Trading Pal Blog

You can't live in a portfolio of shares and you can't sell just your bathroom to raise some extra cash. What are the pros and cons of those two forms of investment?

You never know the price of a property until someone is willing to buy it and someone else is willing to sell it at the same price. Equities are very liquid because there is a market quoting current prices for each trading day.

Borrowing to buy shares is risky while borrowing to buy property is virtually the norm.

Real estate is very much an all or nothing proposition. You buy a house and you sell the whole of it. Besides capital gain you can rent the property and it ties you to the duration of the lease. Some clever operators had the idea of getting people to invest in a pool of properties by holding a number of units while others have a time-share arrangement in a holiday condominium. Those arrangements end up having the drawbacks of both investment types and none of the advantages.

Shares allow you to build up a position over time taking a small risk at first because your holding is only a few shares (the broker's commission compounds but then you could use CFDs instead). Shares that you hold over time generate income by way of dividends.

People who are skilled as a tradesperson look for properties they can repair and maintain in order to add value. In real estate the location is crucial. Proximity to schools, public transport, shopping centers is built into the price. What maybe a good family home for you may turn out to be a disaster as a rental property.

You would think a farmer close to a urban centre has the option to subdivide his land into residential blocks and make a huge profit. That's the theory but in practice it is a 10 or 20 years plan and will require going around corrupt local authorities.

If you plan to buy land, build a house on it, sell it and repeat the process as an investment strategy this is a full time occupation - not a dabbling investing past-time. The building trade is notorious to attract unsavoury operators and local authorities are sure to change the rules with more and more regulations - not less!

Two big assumptions maybe falling apart with property: ongoing capital gain and cheap credit through a competitive banking sector. The recent crash has shown that like everything else inflated house prices will have to come down to earth while the few banking institutions left will tighten their credit assessment.

Property transaction costs are huge (conveyancing, local council duties, agent's fees) but online brokers have brought commissions to a bare minimum.

It seems people are either comfortable playing the property game or researching stocks with good growth potential but rarely do you find folks who have the mindset to actually do both.

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Ethical investing is a moral issue. If you do your research into a given stock you are bound to uncover issues you may not agree with. So do you put your money where your mouth is not?

In the past people had rightful concerns about investing in military contractors, cigarette companies, gambling operators, etc... Today the spectrum widens as some would be innocent operators turn out into major public relation disasters. But how can you tell in advance if a public company is above board?

The short answer is you probably can't but the question really is: Do you invest with your head or with your heart? Do you know enough about the history, the background and the mindset of a company to be associated with them? Instead of investing your money, would you invest your time that is your working life there? How would it feel like if instead of an investor you were an employee?

What are the issues that would make you embarrassed of financing an operation in the view of earning a profit from it? Do they have a social balance sheet? How do they treat the people whose livelihoods depend on wages paid? Do they train their own staff or would they rather steal employees from competitors?

If a mining concern, do they improve the lives of local residents or do they pollute the water supply?

If a drug company, do they test new medicines in third world countries on unsuspecting volunteers?

If a food company do they use reckless marketing to promote harmful products? Remember Nestle selling baby formula as an alternative to breast feeding.

What is the company safety record? Was the widow of a workplace accident victim treated fairly?

Does the company have a 5, 10, 20 years plan? Has the board recently appointed a new CEO who is going to turn the operation into a cash cow - a bonanza for investors, a disaster for employees and customers?

Does the company stand by its products or do they hide quality assurance issues? Remember Toyota and the massive recall.

In the long run bad policies will turn out to be bad investments. Invest with your head to look at all the fundamentals but invest with your heart to spot an ethical operator who add real value to society and by correlation value to investors also.

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Pump and dump strategies and other shenanigans were rife before the advent of discount online brokers. As the saying goes "it's never a bad time to take a commission".

Marketing and spin is taking a whole life of its own if you can spread a rumour and have enough bystanders repeat and embellish the story for you.

Can those good old times survive or has the internet killed the opportunity for brokers to dispense investing therapy? So what made a juicy good story? How easily could greedy investors (gamblers ?) be caught?

Since inside knowledge can be turned into a trading advantage there is an in-built collusion of interest between those who know of some impending market data and those who are eager to trade that information before it becomes common knowledge.

Full service stockbrokers were notorious to cultivate a following of people who wanted to be in on a good trade. For some unknown reason it always became a bad trade. Stock manipulation is more transparent now since any good online trading platform allows you to see the course of trades entered in the market. In the past a broker could interfere with the market of an illiquid stock by withholding either buy or sell orders to cause the asking price to temporarily rise or fall on demand. Then he could place the trades of his "preferred" customers at a more advantageous price. An electronic market has blown out those cosy arrangements.

Insider_trading is a hot issue and authorities play a cat and mouse game to unravel after the facts the actions of operators ever so clever at covering their tracks. After the stock market crash of 2007 authorities had to be seen as doing something. There is even an academic who claims to have written some software to identify suspicious insider trades!

