Wednesday, July 29, 2009

Control Risk and Loss in the Stock Market

Risk is the probability of loss. It is best to estimate it and to adjust your purchase and sell strategies to it in order to control loss before the purchase is made. Correct timing of purchases, buying near support, limiting loss potential, and stopping the decline by using volatility stop losses are all ingredients of a good risk control system. Let's look at a few of these loss control discipline components.

One method of controlling risk is by timing purchases so that they occur at or near support. That way, your stop loss can be a very small distance away from your purchase price. If you buy when the stock is 5% above its trendline, for example, it will mean little if the stock declines 5% to reach its trendline. Since stocks often return to support, why would you sell? You would sell only if it broke to the downside through its rising trendline. Therefore, your loss would be calculated by adding the distance the sell point is below the trendline to the distance the purchase price was above the trendline. Buying at the trendline instead of above it would eliminate that unnecessary 5% loss.

However, stocks often make a small temporary penetration through a support line and then resume their climb. When, precisely do you sell? Let us use the suggestions offered in Technical Analysis of Stock Trends by Edwards and Magee as an example. If you are using stops that are based on closing prices, they suggest a trendline penetration of 3% would warrant selling. If your stop loss is placed with a broker, they recommend that the stop be placed 6% below the trendline because of the possibility of inconsequential intra-day spikes. Therefore, if you buy when the stock is 8% above its rising trendline and place the stop loss 3% below the trendline, you will lose 11% before your stop is triggered. On the other hand, if you wait for the stock to return to its trendline before buying, you will lose only 3% if your stop is triggered. It is important to buy right so that you can sell right.

Risk is also blunted when the downside behavior of stocks is strictly limited to predefined tolerances. For example, a tradermight plan his purchases so that the projected profit is about three times the expected loss if the trade goes against him. Thus, in order to try to capture a gain of 6%, the stop loss must be no more than 2% below the purchase price. If he can reasonably expect a gain of 12%, then his stop loss would be no more than about 4% below the purchase price. Long-term investors can use a ratio perhaps as low as two to one because they have a presumptive tolerance for wider price swings and a longer time-horizon. It can take more than one price cycle to reach the targeted profit, and the uncertainty associated with the accomplishment of that is already part of the risk accepted by the long-term investor. Therefore, there is greater tolerance for negative price movement relative to the expected gain. The trader, on the other hand, does not have that luxury. He must put into effect more rigorous profit to loss ratio requirements.

Another approach to blunting the downside behavior of stocks is to reject as a purchase candidate any stock that has a logical stop loss placement greater than a certain amount. Let's say that our investor or trader finds a stock with a great story and feels he must have it. The stock is climbing rapidly and it looks as though it will never be at the current price level again. If the stock is rising at a steep angle of ascent, an appropriate stop loss may be 16% below support. If his rule is never to risk more than a 1% portfolio loss because of a single position and he has 15 positions, the stock must be rejected. A 15% loss on one position when there are 15 positions would cause the portfolio to lose 1%. A 16% loss would exceed the limit. Though downside behavior would be permitted within the parameters and tolerances of the prevailing growth pattern, the outer limit is set at some specific amount by design. The amount should be determined by the overall risk assumed by the portfolio. For example, limiting the portfolio's risk to 1% per position would mean that a portfolio of 10 stocks would have to reject any stock that has a logical stop loss more than 10% below the purchase price.

The volatility-adjusted stop loss makes use of probability theory. The idea here is to measure the stock volatility and place the stop loss just beyond the normal price excursion of the stock. The distance of the stop will be determined by the investor's preference as to the probability that the stop loss will be triggered by the random non-meaningful fluctuations of the stock. Thus, he can set the stop so that it will be triggered once in twenty days, once in 100 days, or once in 200 days because of a random surge. Any probability can be chosen. Let’s assume that our trader wants to minimize the chances that a random spike will trigger the stop. He could set the stop so that a random spike would be likely to trigger the stop no more than once out of 161 days by setting the stop 2.5 standard deviations below the average price. Other probabilities are reported in the twenty-fourth stockdisciplines tutorial. These statistical references may sound complicated, but there is a tool available to traders that makes it possible to do this without any knowledge of statistics. Since random noise in the stock's behavior would cause a sale only once in 161 days, then the probability is quite high that if the stop loss is triggered, it is because the stock is misbehaving to a significant degree. An unusual decline has occurred, a decline that is well beyond what is probable for that stock. Think about it. Those are precisely the conditions under which an investor would want to sell. The beauty of this approach is that the stock tells on itself. It's as if the stock were shouting "hey, I’m behaving badly. Sell me before I cause you pain!"

