Friday, April 29, 2011

Trading and Mindsets

Hey there

A friend of mine was in a restaurant on Darby Street with me a few nights ago and while waiting for a few other friends to arrive, like all good medical students, we talked about investments. We were talking about charts and this friend was asking me how I interpreted them and what indicators I used and if I could teach her what I had learnt.

See charting is a really really weird thing. It is very subjective, like you can ask 10 people to look at the same chart and all 10 of them can draw different lines on them and tell you different things. 3 can tell you to buy, 3 can tell you to hold and 1 can say this is retarded. To some people, charting is a science and to some, it is as good as witchcraft, as long as it works, it works.

After talking to enough people who knows half of what they are doing and reading enough books about charting, you’ll eventually devise your own technique and ways to look at different charts. It is very interesting to get into the psychology and explanation behind each interpretation but I think to be good at reading charts, it is more important to have the right mindset yourself.

Almost all the books that I’ve read or people that I talk to about charting emphasizes the importance of having good mental discipline. In fact, one of the most interesting books that I’ve read about trading is called “Inside the Mind of a Turtle” and the whole book teaches us how to think like a trader.

I guess what I’m trying to say is that it is one thing to learn how to read charts and it is another to acquire the correct mind set to be good at it. Trust me when I say it is easy to say I’ll sell at a 10% loss or when the chart does “this” but when the time comes to actually close your position at a loss or even at a profit, it can actually be really difficult type in your trading password and click execute.

It is not easy but with enough practice and education we'll get there eventually. I hope.

Remember that charting is just a tool, how you use it is completely up to you.

So what do you think it takes to be a good trader? Do you have to be totally free of emotions when executing trades? Is that even possible?

Do leave me comments or drop me an email. I’m more than happy to read about what you think. Thanks for reading!

Sunday, April 24, 2011

The Unintelligent Investor's Definition of the Week: Candlestick Chart

The Unintelligent Investor’s Definition on the Week: Candlestick Chart

Hey there,

Candlestick chart

Definition from www.investopedia.com: A price chart that displays the high, low, open and close for a security each day over a specified period of time.

Unintelligent Investor’s explanation:

Has any of you guys used a candlestick chart? The most basic or charts is a line chart, where the lines are plotted according to the close of the day only. It looks something like this:


A candlestick chart offers you a lot more information than a simple line chart. As investopedia said, it displays the high, low, open and close in the chart. This is how a candlestick chart of the exact same company at the same time frame looks like.


And if we zoom into one candlestick, this is what it will show.


In most cases, a white candle stick means that the day ended higher than its opening price and if the candlestick is black, it means that the day ended lower. Some charts prefer to use green and red candles.

Candlesticks are very useful because they show you so much more information than just the closing price. Just by looking at it, you can see how high the price has reached today, or has ever reached and how low it has ever reached.

There are a lot of patterns and ways to interpret them but I cant get into them here because people write books about them. I think it is also very subjective and up to you to interpret yourself. For some people, it looks more like witchcraft and for some it is a science.

So this is just a very simple post to show you how a candlestick chart looks like, I really wanted to type some interpretations but I really don’t know how or where to start because it is really such a vast thing. I guess if you wanna discuss a certain way to use it leave me a comment or email and we can have a discussion there. I’m more than happy to hear from you.

Thanks for reading! Do press on the little like button on the right hand side of the screen to like the page on Facebook, or follow me on Twitter!

Thursday, April 21, 2011

Recommendation: Buy

Hey there,

I have just come back from a talk given by a few people who used to work with the Medecins Sans Frontieres or MSF or Doctors Without Borders and I have to say the stuff that they do are crazy. Humanitarian work, especially in conflicted areas, I don’t know if I can handle doing such a thing. It is one thing to read about it or watch about it on the news but it is a whole different story when you’re actually there.

I guess the way I see it is that I came from Malaysia, to Australia to get all the perks that comes with a 1st world country, basically a good life. I’m not saying that Malaysia is a shit place to live, Malaysia is one of the best countries in the world, but it has its bad points. Now that I’m in Australia, I wish to work here and gain access to all the goodness Australia has to offer. Really, some of the “issues” Australia face, or problems that they bring up in the news almost seem trivial in the grand scheme of things.

If I ever do humanitarian work, I’ll go back to Malaysia and give back in whichever way I can to the country that I love and grew up in and trust me Malaysia needs help.

Anyways back to investing, so how many of you actually bought a share because you read about it in a report sent out by your broker? I am with ComSec and every few weeks, they send out an email with a list of companies that they think you should buy, hold or sell. For some reason the company that they put a buy recommendation on, always have a target price that is really close to the current price. For example, XYZ, recommendation, buy, target price, $1.50, last price $1.30. What about when the price was 1 dollar or 90 cents? Was it a buy at that price as well? Or was it hold? Or sell?

I think it is important to remember that it does not really matter if the market is good or bad, if we make money or lose money. As long as we make a trade, the broker makes money. So will they make more money if we buy at 1.30 and sell at 1.50? I think yes, significantly more than if we bought it at lets say 1 dollar.

