The Exceptional Wealth Accumulation Ideas and Thinking Thread

[Mr J]

In essential, I think that's what he meant. Increased leverage does not necessary equate to higher risk if you can manage your position properly.

As long as position size isn't altered, I don't have a problem with it. Many people do see leverage as a way to increase their position size, and are ignorant of the increased risk.

Risk is what you stand to lose on a trade.
If your s/l is in profit you can't lose any capital on the trade. You are risking open profit but that occurs in any trade.

And it can be argued that our unrealised profit is ours to lose, since we have the decision to close the trade for that amount of profit. Consider the same situation, but instead of a trade we have the trading career. If we make 2 million and then lose it all, have we broken even or have we lost 2 million? We've done both.

Personally, I do move my stops up quickly, but I always consider open profit to be an amount I risk. Technically, it's not ours until the profit is realised, but going by that logic our trading capital is not ours until we've finished our trading careers. There multiple ways of seeing these things.

A stop at breakeven means a no risk trade

Even if you argue that it is now a risk-free trade, it did have initial risk, so it is not a risk free trade.

 

[beamstas]

capital/open profit;

open your eyes- they are the same thing.

So what do you do? Sell for 2.5c profit because you believe your opinion on the price actually counts for something? Or put your stop loss at break even and let it do whatever the hell it wants.

All you can do is manage risk, putting your stop at break even (note the term used break even implying that if the trade now goes against you, you will break even ) is a great way to manage your risk.

When calculating the profit or loss for a trade do you calculate how high the sp got then deduct the actual sale price? For example you buy at 10c with s/l at 9c. It gets to 11c and you move stop to 10c (break even) and then the price reveses to 10c and stops you out. Did you make 0c (10c - 10c) or lose 1c (11c-10c). You made 0c. You were break even and while the stop was at 10c you couldn't make a loss on that trade.

Simple as that.

 

[--B--]

seems like semantics now fellas.

both explanations are sound in that they are not incorrect and it clearly depends on which was you prefer to look at it.

one can view the loss of only thier unrealised profits as zero loss (zero risk) given they have lost nothing of their initial stock of capital. one can equally view the loss of unrealised profits as risky as this component of THEIR money was clearly at risk and lost.

 

[beerwm]

So what do you do? Sell for 2.5c profit because you believe your opinion on the price actually counts for something? Or put your stop loss at break even and let it do whatever the hell it wants.

All you can do is manage risk, putting your stop at break even (note the term used break even implying that if the trade now goes against you, you will break even ) is a great way to manage your risk.

Simple as that.

LOL!

you just spent the last 3 posts telling me that there is NO RISK.

so - im managing risk... in a NO RISK trade?

you're totally contradicting yourself, you say "opinion on price doesnt matter" but than you support a B/E stop. -
which is a stop which is set by the trader, and has no relevance to the market

MR J. has it right, we can debate open profit as being money gained or not,

the price and date at which I buy a share has no relevance to me as how I play that trade out
- It seems you are saying it does - dont know how the helps you.

 

[beamstas]

the price and date at which I buy a share has no relevance to me as how I play that trade out
- It seems you are saying it does - dont know how the helps you.

Of course the price has relevance, it forms the basis of whether you made profit or loss.

Risk is Entry Price minus Stop Loss. If entry price is the same as stop loss then risk is 0. Current Price doesn't come into it.

 

[beerwm]

Of course the price has relevance, it forms the basis of whether you made profit or loss.

Risk is Entry Price minus Stop Loss. If entry price is the same as stop loss then risk is 0. Current Price doesn't come into it.

Current PRice = $11.
Entry = $9
SL = $10

Entry - SL = Risk
9 - 10 = -1.

-1 RISK... nice beama, not only have you eliminated RISK, but now we are operating in NEGATIVE RISK.

So now you're telling me that current price doesnt effect your StopLoss?

lets just leave it at that,

 

[beamstas]

negative risk
commonly known as gain

 

[ducati916]

tech/a

Duc

Its not meant to be.
All I need to know is in MY AREA
(1) Rentals have 30 or so at opens often tenants out bid each other.
(2) Average sale time here is 46 days
I don't procrastinate and analyse a deal to death.
I do it.

