His father bought property at River Valley at $550K during 2005 and sold at $800K at 2008.
After accounting for those fees payable, annualized ROC is 9.9%
So I think the biggest advantage of Property Investing over Active Stock Investing is your size of capital. It is extremely emotional to invest huge sum of capital in the stock market, and so much relaxing to invest in the Property market. As property investors will never see any unrealized losses throughout their holding period.
For much smaller capital, ROC on value stocks is really not too bad either. Another advantage is active capital recycling for compounding effect, which is not possible for property investing unless you are flipper.
For emotional control, think like a property investor so you too will never see any unrealized losses throughout your holding period. The conclusion is that you have bigger stomach and live the life of a cat (sleep well no matter what happen), ROC on stocks may be better.
So I think the biggest advantage of Property Investing over Active Stock Investing is your size of capital. It is extremely emotional to invest huge sum of capital in the stock market, and so much relaxing to invest in the Property market. As property investors will never see any unrealized losses throughout their holding period.
For much smaller capital, ROC on value stocks is really not too bad either. Another advantage is active capital recycling for compounding effect, which is not possible for property investing unless you are flipper.
For emotional control, think like a property investor so you too will never see any unrealized losses throughout your holding period.
In 1998 (probably at low property cycle), he bought condo in East Coast, $480K, sold it in 2004 for $650K
Gross Gain = 35% over 6 years. Gross Annualized Gain = 5.9%
Annualized Gross Rental Yield = 7.5%
Just purely looking at annualized Gross ROC of 5.9%, without any leveraging, may not really much better than buying blue chips during market low for those with smaller capital.
Now, comparing with my personal annualized stock dividend yield (since 2002, before that I didn't bother to track) of 8.3%.
I mainly hold blue chips for dividend play. So, for long term investors, it may not be wise to overlook those blue chips giving good dividends. If you have spare cash, you may want to "eyes open wide" to look for blue chips with good dividends
BTW, I intend to agree the view of http://market-uncle.blogspot.com/ on Property vs Stock. See his view as belows:
06 December 2008
Property vs Equity as an Investment
I happen to have chat with my former colleague on the investment merits of equity versus property, in the context of passive income as primary concern and capital returns being secondary. Under this context, an investment must be one that provides a stable cash flow, either from monthly rentals or dividend payouts.
Property vs Equity
Rents vs Dividend
At first glance, property provides stable rental returns, usually in substantial monthly figures that can supplement or even substitute active incomes from work. Monthly rental figures in the magnitude of $3,000 to $5,000 are reasonable for renting out entire 3-room condominium units in reasonably attractive locations, close to basic amenities like MRT station, food centres etc.
On the other hand, dividend from equities are usually paid out once a year and are far less stable than rents. The amount are usually meagre and are regarded more as extra annual bonus than monthly income supplements.
Leveraged vs Unleveraged Portfolio
But on closer look, the significant difference in payout can be attributed to leverage. To obtain the rental figures listed above, a typical condominium would have cost anything from $700,000 to above $1,000,000. A typical well-to-do middle income household that can afford to purchase a second property would typically have to draw down a housing loan ranging from 80 to 90%. Few from this group will be expected to 'cash and carry' their property.
In contrast, few sensible people who invest in stocks with objective of getting stable dividend returns would take up any loan to finance their purchase. If the typical well-to-do middle income household above who can afford to pay a 20% down payment or $200,000 on a $1,000,000 property, instead use the down payment to for share purchase, it would have earned them only $14,000 in dividend annually or $1167, assuming a 7% dividend yield (a respectable figure in 'normal' times). This is way below the $3,000 to $5,000 for rents above. The difference attributed to leverage can hence be seen quite clearly.
What if they are willing to take up a $800,000 loan to buy shares? Combined with their original $200,000, there annual dividend income would have been $70,000 or $5833 monthly, a equally respectable figure. But in both scenarios, I have not taken into account the cost of borrowing. Since equity loan are usually unsecured and the cost of borrowing will be much higher than a comparable housing loan.
Fall out from current financial crisis
Every crisis offers new opportunities. The current credit crisis is no different. Property prices and rents have started falling and could plunge further given weaker demand and greater supply in the years ahead as more new property projects are ready. More information can be found in the URA's website.
If falling property prices offers opportunities, plunging equity prices offers even greater opportunities, though the risk should be higher (risk must commensurate higher returns). Once built, the condominium should remain there but there is no guarantee the company still exist to honour the claim by the shareholder.
I extract out 7 relatively high and stable dividend play equities from SGX and summarise them in the following table:
The 7 are well represented by 3 shipping trusts, 2 REITs and 2 food industry related business. The stability in yield arises by nature of the business, e.g. Singapore Airport Terminal Services and Pacific Andes, or by long term contracts e.g. The shipping trusts and REITS.
Taken together, these 7 offers an averaged yield of about 26%. Reusing the example of the middle income household above, a $200,000 investment would give $52,000 annually or $4,333 monthly, without leverage!
But the fact these equities offers such high yields is due to the underlying risk. Other then Singapore Airport Terminal Services, the other 6 businesses are highly leveraged and there is no certainty all will survive the current credit storm. Even if they could, there is a high chance dividend could be cut due to lower income and hence reduce the yield significantly.
Given the current credit storm, if I have the funds to purchase a private property, I would rather threw them into equity. The chance that all 7 high yield stocks above turn into useless scrap paper ALTOGETHER is actually quite low, at least, that's what I think. Unfortunately, I don't have such funds now...still waiting for Singapore Pools to give me a hand.
Answer: Brokers make their money on the spread. They are happy to provide leverage to forex traders because the bigger the trade, the more the pips in the spread are worth.
