Real Estate Investor Question: Rehab and Sell, or Rehab and Keep?

Here’s another awesome question I received from my discussion board. The question; Why bother keeping property after it’s rehabbed? Why not sell it after the rehab and GET PAID!

Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.

If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long-term financing (at 85% or 90% loan to value).

The short answer is an investor is going to make considerably more money by hanging onto a property after it’s rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don’t think it’s too bad as long the landlord is done correctly.

Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;

Let’s say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhood's investors buy in is $100,000. Let’s also say there are Bill and Fred.

Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!

Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long-term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)

Bill (rehab and sell) makes a great living. Ten houses per year are $150,000-$180,000 per year…nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.

Fred (the rehabber) also makes a great living. Ten houses per year make him $100,000 or so in tax-free, spendable cash. But, Fred controls a million dollars in real estate and it’s going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It’s part of a mortgage, so must be paid back, therefore is not income! I love that part!

Let’s look at what Fred’s doing more closely.

Let’s say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):

Purchase year – 10 houses x $100,000 = $1,000,000
Year 1 – Same 10 houses X $105,000 = $1,050,000
Year 2 – Same 10 houses X $110,250 = $1,102,500
Year 3 – Same 10 houses X $115,762 = $1,157,620
Year 4 – Same 10 houses X $121,550 = $1,215,500
Year 5 – Same 10 houses X $127,627 = $1,276,270

Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.

Remember

– Some parts of the country will appreciate much faster than 5%. Heck, some places properties will double in value in 5 years.
– No tax benefits of keeping the property are included here. That equates to thousands of dollars in real income.
– This is ONE ten-house year. Let’s say you want to “top out” at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you’ll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life?
– What if you hold these houses 10 years? The numbers get pretty exciting.

If you’re like me and you don’t want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.

So what of poor old Bill? Chances are, Bill will satisfy his need for short-term cash, then start holding property. What do you think?

Accepting Losses With Grace

The lack of a proper trading plan which includes precise rules for entering and exiting a trade will most certainly guarantee failure over the long term. Beginners usually suffer from the same common ailments. They abandon trading plans purely on impulse because things are not going exactly as how they had envisioned. Repeatedly they use unreliable methods that fail to produce a profit. Many traders hold on to losing positions telling themselves “it is going to turn” when every indicator says otherwise because they cannot bear the thought of a loss.

Why do they torture themselves? Why don’t they just identify what’s going wrong and make a change? For some people recognizing that a trade or even a trading method is not working and making a change is easy, but for others, it’s very difficult. They have to look at their limitations admit that they have made a mistake and that’s hard because it hurts our ego. Psychologically it’s risky, it’s often easier to fool ourselves. Just keep going, living in a state of denial until your account is depleted. If you recognize any of these traits in yourself you must stop trading immediately.

Take a good look at what has been happening, try and identify the problem. If you look close enough you may see a pattern. This is why it is vital to record every trade and as much information about it as possible. You have to break out of old patterns and see things in a new light.

You will never be a successful trader if you continue to live in a state of denial. What can be done to return to reality? There is a lot you can do. First of all, make sure you are not trading under stress. When stressed out you can’t see clearly, you become rigid and unable to see alternative views. One of the easiest solutions is to trade smaller. The smaller the trade the less the stress, especially for the beginner. If you are experienced and in a losing streak reduce your contracts until you get your confidence returns. Some people need to take a break altogether. Get away from it all. Take your mind off the trading.

The second thing you can do is to make sure you have a life. Trading can be addictive especially when you are winning. Do not put all your emotional eggs in the trading basket. You need to have other roles that give your life meaning and purpose. By defining your identity in a variety of ways, you will not place unnatural importance on trading events. Therefore, you will be able to take losses in stride and look at your trading more objectively.

Finally, radical acceptance is a key mental strategy for coping with market uncertainty. Many traders make the mistake of thinking they can control the markets. Nobody can control the markets. We must learn to accept anything that comes our way and to trade accordingly. Adopt the attitude that trading is a journey and that all we can do is go where the markets take us.

To succeed on this journey you cannot afford to lose too much. Manage risk and just accept what you get and enjoy the ride. This way you will trade more freely and creatively. Don’t live your life in denial. Accept your limitations, work with them, and become a winning trader. Write out your trading plan with precise entry and exit points. Most important set your stops and mentally decide you will not break them. Test your system on paper and when the confident test in real time with the minimum contract size. You will have losing trades, accept them with grace and go on to the next trade.

7 Tips For Choosing Forex Brokers

The more we live the more we find out that we are dependent on many things besides our wits. Smartness will only get us so far, but unless we make use of systems set up for our convenience we are apt to fail. This is so with the Forex market. The way how the market works means we have to work through a broker or a market maker to get our trades started and completed. You can find Forex brokers in every part of the world just as you will find currencies traded in almost every corner of the globe. However, you should consider a few points when you go out shopping for the right broker to help you with your trades.

1.  Qualifications. Probably the most important thing of all is ensuring the Forex broker you use has the correct qualifications. Therefore, choose a broker registered with the Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant (FCM). This means that you have legal protection against any abusive trading practices and scams that may arise.

2.  Is the broker regulated?  This means that when you sign up to use their services you will have protection and insurance against any internal fraud. Also, your funds will remain separate from the broker's operating funds.

3.  What business model does the broker use?  Some brokers are market makers while others are ECN brokers, providing a dealing desks for many traders.

4.  Look at the types of spreads they offer.  The spread is the difference between the bid and asks prices of the currencies you trade. Brokers do not make a commission on your trade, instead, they take the spread as compensation.  Your broker may also offer fixed or variable spreads, and they can be different for large accounts and mini accounts.

5.  Slippage.  Can they provide you with details of just what slippage they would expect to occur during normal and fast moving markets?

