing something right since luck can account for so much. I have to reiterate that I do not invest in the oil and gas sector because it’s cool. I do it because it is a pleasure for me to research and learn about this sector. I spend several hours in research every week covering from management teams to the potential of a company’s drilling inventory amongst several other variables. I have annoyed more than once investor relations of certain companies with my incessant questions and calls.

Even with all of the above, I can humbly declare that I am no expert in the field. Many investors out there understand this sector better than me and easily outperform my results which is ok because I am not in a competition. To sum up my success formula it comes down to the following equation:

Success= Preparation + Opportunity + Execution

I will grant luck its place in all of this. I have been lucky we did not slip into a second global recession so far. Double dipping would be equivalent to a Russian winter striking a German panzer division at the outskirts of Moscow.

Final Thoughts

The year is not over and my past performance does not guarantee future results. I never leveraged the security of my family so even if the HELOC portfolio ends in disaster for whatever reason life will go on and my family will not be affected. I will feel much better once my portfolio is set on autopilot since dividends will take over and market noise will be ignored.