For example, let’s say you used no leverage and were just trading a $1,000 account. You make a trade for the full amount of $1,000 and the spread is 3 pips. Each pip would be worth about 10 cents. The broker would make 30 cents as a payment for handling your trade. Let’s add some leverage now. You use the same $1,000 at 50:1 leverage. Now your trade on the market is worth $50,000. Each pip is now worth around $5! The broker makes $15 for handling your trade. The broker gets to keep that money whether you win or lose your trade. This is why you see some brokers out there offering 200:1 leverage. They can make the most money from your trading and at the same time make it very easy for you to trade by letting you open an account with a small amount of capital.
STI closed a new low breaking the previous low at Oct 08.
While STI is slightly lower than the low of 1600 on 24 Oct 08; however, the portfolio value as of today closing is 19% higher than the value at the closing on 24 Oct 08.
Why leh? Let me think through .......
Oh. Since 24 Oct 08, I have been re-balancing, swapping counters to diversify or replacing "dead" counters in the portfolio, and it is showing some positive results.
So be brave and control your emotion over losses. During the time of market depression, it will also present you with better opportunity for you to re-balance, swapping counters to diversify or replacing "dead" counters in the portfolio at current reasonable price level.
"The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable." - Sun Tzu, The Art of War
"The art of survival teaches us to rely not on the likelihood of the LOSSES's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable." - Createwealth8888, The Art of Survival
Before jumping into any investment of any kinds including trading or setting up small businesses, besides looking at how much we are going to MAKE, few people really think harder, how much we are going to LOSE, and how long can we SURVIVE under losing environment before we are forced to GIVE UP. Always remember that there is possibility of a BLACK SWAN appearing.
------------------------------------------- Black swan theory
The term black swan comes from the ancient Western conception that all swans were white. Thus, the Black Swan is an oft cited reference in philosophical discussions of the improbable. Aristotle's Prior Analytics is most likely the original reference that makes use of example syllogisms involving the predicates "white", "black" and "swan." More specifically Aristotle uses the White Swan as an example of necessary relations and the Black Swan as improbable. This example may be used to demonstrate either deductive or inductive reasoning. However, neither form of reasoning is infallible since in inductive reasoning premises of an argument may support a conclusion but does not ensure it and similarly in deductive reasoning an argument is dependent on the truth of its premises. That is, a false premise can possibly lead to a false result, and inconclusive premises will also yield an inconclusive conclusion. John Stuart Mill first used the black swan narrative to discuss falsification.
Ironically the 17th Century discovery of black swans in Australia metamorphosed the term to connote an exception to the rule and the very existence of the improbable. Thus, the limits of the argument behind "all swans are white" is exposed - it is merely based on the limits of experience (e.g that every swan I have seen, heard, or read about is white). Hume's attack against induction and causation is primarily based on the limits of experience and so too the limitations of scientific knowledge.
Rare and improbable events do occur much more than we dare to think. Our thinking is usually limited in scope and we make assumptions based on what we see, know, and assume. Reality, however, is much more complicated and unpredictable than we think.
Also, assumptions relevant to average situations are less relevant to irregular situations, especially when the "rules of the game" themselves do change.
The huge effect
Extreme events do happen and have a big effect. Examples abound, including September 11th. The Internet with its various effects was scarcely anticipated, and it is a development that has had a significant effect. The effects of extreme events are even higher due to the fact that they are unexpected.
Limited human knowledge
Why do people tend to neglect rare events? Partly because humans underestimate their ignorance in most situations—the effect of unexpected events is far more significant than people often imagine. Taleb argues that the proposition "we know" is in many cases an illusion—the human mind tends to think it knows, but it does not always have a solid basis for this delusion of "I know". This notion that we do not know is very old, dated as far back at least as Socrates. Some felt[who?] that the advancement of science has rendered the world well-known; Taleb argues that while science added knowledge, the world did not turn into a fictitious world where everything is known. Socrates' dictum "the only thing I know is that I do not know" is as true as ever, Taleb concludes. Taleb characterizes the trait, in part, as the Ludic fallacy.
By Lisa Smith
Thursday February 12, 2009, 6:29 pm EST
When stock markets become volatile, it makes investors nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will and for most people, having money in hand feels safe. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.
All Hail Cash?
There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash. Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.
A Loss In Not a Loss ...
When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to breakeven and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.
Inflation: The Cash Killer
While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes.
Opportunity Costs Add Up
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has generally been the better bet.
Time Is Money
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, when you should make this move. Trying to choose the right times to get in and out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.
Common Sense Is King
Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red.
Buy and Hold on Tight
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested.
Nerve Wracking, but Necessary
Serious investors understand that the markets are no place for the faint of heart. Of course, with private pension plans disappearing and the future of Social Security in question, many of us have no other choice.
Once you've faced the facts, you need to have a plan. Figure out how much money you need to amass to meet your future needs, and develop a plan to help your portfolio get there. Find an asset allocation strategy that meets your needs. Monitor your investments. Rebalance your portfolio to correspond with market conditions, making sure to maintain your desired mix of investments. When you reach your goal, move assets out of equities and into less volatile investments. While the process can be nerve-wracking, approaching it strategically can help you keep your savings plan on track, despite market volatility
Wow, these are the same wise words that I learnt some 25 years ago and after reading it, it is ringing soundly in my mind. So TRUE!!!
You will have to live somewhere no matter how rich or poor you are. So your domicile will forever be an expense that you have to incur. That being the case, you should try to convert it to the lowest possible expense it can be; and you do that by paying it off.