Another thing to remember is that if ComSec as a company bought XYZ at 1 dollar, and identified that it is time to sell at around 1.30 or 1.50. They can then write an article about it, put a buy recommendation at 1.30, encourage people to buy it, while they are dumping the shares, making a healthy profit.

I don’t know, I’ve never worked in a brokerage firm or ever studied finance or commerce in school lol. But let me know what you think, especially if you work for a brokerage firm. When do you send out buy recommendations? And if you are a trader or investor, have you ever followed their recommendations? What happens after you do?

Thanks for reading, do drop me comments or emails. I’m more than happy to read them. If you like this site, please click on the little like button on the right side of the screen to like the page on facebook or follow me on twitter.

Happy Easter everybody!!!

Tuesday, April 19, 2011

Moving Averages

It is 12.22 a.m. at the moment, I had just got home from a shift in the emergency department that started at 4 p.m. I will have to be back at the hospital tomorrow before 10a.m.... yay...... Anyways, on the way back, I found out that it only takes me about 8 minutes to get home from the hospital without traffic. And of course, I fell victim to a McDonald’s ad. When I was at the drive through, I fell prey to a Coke Zero ad. Lol so kudos to good product placement. However, kudos to me for not getting any chips ;)

Unfortunately, Mr Portfolio is still sick. He is still in the ICU and the bleed is not under control yet. One of my friends asked me what my next plan of action was. I think the answer is absolutely nothing. Not because I am lazy and am giving up, but because the charts tell me not to do anything.

I probably have mentioned this before, because this is a game, I’ve decided to take more risk and experiment with a few things. First of all, I didn’t bother with diversification. Most of the companies in the portfolio are either mining or energy and these 2 sectors has been hit pretty hard this past week.

Another thing I had decided is to stick to Darvas Boxes and moving average crossovers, 12 days and 24 days simple moving averages.

Below is a small snip of the chart of one of the companies in my trading places portfolio EWC.


So the idea is to buy when the 12 day moving average crosses the 24 day moving average and sell when the opposite happens. As we can see, they have not crossed yet, so I’ll keep on holding until they cross. This is basically the same story with my other shares. I bought them when the 12 day MA crosses the 24 day MA, they have a few days of gains and are all retreating now.

Below is a small snip of RIO to illustrate what happens sometimes.


If you look at around 15 October 2009, the MA crosses, that is when you buy, Then at around November 16, the lines almost cross but not quite, in that situation you hold on and finally at December 20 then cross and that is when you sell.

Below is an example of how a beautiful MA cross over trade looks like.


Since I’ve decided on what to experiment on, I’ll stick to it and see how it goes. I guess it does not really matter if I do incredibaly bad, it would be a good learning experience. Better lose money in a game than in real live aye.

So what do you think about moving averages? Do you think what I’m doing is wise? Or am I an idiot and should close all my positions now to cut my losses? What would you do?

Thanks for reading! I hope it has been helpful, do leave comments or send me emails if you have any thoughts at all. Do click on the little like button on the right hand side of the screen to like me on facebook or follow me on twitter! Thanks!

Once again the snippets of the charts are taken from bullcharts. www.bullcharts.com.au definitely check them out!

Now time to eat that McChicken and man its past 1 am already, I should sleep soon.

Monday, April 18, 2011

Hey guys,

My semester is getting busier and busier and my to do list is getting longer and longer.
So I've decided to cut down a little bit, instead if posting every Monday, Wednesday and Friday.
I'll post on Tuesdays and Thursdays. 1 post less a week, unless I can find another author for the site.

Thanks for visiting!!
New post up tomorrow.

Sunday, April 17, 2011

The Unintelligent Investor's Definition of the Week: Put Option

Hey there,

Option

Definition from Oxford Dictionary:
Noun, a right to buy or sell a particular thing at a specified price within a set time.

Definition from The Free Dictionary:
The exclusive right, usually obtained for a few, to buy or sell something within a specified time at a set price.
(Business/ Commerce) an exclusive opportunity, usually for a limited period, to buy something at a future date
(Economics, Accounting & Finance/ Stock Exchange) Commerce the right to buy (call option) or sell (put option) a fixed quantitiy of a commodity, security, foreign exchange, etc., at a fixed price at a specified date in the future.

Last week I wrote about buying call options which gives you the right but not the obligation to buy a stock at a certain price for a certain amount of time. As promised, today I’ll write about buying put options.

So buying put options are sorta similar to buying a call option but instead of getting the right to buy, you get the right to sell.

If you buy a put option, you buy the RIGHT but not the OBLIGATION to sell an asset as a fixed price at a fixed date.

So if you bought a call option, you’ll want the price to go up because that gives you a profit. However, if you buy a put option, you want the price to go down in order to make a profit. When might a call option be useful? Look at the BHP chart below.


It has been trending slowly upwards for the past 6 months. You have shares in BHP and what if you want to cash your profit but at the same time not want to miss the opportunity to make more if it continues to trend upwards?

