With my lunchtime bolthole returning for the forseeable future, it felt rude of me to not pop out of the office and give a quick overview of how the average investor can short.
Of course, with all of the bad press around short selling in the last year - especially its supposed role in the credit crisis, one might reasonably ask why you would want to. One good reason is that a major market rise has now been underway for the past 5 weeks or so, and the apparent euphoria from some financials reporting better than expected results belies the wider economic downturn, and has the hallmarks of a house of cards built on sand.
Markets do typically reach the bottom 6-9mths before we emerge from each recession, so we ought to be there soon, but it is going to be an uneven ride that provides opportunity for profits both ways.
As every day of rises passes, so too does the potential for quick profits from shorting. Individual shorting is a process that the average investor cannot access easily - it requires access to the OTC markets, and additionally extreme caution when combined with leveraging instruments such as futures and derivatives.
In the same way as investing in gold and other commodities is now accessible to the wider market through exchange traded funds (ETF's), so the same principle has been applied for shorting through inverse ETF's. These essentially work by short selling a basket of stocks to mirror their underlying asset class or indices, and in doing so provide an inverse return. Through derivatives, versions even exist which provide a degree of leveraging - hence magnifying the ETF's rises or falls, with equivalent gain or loss for investors.
I recommend reading the Wikipedia article, as while it is simplistic, it provides a useful list of many inverse ETF's, as well as highlighting the higher fees required by an inverse ETF, which make this a strategy that should only be employed in the short-term (unlike conventional ETF's, which are more akin to tracker funds). Additionally this Trading Markets article gives further detail on how to use inverse ETF's, including for all-important hedging.
As with any investment, this is one to research before using and certainly requires caution - not least because the market direction will be upward over the coming years. Having said that, I have concluded that this particular market run is due a downward correction at some point soon, and so shorted the S&P 500 through ProShares Ultrashort yesterday.
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Monday, May 4, 2009
Thursday, February 5, 2009
More Baracking Gets A Reaction
I am a firm believer in the need for regular, institutional change at the highest level; you only have to look at how power corrupts over time, or leads to grotesque complacency of the worst kind. For examples in politics, you need only think back to the detachment from reality of Margaret Thatcher towards the end, or New Labour now, and of course George W Bush for the last.. 8 years. Okay he's a special case but you take my point.
With institutions such as banks, that complacency (and in some cases corruption - you know who you are Bernie), has had longer to fester right up to the top. As we all know, it has been spectacularly laid to bare in the last year, what with the problems requiring vast government bail outs to save many financial institutions. A recent point of major angst with the politicians and public at large are the continuing ramifications from the presumption of bonus payments as some kind of right by many at the top of those banks which have performed worst.
One point on that is to note that some are indeed contractually guaranteed - particularly the rainmakers that bring in vast sums for a bank and could walk to a competitor in a second. However, that is a small percentage of the overall pot so it is not an excuse.
However an interesting development today was Barack Obama's latest announcement that all banks that have received bail outs will need to cap executive pay to a mere $500,000. I think that I can safely disclose that we are one of the 90% of banks that have received some kind of financial package from a government. The reaction here at the bank has been impressive - faced with the prospect of having their pay limited to such trifling levels, the order has come from the very top to immediately investigate ways to pay back the government.
It is hilarious how the moment executives at the top find the trough being emptied, they're squealing with indignation and looking for ways to get their snouts back in. So let me see - your priority is helping fund all those businesses suffering as a direct result of the systemic failure of which you have to accept a proportion of responsibility? No, it seems to be working out how to squeeze internally through the coming cull, or externally via recalling loans, to ensure we remain fully independent of the US government.
Away from the subject of bonuses, it is interesting to see that momentum is building up through the press for the strong case of investing in gold as a good option for 2009. I continue to recommend placing significant funds into a gold ETF and moving some away from Sterling and the US dollar this year, but the linked article gives a good summary with some options.
Otherwise I have found out some interesting office rumours from a recent night out, as well as confirming whether I am to be included in the coming job cuts. Both can wait for another entry.