The average home owner is over 33x richer at point of retirement than the average renter. That’s because mortgage payments go towards reduction in a loan until a house is paid off. When you rent, the same thing happens as well, except you are NOT the beneficiary of the house being paid off.
Paying off your house is one of the best things you can do to obtain peace of mind. Understand the basics of how math (and specifically compound interest) applies to your house. For example, if you have a mortgage that is 7% for 30 years, every dollar you pay against it is a guarantee of 7% FOR 30 YEARS!
A lot of people think they can beat this by investing in the stock market or the like. Maybe you can, but can you guarantee that for 30 years?? If your child is one year old, and you are trying to save for his/her college, my advice is to not even save a dollar at all; and instead, take every dollar and put it towards the house.
You will probably find that you cut years and years off your mortgage, and when you have paid off your house, then the old mortgage plus the extra savings can all be thrown against Junior’s college. You will find that generally the math for that works much better, you will probably be able to pay off the house in 11 years, and still have an extra 7 years of unfettered savings for college. Also, understand why most people who retire still don’t own their own homes. First, it is not a priority for them (they say it is, but never bother to do the math for it).
Second, the average family moves every 7~8 years into (generally) a bigger home. What happens is, the family buys a home, takes out a 30 year mortgage, and then pays 20% of it off in 7 years. Then they move to a bigger house, and then START OVER, with another 30 year mortgage. After 7 more years, they have paid off another 20% but move again, and (yep, you guessed it) START OVER again with another 30 year mortgage. After 21 years, they have owned 20 percent of 3 houses, but only own really 20% of their current house, not 60% of a house.
It is this perpetual movement forward that kills the retirement, and renders most families without a house that is free and clear when they retire.
The way to do it is this: If I live in house A, and pay off 7 years of a 30 year mortgage, can I afford to move into house B, while taking only a 23 year mortgage? If I cannot, then I should not move into house B. The key to defeating this vicious cycle is to NEVER reset your mortgage payment length, and to throw every available dollar against it.
When you do this, you will neutralize the compound interest that is against you, and you will also save hundreds of thousands of dollars and buy safety and security all at the same time.
A man is not a man; until there is a house that he may call his castle. A woman is not a woman; until she has a place she may call her home. And neither a man nor a woman can say anything about their house, until they are the masters of it, and own it outright and unencumbered.
Never buy more home than you can comfortably afford, and without dipping into the 1/10th you are saving
When broker called you giving advice, he is happily calling his God of Fortune. This is probably how broker's advice works.
Slowly generating a pool of faithful Believers. How?
Everyday, some counters will be down and some counters will be up. This is how Market works.
He probably segments his targets into two groups. One group giving BUY advice on some counters and the other group advising SHORT on some counters. The trick is to give different advice to different people.
The Market does what it does. The results at the end of the day will be
Right calls: BUY call, Counter UP; SHORT call, Counter DOWN
Wow, a pool of BELIEVERS was born.
Wrong calls: BUY call, Counter DOWN; SHORT call, Counter UP
Wow, a pool of GIVE HIM A SECOND CHANCE MAN was born.
Every trading day, he just goes about giving different advice to different people.
Soon he will have a pool of strong BELIEVER, a pool of strong GIVE HIM A SECOND CHANCE and a group of HATE YOUR BROKER will leave.
To survive in this Game, he will enlist the BELIEVER and the SECOND CHANCE to help him to recruit new members to carry on the Game of Broker's advice.
Your brokers LOVE to give you ADVICE. Why? You are his GOD OF FORTUNE. You are his RELIGION and do help him to bring more followers. You more you take his advice, the more brokerage commissions he made. This is just that simple.
Listen to Warren Buffet's advice: Don't take your broker's advice.
Your brokers love you most if you use leverages and margins for trading. Why? The rules are there to protect them but definitely not you. If you got it wrong, you are wiped out due to your own greediness. Your brokers WILL NEVER LOSE. Your BROKERS ARE NOT YOUR FATHER OR MOTHER!. They exist to make money for themselves, but they always seem to be there to HELP you to make money. They also appear to be your GOD OF FORTUNE. At least, some of them will behave like your friends or personal financial consultants.
When you use your own to make money, if you got it wrong, you only lose what you intentionally put in. For example, you earn and save up to $50K, and you have decided to go into trading and unfortunately, you got it all wrong. How much will you lose? You probably sitting on paper loss UP TO $50K and with the hope of some recovery if you decided to hang on or take back some money if you decided to cut losses. Maximum loss UP TO $50K. You lost what you intended to lose i.e. $50K at most.
What if you do margin or leverage? Now you put in $50K in margin account to trade. For leverage trading, you need to implement stop losses mechanism due to the leverage of 5 or 10 times. As you lose , the losses multiplied by 5 or 10. What if you keep losing? It is a matter of time, you will hit the stage of Negative Equity, then you will be asked by your broker to top up or liquidate?
When you are forced to top up, it means that you now are forced to potentially LOSE MORE THAN what you have intended i.e. up to $50K. NOW YOU ARE FORCED TO POTENTIALLY LOSE MORE THAN $50K. Furthermore, you can't be sure what is the LIMIT of Potential Losses like. You are cornered to continue the Game of Trading with more money or GET OUT.
What if you liquidate your positions as you do not want to add more capital or have no more capital, your equity level will drop more and you have lesser ability to recover with a smaller equity.
So using MARGIN OR LEVERAGE is not only about controlling and understanding RISKS, people DO NOT often think hard enough about it. ARE YOU PREPARED TO ADD MORE MONEY TO CONTINUE THIS GAME? If yes, then margin or leverage, is not a bad idea too.