6.  Margin requirements.  What is their margin requirement? That is,  what percentage of the investment in your trades do they expect you to pay to open a trade. You also want to know about their margin calls, and the time you need to respond to such calls.

7.  What is their Rollover Policy?  Do they have any minimum margin requirements which they use to earn interest on any overnight positions?  Plus, do they have any other requirements or conditions about you earning interest on any rollovers. 

Once you have done your research and have selected one or more Forex brokers, then it is time to set up your trading account. When your funds clear you can begin trading. Remember to read
carefully the trading instructions to know how the broker can help you manage your trades. If you overlook some relevant details, you can lose money on your first trade. So take the time to read the details and ask the brokers or their support staff any questions you may have before you open your first trade.

Why You Must Invest In Gold Today

Gold. Rare, beautiful, and unique. Treasured as a store of value for thousands of years, it is an important and secure asset. It has maintained its long term value, is not directly affected by the economic policies of individual countries and doesn’t depend on a ‘promise to pay’.

Completely free of credit risk, although it bears a market risk gold has always been a secure refuge in unsettled times. Its safe haven attributes attract wise investors. Gold has proved itself to be an effective way to manage wealth.

For at least 200 years the price of gold has kept pace with inflation. Another important reason to invest in gold is its consistent delivery within a portfolio of assets. Its performance tends to move independently of other investments and of key economic indicators. Even a small weighting of gold in an investment portfolio can help reduce overall risk.

Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class.

Portfolios that contain gold are generally more robust and better able to cope with market ncertainties than those that don’t. Adding gold to a portfolio introduces an entirely different class of asset.

Gold is unusual because it is both a commodity and a monetary asset. It is an ‘effective diversifier’ because its performance tends to move independently of other investments and key economic indicators.

Studies have shown that traditional diversifiers (such as bonds and alternative assets) often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods.

Gold improves the stability and predictability of returns. It is not correlated with other assets because the gold price is not driven by the same factors that drive the performance of other assets. Gold is also significantly less volatile than practically all equity indices.

The value of gold, in terms of real goods and services that it can buy,has remained remarkably stable. In contrast, the purchasing power of many currencies has generally declined.

Traditionally, access to the gold market has been through: investment in physical gold, usually as gold coins or small bars,or, for larger quantities, by way of the over the counter market; gold futures and options; gold mining equities, often packaged in gold-oriented mutual funds.

When To Buy And Sell

The mechanism of buying and selling is quite easy. It is as easy as pressing a button in front of your computer screen. The question of when investors should buy and sell warrant a more detailed analysis.

When to sell: Ideally, we should sell when a stock reaches its fair value. There are 9 other reasons to sell but I won’t cover it here. So, what is a stock’s fair value? I have covered this plenty of time. But, in general, a stock reaches its fair value when it is yielding 3% above the current free risk interest rate. I am using 10-year treasury bond as a proxy for the free risk interest rate. Currently, the 10-year bond is yielding 4.46%. The fair value of a stock is therefore when it is yielding 7.46%. Inverting yield, we then got the widely used Price Earning Ratio. Yield of 7.46% corresponds to P/E ratio of 13.4

When to buy: This is an easier question to answer. We, of course, should buy stock lower than we sell. If we sell the stock at a P/E ratio of 13.4, then we should buy it when the P/E ratio is less than 13.4. How much lower ? It depends on how much return you aim for. If, say, you are aiming for 50% return, then your buying price is when the stock is trading at a P/E of 8.93. If you are aiming for a 34% return, then your buying price is at a P/E of 10.

In short, we should buy at a P/E of 8.93 and then sell at a P/E of 13.4, correct? Yes, but with a lot of caveats. I’ve covered those caveats in 5 common misuses of P/E ratio. To emphasize, the P/E ratio used here is not trailing P/E ratio, does not ignore the value of cash in the balance sheet, does not ignore the one-time event and does not ignore the change in interest rate. At this point, I am ignoring earning growth simply because the fair value calculation is a company with 0% growth.

You might be wondering where you might find stocks that are trading at a P/E of 13, let alone 8.93. Here are a few candidates to help you getting started. Seagate Technology (STX) has a forward P/E of 7.5 and $ 2.30 per share of net cash on the balance sheet. Western Digital Corporation (WDC) has a forward P/E of 9.75 with $ 2.65 per share of net cash. OmniVision Technologies Inc. (OVTI) is trading at a forward P/E of 10.3 with $ 5.30 per share of net cash. Magna International (MGA) is trading at a forward P/E of 9.72 with $ 4.58 per share of net cash.

Please note that this is not a buy/sell recommendation. You would do very well if you do your own homework.

4 Tips to Build a Successful Portfolio

Walking through the financial maze of stocks, bonds, and mutual funds can be quite a challenge. American Century Investments offers the following tips to give you the know-how on building a profitable portfolio.

* Know your goals. Consider how much money you’ll need for your children’s education or your retirement. Whatever your vision for the future might be, set your goals and develop a concrete plan for meeting them.

* Define your investment time horizon. If you’re not planning on retiring anytime soon, you might want to have a portfolio that includes more long-term investments. If retirement is just around the corner, consider a more conservative approach.

* Determine your risk tolerance. Figure out your risk comfort level and compare that with what you can afford. In general, the longer you have to invest, the bigger risk you can take.

* Consult a professional. In order to avoid financial pitfalls, later on, it is often wise to seek professional guidance when putting together a portfolio.

“Recent research shows that investors continue to grapple with some of the most basic investment concepts, suggesting a greater need for financial advice and guidance,” said Doug Lockwood, a certified financial planner.

To help investors meet their financial goals, American Century Investments has developed On Plan Investing, a program designed to help investors build and maintain diversified investment portfolios – at no additional cost.