You buy a put option. So you pay a premium and get the right to sell BHP at 47.53 dollars with an expiry date of lets say, 6 months. So if in 6 months, if the price drops below 47.53 dollars, say 20 dollars, you would exercise your right to sell the shares at your strike price and make a healthy profit. On the other hand, if the price of BHP keeps going up, you will let your option expire; losing the premium you paid but still owning the shares.

If we draw pay off a diagram for buying put options like we did for call options, this is how it will look like.


With these examples and illustrations, I hope you can see why options are sometimes used to hedge a portfolio. For example, if you buy a call option, you protect yourself from losing too much in case a share price drops below the purchase price. Whereas if you bought a put option, you lock in your profit in case the share price drops below the current level and at the same time allow yourself to make more if it keeps going up.

Thanks for reading, I hope it has been helpful, if you are confused, I recommend reading last weeks’s post for the explanation of options. Click on the little like icon on the right side of the screen to like the page on facebook or follow me on twitter. Thank you!

Friday, April 15, 2011

Skinny Dipping?

"It's only when the tide goes out that you learn who's been swimming naked" Warren Buffet

This is a fairly famous quote by Warren Buffet.
He is basically talking about creative accounting or accounting magic.

A lot of times, companies and their accountants find ingenious ways to make it look like they are making a huge profit on paper when in actual fact, they might not. I guess a very good example is what had happened to Enron. I think what they did was they had set up offshore entities in which they used to hide their losses to the company Enron itself looked very profitable. Their collapse then brought down one of the world's biggest accounting firms as well, Arthur Anderson. Just in case you're not sure what happened, their share prices were trading at 90 dollars a share at mid 2000 and dropped to less than a dollar by November 2001 and it filed for Chapter 11 bankruptcy soon after that.

I dont think many people anticipated that such a big blue chip company would pull off such a fraud. I guess people thought the same with Bernie Madoff and his hedge fund. I mean why will the good guy/philanthropist of Wall Street, the chairman of NASDAQ defraud us? Well to get very very very very rich.

I guess with creative accounting, if the real money does not show up, all the enthusiasm and illusion and speculation by stock market traders will fade away. What you get in the end is an empty bank account and a chapter 11 filing or if in Australia, it goes into administration.

So when the tide went out, we all found out that Enron was skinny dipping.

I think what we need to think about is how can we, people learning to be investors or traders learn how to identify companies that are swimming naked before the tide goes out.

So let me know what will you do to maybe try and identify companies that are dodgy or a bit suspicious. What signs and symptoms do you look for and what are your investigations? Sorry, I am a medical student afterall hehe.

Thanks for reading, do leave comments or drop me an email. If you like me site, click on the little like button on the right hand side of the screen or follow me on twitter!

Wednesday, April 13, 2011

Mr Portfolio's Drawdown.

Hey there,

Sorry this post took so long, its 11.45pm now so technically its still Wednesday haha. Its been such a busy day and I had just came back from having dinner. The post was only half written so I’ve just finished typing it up.
Here it goes!

So a patient came into the emergency department last Tuesday, his name was Jeff Sia’s Trading places portfolio. He prefers to be called Mr. Portfolio. He walked in with a small wound on the chest, we padded him up and he looked beautiful on Tuesday at 4pm. Then all of a sudden on Wednesday he started bleeding profusely. We tried to manage his bleeding but he just kept bleeding and bleeding and bleeding.

Today he went into shock and has been admitted to the ICU for resuscitation and monitoring. He needs a few units of packed red cells (cross matching has been done), some IV fluid, a high flow oxygen mask, the anaesthetist has been notified so that if things get worst we’ll intubate him and put him on mechanical ventilation. For some reason the bleed is getting worst. A FBC, LFT, and UEC has been requested, we are waiting for the results.

On initial assessment, it looked like a minor trauma probably by a projectile object. On further examination it looks like it is a gunshot wound. The patient could not communicate so he couldn’t tell us what had happened. But after a few investigations and scans were requested, it looks like a bomb had exploded in him. The surgical team has been notified so that they can come and make an assessment.

That sums up the story of Mr Portfolio. What are your management plans, doctor? What further investigations will your request, what are your impressions and differentials and what is your priority at the moment.

...

I’ve always been a more conservative trader, focusing mostly on the ASX 200, using a mixture of moving average crossovers, Darvas Boxes and intrinsic value calculations. Usually no more than 20% of my portfolio goes to small caps and penny stocks. However for Mr Portfolio, I’ve decided to go nuts and not worry about risks, well because it is a game and the money you lose in the game does not really matter and it is good practice.

A big thing that comes with trading especially with more volatile shares is managing downside and capital preservation. Of course with volatility, traders will face drawdowns almost inevitably. A drawdown is any losing period during an investment record. It is defined as the percent retrenchment from an equity peak to an equity valley. So if you have 220 000 and you drop down to 200 000, the drawdown is 9.09%, which is the case for Mr Portfolio.