I'm just adding carriages to the train.

How people quantify their own investments are up to them----just create your own train!

Your area however will be effected or influenced by the macro/micro factors that you highlighted as forming part of your analysis. Said analysis, I assume, to identify potential rewards/risks that constitute the basis of the opportunity.

Essentially, from the quote above, minimal analysis is undertaken. Therefore, by definition minimal appreciation of potential rewards/risks.

You would seem to be operating on a deterministic basis, based on historical data gleaned from an arbitrary lookback period. Would you recommend this approach to all and sundry?

jog on
duc

 

[tech/a]

Absolutely.

Once risk is taken care of there is little concern.
Of course most will complicate opportunity and disguise fear and indecision with "Reseach" or "Analysis".
One of the most common causes of Procrastination.

I'm wrong more often than I'm right.
When wrong I'm wrong very quickly.
When Right I'm right for a very long time.

I could drop dead tommorow.
Korea could take on the US.
An asteroid may hit.

Worst of all duc.
You could be dead tommorow.

 

[moreld]

For the moment, let's say I agree. How then will you analyse in relation to your example in Property [I assume residential]:

*Drivers of Supply
*Drivers of Demand
*In a micro/macro context.

The example you provide is not an analysis of supply/demand. It is simply an exposition of projected costs and revenues.
jog on
duc

Wonderful thread, full of some great advice. I've wanted to reply to many posts, but time is short. I reckon I could guess the age and experience of many of the posters here just by comments on this thread.
Young or new investors often fail to realise the power of compounding. They may understand how it works theoretically, but they really don't get it and very few implement it. Any young person with a reasonable brain should end up very wealthy. It is incredibly easy to do so if you utilise compounding and there is not even any need to engage a financial advisor or invest in anything more complex than a broad market fund. What ever you do DON"T invest in any structured product. BUT that's not what I wanted to talk about.

Duc asked about supply and demand in residential real-estate. I am not a property expert, yet I'll happily disagree with the "experts" who are promoting the next bull run in RR.
The experts are pointing out that there is more demand than supply for RR in many parts of Australia. Immigration/population growth and a shortage of land are the two main drivers behind that. However, what they and most economists seem to fail to realise is that nothing moves in a straight line. Supply and demand matter in the long term, but not in the short term. There is no average return and caucasian distribution does not exist in the real world markets.

The experts seem to ignore that Australian property is over priced in relation to its long term trend line and now to international property markets. They are declaring it is different this time; it's different due to supply and demand. That does not cut the cheese.

Australian property prices have been propped up by government funding for new home buyers and the ripple effect that has caused. Falling interest rates have been the other kicker. Both the funding and interest rates will reverse and property prices will fall to below their long term trend line. It is so freaking inevitable that if anyone can figure out how to profit from it they will get their exceptional wealth. Assets always move around their long term lines, above and below. Buying when they are above is a dangerous game.

I haven't managed to figure out how to profit from the coming fall or whether the fall will be a fall or a more traditional period of stagnation as wages catch up to prices. If someone has a suggestion I'd love to hear it, but I'm not too stressed as life is long and at some point in the future RR will again be relatively inexpensive and I will buy. Like all assets the key is to buy low and sell high. Those buying into RR at the moment are hoping to buy high and sell higher.

tech/a seems to have a good strategy, the trick will be ensuring he is not over leveraged when rates rise and prices fall. I love leverage, but only to buy undervalued assets.

All the above is for amusement only. Kids at elbow, no time to check this post. Thanks for so many great posts. I hope it's OK that I "borrowed" that great chart of the DJIA, let me know if not. I just wanted to make sure I would keep it forever.

 

[ducati916]

Everything you invest in is governed by Supply and Demand,and always on a micro and macro scale.

Its the macro scale we look to be in sync with.
In the 2 times I have caught the Macro scale once in property and once in trading,I had no idea they were coming.
I did know I had to be exposed to opportunity.