Combining educational tools, advice, market insight and investment products, On Plan Investing helps investors develop a personal investment strategy, whether they are new to investing, seeking guidance but still want control over their investment mix, need help positioning their portfolios with a long-term perspective or need help understanding how the markets work.

Investing in Gold

 

It may seem old-fashioned, but it is still possible to place some of your wealth and prospects into the ancient practice of hoarding gold. Gold has been the standard of wealth for centuries, in almost every culture that requires some system of barter, from Europe to Asia to South America. The metal has been known to launch expeditions for new lands, start wars, and to be the cause of the annihilation of entire cultures.

The reasons for the world's fascination with gold have been the same from the first item that a person exchanged one good for another until the present day. Gold is rare, easy to move, does not go bad or decay in any way, and it can be broken down into smaller parts. All cultures have recognized the value of gold, and as a result, it is still a hot commodity on the markets in countries throughout the world today.

Many people who chose to invest in gold are somewhat skeptical about the state of the world. Gold, they figure, has always been and will always be in demand, so if the worst happens and an economy goes into the toilet, investments in gold will remain safe and secure (provided, of course, that it is not stolen, another common historical occurrence with the precious metal). Whenever a large scale war breaks out, gold prices always go up, as it is proof against an inflated and devalued the dollar and other economic downturns.

Gold allows the investor a number of opportunities in their options. Many of us would not think of it in this way, but gold is easily stored in our houses and even in our persons in the form of decorations or jewelry, which means that gold is a kind of portable wealth. Someone who buys a lot of jewelry can, therefore, be thought of as a kind of investor in gold.

More serious investors might consider buying gold in the form of bullion or coins issued by stable, reputable governments through brokerage firms or well-known dealers. Again, this gold is transportable, easily liquidated wealth and the investor must undertake for its safety herself. If you choose this method of investment and storing, you will have to get your gold tested before you can sell it on your own.

In order to avoid the expense and the hassle of testing your gold, you could instead choose to purchase the metal through a mutual fund that specializes in precious metals. Not only will this eliminate the need to have the gold tested before sale, it will also earn you some interest over time, which hard sales of gold will not. You will also avoid the costs of insurance and the anxiety of storage.

Investing in gold is a time proven way of retaining wealth even in the most trying of circumstances. The risks of gold also remain, however, as it remains a highly mobile commodity that can be taken away as easily as it is stored, and the proper precautions must be taken.

WHY THE FINANCIAL NEWS MEDIA CAN COST YOU MONEY !

The communication innovations we have around us today like the internet, financial newspapers and special interest television channels focused on investing like CNBC are a high-speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks. You have to remember that the news media are constantly competing to survive against other stuff you can watch. If they don't always sound like they know exactly what is going on then you won't watch their presentations. If you don't tune into their show then their ratings go down. If their ratings go down they get fired and their show gets canceled.

This means that financial journalists are in the business of finding great stories and sounding like authorities no matter what. A stock market is a great place for them to dig up news scoops to feed to the public. They don't really check their facts very well and sometimes not at all. This means that if some insider wants to feed you a line of bull manure then all they have to do is maintain good connections with financial journalists, sponsor an investment show, or outright buy an investing TV channel like Jack Welch the CEO of GE did when he set up CNBC. What a great way for inside executives to control the flow of news information to the public then to actually own one of the only financial news channels but not so great for you!

These journalists also kick up the fire by bringing in so-called experts to talk about each side of some topic that real experts would not consider important.

This just makes it all the more confusing for the public to understand what is important when buying or selling a stock. Shows on CNBC like Closing Bell, Kudlow & Company, and Mad Money do nothing but confuse and misdirect the attention of most individual investors in the public. Even worse this means that the financial news media allows overpriced stocks to be recommended through analysts in the inside web that inside executives are dumping on the public because they are trying to get out. This actually happened at the top of the bull market in 1999. For a great historical description of what happened read Maggie Mahar's book entitled Bull.

The famous Yale University Economist, Prof. Bob Shiller, Ph.D. is particularly harsh on the media in his book Irrational Exuberance. Dr. Shiller is one the economists that Alan Greenspan respects most and where he got the term Irrational Exuberance. He portrays the media as sound-bite-driven where superficial opinions are preferred over in-depth analyses. I agree wholeheartedly with him and contend that it is also done just because the industry would rather have the retail investor confused and emotionally pliable to get you to buy and sell when they want with total disregard for your best interests!

People who had invested their life savings in the stock market were ripped off in the stock market because the financial news media and analysts were hyping up what a great buy stocks were at the very top of the market in 1999 and 2000. At the same time inside corporate executives were selling out everything they had. What is amazing is that our federal government in the form of the Security Exchange Commission never did a thing about it. There was never a blanket case taken or an outcry that almost all of the inside executives had somehow magically sold out of the market six months before the market crashed.

Here is the valuable tip I want you to consider: when you are a beginner investor it is important that you DO NOT WATCH THE FINANCIAL NEWS OR READ THE FINANCIAL NEWSPAPERS! Don't let the stock market industry lead you around by the nose like livestock to the slaughterhouse. Don't listen to what they want you to listen to. You should focus on learning what is important in the stock market and the mass media will only confuse you until you have educated yourself.

Recommended reading:

1. Mahar, M. Bull! A History of the Boom, 1929-1999 (New York, HarperBusiness , 2003)

2. Shiller, R., Irrational Exhuberance, (New York, Broadway Books, 2000)

Do You Have A Backup Plan?

I know a woman in her sixties. She worked for a company for a little more than a decade as an administration and office assistant for a staff of one hundred sales people, who loved her dearly. She always made sure all the faxes got to their desks; the stationery stock was full and each staff member had what he needed.