Experience in the market is not measured by years, but by decades of experiences of watching and hearing those horrible life stories of those (especially friends and relatives) under-capitalized market players without Angels supporting them got wiped due to listening or getting advices from those BIG BROTHERS or BROKERS. If you are forced OUT OF THE MARKET, then there is virtually NO way for you to recover. To recover your losses or paper losses, you have to be in the MARKET in time to ride on the recovery.
Think how you will survive if you LOSE, and not thinking how much you can MAKE.
As the Market is naturally UPWARD BIAS, the Market will ALWAYS RECOVER, but you make sure those COUNTERS you have are part of the MARKET. Your counters MUST be part of the Market.
Be wise, be brave and control your emotion, at the time of market depression, it will also present you with better opportunity for you to swap counters that will be part of the MARKET at current reasonable price level.
Market is already expecting good result. -------------------------------------------------------------------------------- NOBLE BUSINESS STRATEGY RESULTS IN RECORD NINE MONTHS 2008 PERFORMANCE 10 Nov 2008 Hong Kong
REVENUES: UP 87% TO RECORD US$29.3 BILLION GROSS PROFITS: UP 117% TO RECORD US$1.15 BILLION NET PROFITS: UP 174% TO RECORD US$438 MILLION Noble Group (SGX: NOBL), a global supply chain manager of agricultural, metals, minerals and ores, and energy products, announced record Group revenues of US$29.3 billion and US$9.4 billion for the nine months and third quarter periods, respectively, ended September 30, 2008. Revenue growth continues to be well diversified with each of our four business segments reporting revenue increases of between 65% and 110% compared to the corresponding nine months levels for 2007.
A while ago I could have been convinced that if I put in a lots of effort into FA , TA and watching the market closely to gain knowledge, skills, market view, and a lots of experience, and with intelligence would produce some good returns from the stock market.
But, while the intelligence and experience will help me avoid unnecessary risks, apply money management, reduce day-to-day emotional stress, it doesn't assure me of the desired returns from the market. The market does whatever it wants, rational or irrational, it's just the market. It is always uncertain and not precisely knowing
Who are those that really move the market up and down? This is the mass of market watchers with either plenty of money, plenty of shares on hand, or plenty of guts. Once these masses rush in or rush out, prices will move drastically in either direction, and then after that the news will come out to explain and justify these price movement.
There is no proven method of detecting the forces and magnitude of these market watchers. TA can only show us after these forces have swept over, and often it may be too late for the poor chaps like us to get in. If we are lucky to be on the right side, we survive and profit from it, otherwise, we will be agonising, doubting our intelligence again, and questioning why are we so foolish again and again. Some will give up and turn to another bunch of TA gurus to seek for another holy grail.
Perhaps, only those truly professionals or the market sharks have such capabilities to drive the market and profit from it, but definitely not for ordinary investors/traders, we can't. These truly professionals or the market sharks are not your fathers or mothers. They consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth.
So, I've learned to accept the market as it is, a reality. It's never going to be what I think it should be, but I can still use my insights to reduce my risks of running into financial stress and still have time or money to go fishing.
I am choosing to write a short biography of Jesse Livermore and his trading philosophies. Livermore was a great trader and speculator - always willing to learn, study and open to new ideas. He was also an eccentric man, unparalleled in his dedication to always gaining an advantage over all other traders and investors. So why Livermore? Is it because of the glamour of discussing such a man? No. Why not Gann? Or Buffet? Was there some type of "secret recipe" for his successes in both the stock and the commodities market?
Definitely not. I am choosing to discuss Livermore because I believe that the legacy left by Livermore is a very important and instructive legacy for the novice, the amateur, and even the professional trader. His teachings all throughout his books and biographies were all about basic trading philosophies such as trend-following, buying and holding in a bull market, industry analyses, following the leaders, identifying pivot points, and of course, risk management. All this did not come easily. It took Livermore literally years to nearly perfect his system and methods, and it requires intensive studying and effort in order to execute and to stay disciplined. This is what Livermore has emphasized all throughout his writings - that the stock market is not for the lazy nor the uninitiated. If one really wants to succeed in making money in the stock market over the long haul, then one will need to put in the necessary time and effort - not only in the studying of the stock market, but in the studying of one's own psychology and tolerances as well.
A more subtle but if not more important question for professional traders to ask is: If Livermore was so great, why did he ultimately lose his fortune again during the Great Depression and why was he not able to make a "comeback" again? This and the fact that Livermore had periodically suffered from depression throughout his life finally led to his suicide in 1940. What went wrong? Traders would often cite his lack of risk management, but I think it goes deeper than that. Perhaps he was getting older and lost his drive, but I believe there is a more important underlying theme and lesson to all this. I will discuss this in later paragraphs.
Early on, Jesse Livermore learned that in order to succeed in life, one needs to put in a great deal of time and effort to an endeavor that one enjoys doing. Of course, it didn't hurt that Livermore also had a great genius with crunching numbers and a great discipline for keeping records. It also didn't hurt in that Livermore was always willing to learn and was always receptive to new ideas. As a young lad, he chose the stock and commodities market as a way to keep score and to make his fortune, and this is what he did until the day that he died.
Livermore was a self-made man. He ran away from home at the age of only 14 and subsequently went to work as a quotation boy in Boston. He quickly learned the art of "reading the tape" and from here, he proceeded to trade in the bucket shops - and was so successful that he was practically banned from trading in all the major bucket shops in Boston. From the bucket shops, he relocated to New York and started trading on the Big Board in the office of E. F. Hutton. This was in the year 1897. By that time, Livermore had already gained a reputation as the "Boy Plunger" in all the bucket shops in Boston. He was only 20 years old.
