Motley Fool Million Dollar Portfolio Holdings

A number of people have come to this blog recently, searching for a list of stocks in Motley Fool's Million Dollar Portfolio. The newsletter publisher is investing $1 million of its own money. For a fee of $500 a year, and $1000 renewal for each subsequent year, subscribers can follow Motley Fool's real stock trades.

Given the hefty fees, it's unsurprising that people are searching for a free list of Motley Fool's holdings. I doubt you'll find one, however, as it would almost certainly violate the Million Dollar Portfolio's terms of service. This is the reason I haven't posted lists of Motley Fool's recommended stocks in my reviews of Stock Advisor and Income Investor.

The best way to find out which stocks Motley Fool is buying and selling is to sign up for the Million Dollar Portfolio. I'm not a subscriber and have no idea what the Million Dollar Portfolio's holdings currently are. Nevertheless, there is publicly available information on many (perhaps all?) of the Million Dollar Portfolio's (possibly past) holdings.

As of 11/17/08, the below stocks are or have been owned by the Motley Fool. Click on the links for the source of the information.

Allied Irish Banks (AIB)
American Eagle Outfitters (AEO)
American Express (AXP)
Bed Bath & Beyond (BBBY)
Berkshire Hathaway (BRK-B)
Best Buy (BBY)
Buffalo Wild Wings (BWLD)
Capital Source (CSE)
Cemex (CX)
Copart (CPRT)
Exelixis (EXEL)
Infinera (INFN)
Intel (INTC)*
IPG Photonics (IPGP)
KHD Humboldt Wedag (KHD)
Legg Mason
Morningstar (MORN)
Pfizer (PFE)
Starbucks (SBUX)
S&P Depository Receipts (SPY)
Stryker (SYK)
Terex (TEX)
UMB Scout Small Cap Fund (UMBHX)
Under Armour (UA)

*Might be held in the new Motley Fool Pro.

Traditional Covered Call Writing vs LEAP "Covered" Call Writing

Writing Calls

Selling (writing) covered calls is one of the most conservative options strategies. I've talked about puts before, if you're interested. For those unfamiliar, a call is a contract on an underlying asset (like 100 shares of stock, a painting, car, house, etc) that gives the buyer of the contract a right, but not an obligation, to buy the asset at a certain price within a certain time. In exchange for this right the call buyer pays the call writer a premium.

There are two types of call contracts, covered and naked. A call is covered when the call writer owns the underlying asset. A call is naked when the call writer does not own the underlying asset.

Let's take a simple example. Suppose I have a painting, with a cost basis of $10,000. I decide that I'm willing to part with it for $12,000. I meet an interested buyer, Bob, but he's not sure he wants to pay that much. He wants some time to think about it. Fearing that another buyer may emerge or the price of the painting will appreciate while he's thinking about it, he offers to pay me $500 to give him the right to buy the painting from me for $12,000 within the next year. This is a covered call contract. I am the writer and Bob is the buyer.

There are several possible outcomes. Here are a couple. Suppose a few months after the contract is signed the painting's value appreciates greatly for whatever reason. Say its market price is now $20,000. Bob can now exercise his right and purchase the painting from me for $12,000. My profit would be $2,500 ($500 premium Bob previously paid plus the difference of the selling price and my cost basis). Bob would make a $7,500 profit (painting's current market price less the premium he paid me, less the sell price). Bob has another choice. Suppose he's merely a speculator with no interest in art. He can sell the contract to someone else, and that person can buy the painting from me for $12,000. My gain would be the same ($2,500). Bob's gain would be however much he sold the contract for less the premium he paid me. The third party's gain (or loss) would be the painting's current market value minus the sum of the premium they paid Bob and the $12,000 selling price.

Why Buy and Sell Calls?