With institutions such as banks, that complacency (and in some cases corruption - you know who you are Bernie), has had longer to fester right up to the top. As we all know, it has been spectacularly laid to bare in the last year, what with the problems requiring vast government bail outs to save many financial institutions. A recent point of major angst with the politicians and public at large are the continuing ramifications from the presumption of bonus payments as some kind of right by many at the top of those banks which have performed worst.
One point on that is to note that some are indeed contractually guaranteed - particularly the rainmakers that bring in vast sums for a bank and could walk to a competitor in a second. However, that is a small percentage of the overall pot so it is not an excuse.
However an interesting development today was Barack Obama's latest announcement that all banks that have received bail outs will need to cap executive pay to a mere $500,000. I think that I can safely disclose that we are one of the 90% of banks that have received some kind of financial package from a government. The reaction here at the bank has been impressive - faced with the prospect of having their pay limited to such trifling levels, the order has come from the very top to immediately investigate ways to pay back the government.
It is hilarious how the moment executives at the top find the trough being emptied, they're squealing with indignation and looking for ways to get their snouts back in. So let me see - your priority is helping fund all those businesses suffering as a direct result of the systemic failure of which you have to accept a proportion of responsibility? No, it seems to be working out how to squeeze internally through the coming cull, or externally via recalling loans, to ensure we remain fully independent of the US government.
Away from the subject of bonuses, it is interesting to see that momentum is building up through the press for the strong case of investing in gold as a good option for 2009. I continue to recommend placing significant funds into a gold ETF and moving some away from Sterling and the US dollar this year, but the linked article gives a good summary with some options.
Otherwise I have found out some interesting office rumours from a recent night out, as well as confirming whether I am to be included in the coming job cuts. Both can wait for another entry.
Tuesday, February 3, 2009
Investing for a Recession (Part II)
Having outlined how I have made some useful money from the recession to date, it would be worth now moving to my current main investment at present, so that there is some context when I update on this going forwards.
Apart from putting a proportion of my funds into a gold ETF, which is an excellent hedge both against recessionary worries, a devaluing dollar and future inflationary concerns from all the quantitive easing taking place, I have also placed a significant sum into something that is much less obvious in these turbulent times: US commercial property.
You might think that is insane, and is totally contrary to what everybody else is putting their money into at the moment. But part of investing is looking for value, and sometimes that means looking beyond the conventional wisdom. I have bought into something called a Real Estate Investment Trust (REIT) - these are essentially US commercial property companies, which by and large have plunged by enormous amounts in the last 6 months.
As such, several are rumoured to be on the verge of bankruptcy, and one in particular is down a staggering 97% since the summer of 2008. When you factor in a fall of that magnitude, you have to start looking at the price and ask why, and whether this is rational or fueled by other factors. The underlying reason is the credit crunch, combined with investor fear of a Chapter 11 bankruptcy filing.
To give some background here, REIT's have by and large used a previously acceptable business model, whereby they were highly leveraged and routinely took out large levels of debt to increase their asset base and buy up more property. They then serviced this debt, steadily paying it off while periodicially refinancing this - without problems in a normally functioning credit market. Of course, everybody now sees US property as having been in a huge bubble, and all associated loans as necessarily toxic. As such, suddenly some enormous commercial property companies are on the brink of bankruptcy - including the particular REIT I have invested in called General Growth Properties (GGP).
To put it into context, GGP is the second largest mall owner in the US. That is not an insignificant statistic in itself, and should it fold there would be enormous ramifications for the US retail sector, not to mention a political backlash. I would actually not mind if it did file for Chapter 11 within the next few weeks, for reasons summarised well in this Reuters article.
Estimates suggest that GGP's assets exceed liabilities on the balance sheet by several billion dollars already. Additionally it has no problems servicing its actual debts, just refinancing them. In effect the problems of GGP are not with solvency, as with normal bankruptcy risk, but liquidity - this is a direct result of the banks own liquidity issues that have made them more risk averse.