Another thing to have in mind when losing money is how much do you have to make to break-even. So if you lose 10%, how much do you have to make to break even? 11%. If you lose 50%, you’ll have to make 100% just to break even. To add figures to that example, if you have 100 000 dollars, and lost 50% of it, you’re left with 50 000. So to bring your portfolio back to 100 000 from 50 000, you’ll have to make a profit of 100%.

Below is a drawdown recovery chart that I got from the book Trend Following written by Michael W. Covel. Definitely check out and buy this book if you want to learn more about mechanical trading and trend following.



Top traders will have these numbers in their head, so they know how much they have to make in order to break even. With these numbers in mind, they then estimate the risk they are willing to take, their position sizes, etc.

I guess for us beginners, it is important to remember that drawdowns are inevitable. Even the best traders in the world face massive drawdowns. It becomes worst when investors lose confidence in them and pull their funds out. The best we can do is probably to stick to our investing or trading strategy, maybe modify it a bit if you’ve identified some weaknesses and ride the drawdown.

For Mr Portfolio, my confidence really took a hit when I saw his condition today. I mean losing more than 20 000 in 4 days is a lot. I guess its not that much if you compare to the drawdowns that some of the top traders face but for me it is a fairly large number. Even with strategies in place and rules to follow, it can really make you doubt your trading decisions.

But like I’ve said in my older post, if you stick to one of the most basic rules of trading, cut your losers and let your winners run, your next winning position should cover your losses.

Hopefully.
Hopefully...

So tell me a bit about your experience with drawdowns. How have you felt, psychologically because drawdowns can be very stressful. What have you done when faced with a big drawdown?

Thanks for reading! If you think this site is good, do click on the little like button on the right hand side of the screen or follow me on twitter. Feel free to drop me an email or a comment, I’d love to read them.

Monday, April 11, 2011

Make Them Irrelevant!

Before I start typing this post I would like to thank you all for visiting. The site has received more than 1000 views since I first started it a few weeks ago. Thanks for coming back if you’ve been here before and if this is your first time, I hope you find this site helpful. Do like the page on facebook, just click on the little like icon on the right of the screen or follow me on twitter. Thank you for all the comments, emails and feedback. Keep them coming! As I’ve mentioned in the previous post, I have a few things coming in the mail and as soon as they arrive I’ll give them away. So stay tuned!

Last Saturday, I went to the Hunter Valley, went to the little driving range there, went to a few wineries and had a very good lunch as well, just for fun and it was a nice break from all the studying. After a whole week of terrible weather, by terrible I mean hardly any sun and raining most of the time, Saturday’s weather was perfect. So I was driving towards a winery and my friend asked, “So how do you think wineries like Tempest Two or Peppertree establish their brand and make themselves knows when there are so many other good wineries here?”

The first thing that came to my mind was the Blue Ocean analogy. So there is a book called “The Blue Ocean Strategy” written by W. Chan Kim and Renee Mauborgne. I highly recommend buying this book and reading it if you are thinking of starting a business. Basically it is a book about differentiating yourself from the competition and creating a blue ocean for yourself.

So a blue ocean is when you have uncontested market space and pretty much no competition. Blue oceans are vast and wide and almost never ending. The more traditional market space is described as red oceans, where they are a lot of sharks. It is small, bloody and very competitive. Companies try to beat their competitors by cutting margins and offering more. If you had a blue ocean where there were hardly any competition, you can charge more for less.

Some examples that they gave were like Curves gym. The more traditional gyms were like Fitness First, big, buff man pumping iron, slender women running on the treadmills, expensive to join, 12 month contracts, etc. Now this type of gyms are popping up everywhere and they can be rather intimidating for people with self esteem issues to join. So Curves came up with an ingenious idea. Offer memberships to females only and only focus on circuit training. Take away the hassle of learning how to use different machines and exercise regimes and make it simple. On top of that because it was an all female circuit gym, their members do not feel judges or self conscious. Curves gyms exploded not only because of their differentiation from conventional gyms but also their simple franchising model.

Some other examples were like budget airlines, Air Asia for instance. They differentiated themselves and created a blue ocean by offering dirt cheap tickets and different options for their passengers. The more traditional airlines only had a few different price options and had everything included in them. Air Asia gave you the freedom to purchase more baggage allowance, purchase food if you wanted to, rent a car, book a hotel, etc. In fact, most of their revenue came from these optional extras.

So as a business owner, it is important to educate yourself and think about creating a blue ocean for your business by differentiating yourself from competitors.

As an investor, it is important to identify companies that have created a blue ocean for themselves. Less competition means higher margins which mean more revenue and net profit. That is why in the post “To buy or Not to Buy”; does the company has a sustainable competitive advantage is included in the checklist.

So if you are a business owner, does your business have a strategy for differentiation? What is it if you do? If not, why not? If you’re a value investor, do the companies that you invested in have a good strategy in place to make competition irrelevant?

Thanks for reading. Do drop me an email or comments. Like the page on facebook if you find this site helpful or follow me on twitter!