One characteristic that differentiates an expert trader from an amateur, is that all the losses of the expert are small. He has no large losses. The trading pattern of amateurs is strewn with losses and gains of all sizes. Amateurs and experts can both find big winners, but amateurs are likely to lose those gains on subsequent trades. Only experts consistently control their losses so that none of them are large. If you learn to control risk (limit the downside behavior of stocks), accumulated profits should be the consequence. In the market, it is wiser to concentrate on developing a good sell strategy than to concentrate on developing a good way to find winning stocks. Part of controlling risk is buying right. Any stock can be a winner if it is bought right. The bottom line is that it is more a matter of what you can keep than what you can gain. If you want to perform like an expert, develop your stop loss and selling disciplines. Many professional money managers do not have true ownership of this principle. It is imperative that you make loss-control an integral part of your discipline.

The increased volatility of the market caused me to review my data on thousands of different strategies. I saw the elements that all the most profitable strategies had in common. The point was driven home. All these strategies exercised rigorous risk control. Sometimes they even generated more losses than gains, but they were all profitable. There was one characteristic trading pattern all the strategies had in common. They all generated consistently small losses and occasional big gains, but they never had a large gain wiped out by a large loss. There were no large losses.

Investments in 2009

Most people today are scrambling around trying to figure out if they should spend money on vacation or even eating out. The way this economy is going it has even the more flamboyant with their money in conservative mode. We work hard all week and even put money into our safe or not so safe 401K plans and await the results. We want to retire early but most of us need a part-time job even with our pension plan. When we were younger it was engrained in our thinking to go to college and a secure a job and everything will be fine. This is a myth for some and works for others. However once the children come the nicer mini-van, the larger house, the dogs, and the college education for the children we are at a bump in the road. While in panic mode some of us work more hours if our company permits overtime while others pick up a second job to satisfy the difference. The only problem with this solution to our financial burden is now we may be able to pay our bills but we have no time in our schedule to enjoy those around us. This predicament really forces us into a plan B. We start to think of investments and how they could pay us the rest of our lives and the rest of our children's lives. Now we are on to something pretty remarkable.

In a good economy the stocks and bonds were a great place to put our money and now that is risky. Every investment requires some risk so we keep looking and searching for one that will pay us years ahead. Another option is being a business owner, but then there is overhead and employees to tend with and the risk of it failing. We could even go back to School yet when we so that the cost of our education and working two jobs just doesn't work at this phase in our life. Our families and all the added responsibilities of adulthood this combination is a far stretch. Real Estate is another option to invest in yet the way the market is going and the interest rates that vary one never knows the right time to jump in. Yet what if you owned multiple properties and had rental income every month going into your bank account. Two and three families could end up being a great decision to secure you for the future. Another option is being an affiliate to promote another's website and everyone you sent there who bought you received some kind of credit. This kind of system set up correctly with the right coaching and some discipline on the affiliate's part could be very profitable.

Finally, if you could figure out your next investment wouldn't it be wise to start today while we see this economy not improving and it needing to be you as your own advocate to stir up the pot and get your lifetime profits each month because we all deserve to be happy!

Avoiding Common Pitfalls When Investing In Stocks

These can be frightening times for those who are not used to investing in the stock market: there's no denying it's a bear market right now, but things will eventually turn themselves around. Just make sure to avoid the pitfalls that are common to most casual traders!

Beware of the green-eyed monster that is a hydra with two heads: jealousy and greed. In the case of buying stocks, it is often a case of "monkey see, monkey do, I wanna piece of that banana too." Sometimes with stock trading, people feel as if they have to keep up with the Jones's when someone begins to do well. Chances are good that if you buy anywhere but near the bottom of a hot stock's value, you probably won't make money.

If your friend has made a ton of money on Company X, it won't do you any good to get in near the top of the stock's value bubble. At that point the stock's price is overvalued and it is bound to drop: your friend still made a lot of money, but you who bought while the price was in the penthouse suite of its value, stand to lose big time. Buy low, sell high. Buy low, sell high. Say it over and over again to yourself, and resist the urge to get greedy when someone other than you got in at the right time.

Don't micromanage every single stock you own: it will lead to fear. Experienced investors know that owning a stock means owning it for the long haul. You can't be swayed and affected by every single market drop that comes along. Fear leads to the temptation to cut losses when a stock drops and try something else: it doesn't work. An experienced investor will buy more of a promising stock when its price is low, and not dump what he already has.