Yesterday

Its happened twice in my lifetime where purchasing a fully established home is far cheaper than purchasing a new home.
Where rent exceeds the repayments on the property holding costs.
Even on zero down.
Where demand way outstrips supply.
Where the balance is clearly out of whack.
We can achieve positive gearing today with 50% or more down but at times in your life you'll find Perfect conditions.
Clearly the less down to hold an investment at zero or very low cost the better the investment.

Whilst holding positively geared property I noticed blocks rising dramatically in price and getting smaller!
600 square meters had gone from $80k to $160k in my area.
Commercial Land was $35/ square meter so 4000 square meters was $140K
Clearly there was an in balance Domestic $260/square meter and Commercial $35 Again it was clear
a balance was to return.

You have in your analysis created ideal circumstances. Possibly these were the very conditions you took advantage of. But now let's look at some of the risks that you have ignored within this ideal scenario.

*Liquidity. Housing is notoriously illiquid. If you need to sell, how quickly can you sell?

*Markets change. The market that you buy in, may not be the market that you want, or need to sell in.

*Transaction costs. These are high in real estate. They can seriously alter a marginal investment.

*Your calculations assume a continuous rise in capital values.
*Your calculations assume a continuous rise in rental values.
*Your calculations assume demand continuing to be higher than supply.

All of these assumptions, if incorrect, do what to your position?
Certainly I would argue that real estate actually fulfills none of your assumptions.

*Change in nature of the neighborhood
*Black Swan event [macro/micro]

Essentially, you are highlighting hindsight factors. Yes, you may have partaken, and you may well have profited, yes, you may even have posted about them. The fact is though, although the historical record bears you out, this is in point of fact a perfect example of survivorship bias

By that I mean this. By sheer luck, or skill, we can't at this point tell the difference, you profited from said property conditions. Without a detailed analysis of the risks, and the means of mitigating or offsetting the risks, I have to assume you were simply lucky.

Previously, you have mentioned that in property, you were unlucky, and nearly went under. Assuming for the moment that you learned valuable lessons from the debacle, they [the lessons] should be apparent in the analysis that you provide.

At the moment I am reading, don't think too much, jump in feet first and leverage your ****-to-the-max - is that unfair?

jog on
duc

 

[It's Snake Pliskin]

Tech I have some questions on what you have put together.

I like 3 or more dwelling developments.
with 20% down initially finance isn't an issue.

Why isn't finance an issue? Some will have trouble getting it.

270K less $50k initial outlay at say 6.5% for ease of calculation
gives an initial holding cost of $14,300 a year.
Other costs will amount to around 40K if your sub dividing.
Plus of course building costs.
I have standard designs from my builder ready for application.
I also have a performance clause with liquidated damages if not adhered to.
As soon as the approval is granted I place the development for sale.
I only want to sell 2 and I work on an option to purchase after 14 mths
to minimise capital gains tax. I'll keep 1.

Clearly you can see after 1 yr the holding costs and risk are almost zero.
I wont go through the exact figures but hope you see how to virtually
eliminate risk.

Risk is almost zero? You virtually eliminate risk?

So there is risk? Or there is no risk at all?

 

[ducati916]

Duc asked about supply and demand in residential real-estate. I am not a property expert, yet I'll happily disagree with the "experts" who are promoting the next bull run in RR.

The experts are pointing out that there is more demand than supply for RR in many parts of Australia. Immigration/population growth and a shortage of land are the two main drivers behind that. However, what they and most economists seem to fail to realise is that nothing moves in a straight line. Supply and demand matter in the long term, but not in the short term. There is no average return and caucasian distribution does not exist in the real world markets.

moreld

I was interested to see if tech/a, who is I believe a specialist in property had any particular analysis that he thought was worth sharing. As you have picked up the baton, I shall pick up on your initial analysis.

First in any cycle it behooves us to identify correctly the sector that we are going to invest in. Housing, residential property, one would assume, is a consumer durable good. Consumer durable goods have a lifespan that is used up both in real terms and accounting terms [depreciation]

Thus, consumer durables, are by definition, capital.