Beyond her job description, she was like a mother to all of them: making sure the toilets got cleaned, old food was removed from the fridge and decorating the entire floor which the department occupied. She worked hard and never complained. She was always smiling, friendly and polite.

She felt good about being a ‘mother’ to all the people who entered and left that department. She was comfortable with her position. No-one else could do the things she did. And she did them better than anyone else in the building.

One day, she went to work as usual. After doing her morning chores, she was invited to the office, where she was told her services were no longer needed. The company was undergoing certain cost-cutting measures in every department and unfortunately, her role would have to be sacrificed. She was then asked to leave the building as soon as possible. She was assured, however, that before having made the decision, every attempt had been made to find a position for her somewhere within the company.

She has financial obligations to fulfil and she still hasn’t saved enough for her retirement. She still has credit to pay off and she was saving for a trip overseas, something she never got around to doing in her younger years. She wanted to save up to establish a book-selling business. Suddenly, she would have to re-evaluate her plans. Losing a job and nearing retirement age, she will have to relinquish some of the things she had dreamt for herself.

I am sure you have heard hundreds of similar stories like these. Just five months before writing this article, I had already read about companies cutting costs by laying off jobs. Their main reason is to remain competitive so they would not have to raise the prices they charge to their customers. Companies are outsourcing jobs overseas because the labour costs in other countries are relatively cheap compared to the local currency and sometimes because of significant skills or technological advantages. Other businesses lessen staff when sales drop and they can no longer sustain to pay the same number of people they have on their payroll. No organisation – not even a big, established business – is immune from the need to become leaner in an ever-increasingly competitive market environment.

In the past, most people believed the companies or the governments – whom they work for – could guarantee them a job for life. Nowadays, I think more and more people are becoming increasingly aware that expecting to have a job-for-life is unrealistic. It is a dire predicament to be working every day, taking care of someone else’s business and realising that at the end of one’s career, years of service do not guarantee one’s well-being. Because of this, I believe that people are now looking to improve their chances of having enough funds to meet their needs and wants after retirement.

I think there is a dawning awareness that the ultimate responsibility for one’s own well-being lies within each individual. People are beginning to understand that their boss or the company they work for does not have an obligation nor the ability to ensure that they are taken care of when they finish working for them.

According to an article written by John Roskam*, based on a forthcoming Institute of Public Affairs (IPA) Backgrounder on self-employment and the self-reliant society, the trend to self-employment will speed up in coming decades. Five reasons explain this change:

1. Our societies will continue to develop knowledge-intensive and service industries.
2. Jobs of the future need more education; however, better-educated workers might opt to work for themselves instead.
3. Older workers are more comfortable with being self-employed than the younger workers, which might indicate individuals would prefer to work for themselves as they grow older.
4. Individuals want more control and flexibility over their working arrangements and self-employment allows for this.
5. Individuals are more willing to assume responsibility for the decisions that affect their lives and their families.

In addition to this trend, more and more people are now seeking to gain greater control over their financial assets.

What we can all learn from this article is the idea that we do not have to rely on our employers to be there for us when we desperately need them to pay us our periodic paycheques at the end of our working days. There are alternatives and, while we still can, I believe we owe it to ourselves and our families to have a backup plan and look at every single opportunity available. The question for you is this: Do you have a backup plan?

------------

Footnotes:

* “Self-Reliance and the Self-Employment Revolution” http://www.ipa.org.au/files/news_953.html (21st March 2005).

What Moves The Forex Markets?

 

Investors in any market, be it securities or currencies, wants to know what causes price fluctuations so they can predict them and make a profit.  While stock investors research publicly traded corporations in order to make trading decisions, those on the Forex must consider what influences the currency exchange rates between nations.  Because it is so volatile with significant fluctuations in short-term prices, it is especially important for the Forex trader to understand what moves the markets in order to be successful and make a profit.

Partly because trades occur 24 hours a day between Sunday and Friday afternoon, the Forex is a very volatile market.  Just as with equities, pricing on the Forex is influenced by economic and political factors facing the nations involved in the currency pair.  Because the U.S. dollar is used to back 90% of all the transactions in the Forex and its economy plays such a significant role in the world economy, economic data released by the government will affect market prices—temporarily.  Here are some of the prime releases that Forex scalpers or day traders tend to look at when determining whether or not to enter a position:

1.  Interest Rate Decisions
2.  GDP rate increase/decrease
3.  Unemployment data
4.  Inflation:  Consumer/Produce price
5.  Retail Sales
6.  Consumer Confidence Surveys
7.  Business Confidence Surveys
8.  Trade Balance
9.  Manufacturing Confidence Surveys

However, while all of these forces no doubt play a short term role in price movements on the Forex and other financial markets, their influence is very temporary and the prices soon reflect them.  It is not common for Forex scalpers or day traders to enjoy long-term success because the volatile nature of the market makes losses more likely with more trading. 

There is another force that does play a role in the movements of all financial markets:  human behavior.  Indeed, Psychology is a very big factor in any investment decision and its effects can be studied in financial charts.  Four human emotions play very big roles in the price movements on the Forex:
·    Greed
·    Fear
·    Faith
·    Hope
Greed compels even technical traders to ignore stopping points and chase a trend too far—to the point of loss or losing a significant portion of profits.  Once an exit point has been reached—cash out.

Fear of loss is a very common human emotion and it definitely causes many investors to take a loss too hard and quit investing.  However, simply setting acceptable stop/loss orders will prevent you from losing more than you are comfortable with.

Even faith and hope can cause us to chase profits too far or not get out when losses start to mount.  Technical analysis, continuous back testing, and sticking with an investment strategy while being open to adjustment—these are all common traits in the most successful traders.  Although the economic indicators and news releases do play a short term role in prices, it is ultimately human Psychology that moves the Forex.