The appeal of buying calls is readily manifest. If the underlying asset goes up in value within the time period specified in the contract, the call buyer can get great returns on a relatively small amount of capital. In the example above, Bob has made a $7,500 profit on a $500 investment. Should the asset fall in value, the call buyer doesn't have to buy it. His maximum loss is the premium he pays for the call. The owner of the underlying asset, on the other hand, can lose however much he originally paid for the asset.

Writing covered calls can also be appealing. It puts cash into the writer's pocket right away. If the contract expires without being exercised, the premium received is the call writer's profit. With regard to stock options, covered call writing can be a great way to generate extra income from your stock holdings.

For example, let's say you bought 100 shares of Verizon (VZ) at $32 a share. As I'm writing, Verizon is trading at $34.50. You can sell right now and make a $250 profit. But suppose you want to hold the stock for as long as possible. It pays a good dividend, its future looks pretty bright, etc. If you want to generate some extra "dividends" off of your position, you might consider writing calls. Suppose you think Verizon's share price will remain relatively stable between now (August 21st) and mid October. You don't think the share price will reach $37.50, but you're willing to part with the stock at that price. As I'm writing, the October '08 37.5 call is trading at 0.42 (or $42 a contract, as each option contract, usually, is for 100 shares).

Let's say you go ahead and sell the October '08 37.5 call. Right away, you pocket $42 (I'm ignoring commissions). In exchange, you've given the call buyer the right to purchase your 100 shares from you for $37.50 a share between now and October 18, 2008. If Verizon's share price at the contract's expiration is at or above the 37.5 strike price, your stock will be sold. Should this occur, your profit will be $592 ($3,750 selling price plus $42 premium received less your original cost basis of $3,200). If Verizon's share price does not reach $37.50 a share before October 18, chances are the contract will expire without being exercised. You'll get to keep your shares. Your profit will be the premium you received (note that if VZ's share price plunges during the period, say to $25 a share, you will have a paper loss of $700, which would be slightly offset by the $42 premium you received).

Writing Covered Calls Safer than Writing Naked Calls

Writing covered calls is considered a conservative strategy because you own the underlying asset. If the option is exercised, you simply sell the buyer your shares.

You may have surmised that naked calls can be much more dangerous. When you sell a call on a stock you don't have, you receive the same premium as the covered call writer. One advantage of naked call writing is that if the underlying stock plunges, you don't even suffer a paper loss. The danger, however, comes from the underlying stock going up in price. Suppose you sell the Verizon October '08 37.5 call for a premium of $42, as in the example above, but you don't own 100 shares of Verizon stock. Should VZ's share price go above $37.50 before the contract expires you may lose a lot of money. If the buyer exercises the contract, you have to deliver 100 Verizon shares that you don't currently own. You have to buy them on the open market. (Note that to avoid option assignment when the underlying stock's share price approaches the strike price, you can buy back the call--probably at a higher price--before it is exercised.) Suppose VZ is trading at $45 a share. You spend $4,500 buying the hundred shares. They are then delivered to the call buyer, and he pays you $3,750 for them. You've lost $708 ($750 loss offset by $42 premium previously received).

With a covered call, the most you can lose is your original cost basis on the underlying stock less the premium you receive for the call. With the writing of naked calls your loses are theoretically unlimited. Naked call writing is thus not for everyone. Brokerage houses often make you meet various requirements (in terms of your cash balance, salary, and trading experience) before they let you sell naked calls.

Disadvantage of Covered Call Writing

For the conservative investor looking to generate more income, covered calls are the way to go. One major disadvantage of covered call writing, however, has already been alluded to. After you have sold the call, you are sort of stuck with the stock until the contract expires or is assigned. In most cases, you have to buy back your call before your broker will let you sell your shares. Because near term option premiums are rather small, they hardly offset large drops in share prices.

Suppose, as above, you sell an October '08 37.5 call on your 100 Verizon shares. Recall that in the example your cost basis is $32 a share. Let's say there's some terrible news, a panic ensues, and over the course of the month VZ drops to $16 a share. Let's say you didn't sell your shares earlier in the drop because you thought they'd go back up (dropping stocks often have big rallies before falling further--look at a chart of FRE and FNM since January). Having to buy back the call also weighed on you. Well, as a result you've suffered a paper loss of $1,600, offset slightly by the $42 premium you received.