Similarly, fear leads people to not invest at all when the stock market is low: but this is also a mistake. If you have the money and the know-how, a bear market is a great time to find bargains which will pay off big time down the road. If you wait too long, you may lose out on a lot of great opportunities.

Make a conscious decision to remain in the market over a period of several decades, and resist the temptation to jump ship every time a stock you own experiences the normal downs.

The Benefits of Buying Real Estate in a Bad Neighborhood

When people call me, typically one of the first requests they make is for a house in a "nice" neighborhood. And this makes sense to want a neighborhood that is safe and enjoyable. But there are some benefits to buying real estate in the rough part of town or on the wrong side of the tracks. This article highlights some of them.

- There is less worry of your neighborhood going downhill because it is already downhill. Good neighborhoods can get bad and bad neighborhoods can get better. Since the price usually reflects the current condition, buying in a neighborhood that has room for improvement might be a good idea.

- If you are buying a rental, you usually get better cash flow in rough neighborhoods. If you are renting your property, there are more renters and they are more long term. It's difficult to rent in good neighborhoods because fewer people are looking to rent and those who do are generally there short term while they look for a house to buy.

- You can look better in comparison to other landlords. Landlords in rough areas frequently don't maintain their properties as well as people in nice areas. Therefore, if you maintain your properties, you can blow away your competition, and charge more for it.

- If you are in a rough neighborhood, you can propose that your property change will improve the neighborhood and you have a better chance of getting a different zoning. Conversely, if you are in a good neighborhood, it's hard to make the same argument.

- You can buy more property. If you want to spend 500k, you can either buy one house in an upscale neighborhood or six or seven houses in a rougher neighborhood.

- They're more recession proof. When the economy goes south, real estate in rough neighborhoods is less affected.

In summary, I am not saying you have to buy in a bad neighborhood. But simply that if you are looking for long term investments sometimes its a good idea to wander over the tracks and look around a bit.

Stop Trading Individual Shares If You're Not Beating The Market

Every share investor enjoys hunting out profitable companies they can invest in, and hopefully finding a potential ten-bagger that will make them rich, but there comes a time when you have to analyze your portfolio and make harsh decisions if you're not beating the overall market.

After all what is the point in spending hours and hours researching different companies if the end result is that you are underperforming the overall market. You may as well just invest in a tracker fund that tracks the market or a top performing mutual fund and spend your time doing more worthwhile things.

I know it can be quite exciting doing your own research and investing in the companies of your choice, but professionals are paid to do the same job and will generally have access to more information than you do, and can make better informed decisions.

So take a look at your share portfolio over the years and see how it's performed in percentage terms. Then compare this to the performance of the FTSE 100, for example (or the Dow Jones if investing in US shares) and see how you compare.

If you find that the overall index has seriously outperformed your own efforts then something is seriously wrong here, and it might be an idea to seriously rethink your investment strategy.

For instance, taking the FTSE 100 as an example, this index has increased dramatically since 2003 almost doubling in value so almost all good quality companies will have risen a lot during this time. Now look at the companies you've been investing in. If they haven't risen during this time when the market as a whole has been extremely bullish, then your investment strategy is seriously flawed.

If however, you have achieved excellent gains in percentage terms then your individual share picking strategy is of course justified, although it might still be an idea to place your money in a tracker or mutual fund, depending on your performance.

This isn't always true though, because it's important to note that portfolio managers have more constraints placed on them in terms of the types of companies they can invest in, plus of course there's the added fees you have to pay for their service, so ultimately it's a matter of choice and convenience.

I personally have done extremely well investing in my own portfolio over the years and have plenty of time to do my own research. However for people who have busy lives and have maybe shown that they are not that successful in managing their own portfolio and selecting individual companies to invest in, then paying someone else to do it for you is probably the better option.

Investment Strategies For Avoiding Risk

Ideally, investors try to buy a stock when the price has reached a support level (a level at which the price is as low as it will go) and sell the stock when it hits a resistance level (a level at which the price is as high as it will go). This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go. In this article, we will focus on the two most popular strategies that you can use to invest without having to worry about market timing.

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares of stock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.

An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share.

The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certain stock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.

Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.

Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments.

If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of my investment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of my investment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.

Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as the stock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price. But, neither of these strategies are necessarily full-proof. Make sure you know something about the company you are going to invest in before you go forward.