The Evolution Of The Giant Turtle

You know, it’s true what they say. “The more things change, the more they stay the same!” It has been just about three years now, since January of 2003, that I wrote my now classic “I Was Wrong” article, admitting that trend following was not dead after all.  And in the past couple of years, we have seen some good trending markets and some nice returns, with the Turtle computer model being up between 50% and 100% for 2003 and 2004 respectively. And while the current final yearly results are not quite in yet, although 2005 got off to a pretty rough start, it looks like a late rally in many of the markets is going to wind up giving us another profitable year.

 But the truth of the matter is, if you look very closely, as I have, at both the Turtle system in particular as well as another trend following systems in general, there are some things that have changed slightly. An examination of ‘rolling’ five or ten year periods will show some smaller deteriorating statistics since the ‘formal’ origination of the trading method back in the early 1980’s. The total returns are slightly lower, the drawdowns are a little deeper, and the recovery periods are a little longer.

 There are several reasons for this, most of which can be summed up under the wide umbrella of the natural progression.  On the one hand, we have the good old fashioned Darwinistic “survival of the fittest model”.

 Hey, trading is basically still one big zero-sum game, where somebody has to win, and somebody else has to lose.  The winners are the smarter combatants, the losers will tap out and fall by the wayside (or even become ‘brokers’). As with any competition, this means that eventually, you will have the winners competing against other winners, thus raising the bar for the entire level of competition, and making the whole damn game harder, to begin with. At least that is the philosophical argument for what happens.

 The technical argument is a lot more cut and dried, but it is basically the same story. In the ‘old’ days, whoever was the first and quickest to figure things out while they were still changing had a huge edge. But then along came that crutch to human thought, the computer. By the early 1990’s everybody had one sitting on his desk, and the playing field had been greatly leveled. Information still flowed, but now it flowed faster, and everyone became more quickly aware of it. Which meant that all the traders on the outside were now able to more quickly adjust their positions and come back into line with whatever sudden new information had become available.

 I have spoken at great lengths before about how and why trend following works, and the fundamental reasons that trends come about in the first place. Simply put, when something happens to either the supply or demand of a commodity (or stock), the equilibrium fair market value shifts, and the price moves to a new level. In the old days, sometimes it took a while for the market mechanism to find this new level, but nowadays, thanks to more powerful computer speed and efficiency, everything is all happening a lot faster.

 The end result as far as we are concerned is two-fold. First of all, the trends that do occur are more explosive coming out of the box, which means the trader has to be both quicker and more nimble, both jumping on board, and holding on.  Secondly, and more importantly, is the fact that these trends don’t run as far, or last as long, as they used to, before all the players have had a chance to adjust their positions, and the market (any market) comes back into balance.

 To put it in Turtle terms, a good freeze or heat wave or embargo used to cause a market like Coffee or Soybeans or Crude Oil to run for months, and give us maybe a 40 N move before it was over. I remember a hot dry Summer in 1988 when Beans ran 40 N.  I also remember that Crude Oil during the first Gulf War in 1991 ran for just about a 40 N profit as well. Hell, there was even a nice 40 N run in the Stock Indexes during the dot.com bubble of the mid-1990’s. But in the past five years or so, I am hard-pressed to think of any market that has had such a big super trend.

 Back in the 1980’s, these were the kinds of moves we got excited about, and we got one or two of them almost every year. 20 N moves were the fairly commonplace, and 10 N was nothing that much to get excited about. But since the turn of the century, I think 20-25 N moves are about the largest I can recall seeing.  I think Feeder Cattle last year at 23 N was the largest trend of the year, and a further problem is that not too many people even follow that (relatively) small market.

 But remember, we still need these few big home run trades every year to pay for all the small losses and whipsaws and slippage and other costs of doing trading on a daily basis. The basic problem during the ‘difficult’ periods is not that we don’t get any trends, but that the trends we do get are not big enough or long enough to pay for all the other stuff. We are still trading in a distribution that has more losing trades than winning ones, so at least some of the few winners we do hit still have to be large enough to cover all the losses.

 The question we face as continually evolving traders becomes, what, if anything, are we supposed to do about this kind of stuff.  In the past, I have been a large advocate of the school of thought that says, “if it ain’t broke, don’t fix it”. Sure, the Turtles, or any other trend followers, were not getting the easy triple digit returns from two decades ago. But hey, we were still doing better than anybody else around, and I for one did not see a lot of reason to complain, or even get upset about it.

 But my thinking has changed in the past couple of years. I’m no longer holding out for the 40 N outliers because they just don’t come around that often anymore.  I have not gotten to the point where if I see a trend approaching 20 N profit, I start putting one foot out the door and looking around for warning signs to get me to duck out quickly. Those warning signs will come in the form of some other types of indicators I have learned to pay attention to. But keep in mind that all of this is still just a math and probability decision, not one of fear or emotion or just ‘wanting’ to take a profit.

 Without getting into too much of the detail, let’s just say that at some point it can still be obvious that if you have a reasonable minimum probability of catching a big move, you should try to hold out for it. On the other hand, if the chances are lower of that big move occurring, then at some point it has to become better to take the smaller but super profit. And while the odds are not always so quantifiable, and this is as much art as it is science, let’s just say I have been getting better at it with more experience over the years.

 The bottom line is that where I used to hold out as long as possible, often times after the trend had reversed on me, now I am quicker to exit first and ask questions later. And to be sure, I have left some money on the table when the trend kept going and I had gotten out prematurely.  But I have also saved a lot more by recognizing when the party was over and getting out before everybody else ran for the door.  And the funny thing is that one of my brokers thinks I have become a better trader because he has always been an advocate of locking up a profit and putting some money in your pocket.  But that is not the reason I do what I do, my criteria are technical and unemotional in nature.