Sunday, April 10, 2011

The Unintelligent Investor's Definition of the Week: Option

Option

Definition from Oxford Dictionary:
Noun, a right to buy or sell a particular thing at a specified price within a set time.

Definition from The Free Dictionary:
The exclusive right, usually obtained for a few, to buy or sell something within a specified time at a set price.
(Business/ Commerce) an exclusive opportunity, usually for a limited period, to buy something at a future date
(Economics, Accounting & Finance/ Stock Exchange) Commerce the right to buy (call option) or sell (put option) a fixed quantitiy of a commodity, security, foreign exchange, etc., at a fixed price at a specified date in the future.

Confused yet? Lol lets hope I don’t make it worst.

Explanation by the Unintelligent Investor:

First of all, an option is a derivative, which means its value is derived from an underlying asset, e.g. stock, commodities, real estate, etc.

Let’s try and understand buying options first because I think once we understand that, selling options are pretty straight forward. Note that I’ll be focusing on shares as the underlying asset.

Basically, there are two types of options that you can buy. Call options and put options.
If you buy a call option, you buy the RIGHT but not the OBLIGATION to buy an asset at a fixed price on a fixed date.
If you buy a put option, you buy the RIGHT but not the OBLIGATION to sell an asset at a fixed price on a fixed date.
The money that you pay up front to buy the option is called a premium
That fixed price is called the strike
And finally the fixed date is called the expiry date.

If I have confused you further, I’m very sorry but I hope this example will help you understand.

Everybody loves sales, so I’ll use that as an example,

Say one day you walk into a store that was having a massive sale. You find this shirt that you really like and decide that you might want to buy it but then, you are not too sure. What if you find another shirt that you like more in another store. You only have enough money to buy 1 shirt so now you have a dilemma, should you buy this shirt? Or should you go look around another store and risk the chance of not being able to buy this shirt because sales end today so the price of that shirt will shoot back up to its original price.

The shirt is worth 100 dollars, and it was discounted to 30 dollars. So you walk up to the store owner, who let’s just say happen to be the Unintelligent Investor and he tells you, why not you pay 3 dollars now and I’ll put it on hold for you until the end of the day. If you decide to buy it at the end of the day, just pay the 30 dollars and it is yours, if you decide not to, you’ll only lose the 3 dollars that you paid for me to put it on hold.

Bingo, you’ve just bought a call option from the store owner (who is selling the call option)

So in this case, the shirt is the asset.
30 dollars is the strike price (at the money, because the strike price is similar to the underlying price)
3 dollars is the premium
And end of the day is the expiry date.

Now let’s substitute that shirt for shares.

Look at the chart below, once again taken from bull charts (which is the software that I use, unfortunately I’m not getting any sponsorship at all from them lol)


You can see that the price at its high was almost 32 dollars and all of a sudden it drops all the way down to 12 dollars and now it looks like it might be going up again. However because the financial crisis had just started, you have no idea what is going to happen to the banking industry. You want to have shares in ANZ but you don’t want to lose all your capital.

So you can buy a call option. So if you buy a call option with a strike price of 17 dollars with an expiry date of 6 months, you buy the right to buy ANZ at 17 dollars even if the price goes up.

Say in 6 months, the price goes up to 25 dollars, that is when you exercise your right to buy ANZ at 17 dollars (from the call option seller) and then you can sell it back to the market for 25 dollars and make a healthy profit.

On the other hand, if the price drops to 5 dollars, you will not exercise your right to buy the shares because that will mean that you have to pay 17 dollars per share for something that is only worth 5 dollars. In that case you only lose the premium that you’ve already paid (to the call option seller)

So effectively, you are limiting your losses for potentially infinite return. If I have to draw a graph it will look like this.

This is a pay-off diagram and it is drawn for almost every option strategy.
As you can see, you had capped your losses and potentially can make an infinite gain

Pay off diagram for buying a call option

Compare that to the pay-off diagram for buying the shares itself
Pay off diagram for buying shares

As you can see, you still have the potential to make an infinite return but you also stand to lose all the capital you put in.

I hope this post has been helpful for you guys, I tried my best to explain buying call options and hope I did not confuse the heck out of everybody because they are highly complex derivatives. I’ll talk about buying put options in next week’s Unintelligent Investor’s Definition of the Week and hopefully the post won’t be as long.
There are a lot more to options than what I’ve typed in this post. Like I’ve mentioned they are highly complex derivatives.

I guess the main purpose of this post is to explain what options or buying call options are about so that when we read about it or hear about it, we know what they are talking about. By no means am encouraging you to speculate in options. Speculating options takes a lot of time, skill and experience and it carries a huge amount of risk because of the leverage involved.

Thanks for reading this incredibly long post, I really hope I’ve been helpful, please comment or send me an email to let me know if I explained it well enough or if it was just crap, I would love to read your feedback. Do click on the little icon on the right side of the screen to like the page on facebook or follow me on twitter! Thank you once again.

The Unintelligent Investor's Portfolio: Week 2

Hey there!