What is most interesting with GGP is also that the balance sheet is not fully marked to market, which means that if its assets are valued at today's prices instead of when purchased there will be a change. Many properties on its books were bought years ago and have never been revalued, so it is reasonable to expect many will be worth more than marked, even with the current woes of the US property market. As such, assuming GGP were to go bust, what does that mean for ordinary shareholders? Normally it is a disaster and means no money, but in this case it should mean that the US courts would order the banks to agree refinancing terms, after which GGP would emerge out on the other side without that perceived stigma. Meantime the shares will continue trading on the stock exchange.
Since the Reuters article, all indications are that GGP will not file for Chapter 11 however, with its banking consortium of lenders bending over to give multiple loan extensions (including one over the weekend through to mid-March). There are many factors at play in whether full refinancing of the loans due in 2009 will take place - that is what would remove the market risk of bankruptcy that has so severely depressed the share price.
The main sticking point for lenders is several billion dollars of loans that are currently unsecured (i.e. have no assets backing them up), which are due for refinancing. Understandably the banks want assurances they would have some collateral to offset should GGP go under at a later date, and at present the unsecured loans are not acceptable to them. As such GGP is looking to either sell assets to pay those off, or negotiate terms. Both are possibilities, but at this stage it is unclear which is the more likely.
Another factor is the recent extension of uses for the Troubled Asset Relief Program (TARP) by Barack Obama, to now explicitly include money for Commercial Real Estate. This bill has passed through congress, and the campaign is continuing - again it provides political pressure on the banks to lend and not push under a company as significant as GGP.
Once terms are agreed, or GGP manages to sell off a number of assets to enable refinancing, I expect there to be significant upwards movement on the stock price. I have gradually increased my long position on GGP from $1.61 down to $1.03 in the last 2 months, although it is worth adding that a recent sell off last week on fears ahead of the loan deadline (prior to extension again) lead to a sharp fall back to around 55 cents a share. As of yesterday, GGP's share price bounced up 30% on the news of the loan extension, and is now currently at around 80 cents a share as I type.
So I am sitting on an unrealised loss at present. Since I bought into this REIT in December, the share price has risen by 80% at its peak, and fallen by 50% from where I entered at its lows. I turned down the chance to cash in a £50k profit in early January because I am more interested in the bigger picture here. That's how trading works - I have a strategy which does not include day trading this stock, because I do not know when the news will be announced that will make the crucial difference.
To give you an idea of the potential rewards at stake here, if the share price were to rise back to just $3.50, where it was in October, I would make in the region of £150k from the trade.
I should add a cautionary note that this is considered a speculative play. I am speculating on the most likely outcome based on extensive research - what makes this unusual is that there appears to be significant upside regardless of whether GGP files for bankruptcy protection or not. To me the share price of GGP is significantly undervalued, and at some point the market is going to realise that.
Most people are not prepared to accept this level of risk, and that is entirely right, although it is worth pointing out that you can take a zero off the figures and it could easily be you making (or losing) these amounts. In my case, if everything goes as well as I expect, I could make over £1 million from the trade. Admittedly that is unlikely and would require me holding for a couple of years. I am looking at cashing in £250k as a more realistic profit, but it gives you an idea of how risk vs reward works in the markets.
I will keep you updated on the progress of this particular hot potato in the coming months. Anyway back to work.
Apart from putting a proportion of my funds into a gold ETF, which is an excellent hedge both against recessionary worries, a devaluing dollar and future inflationary concerns from all the quantitive easing taking place, I have also placed a significant sum into something that is much less obvious in these turbulent times: US commercial property.
You might think that is insane, and is totally contrary to what everybody else is putting their money into at the moment. But part of investing is looking for value, and sometimes that means looking beyond the conventional wisdom. I have bought into something called a Real Estate Investment Trust (REIT) - these are essentially US commercial property companies, which by and large have plunged by enormous amounts in the last 6 months.
As such, several are rumoured to be on the verge of bankruptcy, and one in particular is down a staggering 97% since the summer of 2008. When you factor in a fall of that magnitude, you have to start looking at the price and ask why, and whether this is rational or fueled by other factors. The underlying reason is the credit crunch, combined with investor fear of a Chapter 11 bankruptcy filing.