 Of course, Richard Dennis was always an advocate of using personal discretion to override mechanical technical criteria, the trick has been getting good at knowing how and when to do this. And I think this is something that cannot be taught, even by me, but just comes with experience.  I can now look at half a dozen different things, including stochastics, market profiles, sentiment indicators, and even news reports, and somehow assimilate that all  in my mind and decide when it ‘feels right’ to make a discretionary move.

 Last year at Thanksgiving, I exited some Currency trends right near the top of the market. And this year, I got out of the Energies right after Hurricane Katrina, two days off the top. As I have gotten better at this, I have also been able to strengthen the courage of my convictions to stick to my guns and not second guess myself. In the past, if I would get out of a trade too early and it kept on going, I would think I made a mistake and then try to jump back in, ostensibly at a worse price than when I got out. Now, once I’m out, I have the patience and discipline to stay out and fight the temptation to jump back in and whip myself around.

 It seems when I am wrong, I am wrong by a little, because even if the move keeps going, it doesn’t go too far before it eventually peters out and turns around. I got out of the Yen last week, and have left about 1 N on the table so far. And I just got out of some Gold the other night, and right now it is sharply higher again (also by about 1 N). But when I’m right, as in Unleaded Gas this past August, I was able to save myself close to 10 N before the market reversed enough for the computer model to finally give a liquidation signal. So that seems like a pretty fair tradeoff for me. And it is also the big reason that my personal trading account is outperforming the Turtle computer model so far in 2005.

Russell Sands

Hedging - What Is It, And It’s Uses In Risk Management

Before I discuss the use of hedging to offset risk, we need to understand the role and the purpose of hedging.  The history of modern futures trading begins in Chicago in the early 1800’s. Chicago is located at the base of the Great Lakes, close to the farmlands and cattle country of the U.S. Midwest making it a natural center for transportation, distribution and trading of agricultural produce. Gluts and shortages of these products caused chaotic fluctuations in price. This led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in contracts to insulate them from the risk of adverse price change and enable them to hedge.

The first commodity exchange was the creation of the Chicago Board of Trade, CBOT in 1848.  Since then, modern derivative products have grown to include more than the agricultural industry.  Products include Stock Indices, Interest Rates, Currency, Precious Metals, Oil and Gas, Steel and a host of others.  The origins of the commodity and futures exchange were created to support  hedging.  The role of speculators is beneficial as they add trading volume and important volatility to what would otherwise be a small and illiquid marketplace.

A bonafide hedge is someone with an actual product to buy or sell.  The hedge establishes an off-setting position on the futures or commodity exchange, thereby instituting a set price for his product.  Someone buying a hedge is known as being “Long” or “Taking Delivery”.  Someone selling a hedge is known as being “Short” or “Making Delivery”.  These positions are known as “Contracts” are legally binding and enforced by the exchange.

Entering your trades either for speculation or hedging is done through your broker.  Commodity Trading Advisor, Genuine Trading Solutions President Dwayne Strocen, states that “Commodity and Futures exchanges are distinct from Stock Exchanges, although they operate using the same principals.  They are regulated by different agencies such as the Commodity Futures Trading Commission who are responsible for regulation of retail brokers in the USA as well as Commodity Trading Advisors such as us.”

Now let’s view some real life examples of hedging or mitigation of risk by using exchange traded derivatives.

Example 1:  A mutual fund manager has a portfolio valued at $10 million closely resembling the S&P 500 index.  The Portfolio Manager believes the economy is worsening with deteriorating corporate returns.  The next two to three weeks are reports of quarterly corporate earnings.  Until the report exposes which companies have poor earnings, he is concerned with the results of a short-term general market correction.   Without the privilege of foresight, he is unsure of the magnitude the earnings figures will produce.  He now has an exposure to Market Risk.

The manager thinks of his options.  The greatest risk is to do nothing if the market falls as expected, he risks giving up all recent gains.  If he sells his portfolio early, he also risks being wrong and missing further rallies.  Selling also incurs substantial brokerage fees with additional fees to buy back again later.

Then he realizes a hedge is the best option to mitigate his short term risk.  He begins by calling his CTA (Commodity Trading Advisor) and after consultation places an order to sell short the equivalent of $10 million of the S&P 500 index on the Chicago Mercantile Exchange “CME”.  Now his result is when the market falls as expected, he will offset any losses in the portfolio with gains from the Index hedge.  Should the earnings report be better than expected, and his portfolio continues upward, he will continue making profits.

Two weeks later the fund manager calls his CTA and closes the hedge by buying back the equivalent number of contracts on the CME.  Regardless of the resulting market events, the mutual fund manager was protected during the period of short-term volatility.  There was no risk to the portfolio.

Example 2: An electronics firm ABC has recently signed an order to deliver $5 million in electronic components of next year's model to an overseas retailer located in Europe.  These components will be built in 6 months for delivery two months after that.  ABC instantly realizes they are exposed to two risks.  1. the rising and volatile price of copper in 6 months may result in losses to the firm.     2.  the fluctuation in the currency could easily add to those losses.  ABC being a young firm cannot absorb these losses in view of the highly competitive market from others in the field.  Losses from this order would result in layoffs and possibly plant closures.

ABC telephones their CTA and after consultation places an order for two hedges, both for an expiry in 8 months, the date of delivery.  Hedge #1 is to buy long $5 million of copper effectively locking in today’s price against further price increases.  ABC has now eliminated all price risk.  The risk of plant closures is greater  than the lure of increased profit should copper price fall.  After all, ABC is not in the business of speculating on copper prices.

Hedge #2 is to sell short the equivalent of Euro Currency vs US Dollars.  Since ABC is effectively accepting EC in payment, a rising US dollar, and a weak EC would be detrimental and erode profits further.  The result of the hedge is no risk and no surprises to ABC in either copper or currency levels.  A risk-free transaction and full transparency is the result. In 8 months with the order completed and the customer accepting delivery, ABC notifies the CTA to close the hedge by selling the copper and buying back the Euro Currency contacts.