LEAP "Covered" Call Writing vs Traditional Covered Call Writing

Such a loss could have been minimized with a little less conservative "covered" call writing strategy. Instead of owning 100 shares of the underlying stock, you can own a LEAP call with a lower strike price. A LEAP call is a call contract with an expiration date longer than a year in the future.

Suppose that instead of buying 100 shares of Verizon for $32 a share, you buy instead one January '10 20 call for 12.42 (for a purchase price of $1,242). Between now and January 16, 2010, you get to control 100 shares of Verizon. You have the right to buy 100 shares of Verizon for $2,000. (Should you exercise this right, your total purchase price will be $3,242.) Rather than paying $3,200 for the shares, you spend less than half on the LEAP call.

As in the previous example, suppose you write the October '08 37.5 call, pocketing the $42 premium. The goal, if you recall, is to generate income without having to sell the underlying stock. If Verizon doesn't reach the 37.50 strike price, the option will probably expire without being assigned. At that point you can go ahead and write another call. In the covered call write, you would have generated the $42 on a base of $3,200. If you own the LEAP call instead, you're generating the $42 on a base of $1,242. If you own the underlying shares your yield is 1.31%. If you own the LEAP instead, your yield is 3.38%. Selling four covered calls a year for about this premium would get you a yield of around 5.25%. Doing the same with the LEAP call as your underlying, would get you a yield of around 13.5%. (Should you decide to take on some more risk, you can buy two LEAP calls for less than the cost of 100 shares. Selling eight similarly priced covered calls a year would get you the same 13.5% yield, but twice the income). Note that the actual income generated on owning Verizon shares would be higher than 5.25%, given that you'd be entitled to Verizon's regular quarterly dividend payments.

But suppose that within the contract period the stock goes to $45 a share and the buyer exercises it. Had you written a naked call (not owning 100 shares) we saw above that you would lose $708. Not so if you own the LEAP call. After buying 100 shares for $4,500 and selling them to the call buyer for $3,750, you can exercise your LEAP call. You'll pay $2,000 for 100 shares of Verizon. You can then sell these for $45 a share. The net result is a gain of $550. ($1,242 LEAP premium plus $2,000 = $3,242, your cost basis for the new shares. You sell these for current market price of $4,500. This results in a profit of $1,258, which is decreased by the $708 loss from your call write assignment. This comes to a profit of $550. Another way to do this, with the same net result, involves short selling the 100 Verizon shares to be delivered to the buyer of the October call and then exercising your LEAP call.) This is slightly less than the profit of $592 you'd receive had you purchased 100 shares of Verizon at $32 instead of buying a LEAP call. Remember, though, the original goal was to generate income. Using the LEAP call originally involved less than half the capital to accomplish the same task.

Let's say the opposite of the above scenario happens. Instead of VZ going up and being assigned, the stock plunges to $16 within a month. If you owned 100 shares (with the cost basis of $3,200, as in the examples above) you would suffer a paper loss of $1,600 offset by the $42 premium you received for writing the October '08 call. That's a paper loss of $1,558.

With the LEAP call as you underlying, on the other hand, the most you can lose is how much you paid: $1,242. If VZ got a 50% haircut in less than a month, volatility would spike. Given that one of the factors in option pricing is volatility, and volatility has a direct relationship with an option's price, your Jan '10 20 call would be worth more than $0. So, your paper loss would be less than $1,242. Factoring in the $42 premium received for the October '08 call write, your paper loss would be less than $1,200. Compare this with the paper loss of $1,558 if you owned the shares instead. In terms of limiting losses, then, it can be better to own LEAPs instead of shares of the underlying stock.

Things to Note

Don't try the LEAP "covered" call strategy without doing further research on the subject. The above is a simplistic overview of why owning leaps instead of actual stock may be advantageous for a call writing strategy.