Week 2 is kinda embarrassing. On Tuesday the markets open and put a massive smile on my face. I was ranked number 22 with an equity of more than 220 000 dollars. It started to go downhill from then lol and now I have less than 210 000. But anyway. Lets hope next week gets better.

Currently I'm ranked 614 in Australia and 9th in Newcastle Uni.. Not bad for a medical student lol.

Friday, April 8, 2011

Negative Gear?

Hey there,

Apparently the site got more views from America than Australia this week. So hello American friends! I hope you find this site helpful do feel free to drop me comments or email telling me what you would like me to write about and I’ll try my best. Cheers!

So one of our fellow unintelligent investors asked me a bit about property investment about a week ago so I’ve decided to type a post about what I think briefly.

Property investment is definitely something that I’ll get into when I have enough of an active income and capital to sustain it. For now, I think I’ll stick to stock market trading.

That reader mentioned that if you bought a property, you can take up a loan and use rental income to cover the repayments. That is true but I think you’ll have to be really lucky or good to get enough of a rental income to cover your repayments. If your tenant can afford to pay you a rent that is higher than a mortgage, wouldn’t it make more sense for him to take the loan in the first place? But of course there will be times where your rental income is higher than the loan.

So what happens if your rental income is lower than your loan payments? This can be a really good thing especially if you’re paying a lot of taxes. It is called negative gearing. What that means is that you take a loan, hence gear, and make a loss because of the loan payments. That loss is then used to offset your taxes. As a result, you pay less tax. So then how to you make a profit by negative gearing? Do your research very well and hope you buy a property that will appreciate in value. That way, your losses is used to offset your taxes and the capital gain is used to offset your losses. The end result is a gain! Of course you’ll be in trouble if you negative gear and your properties depreciate in value at the same time.

Positive gearing is what the reader was talking about. So you take a loan and make enough of a profit from your rental income to cover your loan repayments. So you’ll be paying taxes for your profit and your capital gain if you decide to sell the property. If done correctly however, negative gearing can be more profitable than positive gearing because of the tax offsets.

Negative gearing can be applied to stock market investing as well. All you need is a margin loan account. Take a margin loan from your broker, the repayments can be used to offset taxes and if the shares you invested in appreciate in value, you make a profit.

So this is just a quick post mainly about negative gearing because I think when I finally get into property investing, this is what I’m gonna be doing. By no means am I encouraging you to take a margin loan or negative gear because once again, gearing brings a whole level of risk and more risk is added on top of that if you negative gear.

Thanks for reading! Do like my page on facebook, just click the little icon on the right hand side of the screen. Or follow me on twitter, the link is once again on the right hand side of the screen.

I will be giving some freebies to my readers soon! They should arrive in the mail soon. So stay tuned!

p.s. my trading places portfolio got hammered this week. It will be quite embarrassing to post it up tomorrow. lol thanks for reading!

Wednesday, April 6, 2011

No Regrets

I was having dessert with a friend last night and for some reason, we started talking about bad decisions that we’ve made in the past. For her, it was related to decisions she has made with relationships. I stayed with her on that topic for a while but of course being the nerd I am, I eventually related it to investments, talking about risk/reward ratios and time investments, etc. lol.

Some of you might know that I went down to Sydney this weekend, met up with some of my old friends, caught up with my sister and best friend. I only realized when having dessert with this friend that I’ve been using the phrase take it easy quite a bit this past 3 days. Not only to remind myself but also my friends to relax. My best friend is having a massive headache from trying to find a job, on top of that he has girl worries as well. I guess there is really nothing wrong with worrying about relationships because, after all, is one of the biggest investments that most of us will make. Returns can be abysmal at very very high costs but if the investment turns out well then I guess we’ll have a return of what we all long for which is happiness.

I think it is perfectly normal to feel regretful of some of the decisions we’ve made and sometimes it is even okay to feel angry or upset. On hind side things always look very different. I have recently ended a fairly messy relationship and some of my friends would say I’m understating it by saying “fairly”. It baffles me that when you’re in it you lose sense of rationality or what seems to be right or wrong. When its all over, you sit down and assess the damage done and think, ahh why didn’t I pick up on this earlier. Or why have I ignored this sign? Or why didn’t I listen to this person? Etc.

I think this relates to some of the investment decisions that I’ve made in the past. Some of the worst ones I’ve made are emotionally driven. We all know our best friends fear and greed. That is why in the last 2 post I’ve talked about the importance of having a plan or an investment methodology to guide us when we are emotional. This post won’t be about those topics again because that will just be boring.

This post however, is about one emotion that we all feel when we’ve made a bad decision, regret.

See I think with a proper investment or trading methodology, we shouldn’t feel regretful. But I am of course very wrong because this emotion haunts me almost every time I buy or sell and end up in the wrong position.

That is why as traders we have to remember that decisions we make are made at the time when we have no idea what is going to happen in the future. If we did, there will be no reason for us to work for money anymore.