To give some background here, REIT's have by and large used a previously acceptable business model, whereby they were highly leveraged and routinely took out large levels of debt to increase their asset base and buy up more property. They then serviced this debt, steadily paying it off while periodicially refinancing this - without problems in a normally functioning credit market. Of course, everybody now sees US property as having been in a huge bubble, and all associated loans as necessarily toxic. As such, suddenly some enormous commercial property companies are on the brink of bankruptcy - including the particular REIT I have invested in called General Growth Properties (GGP).
To put it into context, GGP is the second largest mall owner in the US. That is not an insignificant statistic in itself, and should it fold there would be enormous ramifications for the US retail sector, not to mention a political backlash. I would actually not mind if it did file for Chapter 11 within the next few weeks, for reasons summarised well in this Reuters article.
Estimates suggest that GGP's assets exceed liabilities on the balance sheet by several billion dollars already. Additionally it has no problems servicing its actual debts, just refinancing them. In effect the problems of GGP are not with solvency, as with normal bankruptcy risk, but liquidity - this is a direct result of the banks own liquidity issues that have made them more risk averse.
What is most interesting with GGP is also that the balance sheet is not fully marked to market, which means that if its assets are valued at today's prices instead of when purchased there will be a change. Many properties on its books were bought years ago and have never been revalued, so it is reasonable to expect many will be worth more than marked, even with the current woes of the US property market. As such, assuming GGP were to go bust, what does that mean for ordinary shareholders? Normally it is a disaster and means no money, but in this case it should mean that the US courts would order the banks to agree refinancing terms, after which GGP would emerge out on the other side without that perceived stigma. Meantime the shares will continue trading on the stock exchange.
Since the Reuters article, all indications are that GGP will not file for Chapter 11 however, with its banking consortium of lenders bending over to give multiple loan extensions (including one over the weekend through to mid-March). There are many factors at play in whether full refinancing of the loans due in 2009 will take place - that is what would remove the market risk of bankruptcy that has so severely depressed the share price.
The main sticking point for lenders is several billion dollars of loans that are currently unsecured (i.e. have no assets backing them up), which are due for refinancing. Understandably the banks want assurances they would have some collateral to offset should GGP go under at a later date, and at present the unsecured loans are not acceptable to them. As such GGP is looking to either sell assets to pay those off, or negotiate terms. Both are possibilities, but at this stage it is unclear which is the more likely.
Another factor is the recent extension of uses for the Troubled Asset Relief Program (TARP) by Barack Obama, to now explicitly include money for Commercial Real Estate. This bill has passed through congress, and the campaign is continuing - again it provides political pressure on the banks to lend and not push under a company as significant as GGP.
Once terms are agreed, or GGP manages to sell off a number of assets to enable refinancing, I expect there to be significant upwards movement on the stock price. I have gradually increased my long position on GGP from $1.61 down to $1.03 in the last 2 months, although it is worth adding that a recent sell off last week on fears ahead of the loan deadline (prior to extension again) lead to a sharp fall back to around 55 cents a share. As of yesterday, GGP's share price bounced up 30% on the news of the loan extension, and is now currently at around 80 cents a share as I type.
So I am sitting on an unrealised loss at present. Since I bought into this REIT in December, the share price has risen by 80% at its peak, and fallen by 50% from where I entered at its lows. I turned down the chance to cash in a £50k profit in early January because I am more interested in the bigger picture here. That's how trading works - I have a strategy which does not include day trading this stock, because I do not know when the news will be announced that will make the crucial difference.
To give you an idea of the potential rewards at stake here, if the share price were to rise back to just $3.50, where it was in October, I would make in the region of £150k from the trade.
I should add a cautionary note that this is considered a speculative play. I am speculating on the most likely outcome based on extensive research - what makes this unusual is that there appears to be significant upside regardless of whether GGP files for bankruptcy protection or not. To me the share price of GGP is significantly undervalued, and at some point the market is going to realise that.