Owning calls does not entitle you to receive any stock dividends and does not give you any other shareholder rights.

Be sure to formulate a clear plan for your entries and exits should you ever attempt a call writing strategy with LEAPs as your underlying.

A factor in option pricing is time to expiration. For example, an October '08 option at strike x will generally be worth more than a September '08 option at the same strike price. Because of their high deltas, deep in the money LEAP options behave similarly to their underlying stocks. As the LEAP's expiration date draws closer and time decay sets in, it may not be advisable to continue writing calls on it. Consider closing the position or rolling the LEAP to an option with an expiry date farther in the future (e.g, selling the January '10 call and buying a January '11 call).

Disclosure: I don't hold a position in any securities mentioned above.


Another Way to Buy BAC

If you are confident that Bank of America (BAC) won't go out of business, won't eliminate its dividend, and that its share price will eventually recover, you may want to consider buying its convertible preferred shares (BAC-PL) to wait out the storm.

Bank of America's convertible preferred (Series L) pays an annual dividend of $72.50 per share in quarterly installments. Series L's recent price is around $837 a share. That makes its yield over 8.6%. Unlike the majority of preferred stocks, which treat their payouts as interest payments, Series L pays a dividend eligible for the 15% tax rate for qualified dividends.

Each Series L share converts to 20 shares of common stock any time at the holder's option. See the prospectus for details.

Series L's 52 week low, which it made on 7/15/08, is $750.25. Its 52 week high, made in February 2008, is $1,168.

If you're considering buying BAC's common shares as they slump because you think BAC will survive and its dividend will not be eliminated, keep an eye on Series L. It may be the safer bet. First, you'll get a pretty good dividend that's safer than the common stock's. Some analysts expect BAC to lower its common share dividend before the credit crisis is over. Second, when (if) the common shares recover, you can convert to them.

If I were looking to buy Bank of America stock (I'm not, at least at current prices), I'd buy it through the preferred.

Things to Note

If you are interested, you must read the prospectus.

At Bank of America's option, the preferred stock can be bought back by the company for $1,000 a share on or after 1/30/13.

If BAC's board does not declare a dividend or fails to pay a dividend, holders of the preferred stock will not be entitled to a dividend that quarter. The preferred stock is non-cumulative. Any unpaid dividends will not accumulate, and won't be paid at a future date.

If the price of the common stock exceeds the conversion price by 130% on or after 1/30/13 for 20 of any 30 consecutive days, Bank of America can force the conversion of preferred stock into common stock.

Disclosure: I hold no positions in any securities mentioned above. A note on my recommendations is here.


Motley Fool Income Investor Review

The Motley Fool Income Investor is run by James Early and Andy Cross. The newsletter is "dedicated to provide the best total returns through winning dividend stocks."

The following review uses some of the same analysis as was used in my review of Motley Fool's Stock Advisor.


Just as with Motley Fool's Stock Advisor, when you log on to Income Investor, you're presented with an easy to navigate layout. There are three main links: to the latest newsletter issue (published once a month), the newsletter's performance (tracked from the September 2003 issue), and the best previously made recommendations to buy now. When on the current issue page, you can find a link to and read all the past issues, going back to September 2003.

The home page also features updates on past stock picks, as well as links to Motley Fool articles and discussion board messages relating to the newsletter's picks. There is also an "Online Exclusives" tab, which features updates on previous picks, dividend tax tables relating how each pick's dividend is treated by the IRS, interviews with CEOs (as of writing, the last interview was posted in October 2007, almost a year ago), and "Special Reports" (tax tips, Income Investor 12 month recap, articles on dividend paying stocks, etc).