Many examples exist to demonstrate the mitigation of risk to an institution or financial portfolio.  Dwayne Strocen states that new products are constantly created and available on both over-the-counter and exchange traded markets.  If would be wise to consult with a qualified Commodity Trading Advisor or broker to discuss the analysis for an on-going risk management solution or a one time only hedge.

$300 + 10 Minutes a Day = $30,000?!?

We all know the saying, work smarter, not harder, but could it actually be possible to work THAT much smarter? Working only minutes a day and replacing, Exceeding your current Income? Don’t worry, Its perfectly legal and people are doing it right this very second around the world!
Its FOREX Trading, and what you don’t know, could be costing thousands of dollars.
Forex stands for Foreign Currency Exchange Market, commonly referred to as FOREX, FX, and 4X. You may be familiar with the stock market, but there are a few reasons Currency Trading can blow Stock Trading right out of the water!
There are 3 Major reasons why Currency Trading can outperform the stock market any day!
There Is a Very low Investment of only $300 dollars needed to start. This is a lower investment when compared to the investment you would make with stocks, futures, or day trading. Of course, you can start with something more than $300, but just start where you are, whatever that is and it will grow.
Forex is the most liquid market in the world so it offers a leverage of up to 100:1. The Stock Market offers 1:1 and-and Futures 15:1. This gives your money awesome room to grow and gain even more leverage!
The Forex Market Open 24 hours a day and has a trading volume of almost 2 Trillion dollars a day. This makes the market trend well and technical analysis works pretty well too. You can focus your attention and analysis on one or two pairs of currency instead of the 40,000+ stocks in the Stock Market.
The Forex market is open 24 hours, can be accessed anywhere in the world with an internet connection, and can be the ultimate tool for building wealth. Make money working 10 minutes a day, or a few hours a day. Work day or night, and make money while the market is up or down. The Forex is flexible and can fit around anyone's schedule!
Not sure you want to risk that $300? Gain the experience you need by playing around with a free demo account, then when you feel ready to open your first account and start building your wealth! What do you have to lose ?

How To Make Easy Money From Global Forex Trading

There are different forms of business. But the easiest way of making money is to trade forex. One of the leading providers of forex trading in real times basis is the global forex trading. It started out its operation since 1997.

It gives chances to individuals to trade forex online on real times and it offers an opportunity to most forex brokers to earn millions each day.

Global forex trading is currently serving over one hundred countries. It uses the DealBrook FX2 software and provides twenty-four hours access on the forex market.

It is also equipped with the highest quality of consumer service which is widely available in the industry of forex trading. The forex brokers are given the opportunity to have an access on the prices of over sixty currency pairs and provide analytical services from renowned experts.

The traders are also updated with the latest news bulletin on currency status and available forex charts. Global forex trading is the only provider of trading platforms on forex suitable for beginners as well as professionals.

There are various advantages when trading forex. It is very accessible since it is open twenty-four hours besides having the most liquid market. The leverage strategy is always available wherein the traders have the option of using a 100:1 leverage. This reduces the need for larger capitals that is to be opened on the trader's account.

Forex trading has no commission and the trading is widely available over sixty currencies all over the world. Forex trading is globally available that is why the traders have wider trading opportunities regardless of any market conditions.

Don’t assume that forex trading is only for big investors because of the given advantages. Global forex trading has open the way for smaller transactions. In this way, both small and big investors are given the opportunity to gain profits from trading forex.

In rare cases, some people assume that the market for global forex trading dwarfs the equities. However, this is not true because the volume of forex trading even exceeds two trillion dollars each day. So, global forex trading is considered the leader in the field of competitive market exchange. There are several reasons why global forex trading is very exciting.

-The forex market is widely available. The traders can trade currencies twenty-four hours a day, seven days a week regardless of its fluctuations. This provides the greater market opportunity for traders compared to equities which can only transact business on market hours or when stock exchanges are available.

-The global forex trading potential leverage is astounding. Compared to stock trading, the trader can either trade with the money that they have or open margin accounts and double the leverage when trading. Take, for example, you funded your margin accounts with 25,000 then you can control an equity position of 50,000. But in global forex trading, your original capital can obtain leverages up to 20, 50, or even 100 times.

In this manner, the traders can open a forex brokerage online with only 5,000 dollars and can control positions up to 200,000 dollars or above. And if the trader can fund an account with 10,000 dollars then he can control positions up to 500,000 dollars. So, whether the trader can only gain 5% on the positions, then it would still be equivalent to a 25,000 dollars gain with only an initial capital of 10,000 dollars.

-There are lots of traders in the forex market. However, even if it is possible to earn fast profits, the risk of losing is also very high. That is why the technical and fundamental analysis of forex markets is very important. It is advisable for traders to get forex education to have a good start. It could increase their chance of becoming successful forex traders. The traders should guard their business against potential losses.

Global forex trading is indeed a high speculative endeavor. Keep in mind that the traders who are successful in trading forex are those who are methodical, have strong controls over their emotions and impulses, fault-analytical, and disciplined. The traders can really earn big profits in just a few days of trading, it will grow as the time goes by, however only avoid making any mistakes.

