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but for many share traders/investors hedging is a great way of increasing your capital.
It is??
Please educate me,Ive been trading for many years and have never been introduced to trading using hedging to increase my capital.
Please explain your method of hedging.
tech
The most expensive habit youll ever have is a Wife/Girlfriend/lover or all three.
The Majority talk about it.
The minority DO IT.There in lies the secret of success
whatever the method/s you employ.Just quickly something that should stir some interest.
To the Math
Line of credit on your equity–say 7%
Interest on Margin say 7.6%
Costs of buying and selling portfolio etc 1.5%
So you need to make say 10% P/A to be viable.Remember a 10% return on your Margin account.
is approx $35000 on our case above.This is 35% on our initial investment of $100K
Now imagine 20% or 30%
But as with all leveraged instruments the downside is leveraged as well.
So a 10% portfolio loss is a 35% Initial capital loss.Now imagine 20% or 30%.
tech
Thought it maybe worth explaining the stratagy of using equity in a Margin Loan a little more in depth as reading back it seems that the concept is or will be very new and daunting to some.
Firstly we are all happy to run off to a financial institution for a few $100K for our own home or the next IP.Armed with our deposit of cash or equity from our property.Everyone does it from one time to another and as we know “Everyone makes money in property”
(Well they should).
Generally society is comfortable with the concept.But money in the bank and equity (Particularly) in a property is dead money.Its not working for you.Equity is to a bank like cash in your hand.
Some discover how to unlock it when buying IP’s.But the time comes when property stalls or even goes backward and those who are geared positively enough sit back and smile with satisfaction and others struggle when their gearing puts them at risk when rates inevitably rise.
The gurus rightly point out that there is a pool of wealth available to all who have some equity in their home.They are encouraging you to look outside the square of convention.One idea is to ues the equity as a deposit against a loan from a Margin Lender (Bank,eg Commonwealth,BT,Maquarie).To invest in (In the case discussed)Property trusts.
We call any group of stocks that are in our pool for trading a “Universe” The All Ordinaries is a universe of over 1600 stocks.You could trade just Banks or Mining Companies or Property trusts all universes within the Universe of the “All Ordinaries”
Margin lenders have their own group of stocks they allow to be traded using your funds and theirs.Their “Universe” of allowable stocks to trade have been selected on fundamental criteria which their analysts believe warrent the stocks inclusion.
Like a Bank researching high growth areas for property and only lending on them,how good would that be!! (Sure they are only human and get it wrong ).
They rate the amount that they will allow to be fully vested in one stock from 45% to 85%,so if you trade only one Stock,property trust or whatever you will have a limit to the amount of funds the bank will lend on the ONE stock.
However “Normally” people trade a Portfolio or group of stocks,so if trading 5 equal $ value parcels only 20% of any one investment will make up you portfolio so you will have no restrictions on what the lender will allow you to trade as your below his minimums.
OK that explained you have say $100k equity in your home and you want to unleash it without selling.Off to the bank and we setup a line of credit! Now released we chose a “universe” of Stock to trade and give our Margin lenders their deposit.
$17000 was the minimum margin requirement from BT
.
You can use any amount from 17K to the 100K.As a rule of thumb you will recieve around 2.5* your Margin from the lender so $100K will give you a total of around 350K to trade.
To the Math
Line of credit on your equity–say 7%
Interest on Margin say 7.6%
Costs of buying and selling portfolio etc 1.5%
So you need to make say 10% P/A to be viable.Dividends cover most of your interest.
For those who want more info on Margin lending I have a discussion Paper from 2000 when I first became involved just email me and Ill send it on.
[email protected] please address as “Margin info” or go to https://online.btfunds.com.au.For those wondering.
Im an investor like you I have a Civil Construction Company, 8 IP’s and 2 Trading Portfolios.If you can find it seek your own independant
financial advice from a licienced advisor.John tech/a
Kp
Ive never asked that question of my lender but would say that as your security to the lender is either cash of stock and provided you are within their margin parameters I cant see why not its your stock.
That also raises a question re stock held by a self contributing super fund (Your own) wether you could write covered calls on that as well.Ill find out.
If your interested in options
“The New Options Advantage” by David Caplan
ISBN 1-55738-863-6 is outstanding.John
Ajax.
Writing puts are fine in a bull market,are you writing index options?There are some interesting stratagies writing puts or calls 3 weeks out 3 standard deviations from the mean.Your in the minority.
Im sure you are aware that your writing of call options while holding the underlying is a stratagy for flat or falling markets as a hedge.
Still a whole seperate topic which is beyond this discussion—I think.
Just trying to get an idea wether there is any interest in this thread.
The question originally broadly asked about alternate methods of investment of equity in housing now that the market is somewhat flat.
Having equity that isnt working for you is really dead money and can be chewed up if interest rates turn you from a positive geared property into a negative.I thought Id do some comparison work on the BT Margin list of ALL Property trusts that can be traded,over the last 5 yrs year by year to see the possible returns.
Managed Funds (Some) are also tradeable so if there was any interest I was going to run some comparisons on them.
Then ofcourse trading stock.