Trading "legitimately" on the NYSE taught Jesse Livermore his first major lesson in how to consistently make money in the stock market. How? Within six months of opening his account in a legitimate brokerage firm, he had lost all his money - all $2,500 of it - approximately the equivalent of $60,000 in today's dollars. The average person will most probably swear off stock market speculation forever if he was to lose his entire fortune in the endeavor, but not so for Livermore. Of course, he was depressed. Any emotional being would be depressed on losing his entire fortune. But this unfortunate development only motivated Livermore to study his mistakes more carefully. He was able to beat the game in the bucket shops, so why not on the Big Board?
There are many lessons to be learned here. Let's start with the first lesson. Please note that I am not going to list them in any particular order. Each trader/speculator has to deal with their own trading flaws - some lessons may be more applicable than others to one trader but the same lessons may not apply to another type of trader - especially so if he has conquered them.
Lesson One: Livermore had no prior trading experience except for his trading experience in the bucket shops. His first mistake was his belief that he could directly apply his prior system of trading to trading in actual stocks on the New York Stock Exchange as well.
What were the differences? Why couldn't he directly apply his system of trading in the bucket shops to trading on the NYSE as well? Livermore studied the differences intently - major money and his future career were at stake here. He learned several things about the art of speculation. Among them were:
The greatest amount of money is made following the major trends - not in the day-to-day fluctuations of a stock or in a particular commodity. This fact was later compounded by his experience during the 1901 bull market. He had always been able to call significant bottoms in the stock market and had always be able to initiate long positions at the most opportune time. And yet, he would always sell his long positions after only making 10% or 20% hoping he will be able to get back in at lower prices. This usually does not happen. He eventually learned that in order to make money in the stock market, one will need to adopt a buy and hold strategy in a bull market and only sell when the bull market is on its last legs.
Livermore had a significant execution disadvantage by taking his actual business to the NYSE. Not only does he have go pay a high commission (compared to virtually none in the bucket shops although he got a severe handicap when he did trade there), there was also a significant delay between the time he places his order to when the order was actually executed. This disadvantage is severely magnified when one traded as often as Livermore did in his early days as a trader on the NYSE. Livermore was handed down the ultimate lesson in the art of execution during the final day of the Northern Pacific Corner on May 9, 1901. Livermore had anticipated a huge downside move in the morning and a subsequent one-day upside reversal. He was right, of course, but he ultimately lost his entire stake of $50,000 that day. Because of the huge volume during that day, the tape was nearly two hours behind; his brokers (who were very able) did place an order to short U.S. Steel and Santa Fe in the morning, but those orders did not get executed until two hours later. By then, both Steel and Santa Fe had already fallen by over two dozen points. When Livermore ultimately covered, he did so at levels that were two dozen points higher. This one-day plunder cost him his entire stake which it took him a long time to build up.
While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy. His first successful "raid" on the stock market based on his sound, fundamental studies occurred during the Panic of 1907. As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong - despite the hopes of the public as evident in the still-rising stock market. Sooner or later, Livermore concluded, there will be a huge break of epic proportions. Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric. J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market.
There are many lessons to be learned here by professional and amateur investors alike. While I have always maintained that the majority of traders and investors in the stock market usually under-perform the stock market, it is doubly true that virtually all traders who focus on the short-term eventually lose their capital. The successful daytraders are a rare breed - and the successful ones can only expect to obtain a return of 10% to 12% a year, at best. The amateur trader who expects a first-year 100% return by daytrading stocks just does not have a chance.
A more subtle lesson to be learned is the idea of evolution - evolving one's style to not only fit one's personality, but evolve to the point so that it will fit the market's personality as well. What made Livermore so successful during the first thirty years of the 20th century was this: Not only was he multi-talented in the traditional sense (his skills in analyzing long-term trends and fundamentals were as good as his skills in tape-reading and in daytrading), he was also multi-talented in the sense that he was able to evolve with the market very successfully. He had always been flexible in either trading the long side or short side - and he was also able to sit out in a market that was devoid of activity as well.
Lesson Two: Do not depend your analysis solely on "insider information." Livermore learned this lesson the hard way - twice in all. The first lesson was moderately costly; the second lesson was to cost him his entire fortune:
Livermore had always been skeptical about the dependability on "insider information." After all, why would top management tell outsiders that he was selling shares in his own company because he thinks business will be bad going forward (these were the days before insider-trading was made illegal)? Telling outsiders would only add more selling pressure to the stock, and vice-versa. The legendary trader, Bernard Baruch, had always maintained that insider information was useless, and that a person was doing him a favor if he would keep the insider information to himself and not reveal it to him. Livermore got his first real lesson sometime after he closed out his profitable short position in Union Pacific right before the 1906 San Francisco Earthquake. After three days of tape-watching, he concluded that the shares of Union Pacific were being accumulated. He started to accumulate shares in Union Pacific as well - only to be stopped by Ed Hutton, the great New York financier and owner of the E.F. Hutton brokerage house, and a personal friend. Hutton told Livermore that he had inside information and that the insiders have set up a pool and were dumping shares to him at a furious rate. Sooner or later, Union Pacific is going to tank. Despite his own beliefs and the reinforcements of all those beliefs from years of tape-watching, Livermore liquidated his 5,000 shares of Union Pacific at $162 - making only $10,000 in the process. The next day, the company announced a 10% dividend and the shares shot up by an additional ten points. The opportunity cost? $50,000 in additional profits which would be equivalent to over one million dollars today. Livermore did not get upset or emotional, but after this incident, he swore that he will never listen to insider information again and that he will only trust his tape-watching skills and instincts from now on.