Most people are not prepared to accept this level of risk, and that is entirely right, although it is worth pointing out that you can take a zero off the figures and it could easily be you making (or losing) these amounts. In my case, if everything goes as well as I expect, I could make over £1 million from the trade. Admittedly that is unlikely and would require me holding for a couple of years. I am looking at cashing in £250k as a more realistic profit, but it gives you an idea of how risk vs reward works in the markets.
I will keep you updated on the progress of this particular hot potato in the coming months. Anyway back to work.
Saturday, January 31, 2009
Investing for a Recession (Part I)
One of the key rules of investing at any time is to be flexible in your approach, and not assume that whatever has worked well in the past will necessarily continue to do so in the future.
I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.
Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.
You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.
So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.
Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.
I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.
As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.
Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.
I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.
However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.
My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.
As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.
When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.
You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?
Next time I will explain what I am doing with the majority of my money in 2009 at present.
I am not going to lie: I failed to call the timing of the stock market downturn, but did see it coming. In fact, I called it too early, as after the effective collapse and nationalisation of Bear Stearns in mid-2007, my constant research through economic forecasts was enough to lead me to conclude that storm clouds were gathering and a major correction was coming. So I liquidated all my positions, and sat on mostly cash in my trading account - earning zero interest as I needed it available at short notice in case trading opportunities came up.
Another key investing rule is patience - one that amateur investors all too frequently fail to show as they get excited by a short term fluctuation in a stock price. I was patient for 6 months, as I sat there watching global indicies continue their inexorable rise upwards, and eventually I snapped and made a couple of investments in March 2008. I won't go into details of those as they are not important, but suffice to say that given the unrelenting speed of the market falls from May onwards, I am sitting on losses from those in excess of £50k.
You might whince, but another key to investing is to only invest what you can afford to lose, and while I am not happy about it, it makes no material difference - and I am happy with them both as long holds. More importantly, I have learned a very important lesson for future investing. Learning from your mistakes is the single biggest investing rule of all - and in this case it was that when all the logic points to something happening, it will do.
So by October, when all the fun had kicked off with Lehman Brothers, rather than joining the collective panic gripping many of my peers at the banks, I realised we had reached a wonderful opportunity to start making a large amount of money back from this crisis. Shorting is one, much maligned means of doing this, which is not what I do. On that note, let me say that shorting is needed for valid trading strategies (e.g. hedging), despite the criticism about naked short selling of the banks, which is for nothing other than the pursuit of speculative profit - that is an area more difficult to justify.
Instead I have been much more traditional in my approach - taking long positions (buying) stocks at a lows, and then selling them soon afterwards. The key is that what panic brings to the markets is enormous volatility. I assessed the reality of the fall out by giving it some context. Nothing like this had happened in our lifetimes - it was a cataclysmic shock that would obviously lead to enormous falls in the markets. Therefore key was to not be remotely optimistic and instead look at your worst case scenario expectations on prices and exceed them.
I recall listening on a tedious conference call at work, while idly watching the share prices of all the major banks in freefall. The two of particular interest were Morgan Stanley and Goldman Sachs at that time, due to their status as investment banks. The markets were voting with their wallets in their lack of confidence in this particular business model, and both had fallen a staggering amount in recent days. But no downturn is smooth with stocks, and in this case I had already watched GS hit a floor at $120/share and rally back upwards sharply for a couple of days, before rapidly plunging again.
As such, I watched as GS breached the psychologically important $100 mark and decided it was clearly about to drop off a cliff, despite it already being down 20% on the day. Sure enough, a moment of panic ensued as it moved down below $90/share, and I set a limit order to buy $150,000 of stock at $79/share. The stock suddenly plunged and touched a low of $77/share before spiking upwards above $90/share by the end of the day. I had an unrealised profit of $20,000 in 10 minutes. I also reasoned that based on previous rallies, all those shorting the stock would now be rushing to cover their positions, which creates a short squeeze that drives upward pressure.