All this takes time and my feeling is that very few here have an interest,while it maybe a stratagy some have heard of it is something which most find too hard to comprehend and places them out of their comfort zone.
Similar to the feeling of buying your first IP—-remember that!
Anyway Im happy to put in the work if there is enough interest.
John
For those interested I can show charts and discuss easier here
A favorite topic of mine.
Ok.
Margin is possible on stocks allowed by the Margin lender (I use BT–Bankers Trust)Oh by the way forward paid interest is as low as 6.5%and defered is 7.45%.Now as part of the allowable stocks to trade there are a number of Property trusts–some out performing others.
I think Property trusts have been chosen because in general they have out performed the All Ords over the past years due to the property boom.Their out performance is unlikely in the future and a knowledge of how to analyse a stock chart and in particular a sound grounding in RISK MANAGEMENT when investing would be musts.
The principal is in my veiw very sound and if used correctly can return astounding profits.
Although property trusts have been used in this example a portfolio of stocks will do the same.
Depending on your ability to choose and manage a portfolio you can return far in excess of the 12% offered as a bench mark here.Ive been doing this now for 3 yrs.Having traded for 10 yrs now the opportunity hit me in the face just as it has others.The key ofcourse is your portfolio.
Having been involved in Trading System Developement for 6 yrs I and a few others decided to prove to ourselves if this could be done.(Develope a method which can trade profitably consistantly over a long period of time).
2.5 yrs ago we developed and trade live on the net at reefcap.com a method which has in that time returned around 80% and leveraged at 2.5:1 gives a return on INITIAL equity of 200%.
Figures like this are normally scoffed at.
So I will post the link here for you all to lookback on and watch as time goes by.
Infact the whole method is available to you at no cost if you have the software to make use of it.(Metastock).I can also post on reefcap charts showing what I mean with regard to the Propery trust part of the discussion.Ill open a seperate thread under Traders helping other Traders this afternoon—just hopping out for an hr or so.
Lookforward to more discussion.
http://www.reefcap.com/ubb/Forum8/HTML/000374.html
This link is the latest results sheet.
John
CHECK THE WIRING
If the agent tells you to check it you can bet your life its crook!
For what it worth we do our own.
It savs $8k a year for us.We know all our tennents.
They know us and think we only have 1 IP and are only a little different to them!
We dress like them.
We are certain to call around if even 1 payment is behind.
We inspect regularly and fix(Often they do!)very quickly.
All tennets have been with us over 3 yrs and yes selection is important but being visable saves a lot of dramas and goes a long way to eleviate the US V THEM attitude.You must have the time though!!John
If sevicability of the new loan is no problem then your risk is minimal.
You will than gain 100% on any increase in property value.Servicability will be one of the issues your lender will evaluate on your next purchaese.
Deposit in the way of equity wont be a problem and if you can find properies either Positively or as close to neutrally Geared then servicability shouldnt be an issue—provided your on a decient wage—etc.
John
Even if you buy out the other 1/2 you will still only have the same equity leverage and less servicability in the eyes of lenders.
On a personal note I would not continue with a partner as they can become very expensive passengers on your journey to financial security,often they are not able/willing to make the quick decisions necessary.
Unless they have/perform an equal/greater contribution Id rather be a sole trader.
Each to their own.
Johnjust another quick question, would you buy a property unseen??
Well I bought a Vehical from a dealership Unseen and in another state.(65K).I knew they were reputable and the vehical was un encumbered,and I am protected by many laws.That was 2 yrs ago and I still love it.
So I suppose there are cases of exception.
But for a house—-I honestly cant think of ONE!
If this is your first investment Id be particularly careful that its not your last!
Go see it!
John
Hmm.
Ive never seen the terminology for Options and how you could actually use the implications of the teminology with options to purchase a property.
Put options are options to sell a parcel of share at a pre determined price and time in the future.
Calls are to buy options at a predetermined price and time in the future.
You can also write both puts and calls.How can you go short a property option?
Me thinks this terminology is being used incorrectly here!.
Its a slow process or a fairly quick one if you are lucky enough to take advantage of a boom like that which has just flattened out.
I have to agree with Kay though.
Many just dont have the “Balls” to invest like the gurus.Its a huge task for most to be indebted to an institution for 200K.
When that becomes 1mill or 5 mill its beyond most peoples comprehension.The secret is simple
get as much money from other people(Banks financial insto,s)for little or no cost and put it to work so you can reap the earnings from capital growth and or passive income.Once you have done this once just keep repeating the process.
There are only 3 areas I know of in which this can be done.Business
Property
Trading.
Enjoy the journey.John
Trust Funds are a necessity when sidestepping crippling Landtax.
{{return on your investment in a wrap deal is higher than usual buy and hold scenario.}}
Pelican are you sure about that over the last 5 yrs or so??
If so please explain!
K
I have it on all mine.
In particular melicious damage.
We too had a tennent who was copy book never missd a beat.
Along came ex husband and within 3 mths the inside was trashed and the ex was gone.
Repair bill 8K
What about public liability that to is in the Landlord package.
As is Fire (Well mine anyway).I dont mind insurance as you can see its always worked for me but others see it as just another un necessary expense.
John