If they simply remain as a capital good, economic calculations that bear close proximity to reality can be made, and economic agents through these calculations will keep the supply more or less in line with demand due to reasonably efficient market forces.

However, in a business cycle engendered via an expansion of credit through the banking system, where the object of speculation becomes housing, the nature of housing changes from being capital to becoming a consumer good [consumable]

This fact strongly alters the market forces that guide supply to match demand.

First, relatively higher accounting profits appear in the consumer goods sector which is the last stage, compared to higher stages of production. This draws capital from economic agents who place on hold or liquidate capital investments that show less profit, and redirect it to the stage closest to consumption.

In addition, the rise in prices exceeds the rise in wages, prompting a reverse Ricardo effect, that drives expansion through labour and a reduction in capital goods.

This in effect speeds the rate of supply to match the increase in demand from the increase in speculation [flipping etc] and price signals. Thus the supply chain expands.

The increased demand however is driven by an artificial credit expansion, that unless maintained at a faster pace than the rising prices, will engender the bust at some point.

This is of course what happened in most residential real estate markets around the world. With the bust, the now surplus labour are laid off adding to the unemployment.

What happens next is a function of what government doesn't do, rather than what it does. Unfortunately, government is committed to creating a further credit expansion, and providing subsidies, and make-work schemes, all poor policy decisions. Thus, real estate I agree does not present as an attractive investment choice currently.

jog on
duc

 

[brty]

Duc,

Housing, residential property, one would assume, is a consumer durable good

So you don't like Tech's assumptions, but you make them yourself.

What other "consumer durable good" returns rent??

I also have experience in multiple properties for nearly 30 years, and know how true is Tech's post.

Every investment is based on some assumptions, walking across the road with a green light is done with assumptions. TechA's assumptions are much better than yours.

brty

 

[moreld]

I thought I'd posted a few charts on residential property a few months back and here they are. http://www.fusioninvesting.com/2009/05/is-australian-residential-property-the-last-bubble/

I'm posting the link now as property spruikers seem to be in full-on promo mode at the moment and I hate seeing lambs being led to the slaughter. NO tech/a I'm not referring to you (just in case you're paranoid). The spruikers have a great story to sell at the moment. Bubbles are always created and momentarily sustained by great stories.

For the first time in a many years it is possible to positively gear into Australian cities without too onerous a deposit. Rents are high and "predicted" to go higher. Interest rates are low. It's all beer and skittles. The problem is interest rates will inevitable go higher and rents have a natural ceiling as portion of income. As duc pointed out property is illiquid and when over leveraged punters who are years late to the party start to hurt and dump their properties, prices will fall, or at best stagnate for years.

There was a great post earlier in this thread which pointed out the normal ways of achieving wealth. Inherit, business, work smart or invest (I added that one). Most really rich people fall into the first two categories. It is impossible to get really wealthy just by working smart, but by combining that with investing it can be done. Personally I'd say why bother, there's no need to be exceptionally wealthy, but each to their own.

I pursued what I consider the lowest risk path. As I don't seek great financial wealth and view wealth as friends, family, health and happiness I decided setting up a business was not for me. I did not have the luxury of inherited wealth, but did receive a good education. The secret is there is no secret.
Maximise your hourly rate doing something you like and are good at. Continuously save and invest more than you earn and spend more time on financially educating yourself than watching sport and you'll end up wealthy. While nothing is risk free there, educating yourself has a high probability of success. If you learn something from everyone you come into contact with you'll be a success.

Time. It has been noted that time is the secret to wealth and I totally agree with that. I think most people were talking about compounding, which is the greatest force in nature. There is another important aspect to time and that is time management. If you want to wealthy or successful the number one thing you have to do is maximise your time. You have to practice and study whatever you've chosen to do more than anyone else, or as much as other people who are switched on to time. I don't mean simply working longer hours, it is what you do in those hours that matters. Anyway, I digress and probably bore you, so I'll finish with one time management/learning tip.