Sure enough the next day, GS rose up above $120/share as I had expected, and I immediately sold out. And as I expected, the stock hovered there for a couple of days before plunging and I believe eventually hit a low in the $50/share range - it is somewhere around about $80/share as I type. It is worth noting that as I realised that £40k profit, I liquidated a bad investment from several years ago. Rather than panic or give up on it, I decided to hold and turn a negative into a positive - in this case it became a useful offset against my gains by reducing the amount I will have to pay in capital gains tax. In effect, I had recovered a large percentage of my losses from the market.
I repeated that trade further down with one of the other banks soon afterwards, and then stopped trading in them because I no longer had a strong view on what direction prices were moving and whether or not the downward trend was ending. My considered opinion was that they had further to go when later quarterly results were reported, and so it seems to have panned out as after rallies before Christmas they have plunged again.
However when you cannot decide where you think a stock is going to move, it important to not trade in it. I locked in my gains, and by December had turned £60,000 of spare change into £140,000. Where am I investing now? Two places. Most important was that I had deliberately chosen to trade in US banks throughout the process, because I had known from various research that historically Sterling was overvalued and long-overdue a downward correction.
My analysis concluded that an imminent recession in the UK would eventually fuel a correction in the GBP-USD exchange rate, especially given that the US was ahead in the economic cycle and already in a recession. Sure enough, with money tied up in dollars during the trades, I made considerable sums from the fall in the pound from October to December with so much money held in dollars. I then decided that since I was no longer sure about the direction of banking stocks (or most others), from researching likely directions of currencies in 2009, both sterling and the dollar were likely to continue their falls against other currencies.
As such, with a new policy of 'quantitive easing' on the horizon (aka governments printing money), that meant it was an easy decision to take a large stake in a gold ETF (exchange traded fund) in December 2008. This is effectively like buying shares that are linked to the price of gold in USD. Sure enough, with the pound falling further, I am currently sitting up 35% on my investment to date, and recommend that anybody debating what to do with their money for 2009 use the current minor sterling rally versus the dollar (as I type we are at around $1.43 to £1) and buy into a gold ETF on the London Stock Exchange for 2009.
When governments start printing money in the way they effectively are with all this debt, it will eventually stoke inflation later this year. That should lead to an increase in the price of gold, and makes it a good play until later in the year when it will be worth exiting.
You might be starting to get a taste for what investing is all about from the above outline of my investing activities since October. It is about completing your own analysis, taking into account historical statistics to give perspective, and looking ahead to do your best to assess what is logically going to happen next. If you don't know then do not do anything, but if you do think something is going to happen (such as house prices falling another 20% in the UK) then why sit around holding it?
Next time I will explain what I am doing with the majority of my money in 2009 at present.
Sunday, January 25, 2009
Dinner Time Conversation Killer
It is ironic that the current dinner table conversation killer these days is exactly what most over-extended people wouldn't stop twittering on about for the last 5 years.
By that I'm talking about house prices of course. Apart from a recent evening when I was forced to endure looking through a photo album of a friend's baby for an hour, I can't think of anything more boring. However there were a whole raft of people who took delight in measuring their own success by how much money they had 'made' by virtue of their house value - and telling the rest of us ad infinitum. Of course we can all see this was an illusion now, but I was one of a long-suffering minority who chose to sit out of this particular party as I could see what was coming.
If you are one of those with everything you own tied up in a house or flat, then you need to understand that housing always has and will be the British public's great illusion of wealth. An Englishman's home is his castle as they say. Yet in truth the only time housing should be seen as an investment is when it's a buy-to-let. Otherwise a house is a place to live and use - with the added bonus it can be sold on at some point of time in the future.
However ask yourself a question, what do you DO with all that money you've got tied up in a house you live in? The answer is, absolutely nothing. Money that could be making you a lot of money elsewhere is instead used to avoid paying rent. Where the Great British public justify over-extending themselves is in the naive argument that rent is "dead money" - so you have to get on the property ladder as soon as possible.