Sorta like getting a boyfriend or girlfriend. At that time it seemed like the correct thing to do. Maybe you make each other happy. You like spending time with each other. Things looks good, so we decide okay lets make this investment and see where it brings us. At that point in time, there was no way of telling what was going to happen. Sure we base our judgement on a few signs, maybe the colour of his or her hair or how they smelt or how they made you feel but there was no way of you telling if the investment will pay off or not. All you knew was at that time it seemed like the right thing to do.

I think that applies to my trading decisions as well. When I take a position in a company, there was no way of telling if it would go up or down. All I knew was the p/e ratio looks good, the directors seemed like they are doing their job, the moving averages looks like they are crossing, there seemed to be like a breakout and spike in volume. So all signs point to buy. Next day, it drops 25%... fuck. Thats when I start kicking myself for 3 days and 3 nights.

Someone once said to me, we plan our actions instead of the results. If our actions are planned correctly and results are favourable, good on us, but if our actions are planned right but results turn against us, bad luck.

I think to be a good trader we have to work hard to get used to making mistakes and learning from them quickly and of course not dwelling too much upon them. Regret is a feeling that we most probably cannot avoid but we most certainly can manage. Or learn how to manage.

So tell me, by leaving a comment or dropping me an email, have any of you made a decision that you’ve regretted? It does not even have to be related to investments. Something you wish you could have done differently? Have you learnt from your mistakes or are you still kicking yourself for it.

Thanks for reading! If this is your first time, I welcome you. If you’re a frequent reader thanks for your support! Like my page on facebook or follow me on twitter!

Monday, April 4, 2011

I wanna be Wealthy!!

Wealth, why do I find the creation of wealth so important? A few years ago for no apparent reason I suddenly thought “Shit, very soon not gonna be a teenager anymore and I’m still living completely off my parents” I need learning how to make money, and that was where it all started.

My parents might have mentioned the importance of wealth to me once or twice but unfortunately I was never really thought how to create it. I had to learn for myself. The formula was always, go to med school, graduate and work as a doctor and you’ll be comfortable. Well I do not want to be just comfortable. I want my great grandchildren to be comfortable as well.

The idea of wealth is an interesting one.
Oxford dictionary defines it as an abundance of valuable possessions or money.
Rich is defined as having a great deal of money or assets.
Hmmm abundance vs great deal, go figure.

I cannot remember where I read this from but I remember somebody described wealth as the length of time one can survive from the day he stops working. So a person might be rich but he might not be wealthy. Lets say Mr A has a million dollars and decided to stop working. However, he has 500 000 dollars in debt that he has to pay off. On top of that he has a few cars to maintain and a lot of other expenses as well. So in half a year he would have depleted his money. Mr B on the other hand only has 500 000 dollars but has no debt and lives a modest and down to earth life, his half a million dollars can easily last him a few years. Hence, Mr A is technically richer than Mr B but Mr B is wealthier. I hope that makes sense.

So how do we amass enough wealth to feed our children’s children? I personally think the key is passive income.

An active income is income you get from working your day to day job.
A passive income is income you get from the sides. i.e. investments and businesses.

Say me, as the unintelligent investor. My active income would be generated by being a doctor. With that active income, I invest in different companies. Maybe I set up a few businesses with some friends. Maybe work my way to be on the boards of different companies. So with my active income, I will have to do different things to generate passive income. By doing that, I am making money work for me instead of working for money. If I ever get to the point where my passive income is greater than my expenses, I technically can stop working for the rest of my life. Now that is where we all want to get to. That is probably as wealthy as you can get.

I think in this day and age where opportunities arises everywhere if we look hard enough, trading our time or expertise for money is inadequate. We all need something more.

So how are you creating passive income and building your wealth? For me, I’m educating myself and experimenting in the share markets. I’ll most probably get into commodity trading and property investing when I have enough of an active income to support it. Are you doing anything about it? Are you happy with making money from your day job only? Do drop me comments or send me emails. I am more than happy to read about your thoughts and ideas.

Thanks once again for reading. Do like the page on facebook or follow me on twitter.

Sunday, April 3, 2011

The Unintelligent Investor's Definition of the Week: Leverage

Leverage

Oxford dictionary definition: the use of credit or borrowed capital to increase the earning potential of shares.

Some people have described using leverage as putting cash on steriods

The Unintelligent Investor’s explanation:

Using leverage basically means you want to get more bang for your buck. Or in other words, you increase your investment exposure by using different products or borrowing money.

An easy way to look at it is to think about property investment because almost everybody investing in property will gear or use leverage.

Say a house costs 1 million dollars, you go to a bank and ask for a loan. If you are geared 80% that means you pay 20% up front and the remaining 80% as a mortgage. So you would have paid 200 000 dollars and gained access to an asset that is worth 1 million dollars. Hence, more bang for your buck.

How is this helpful? If you had 1 million dollars to begin with, chances are you wouldn’t buy the house by cutting a million dollar cheque because that would mean you’d have to pay 1 million dollars for something that is worth 1 million dollars. If you were geared at 80%, your 1 million dollars can buy you 10, 1 million dollar houses. As a result, 1 million dollars buys you 10 million dollars’ worth of assets, more bang for buck.