Each monthly newsletter issue, which you can view in html on the site or download as a pdf (a paper version also comes in the mail), ranges from around five to ten pages, and always contains an introduction, Early's pick, Cross' pick, and a "question and answer" section (it's called "Dueling Fools" in Stock Advisor). Most issues have something called "Over/Under" and "Profit Playbook." Many issues, but not the majority, contain updates on previous picks and short articles of the same type as you'll find on the Motley Fool website for free (minus advertisements--both 3rd party and for Motley Fool services), a rare bonus stock pick, and/or reviews of Early's or Cross' performance. Some issues have all of these, some have none.

Each month's introduction is written by Early or Cross, and contains either something general about dividend investing, the newsletter, an anecdote, or something similar to what you'll find on the Motley Fool site for free.

Early's and Cross' stock picks are usually one or two pages in length each. These are short blurbs on the reasons for buying the particular stock and what its fair value is. The page also includes a brief summary of company data (location, website, market cap, etc). In the pdf version there is also a two year chart. For purposes of illustration and comparison, take a look at Value Line. Look at "Part 3--Ratings & Reports" in the samples section. Income Investor picks have a lot less in terms of the company's financials, and about twice to three times as much in terms of text.

The text portion usually amounts to under 1,000 words. This could be a good thing or a bad thing. On the one hand, as an investor (especially one paying for a stock recommendation service) you would presumably want to be given as much information as possible before making your decision. On the other hand, if you're already paying for stock recommendations, you probably don't feel like spending too much time reading and sifting through mounds of data. As long as the recommended stocks go up, most subscribers probably take the latter view.

Since each month's picks are Early's and Cross' best ideas for the month, it is not unusual that the same stock gets recommended more than once, although this happens less frequently in Income Investor than it does in Stock Advisor.

The "question and answer" portion of each issue concerns the recommended stocks in the issue, and perhaps the recommended stock's industry, or some general investing theme relating to the recommended stock. The advisor who didn't recommend the stock asks the recommender questions, attempting to flesh out the pros and cons of buying the recommended stock. This usually runs about 500 to 1,000 words per stock. This section is meant to cover things neglected on the stock recommendation page, and perhaps ask some questions subscribers would have. The question/answer format makes for easy reading, which is a plus.

Just as with Stock Advisor, however, the nature of the questions is not very pointed. That is, the questions aren't meant to really point out the flaws of the stock recommendation. Rather, the questioner seems to know what the answers will be ahead of time. There is also a touch of humor with the questions and answers, and the section frequently ends with a joke. "Fun writeups" are standard at the Motley Fool. It doesn't appeal to me, but it does make Motley Fool different from other stock advisors, and I'm sure many investors find it enjoyable.

The "Over/Under" section is usually written by someone other than Early or Cross. The section is meant to offer investment ideas for subscribers looking for higher dividend yields or growth potential. These investments are higher risk, and are not official picks. This section runs around 1,000 words, and is about one or a few stocks. The section appears to have been called "Cash Flow Corner" before 2008.

The "Profit Playbook" is also usually written by someone other than Early or Cross. It is similar to the types of articles you'll find on Motley Fool for free (but again, without the advertising). For example, August 2008's Profit Playbook discusses whether investing in oil is still a good idea.

The company updates section usually consists of a paragraph about each update of a past recommended stock. The update concerns company news, movement in stock price, industry developments, and the like. The number of companies updated ranges from one to ten. Company updates are available on the newsletter home page. Email alerts are also sent out.

Occasionally, issues (this also comes in an email update and is available on the home page) have sells of past recommended stocks. Since September 2003, around 1/3 of the picks have been sold. Sell recommendations don't come suddenly, as the stocks in question are usually mentioned in updates weeks or months before the actual sell recommendation is made.

Besides the newsletter, there is a series of discussion boards. All the recommended stocks have discussion boards. There are also various boards devoted to different topics like investing philosophy, buying strategies, dividends, budgeting, etc. Whatever you can think of, there's probably a discussion board devoted to that topic. Subscribers and Motley Fool employees post here. Think of the Yahoo! Finance boards but with intelligent discussion.