A report by the Australian Institute of Criminology reveals that as long as you don't get caught the practice is too tempting to be passed by.

But life goes on and judging by the stockbroker fraud blog there is still plenty of action going around.

Bottom line: with a fast electronic market the goal post has shifted and there is more transparency. At the same time new opportunities are being created but we will only find out about them when they have been exposed and can no longer be exploited.

One notorious IPO which surprised all the pundits was Google who handled their float themselves. In fact the original Google IPO site is still around. But if you missed out on buying GOOG shares on NASDAQ at $85 on August 19, 2004 which fetched $500 in 2010 don't despair the next hot tip is now the Facebook IPO site

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It's a pity we can't go back and trade the 1950s market with what we know today. There is a lie that people want to believe that says that there must be out there some efficient market indicator that would consistently pull profits out of the market.

Sorry to shatter your dream but there is a cute term for this - it's called financial astrology!

Just think about it; If indeed there was a bullet-proof trading method and everybody was using it, there would be nobody left to trade with. The fact that you think it's time to buy a given stock today implies that someone else has decided exactly the opposite: for them it's time to sell that same stock.

Let us look at some famous snake-oil methods of trading which still today have their ardent followers.

The Elliott Wave is great entertainment to explain after the facts that such and such market move did precisely comply with the arcane rules of the system (waves within waves to map out the fractal nature of the market). The problem is who decides what is a major wave or a minor wave (!) I have codified the basic rules of the Elliott Waves Principle and my personal experience is that it is much worse that other simpler indicators.

W D Gann Square of Nine is a way to map the gyrations of the market to some phasing or vibration and it is totally useless in the 21st century.

J. Welles Wilder gave us the Relative Strength Index which is based on a sound observation but again does not pull any profit in today's markets (ie blue chip stocks, forex or commodities).

There is conjectural evidence that some of those methods might have worked in the past. In particular J. Welles Wilder gave actual logs and hand written charts to support his conclusions.

So why don't they work today and why do some people want to hang on to them?

They don't work today because the market is much more sophisticated. When we have so much CPU power on everybody's desktop any discrepancy in the market is being cancelled out as soon as it appears through automated trades.

People love a good story and it spreads all by itself. WD Gann died in 1955 and took his secrets with him. Ralph Nelson Elliott died in 1948 and is resting in peace. They did their research with kerosene lamps and plotted their charts by hand. Why would you want to go back in time? You can hire a horse-drawn carriage for your daughter's wedding if she is romantically inclined but for your superannuation you'd better move with the times...

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Contracts for a difference can be your trading staple fare if handled properly.

One account for stocks, forex, commodities and indices
What will you trade today? The choice is yours. Although I recommend you trade the instruments you have a feel for. Like fishing different fish work better with different baits and times of the day. Once you observe a given market you will know the critical times where things move and where things stagnate. You might even mitigate your risk by being long on an item and short on another related item (a form of arbitrage).

No fuss short selling
Why people would want to trade instruments where you can only go long baffles me. There is as much money to be made (or lost) on the way up as on the way down.

Sophisticated trade orders
Balanced orders like OCO (one cancels the other) allow for strategies to help you not being glued to your trading screen all day long (bad for your mental health). Pending orders also give you guaranteed execution while a sticky mouse or a slow internet connection in a busy market might rob you of the value of the spread or worse.

Huge leverage
This is the one feature that allows you to experiment. You can confirm or discredit your trading strategies with just $1,000 worth of capital. Remember paper trading is just that. No risk means no emotions. No gains no losses. You are always right in hindsight. Your strategy might be right but a lousy execution will ruin your trades. A stop too close will be triggered by a spike in the market. No paper trading will simulate that. You need to get involved to find out if trading is for you or not.
Some fools have given CFD trading a bad name by going crazy with leverage. Yes you can lose more that your capital but then why would you want to stand barefoot in the bathtub full of water and stick your fingers in the power point?

No commission (sort of)
CFDs by and large do not slap you with a commission just for the privilege of placing a trade. Instead CFD providers make their money through the spread. The spread is the difference between the buy price and the sell price at any given moment. If an index is quoted at 4000/4002 this means that you can buy at 4002 and sell at 4000. In other words if you buy and sell straight away you have a built-in loss of 2 points: the CFD provider's commission. To break even you have to wait for the market to move 2 points in your favour. For instance buy at 4002 and wait for the market to display 4002/4004. Then you can sell at 4002 and escape scotch-free.

MarketMakers - love them or hate them
The rumour has it that CFD providers can sniff where all the stop orders are and juggle the market just enough to hit them all. If you were a MarketMaker yourself you would realize that being pegged to a real market is their saving grace. Unless they themselves take real trades to counterbalance their customers CFD positions they would not stay alive very long. There might be some leeway here and there but by and large what a large CFD provider offers is on a par or better than what mainstream stockbrokers can offer.

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