Now if the value of the properties increase by 10%, the portfolio that is not geared will only give you a return of 100 000 dollars where as the portfolio that is geared will give you 1 million dollars.

Think about it, without leverage, a 1 million dollar investment, gives you a return of 100 000 dollars which is a return of 10%
With leverage, a 1 million dollar investment, gives you a return of 1 million dollars, which is 100%
In both scenarios, the value of the assets goes up by that same 10%

So leveraging is a tool used to amplify your returns. However, if the value of the asset decreases, your losses will be amplified as well.

In the share markets, there are many ways to gear your portfolio.
The easiest way is to take a loan or a Margin loan.

There are other products that increase your exposure to the share markets as well, I will not go into them today because if I do, the post will be way too long. Some examples are:
CFDs
Instalment Warrants
Capital Protected Loans
Options

So when I say I’m going to use leverage, I mean I am going to increase my exposure to the markets than my investment would normally deliver, whether it be using loans or derivatives.

Remember that I am by no means, encouraging you to gear your portfolio or make use of leverage. Leveraging your portfolio carries a very different risk profile if compared to investing or trading using cash. Remember that your profits can be amplified but so can your losses.

This post is to explain what leverage means so that we will not be so lost when somebody talks about it or if we read it somewhere.

Thanks for reading. I hope this post was helpful, do drop me a comment or an email if it was or if it was not. Definitely let me know if it was crap so that I can improve it.

Thank you!

Saturday, April 2, 2011

The Unintelligent Investor's Portfolio: Week 1

After 1 week of trading in the Trading Places competition, I ended up with a modest gain of $7 523

I am currently ranked 179 out of 3209 in Australia
and 4th out of 49 in University of Newcastle.

This is what my portfolio looks like


I know it is a very conservative one with about moderate risk because I've been playing it rather safely. I'll probably start taking bigger risks in the following weeks and see what happens.

If you look at my trades, I accidentally sold then bought then sold PDN again. That was a complete mistake, I didn't really know how to use the interface yet. Now I know! We're all still learning lol.

Friday, April 1, 2011

Black Swans

Hey there

I guess this post is sorta a follow up from the last post because it is also centered around selling shares.

At about the time of my first post, Japan had one of its biggest natural disasters. The last time I read the news, the death toll topped 10 000 and they had 17 500 missing. On top of that, about a quarter of a million people were living in shelters. As if all those weren’t enough, they also had a six-reactor nuclear plant to worry about.

This kind of events are said to happen once every few decade or even a century. Some might call it a black swan event. Wikipedia explains the black swan theory as “a metaphor that encapsulates the concept that the event is a surprise and has a major impact. After the fact, the event is rationalized by hindsight.” They are considered as extreme outliers that are almost impossible to be predicted, unless of course you practice magic.

As a trader, I hate outliers. I very much prefer trends to be predictable and consistent, i.e. either upwards or downwards, not jumping all over the place (whipsaw). Every time an event such as this occur, the global markets go crazy, usually crashing, while you stare at the news thinking what The F*** just happened. This when I start to lose rationality, I stop thinking about my trading decisions thoroughly. This is when I am most prone to make bad mistakes, mistakes that can cost a lot.

So what should we do to avoid making horrible mistakes when we are caught by surprise? We prepare for it. The Japanese people are taught drills to perform when an earthquake occurs. I guess this is mainly because they are on the Pacific Ring of Fire, and have more than 100 active volcanoes. Hence, it is always important to be educated and prepared.

Hypothetically, black swan events are suppose to happen only once in a blue moon but if you think back, they probably happen more often than we think.
September 11, 2001 – more than 2900 dead and 14% or 1.2 trillion dollars drop in Down Jones in a week.
2004 Tsunami in Sumatra – more than 230 000 deaths, one of my best friends were there, luckily they were fine
Sichuan earthquake
Lehman Brothers failed and Bear Stearns was liquidated. 30% drop in US home prices
Global Financial Crisis
Haiti Earthquake
Bushfires in Victoria
BP’s oil spill
Middle East is getting more and more unstable
Floods in Queensland
Earthquake in New Zealand
Earthquake and tsunami in Japan
And I’m sure we can list a few more unfortunate events that I cannot remember from the top of my head.

As traders or investors, I believe that we need to be prepared and have an exit strategy or a rough guideline to be implemented when something bad occurs. It is probably too late to be looking for the exit, safe spots or safety gear when an earthquake happens. That is why we have to be prepared and have a plan to be implemented as soon as it occurs.

Just like emergencies, we cannot anticipate black swan events. And just like emergencies, we should be prepared.

So what is your exit strategy when outliers occur? What do you do when all of a sudden the market starts to freefall? Do you cash up and buy more? Do you go short? Do you close all your positions? Please leave comments or drop me an email. I would love to hear what you thoughts and strategies are.

Thanks for reading!