Pick performance is measured "by adjusting the cost to reflect dividends, subtracting the current price, and then dividing the difference by the original cost basis. Returns are tracked from the price of the recommendation at the time of release to the stock's most current quote."

So, for example, let's say stock ABC trades at $100 a share when it's picked. Suppose after a couple of years the stock trades at $120 and has paid out a total of $8 in dividends. The return would be calculated as follows: $100 - $8 = $92 (this is the adjusted cost basis). $92 - $120 (the current price) = -$28 (the total gain). -28/100 = -0.28, or -28%. Since this is a gain, we multiply it by -1, to get the total return of 28%.

All this is to say that dividend payments are counted in each pick's performance. The Income Investor's total performance is the average of all the picks' gains and losses. This includes stocks recommended last month as well as those recommended in 2003. As of writing, Motley Fool's Income Investor has an average gain of 16.02%. Suppose you bought every pick when it was recommended and sold everything that Early and Cross sold. Let's say you spent $10,000 in total. Your portfolio would be worth $11,602 today. This amounts to an annualized gain of just under 3.06%.

Performance is also measured as against the S&P 500, both for each stock picked and for the average return. For example, a stock picked in June 2004 is compared with the S&P 500 from June 2004.

As of writing, the S&P's average gain is 7.42%. The Income Investor newsletter is outperforming the market by 8.6 percentage points. Better than most mutual funds.

Since the newsletter focuses on dividends, yield on cost would perhaps be a better measure. Yield on cost is a stock's annualized dividend divided by your cost basis. A dividend investment can be a good one even if the total return (which incorporates stock price) is poor, as long as the yield on cost rises. Yield on cost rises when the dividend paying stock increases its payout.

For example, suppose your portfolio consists of one stock, XYZ. Let's say you bought XYZ at $50 a share, and it paid an annual dividend of $2 a share. The yield when you bought XYZ was thus 4%. Suppose XYZ now trades at $30 a share. Ouch! But let's say it pays a dividend of $4 a share now. While you're down quite a bit in your total return (depending on how long you've held the stock), your yield on cost has doubled. Since you originally paid $50 a share, your yield on cost is now 8%. If there's nothing wrong with the company (let's say its share price is down because it's a bear market) and its dividend is stable, from an income investor's point of view the investment is a good one. Your dividend payments have doubled. Since there's nothing wrong with the company, you should eventually have a decent total return.

Unfortunately, Motley Fool's Income Investor does not include this measure. This is probably because its mission is for "best total returns." Given the amount of time it would take, I do not calculate Income Investor's yield on cost. Perhaps Income Investor's yield on cost has improved, and its paltry return of 16% in five years isn't so bad.

Yes, it's beating the market, but the same amount of money in certificates of deposit over the same period would have given you a better gain, without the risk associated with stocks. Moreover, if we factor in the newsletter's fees, depending on how much you would have invested, you might've been better off buying the S&P 500 instead. For example, suppose you invested $10,000. As mentioned, your portfolio would be worth $11,602 today. Over the five years subscribing to the newsletter, you would have paid approximately $745 in fees ($149 subscription fee over 5 years--note that the subscription rate in previous years may have been less). Your total cost basis would thus be $10,745. Taking fees into account, the newsletter's gain drops to 7.98%. While still better than the S&P 500, it's nothing to brag about.

Note that the time of this review is a factor. Had it been made before the recent market downturn, returns would have been much better. Because of the dividend focus, many of the newsletter's picks are in the financial sector, which has suffered a severe downturn. Many of these stocks have also lowered their dividends.


So, is it possible for an individual investor to keep up with all the Income Investor recommendations? Some stock gurus (e.g., Jim Cramer) recommend so many stocks that their performance doesn't matter, as retail investors don't have enough cash to make so many trades. What's the case with Income Investor?

As mentioned, there are two picks each month, and sometimes there is a bonus stock pick. The average is close to a total of two picks per month. Most people can probably devote a portion of their salary toward buying two stocks a month (this may be different if you're retired). Whether it's practical depends on broker commissions and amount invested. I go into this in greater detail in the cost section below.