Intelligent Stock Trading

If you want be a successful penny stocks trader, youll need to be an intelligent trader. There are very few requirements to start stock trading in penny stocks.

It can be broken down into three main things

1. Money

The money we are talking about is not just the money that is sitting in your bank account. It is not the money that you use to pay for your rent, your car or your food. Penny stocks can be extremely unpredictable and although you might make a great deal of money it is also true that may lose everything, so it is important especially when you are starting out with penny stocks that you only use money that you can afford to lose. After you have built up a nice profit, you can re-invest your profits from past trades which will snowball your earnings.

2. Knowledge

This is without a doubt the single most important factor in determining whether your budding career as a penny stocks investor will be a spectacular triumph or a dismal failure. If you are a newcomer to stock investing of any kind there are various guides you can buy and it is a good idea to read several of these before spending any money.

Penny Stocks: The Next American Gold Rush by Dan Holtzclaw
Stock Investing for Dummies by Paul Mladjenovic
The Guide for Penny Stock Investing by Donny Lowy

These are all good and although they will not help you with specific decisions such as whether to buy a particular penny stock, or when to sell, they give you a good background on how it all works and are invaluable in building a good knowledge base.

3. Make A Plan

Before you investing any money, make an investment plan and stick to it at all times. This will help you become disciplined and will also help you organise your time and investments. Keeping things simple will result in less stress. Your plan should consist of the investments you are going to make and why and how much you are investing in stocks. It should also include your exit point (the price which you will sell your investment at to take profit) and also the time you want to allocate for your investments each day (i.e. The time it takes to monitor and research them).

Now you have got all the major elements in place you are set for the roller coaster ride that is the world of investing in penny stocks But remember that knowledge is the most powerful tool you have to make your penny stocks successful so start learning today.

Thursday, July 9, 2009

Getting comfortable with hard money investing

Many real estate investors overlook hard money loans as a strategy for acquiring property. That's because these loans are typically used by desperate property owners looking for a way out of the real estate market, rather than into it. But hard money can work for anyone, and it can be particularly useful if you're a new investor looking to build your portfolio quickly.

Hard money loans can generally be described as high interest loans available to borrowers with any credit rating, as long as they can can provide solid collateral - usually equity in real estate, such as a home. These loans are almost never issued by banks or deposit institutions, but rather by private lenders who specialize in short term lending at high interest.

Normally a home owner in need of a big loan would apply for a second mortgage, using real estate equity as collateral, but bad credit can make things difficult here. If a home owner has missed a few mortgage payments, the banks may refuse to provide more financing - hard money might be the only option in this case.

The limit for hard money loans typically hover at about 60 to 70 per cent of a property's quick sale value, defined as the price a lender could reasonably expect to realize if the borrower defaulted on the loan, and the property was liquidated fast. The interest rate for a hard money loan is usually in the 15 to 25 per cent range.

Investors can take out hard money loans to buy a property, as long as they provide acceptable collateral - in this case it could even be the property they're buying. The strategy here is to find a pre-foreclosure property, or any real estate with an owner prepared to sell below below market value as long as the sale is fast. If the investor can re-sell the property at full market value, before too much interest is paid on the hard money loan, he or she can make a significant profit. Hard money loans have helped many successful investors get started in real estate.

How to Invest in a Recession

If you have money to invest in a recession, then consider yourself lucky as you are better off than most. This, of course, is taking for granted that you have no outstanding debts and you have an emergency fund at your disposal that can cushion you for unexpected expenses or the loss of a steady income (such as from a job).

Now that the disclaimers are out of the way and if you still wish to invest in a recession, please read on!

There is such a thing as fast easy money but the greater the reward the higher the risks. In a recession, an investor can short sell - selling a financial instrument he does not hold but hoping to buy it back at a later date at a lower price. Seeing as the markets are in a general downtrend, this would make a lot of sense. However, due to market turmoil, nothing is ever predictable. With the U.S. government pouring in billions of dollars in economic stimulus, one never knows if Wall Street or Main Street will view this as a positive sign; buying back the financial instrument at a lower price is not possible. In fact, you would be losing money by short covering in buying it back at a higher price.

The traditional approach to investing is to be long in a security. This means that the holder of the security makes a profit if the price of the underlying security goes up. However, this begs the question, how long to hold the security? You can hold a security for years, a day, a few minutes and still be considered long.

In answer to this question, we can take inspiration from one of the most renowned investors in the world - Warren Buffett. His advice is to hold the security forever. Given his track record of success as consistently being in the top positions of Forbes' World's Richest list, his advice should indeed be considered.