Nothing could be further from the truth, and for proof you only need look at Germany, where house ownership is something like 20% of the population. Germans are no poorer than the British - in fact given Sterling's recent collapse (more on that in a future post), they are a good deal wealthier when measured by earnings. So how can that be? The answer of course is that the money you don't stuff into a house can make you as much (or hopefully a lot more) than by simply following Average Man On The Street. Ask yourself one question: if housing is such a great investment, and everybody does it then why aren't more people rich? No, it's not just down to the amount people earn, it's what they do with it.
Unfortunately as we've seen, most people get excited by a rising number attached to their property in a housing boom, and then pretend that they have 'made' that money. Bzzzzt. As novice traders in the City learn on their first day, one of the golden rules of investing is that an unrealised profit is nothing more than a possibility at that moment in time. Not only have people spent the last 5 years happily falling under this illusion of wealth, but worse some have then borrowed more money against their house (on these unrealised profits) to spend.
That's all fine while those profits can still be realised, but the moment the market does what it does every 18 years or so and crashes, we're left with a large number of people who are about to learn this lesson in the most painful way. Point fingers of blame at the government and housing industry for allowing this to happen.
For even the many who were not so overextended but nonetheless followed the British norm of assuming buying a house or flat was a must do with their money, they are yet to learn another of the golden rules of investing - namely it is vital to detach emotion from an investment decision. Just because your house used to be valued at a certain amount doesn't mean digging your heels in and refusing to sell now if you want to move is a sensible idea.
There is currently a belief amongst home owners that reeks of desperation - namely that the market is simply going to bounce like a ball off its bottom and start shooting back upwards. Nothing could be further from the truth: house prices historically always have a sharp peak at the top as the boom becomes unsustainably fast and then sharply reverses. However that is followed by a near-equivalent fall down on the other side. House prices will continue to fall fast and then that pace will decline until it slows gradually to zero and only gradually begins a rise years later.
We have at least another 20-25% to fall before house prices reach the bottom, and when they do, they will do little other than stay at that level for another 3-5years. That means we won't start to see significant rises in house prices again until around 2014 or 2015.
But most people don't think rationally through the process. Most people don't take the time to research the housing market before buying to understand what has always happened before, and hence try to work out will happen again in such a cyclical market. Nope, we're going to grit our teeth and hold on for another year... as I said, it's that Average Man On The Street mentality which is why most people end up without much money.
No, for anybody debating whether to sell right now the answer is a resounding yes. Be realistic, take that perceived 'hit' compared to the price at the peak, and then put furniture into storage and rent for another 18-24mths. Why sit around holding a falling asset all the way to the bottom if you know it's going to fall?
With stocks, amateur investors often make the same mistake. I certainly did in my earlier years, falling in love with a particular company's product or idea and buying the bullshit press releases to convince myself that I should hold on. It's knowing when to realise your gain (or loss) and get out that is even more important than knowing when to get in.
Nobody should be looking to go into the housing market until mid-2010 at the earliest. In the meantime there are much more profitable places to put your money, but that's for another post.
Meantime I'm sitting here putting off tidying up the house before my fiancee, L, gets back from her extended visit to see her family. She's been away for a week, busy planning for our wedding later this year. Naturally I find the whole process incredibly tedious and am feigning interest throughout as all men do. Wish me luck tomorrow - when I pick her up from Heathrow I suspect it's going to be a day that feels like the baby photo album all over again...
By that I'm talking about house prices of course. Apart from a recent evening when I was forced to endure looking through a photo album of a friend's baby for an hour, I can't think of anything more boring. However there were a whole raft of people who took delight in measuring their own success by how much money they had 'made' by virtue of their house value - and telling the rest of us ad infinitum. Of course we can all see this was an illusion now, but I was one of a long-suffering minority who chose to sit out of this particular party as I could see what was coming.
If you are one of those with everything you own tied up in a house or flat, then you need to understand that housing always has and will be the British public's great illusion of wealth. An Englishman's home is his castle as they say. Yet in truth the only time housing should be seen as an investment is when it's a buy-to-let. Otherwise a house is a place to live and use - with the added bonus it can be sold on at some point of time in the future.