An Income Investor subscription is currently $149 per year. If you buy stocks based on the newsletter's recommendations, you should probably include brokerage commissions in the cost. If we assume $7 a trade, and you buy every recommendation (24 a year), that's an extra $168 a year (this does not include selling stocks, buying bonus picks, or buying previously recommended stocks that are "best buys now"). So, if you buy all the regular recommended stocks, the service will cost you $317 per year. If you buy the bonus picks, "best buys now," and sell your positions, you'll obviously have more broker commissions and your total cost in using the service will be higher.

Before going to practicality, it should be noted that brokerage costs can be reduced. For example, TradeKing has commissions of $4.95. Sharebuilder has $4 commissions for automated orders (the fee for selling, however, is $9.95), SogoTrade has $3 trades, and Zecco has free trades if your account is worth over $2,500.

So, I'll analyze the practicality with two examples. The first one will have the assumptions outlined above: $7 a trade, and you buy 24 stocks a year, selling none. The total cost here, as mentioned, is $317 a year.

For the second scenario, let's say you pay $0 in broker fees, and everything else is the same as above. Here, your total cost will be $149 a year.

As a rule of thumb, your total investment expenses shouldn't be more than 2% of the amount you're investing, as far as practicality is concerned. In the first scenario, you have to invest $15,850 a year to keep your expenses at 2%. In the second scenario, you have to invest $7,450 per year to keep your expenses at 2%.

Taking the second scenario, if you normally invest $7,450 or more a year and have at least the additional $149 a year for the costs, then the Income Investor service is practical for you. If you cannot afford to invest this much, for example, if you are unable to save at least $7,599 ($149 in costs plus $7,450 investment amount) a year the Income Investor service is not practical for you. Recall the actual gains on $10,000 invested above. While investing $7,450 makes Income Investor practical, subscription fees can dramatically lower your returns.

It may also be useful to compare Income Investor with what you'd pay for a similar service. Consider Jim Jubak's column. The updates on income investments are irregular, and there are other minor complications (see review here), but it's free. Jubak's dividend portfolio has averaged a gain of 13.5% annually through June 2008. If you pay for your trades, Jubak's portfolio is more cost effective too. The portfolio consists of less than a dozen positions. Motley Fool's Income Investor has over five times as many picks.

If you like diversification, Motley Fool's newsletter is for you. If you like the simplicity of a model portfolio (Jubak has a set amount of cash to use, with no fresh money) and are an income investor because you are retired, Jubak may be the better choice. Income Investor may offer a model portfolio in the future.

Bottom Line

Because of recent market turmoil, especially in the financial sector, investing in certificates of deposit or high yield savings accounts would probably have resulted in a better gain than Motley Fool's Income Investor newsletter (and the overall market). Depending on how much you would have invested, investing in the newsletter's picks would not have beaten the market due to costs.

There are free alternatives out there, that are just as good if not better. Consider Jim Jubak in this regard.

If you are looking for greater gains and are interested in Motley Fool, Stock Advisor is the better service.

Gambling with Fannie Mae

Fannie Mae (FNM) and Freddie Mac (FRE) fell over 20% today, apparently because of a Barron's article. All of the sudden the prospect of a government bailout has investors spooked. How quickly things change.

There's usually a bounce back up following such steep declines. Shortly before market close, I bought a couple of December calls for Fannie Mae. I'm hoping the stock will go back to $7 or $8 a share or higher within the next two weeks. If it continues lower, I won't lose too much. That's why I bought calls instead of shares. Why December? I want to hold on long enough to benefit from any government efforts to stop the financials' plunge. There will probably be more short selling restrictions soon.

I thought about doing a strangle or a straddle, but I couldn't find a put to make it worthwhile.

To see how this and all my other trades work out, take a look at my trade notes on the lower right of this page.

Update: Out of Fannie.