The second lesson that was handed down to Livermore did not strictly involve insider information, although it was pretty darn close to it. It also taught Livermore a little about himself - his gullibility and his succumbing to another man's sale skills even though he practically knew all the facts of a product (in this case, it was the cotton industry). Let me clarify. This happened soon after the Panic of 1907 - when Livermore was trading successfully at a peak level and soon after he made a small fortune by nearly cornering the cotton market. Some weeks before, a man named Percy Thomas (who was also know as the "Cotton King") had gone bankrupt in trying to corner the Cotton market, and hearing Livermore's exploits, Thomas would seek him out and ask Livermore to be his partner. Livermore refused to be Thomas' partner since he had always played a lone hand. However, Thomas was a man of knowledge (particularly in the cotton market, of course - where he supposedly had "spies" that would report crop conditions and the like to him as soon as they could) and a great charmer, and Livermore was soon put under his spell. Prior to Livermore meeting Thomas, Livermore was short cotton. After a month of listening to Thomas and falling under his spell, Livermore covered his short position and went long. This was the beginning of Livermore's downfall. With his judgment clouded, Livermore continued to average down on his long position even as Cotton fell. He even sold out his profitable wheat position in order to maintain his margin requirements in cotton and to even buy more cotton on the way down. After realizing what had happened, Livermore soon sold out - with a stake of only $300,000 left - 10% of what he had only some months ago. Livermore sold his apartment and his yacht and tried to recoup his losses in the stock market. By this time, however, his emotions were running wild and his trading skills were shot. Soon thereafter, Livermore was broke once again - not only losing his remaining stake of $300,000 - but now, he was in debt to the tune of over one million dollars. Livermore would ultimately establish himself once again, but this lesson further reinforced his beliefs that he should always play a lone hand, and that he should never tell anyone what he was doing or ask otherwise.
Lesson Three: The need to continuously evolve in the stock market. This was initially discussed in lesson one, but I believe this theme is important enough to warrant its own bullet point (no pun intended). In fact, this is probably the most important lesson that could be taught from Jesse Livermore's experience. The most popular rules such as "cutting your losses" and "don't put all your eggs in one basket" have often been cited, but what if one wants to be able to make money in the stock market over the long run? To this I say: "One needs to continuously evolve in the stock market to survive and to flourish." This is definitely applicable to everyday life and one's career (if one is not a trader or investor) as well.
Jesse Livermore has been able to successfully trade the stock and commodity markets over a period of more than thirty years not only because of his intelligence, cool-headedness, trading skills, and his far-sightedness. He was able to do this successfully for such a long period of time primarily because he was able to evolve. He adopted a more long-term, buy-and-hold-like strategy when he shifted his trading from the bucket shops to the New York Stock Exchange. He was also eager to learn something new everyday. He was also flexible - whether on the long or short side or just being in cash. He figured out when there were opportunities in the stock market, and figured out what strategy to adopt and when there were not. He also made friends with very successful people - whether they were businesspeople or great financiers.
This is actually the heart of this commentary: the need to continuously evolve. In his ground-breaking work "Common Stocks and Uncommon Profits," originally published in 1958, Philip A Fisher remarked that times have changed and that the way to make the most money over the long-run is to find great stocks and hold them for the long-run through thick and thin. The old way of speculating and making money by catching the inflection points of boom and bust cycles was gone with the advent of the Federal Reserve and the maturing of the SEC and the new regulations. I believe Jesse Livermore failed to see that. By the end of 1929, he had successfully maneuvered his way out of the Great Crash with a cash horde of over $100 million - becoming of the richest men in America. When Franklin Roosevelt came into office in 1932 - taking his "brain-trust" with him - and with the creation of the SEC in 1934, the stock and commodity markets adopted a different character - a character which Livermore had never seen in his entire life and a character which America had never seen before either. There is no documented history of the trades that Livermore during that time - all we knew is that he went bankrupt for the final time in his life during the 1930s and was never able to successfully make a comeback. Some say he lost his fortune going long sugar futures before FDR put a ceiling on the sugar price. Some say he lost his fortune going long after the crash and didn't get out in time - thinking that the 1929 "dip" would be one of the many similar busts that America had endured during the 19th century and the early parts of the 20th century before the creation of the Federal Reserve. The message is clear, however. The character of the market changed in a big way, and Livermore was not flexible enough to go along for the ride - despite the fact that he had successfully evolved his strategies and trading styles many times before in the past.
This is not unsimilar to the period immediately before the technology bubble burst in the spring of 2000. At the time, I stated that the technical indicators that were so successful in the late 1990s would not work anymore - primarily because that we were entering a secular bear market. Few believed me at the time. They continued to use their oversold technical indicators, buying technology stocks during the many dips along the way. They failed to evolve. Warren Buffett had mentioned in the past that only when the tide turns would it be obvious to see who was swimming naked.
The idea of evolution in the stock market continues to hold true today. In fact, with the advent of globalization and information technology, it is now even more imperative to evolve since trends can change much more quickly. Information is now instantaneous. Investors will need to be more nimble. Whereas Philip Fisher emphasized that timing was not too essential in the purchase of stocks in 1958, this has all changed today. Witness the meteoric rise and fall of Taser - all in a short time span of 12 months! Also witness the huge amount of cash that has been sitting on the balance sheet of Warren Buffett's Berkshire Hathaway over the last 24 months. Yes, the company has grown bigger, but as a percentage of total net worth, the amount of cash that Warren Buffett is currently holding is unprecedented. Ten years ago, Buffett would have been able to find opportunities to put this cash to work. Buffett had always been a great timer in the stock market (he had always had the great ability to evolve), and I believe he will be putting all his cash to work once he finds the best time to buy equities, bonds or whole companies. In a weird way, Livermore's trading/timing strategies may have been revived. The point is: Today, the timing of the stock market and individual stocks is all the more essential. And MarketThoughts.com is here to help. While the analyses of individual stocks and industries continues to be important today (and sites such as the Motley Fool does a good job of it), we also believe that the ability to time the stock market on at least the intermediate-term basis (and the ability to adapt to a different style of trading and to recognize which asset class to buy) is going to become more essential down the road. Through our twice-a-week commentaries and our DJIA Timing System, we will seek to complement our analyses of businesses, individual stocks and industries, with our proprietary technical indicators and our timing skills in the stock market.