Buffett looks at investing as if he's an owner in the company. And technically, if you have shares, you are a partial owner. The question begs to be asked, why invest in a company if you don't believe in it for the long term? That's like getting married but knowing you will get a divorce in a couple of years. Why not just find good companies to invest with the criteria being that they will continue to dominate its competitors over the next ten years? Furthermore, in times of recession when everyone is in a panic, this is the best time to take advantage of cheap stocks that are trading below their fair value. After all, to accumulate wealth, everyone knows to buy low and sell high.

Beware the Hype in Options Trading

Selling education on options trading is a big business. We see infomercials on television and receive emails advertising free trading software and foolproof trading systems. Unfortunately, there are many “snake oil salesmen” operating in options education. They are busy selling the dream of instantaneous riches without effort – and their price tag isn’t cheap.

I recently came across the following statements on option education web sites or advertisements for those web sites:

Make all the money you ever dreamed of trading options!

Trade options like a pro tomorrow!

Want to make 627% trading options?

The first statement doesn’t even deserve comment. The second statement is extremely misleading. It is certainly true that ordinary people of average intelligence can learn how to trade options – but it won’t happen tomorrow! Learning the fundamentals of options terminology, how options trade, how they are priced, and then all of the different options trading strategies and their behavior in differing markets simply does not happen overnight. It requires time, effort, and practice. In my experience, a minimum of six months is required for the fundamental education, paper trading, and then some taste of success trading in small lots before scaling up in volume.

The advertising line, “Want to make 627% trading options?”, is preposterous, but apparently it sells and brings in people. Certainly, it is possible to make returns of several hundred percent trading options. But it is also true that you could easily lose 100% of your money very quickly if you did not know what you were doing. Options trading strategies with the potential of several hundred percent returns are inherently trades with low probabilities of success. So, yes, I would like to make 627% trading options, but the presumption in this advertisement is that you can do that on most, if not all, of your trades. That is simply not true.

If you are interested in learning to trade options, here is a checklist to ensure your success:

1. Find a reputable options education firm.
2. Continue your search if the options education firm hypes the potential returns or suggests this will be quick and easy.
3. Check references from former students.
4. Expect to spend at least three months learning the fundamentals and trading on paper.
5. Hire a trading coach who will be on call to help and answer questions as you begin to trade with real money (this will actually save you money).
6. Scale up slowly.

Learning to trade options and generate a steady income from the markets is indeed feasible. But it requires time, effort, practice, discipline, and coaching to be successful. Don’t be deceived by the hype.

Penny Stocks Could Bring You Considerable Gains

Many big investors shun MicroCap stocks due to their unpredictability; besides stating that they are for the investors who do not have the resources to invest in more secure high priced company stocks. This is not true altogether since MicroCap stocks too offer great opportunities for making large profits provided you handle them right. That is why increasing numbers are now investing in MicroCaps also called Penny Stocks.
Greater opportunities for growth is an argument often advanced in favor of penny stocks by many experts. This is true subject to the corollary that there are also similar opportunities for losses. All prospective investors in penny stocks should always bear this in mind.
The built-in risk factors involved in investing in MicroCap stocks are well-known. However, here are some tips that would help the serious contenders along. One important factor is that these stocks don't trade fast like their bigger counterparts and you would be stranded with too many small caps in your hand by following a policy of quick buy and sell that works well with large cap stocks. But to make sure you are involved in liquid stocks, we recommend that you register to a FREE Newsletter service called .
If you are already prejudiced with the prospects of making it BIG with SmallCaps, remember that present world's stock giants such as Wall-Mart, Apple, Cisco did not virtually fall from the skies. They have come up having passed their small cap stages. One way to make your investments work effectively with small caps is to be smart enough to spot the small companies already turning the corner or who are likely to be doing so in the days ahead. Once you find a few of them, don't go all the way and dump everything you have into them; but rather go cautiously and invest about one tenth of what you would have invested in large caps under similar circumstances. Spread your investments in small amounts among a couple or more of such good prospects selected through a careful research undertaken. This strategy is bound to take you to the top with those often forsaken and prejudiced small cap stocks too.
Also it is recommended to use newsletter services so that you can learn as you trade, there are many types of newsletters and to read one that has Fundamental information and also Technical Analysis is one method that help learn very fast. is such a service and you should go register, it's a free service loaded with valuable information and many alerts every week.