Grow your stock holdings with other people’s money (GOPM)

In my book The Confident Investor I frequently discuss GOPM (Grow on Other People’s Money). This is a key concept in building your stock portfolio while reducing your financial risk.

Let me show you a quick example of how this works.

You buy 100 shares of company A (perhaps one that is on the Watch List on this site) at $40 with $10 in stock broker commission, so you have invested $4,010. Over the course of a few months, the stock rises to $44. Your investment is now worth $4,400. The technical indicators make you think that this great company will have a short-term pullback in its stock price, so you want to sit back while the market moves against the stock price. However, you still want your money to work for you at this great company. You sell just your initial investment ($4,010) plus the selling commission of $10. $4020 divided by $44 means 92 shares (or a net of $4,048). Your principle is safe (plus $28) and you still have 8 shares of this great company. These 8 shares were bought with Other People’s Money. You have not invested one cent of your own cash in these 8 shares of stock. ¬†They are free!

Perhaps while the market is moving against company A, you buy shares in company B that is experiencing bullish action. This allows you to not have your money sit idle but rather continue to grow while you wait for company A to rebound.

Eventually, the indicators confirm that you should buy in again with company A. Perhaps this new position is $43. You reinvest your $4,048 minus $10 commission and buy 93 shares with $39 left over. You now own 101 shares for your original $4,000 investment with $39 left in your money market account. This $39 is earning interest in your money market account or could be applied to a different stock.

With this technique on a great company, over time your investment will increase and your downside risk will be minimized. However, it is important to remember that, with any investment, there will always be some degree of risk. By bouncing between several well-run companies, you can constantly keep your original investment capital growing even though some stocks are experiencing a bull market.

This is the just the first aspect of the techniques that are taught in my book. The real power lies in learning which companies are worthy of using GOPM. You could just trust my analysis on this site or you can buy my book and understand how you find truly excellent companies to consider for investment. The next tactic after finding the great companies is to anticipate the market and my book will help you with that as well.

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