Dividends harvesting season is here. This year, and probably the next 2 years will be the right condition (deep recession probably happening once in 2-3 decades) to judge the success of the Strategy of Passive Income from stock dividends to fund living expenses after retirement.
So far, ROC from the following dividend play stocks
Being a Buy and Hold investor is like living through a nightmare where you find yourself the main character of the Greek “Myth of Sisyphus."
Futile and Hopeless Labor: In this myth, Sisyphus is condemned by the god Zeus to an eternity of futile and hopeless labor. He must roll a heavy stone to the top of a mountain. But then the stone rolls all the way back down … and Sisyphus has to push the stone back up again to the top.
A sentence of “futile and hopeless labor" is similar to the situation that Buy and Hold investors have faced during many periods of stock market history. Since “Bull" Markets are inevitably followed by “Bear" Markets, the investor’s hard-won gains from the Bull Market up-cycle evaporate as market prices fall during the Bear Market down-cycle.
That’s not to say the stock market hasn’t gone up over time. Looked at over hundreds of years, the market has grown at a 7% average growth rate. You might say: What’s the matter with 7%? The problem is that in order to have a statistically high probability of achieving an average growth rate that high, you should expect a potential wait of as long as 20 to 40 years!
Bear Markets Appear at Regular Intervals: Looking at the past 200 year historical record as author John Mauldin does in his book Bull’s Eye Investing, there have been 7 “secular" bull market cycles and 7 secular bear cycles … the bulls averaging 14 years in length and the bears 15 years. The word secular means “era" as in a long time.
Bull and bear cycles are long enough to consume a major portion of your earning years. Look at the cycles of the past century: The Depression-era bear market cycle lasted from 1929 to 1945. Then the bull cycle after World War II lasted from 1946 to 1964. After that, a new bear market cycle lasted from 1965 until 1981. The most recent bull cycle ended in 2007.
The real forces of moving stock price are not too much on analysis of company future earning, but, they are more likely to be like this ......
If you think hard and truly understand the real meaning of the cartoon, you are likely to profit from the market swing over time. This is how the stock price move, it can be totally irrational and complex.
I don't like the ideas of getting into Negative Passive Income. Read on. The Story ...
Seems unrealistic. Make money while you sleep. While you spend time with family. While you're in your car, on your bike, or eating. Passive income is income that you "set and forget". Wow, passive income is so shiok!!!
Rental income from properties can be the biggest form of passive income you can generate. It can also be the most detrimental to your work free lifestyle and can lead you down the road for another 40 hour a week drudgery if you ever fail in your property investment.
What is Negative Passive Income?
Recalling from Part 1 ....
For 30 years mortgage loan, you probably spent the 1st ten years paying more interests to the bank and little on equity.
Negative Passive Income happens when your monthly mortgage payment exceeds your rental income or no rental income.
If the current recession prolongs for another few years and the property market continue to fall further. Rental is going to drop drastically, and in the worst case, the property may remain vacant for sometime.
A better way for passive income generation through property is not to start with any passive income at all, but removing any negative passive income.
Getting out of debt is the first and hardest part of generating passive income and long term wealth.
That's all, folks. End of My Story. If you like my story, buy me kopi O.
I don't like the ideas of getting into Negative Equity. Read on. The Story ...
What is negative equity, and how does it affect a home buyer?
Generally, a home is said to be in “negative equity” when its market price is less than its outstanding loan.
Banks say that as long as customers pay the monthly instalments on time, they won’t ask them to top-up the difference between the market price and the outstanding loan.
However, if payment isn’t made for a few months, and the customer is unable to work out a payment plan with the bank, the bank may get a court order to do a “forced sale” to recover the outstanding loan and unpaid interest.
While it’s less common for HDB flats to be in negative equity, it’s possible for resale flat buyers to find themselves in such a situation, especially if they had bought the flat when prices were at a relatively high level.
- I don't like the ideas of making the bankers rich. Read on. The story....
(www.wallstraits.com, published 18 December 2000)
Who Really Wins by Paying a Mortgage Off Early? (I think this is true for long term loan, best to go for short term loan, and finish it once and for all. You may have better plan for investment and start as early as possible)
Have you ever gazed across the Singapore skyline at dusk? It is a beautiful sight. Each time I come home at night I open the curtains and take in the beautiful city view--my key criteria when I was selecting my home. Tonight as I take in the view, I find myself asking, why do banks own all the skyscrapers? Banks seem to have so much money they send dollar-sign shaped stars into the night sky above Singapore.
Where does all that money come from?
When you need money who do you call? The Bank! They are always happy to offer you a loan. The less you really need the money, the more you can borrow and the better the terms. Just need a little money for a year or so...we’ve got a great credit card deal for you, don’t worry about that 21% interest thing, just sign here.
Need a car, no problem, we’ve got the loan for you. These shorter-term high interest loans on depreciating assets are the worst place for consumers to borrow, and are the beginning of a spiral of debt that keeps most from ever becoming wealthy.