How to read an book
If you want to learn as much as possible from reading a book then do not read it from cover to cover.
First read the Title, then the contents. That takes a couple minutes at most. This gets your mind into synch and thinking about the concepts in the book. You probably already some things about the topic or related to it and your brain will start bringing those thoughts from "storage" into "memory".

Then read the summary for each chapter, that's usually the first or last paragraph or two. You brain will start indexing the concepts and creating links to your existing knowledge.

At this point which will have taken less than an hour, you'll have learnt as much as most people who will spend days reading the book cover to cover. You'll also be in a better position to know if it is worth reading the book cover to cover.

If the book is worth reading then go ahead and do so. As you now read the book your brain will continue to index it and you'll think "I already know that" and everything will seem to be easier to comprehend and remember.

There is no such thing as a free lunch. While volatility/beta has absolutely nothing to do with risk, there is no doubt that risk always exists. Investing in yourself is the lowest risk activity I know of.

Trends to watch:

• Oil, coal, natural gas and the companies that service them.
• Electric cars are inevitable as we have passed peak oil. BYD is the best play I know of there, but the shares are now overpriced.
• As oil rises AE will have a second wave in it's current growth path. Vestas wind and GE in turbines. STP is the lowest cost producer in solar. These are not recommendations, you should look and wait for good entry points if you are interested. Solar is the riskiest.
• The fall of the USD, especially against commodity based currencies like AUD.
• The final end of this commodity boom. Wealth is made the fastest on the way down.

Nothing is inevitable, but if you're well versed and watch then opportunities present themselves. My problem is I'm easily distracted and forget to watch

 

[Ageo]

Interesting thread, Duc your posts are very informative but jeeez they are a hard read for the average reader.


Tech just to simplify things are we taking about investment or business?

You see i find the 2 different but essential to most for exceptional wealth.

Business can create exceptional cashflow if structured properly (and if in the right industry sold for a capital lump sum).

Investment can create exceptional capital gains (and modest cashflow returns).

For me its a bit like this:

* The pipline of water is my cashflow which needs to come in month in month out. Any excess needs to flow onto another holding tank (investment) which then grows and compounds accordingly. You see Return on Investments are essential but not as essential as compounding your rate of return.

For example id rather make 3% on $10million then 500% on $50,000. The reason being is its so much easier to continue to top up the investment tank (portfolio) and continue compounding your returns each yr and do it for a long period of time then making high gains from a smaller capital base.

But for me the main driver is cashflow from my business's, and without it the process to wealth accumulation is much slower.

Another thing for me psychology is about 95% of the job, if you dont have the right frame of mind all the deals in the world still wont help you.

 

[Mr J]

walking across the road with a green light is done with assumptions

Only if one doesn't think about the possible risk.

Every investment is based on some assumptions

I make no assumptions when I place a trade. It could profit, it could lose, my stop may not be transmitted, the exchange could go down, I could lose my secondary connection, account etc. I don't even assume the entry will be transmitted, or that when it is closed it is actually closed (I check for trade confirmations). Perhaps a nuclear warhead takes out Sydney, or the sun doesn't rise tomorrow. No assumptions, just possibly overlooked events. We shouldn't be making assumptions if we can help it.

For example id rather make 3% on $10million then 500% on $50,000. The reason being is its so much easier to continue to top up the investment tank (portfolio) and continue compounding your returns each yr and do it for a long period of time then making high gains from a smaller capital base.

So would I, because it is $50,000 more. Compounding has nothing to do with it, as both amounts can be compounded. We can't say that the larger capital strategy won't actually outperform the smaller capital strategy, as you haven't given enough informtion. From the sounds of it though, the smaller strategy will significantly outperform the larger strategy in the longrun.

 

[moreld]

If one believes in sector rotation then "consumer durable goods" are towards the end of the investment cycle not the beginning.