3 Reasons To Invest In Dubai Investment Property

Dubai one of the states in the United Arab Emirates (UAE) seeks today to move away from its traditional oil dependence to a more balanced one based on tourism and services. As a result, its economy has grown with more and more tourism resorts coming up to meet this aim. This article will list three reasons why you should invest in the Dubai today.
Firstly, Dubai, as mentioned earlier, is becoming a services hub and in particular a financial services hub, there is going to be an increase in the number of foreign professionals who are flocking there to work and with a high pay and tax free status over there, the average rental yields of properties there is above the average. Currently, the single room studio apartments are doing the best in terms of rental since the expatriates that work in Dubai tend to be single individuals so this would be a great real estate investment tip to note if you intend to invest in Dubai.
Secondly, the cost of Dubai property relative to international standards is still very low and as a result, the chance of a large capital appreciation increase is very high. Coupled with the bullish take on rentals as mentioned above, the prices of your real estate investment in Dubai will be set to soar in the next few months.
The reasoning cited by some real estate professionals is that when US and UK sourced money starts flowing into such properties, the value of the real estate will reach international standards and you would make a handsome profit from the capital appreciation.
Thirdly, there is currently a Disneyland attraction being built there and this would result in an increase in tourist visitors to Dubai. If your property is located near Disneyland, there is a chance that you will be able to rent out your property to people going there on holiday. As for problems with rental collections, most real estate companies double up as property managers and developers so they will be able to handle most of the payment collections on your behalf.
In conclusion, Dubai represents one of the emerging markets where your investment dollar may make a lot more. Spending some time considering whether you want to investment in Dubai property may be worthwhile when considering the potential benefits involved.

Why Set Up An Offshore Bank Account Like the Large Corporations and the Wealthy ?

Suggest to the average American that he or she might benefit by owning a foreign bank account and you'll more than likely get a questioning look and a response such as, "Why on Earth would I want to do that?"

          Americans, you see, tend to have an extremely parochial attitude when it comes to their money — and they also tend to have an almost unnatural suspicion of foreign banking activities. After all, the media have ex­posed them to an unending series of foreign banking tales involving political shenanigans, financial fiascoes and criminal capers.
     
          Yet, the simple fact is, most Americans could benefit by owning a foreign bank account. Already, foreign banking — or, as it is more popularly known today, "offshore banking" — has become an important tool for thousands of legitimate and highly successful businesses and individuals.

           And  in today's high-tech computerized satellite communications world it is easier than one could ever have believed .

        Who would have believed even 5 years ago that standard simple transactions as talking to an  American  Express agent that the person demanding a cheque stub number could be half way around the world in India speaking better English than most Americans.
To top it off this person was probably born in a low tech mud hut and 15  years ago did not even have access to electricity and running water .

            In practice, a foreign bank account gives the prudent investor the opportunity to synchronize the benefits of various banking activities and blend them into a unique profit-making and tax-saving financial strategy. For the careful and conscientious investor, it is one of the most pragmatic ways of expanding the realm of financial op­portunity, because it is one of the most creative ways of diversifying assets.

             Since offshore banks don't operate within the United States (hence their name), accounts held in them are rarely subject to our state and federal laws and regulations. Offshore banks can also offer a wide range of services well beyond the legal ability of domestic banks. Through aggressive use of these services, investors can increase their profits, reduce their tax burdens and raise capital at lower interest rates — all without the restrictive maze of red tap often encountered in the United States.

           There are approximately 45  jurisdictions around the world that bill themselves as offshore financial centers or banking havens.  Many of these centers are remote, lack adequate support facilities or have flaws in their banking or tax laws that could affect your privacy or your rate of investment return. That does not necessarily mean you should avoid banks in these jurisdictions when shopping for a location for your foreign bank account.

          However, it does mean that you should exercise additional caution, making sure the bank is well managed and offers the services, experience and security you are seeking.

         As a means of increasing your wealth by diversifying your investments , minimizing your tex load and increasing your investment profit you should seriously look at obtaining one or more offshore bank accounts.

        Didn't your grandmother ever tell you not to place all your eggs in one basket  ?

Why Trade The U.S. Dollar?

The Forex is an informal marketplace where investors from around the world come to exchange one currency for another. In truth, the investor is buying one currency while simultaneously selling another. Dozens of currencies are exchanged and all at varying rates that fluctuate constantly. There is the potential for unlimited profits for investors that can accurately predict which way the rates will fluctuate for a given period of time. Before an investor can realize any gains, they must first decide which currency pairs to invest their money.

To begin with, an investor does not necessarily lose money when the exchange rates are falling. Just as with equities, investors can profit on the Forex whether prices go up or down—so long as they predict correctly. In fact, the greater the fluctuation (regardless of direction), the greater the potential for profit. Now the Forex market as a whole is considered to be very volatile and very fluid meaning that prices fluctuate substantially but investors can buy and sell positions easily.

While the Forex market as a whole may be both volatile and liquid, this does not mean that all currency pairs are equal. Some currency pairs, for instance, are traded in such low volumes and are so consistent in their exchange rates that they are both unprofitable and hard to liquidate should problems arise.

The U.S. dollar backs or finances almost 90% of all transactions on the Forex. The daily volume alone creates the large moves investors like to see because they can capitalize and make large profits if they play the game correctly. Plus, the liquidity of the U.S. dollar allows investors to unload positions easily when they become unprofitable. For these reasons, investors are advised to stick with only currencies that trade with the dollar when investing in the Forex.

There are dozens of currencies that are exchanged with dollars but not all are as profitable as others. There are actually 7 other currencies that trade with the U.S. which account for the bulk of the transactions on the Forex and they include:

1. Euro (EUR)
2. British Pound (GBP)
3. Swiss Franc (CHF)
4. Canadian Dollar (CAN)
5. Australian Dollar (AUD)
6. New Zealand Dollar (NZD)
7. Japanese Yen (JPY)

The best currency pair will include the USD and the currency that produces the greatest price movement with least volatility. To determine this currency pair, an investor will need to use analysis (fundamental or technical) to identify the best opportunities along with entry and exit points. However, because of its volume and liquidity, it is best for investors to find currency pairs that include the USD as they have the greatest potential for profit and it is easy to enter and exit positions at will.