Need a home? Well, the banks will trip over themselves to attract you to their door for this big loan. Why is that? What’s so attractive about loaning money for a mortgage?
Banks love mortgages. They often have wars with each other to attract new home buying clients with low initial interest rates. That’s good news for consumers. In fact, a long term low interest loan on an appreciating asset is the best way to borrow money. You have the following advantages on your side as a consumer...
· Since a home loan is secured the interest rates are low. Secured means the bank has the ability to take the home back if you don’t make payments on the loan
· Mortgages are long-term, sometimes up to 30 years or more. Such long time frame puts inflation on the side of the consumer. While the mortgage loan payment remains level month to month, year to year, decade to decade...the spending power of the dollars erode every year. That is, your $1,000/month payment today will only seem like a $774/month payment 10 years from now. Why? Because an average 5% per year inflation rate will make the value of every dollar shrink every year as good and services become more expensive.
· Long-term mortgages are also nice if you are early in your career. You are likely to show increasing salary each year which will make the level mortgage payment become an ever lower percentage of your salary.
· Over long periods of time, your home is likely to increase in value. This makes your equity in the home grow faster than just the payments on your loan alone.
· Best of all, you can enjoy all the benefits of living in your home as the full owner even as the bank has paid for most of it.
Back to those starry skies filled with bank buildings in Raffles Place for a moment more.
If home loans are good for consumers, how do banks make so much money? Simple, they focus on three basics of finance...
First, you pay the interest early and the equity late. For example, your $1,000/month mortgage payment during the first year of a 30 year loan may be composed of $990 interest and $10 equity. After the end of year 1, you own little more of the home than at the start of the year. Then, by year 20, you are still paying $1,000/month, but now maybe $800 goes toward equity and just $200 toward interest. The bank wants their interest money for the whole 30 years as soon as possible, and will collect a big chunk of it over the first 10 years of a 30 year loan.
Second, the bank knows most people will sell their home in less than 10 years to upgrade to a larger or newer home, or to relocate outside Singapore, or a host of other reasons. Since they have collected a huge amount of their interest from you during these early years, you still owe the bank nearly the entire balance of the loan when you sell early.
Third, and most clever the bank encourages you to pay off your loan early. They will put together fancy tables that make you think you save huge amounts of interest payments by making extra payments every month or year, or paying off early during the last 15 years of a 30 year loan. Why would the bank want to help you out like that...because they have already collected massive interest payments from you and now they want their equity back to re- lend it to someone else to start the early loan interest loading with a fresh client.
On the surface, making early mortgage payments looks consumer- friendly. Under the surface, it is building another skyscraper. To take full advantage of the long-term low interest loan, make no early payments and certainly don’t pay it off early. Take that extra money and do with it what the bank wants to do...put it to work. Put it into the stock market...in fact, to really get even, buy shares of your bank and profit from all the other mortgage clients less savvy than yourself.
A home owner at 24, this new author has written a guide on property investment
By Lorna Tan, Finance Correspondent
Q: What motivated you to write Buy Bye Property?
When I first started investing in property, I was not sure about what I was doing. I bought my first property, a 678 sq ft one-bedroom condo in district 10, for $676,000 in 2002.
Q: Tell us more about your property investments.
As I said, I bought my first property when I was 24. I held on to it for about five years before selling it in the middle of last year (mid 2007)for a small profit of about $150,000. In addition, I had been collecting rental income from the property.
Source: me & my money, Feb 1, 2009, the sundaytimes
Mr William Wong, founder of property agency RealStar Premiier Property Consultant.
Entered real estate industry in 1995. One of ERA's top agents during 6 years with ERA. Left in 2001.
His bad investment:
Bought walk-in apartment in 1999 for $1.35M. Sold on en bloc in 2007 for $1.25M. Loss of $100K for holding it for 8 years. If we were to include interests payment on mortgage loan. I think it was a huge losses. If it was not sold in 2007, probably the losses were be further escalated.
He commented average rental return is about 3% (Hmm... this is definitely worse than the dividend yield from holding a portfolio of REITs( commercial, office, industrial, and shipping)
Let me examined his investment of this property at 1999.
The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown (financial contagion).
By 1999, however, analysts saw signs that the economies of Asia were beginning to recover.
So he probably got this property near the housing bottom or beginning of housing rise, and yet he suffered huge losses.
He was an not ordinary property investor, he was an industry's insider and top agent, and showed that bad investment can and always happen.
Need very serious thinking....What if the element of bad luck hit, in any investment strategy, no matters who you are, George Soros, Warren Buffet, Bill Gross, etc there is this element called the Element of Bad Luck, it will, and certainly it will hit at least ONCE. These wise men also kena huge losses by bad investment.
So it is more likely to be a MAKE or BREAK strategy for those under-capitalized for just ONE BET. Got it right, you are on your way to an early retirement. Got it wrong (kena hit by the element of bad luck), you are likely to work as slave for a long, long time. So you jolly well make sure you got what it takes to get it right. So is there a MIDDLE ground? Think about it. Don't PRAY, PRAY!
Last updated : 15 Sep 2018
I am 62 yrs old uncle living in HDB heartland who has achieved financial independence @ 56 and finally retired @ 60 from full-time job as employee on 1 Oct 2016.
Single household income since 1995 with three children. Eldest son and daughter are now working and youngest son still in his 3nd year Uni in SUTD.
I have been doing long-term investing and short-term trading in Singapore stock market only since Jan 2000 so I am that Panda or Koala in the investment world; but I am still surviving well in the wild.
I am now executing my Three Taps solution model to maintain sustainable retirement income for life till 2038.
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