Here's a cut and paste from a post of mine from March.
"Coming out of a recession the leaders are likely to be materials, consumer discretionary and information technology. I’ve ignored Financials as they are a special case this time. Though I do find it interesting that some pundits say whatever led us down will lead on the way up, while others like Jim Rogers say financials are not going to recover for five to seven years.

Sectors that logic and sector rotation believers suggest will lag include consumer staples, health care and utilities. Now you may think I’ve simply picked the three best and three worst sectors to illustrate my point, but if you think about it for a few minutes and look at any sector rotation theory you’ll see both the logic and that I have not cherry picked the data. There is one exception, industrials. They are expected to outperform early in the recovery, while they are showing slight out-performance my issue with that group is its diversity. "

I am agnostic on sector rotation, though take a look at Tech on this chart
http://finviz.com/map.ashx?t=sec&st=ytd

 

[Ageo]

So would I, because it is $50,000 more. Compounding has nothing to do with it, as both amounts can be compounded. We can't say that the larger capital strategy won't actually outperform the smaller capital strategy, as you haven't given enough informtion. From the sounds of it though, the smaller strategy will significantly outperform the larger strategy in the longrun.

So your saying you could earn 50% yr in yr out on your capital invested? (not trading as thats a business im talking investing which is long term)

If you can then you are truly exceptional!

You see what im talking about has nothing to do with outperforming other strategy's, what im talking about is that if people understood money management, risk management and the power of compounding they would understand you dont need super returns to become wealthy over time.

* How many people today earn 100k per yr yet there expenses = almost that money management.

* When they invest into something its usually a poor choice with high risk (negative gearing property comes to mind) risk management

How many people compound their returns yr in yr out over 10-20yrs on their own (excluding super) the power of compounding


The reality is people are impatient and always try to skip 1 or 2 simple rules (i know because i have many times).

The funny thing is the 1st million is the hardest/longest, after the the rate of compound starts on its exponential curve.

 

[kincella]

extract from an article comparing shares to property...thought some of the highlighted stuff might help some to understand .....the difference being, one can be ordinary when it comes to investing in property thats leveraged, but one needs to be above average to achieve the same results, consistently with shares, and create a greater income of 16% versus the average of 12%

this post is not about shares versus property....its about the difference between an ordinary investor and an above average investor....
......................................
What if you really cranked up the gearing on property to say 95%? I’ll let you do your own sums,
but you’d need a return of around 16.5% from 50% geared shares to match the outcome over 20 years and your equity only catches up very late in the day.
Meaning a lot of lost opportunity cost from not having the equity earlier to deploy in further investments. I might add that if you can do 16.5%pa year in, year out over 20 years you should immediately march up to a large fund manager and demand they give you an 8 figure salary, massive bonuses and a big office with harbour views
Of course if you’re the next Buffett and can do 28%pa on ungeared shares for 20 years then you’ll trounce the opposition and make a motza. But bear in mind you’ll only catch up in the equity stakes by year 12…

Conclusion

So, apart from having some fun with modelling the future, what can we learn from these projections?

A very average property with good leverage can beat a sharemarket expert with less leverage over the long term.

Just as we all think we’re above average drivers, most investors think they’re above average when it comes to investment. Of course that cannot be true.
So if we assume we’re about average when it comes to investing then when it comes to property, highly leveraged, maybe, just maybe, that’s okay.

We can be average when it comes to property selection provided we gear to 80% or more and hold on for the long term. Which I guess is what authors like Jan Somers have been saying all along. To achieve the same results as a pretty ordinary property investor with shares requires above average skills over the long term.

So, perhaps the question should be, why are we holding shares/managed funds instead of property? The analysis above would suggest the only correct answers to that would be:
a) I’m using it to provide cashflow for my negatively geared properties; and/or
b) I’m using it as a saving vehicle to get the deposit for my next property.

Perhaps the third acceptable answer is that we’re holding shares/funds to have ready access to some liquid assets rather than holding cash.

Ultimately then, the answer to the title of this post is that the REAL story of property vs shares is a story of different permitted levels of leverage.
http://www.invested.com.au/75/property-vs-shares-real-story-34626/