However ask yourself a question, what do you DO with all that money you've got tied up in a house you live in? The answer is, absolutely nothing. Money that could be making you a lot of money elsewhere is instead used to avoid paying rent. Where the Great British public justify over-extending themselves is in the naive argument that rent is "dead money" - so you have to get on the property ladder as soon as possible.
Nothing could be further from the truth, and for proof you only need look at Germany, where house ownership is something like 20% of the population. Germans are no poorer than the British - in fact given Sterling's recent collapse (more on that in a future post), they are a good deal wealthier when measured by earnings. So how can that be? The answer of course is that the money you don't stuff into a house can make you as much (or hopefully a lot more) than by simply following Average Man On The Street. Ask yourself one question: if housing is such a great investment, and everybody does it then why aren't more people rich? No, it's not just down to the amount people earn, it's what they do with it.
Unfortunately as we've seen, most people get excited by a rising number attached to their property in a housing boom, and then pretend that they have 'made' that money. Bzzzzt. As novice traders in the City learn on their first day, one of the golden rules of investing is that an unrealised profit is nothing more than a possibility at that moment in time. Not only have people spent the last 5 years happily falling under this illusion of wealth, but worse some have then borrowed more money against their house (on these unrealised profits) to spend.
That's all fine while those profits can still be realised, but the moment the market does what it does every 18 years or so and crashes, we're left with a large number of people who are about to learn this lesson in the most painful way. Point fingers of blame at the government and housing industry for allowing this to happen.
For even the many who were not so overextended but nonetheless followed the British norm of assuming buying a house or flat was a must do with their money, they are yet to learn another of the golden rules of investing - namely it is vital to detach emotion from an investment decision. Just because your house used to be valued at a certain amount doesn't mean digging your heels in and refusing to sell now if you want to move is a sensible idea.
There is currently a belief amongst home owners that reeks of desperation - namely that the market is simply going to bounce like a ball off its bottom and start shooting back upwards. Nothing could be further from the truth: house prices historically always have a sharp peak at the top as the boom becomes unsustainably fast and then sharply reverses. However that is followed by a near-equivalent fall down on the other side. House prices will continue to fall fast and then that pace will decline until it slows gradually to zero and only gradually begins a rise years later.
We have at least another 20-25% to fall before house prices reach the bottom, and when they do, they will do little other than stay at that level for another 3-5years. That means we won't start to see significant rises in house prices again until around 2014 or 2015.
But most people don't think rationally through the process. Most people don't take the time to research the housing market before buying to understand what has always happened before, and hence try to work out will happen again in such a cyclical market. Nope, we're going to grit our teeth and hold on for another year... as I said, it's that Average Man On The Street mentality which is why most people end up without much money.
No, for anybody debating whether to sell right now the answer is a resounding yes. Be realistic, take that perceived 'hit' compared to the price at the peak, and then put furniture into storage and rent for another 18-24mths. Why sit around holding a falling asset all the way to the bottom if you know it's going to fall?
With stocks, amateur investors often make the same mistake. I certainly did in my earlier years, falling in love with a particular company's product or idea and buying the bullshit press releases to convince myself that I should hold on. It's knowing when to realise your gain (or loss) and get out that is even more important than knowing when to get in.
Nobody should be looking to go into the housing market until mid-2010 at the earliest. In the meantime there are much more profitable places to put your money, but that's for another post.
Meantime I'm sitting here putting off tidying up the house before my fiancee, L, gets back from her extended visit to see her family. She's been away for a week, busy planning for our wedding later this year. Naturally I find the whole process incredibly tedious and am feigning interest throughout as all men do. Wish me luck tomorrow - when I pick her up from Heathrow I suspect it's going to be a day that feels like the baby photo album all over again...
Saturday, January 24, 2009
Doom, Doom & More Doom
Well, it has certainly been an interesting year, with an even more interesting one coming. I am not one to sit around piously lecturing others, but I am sure I'm not alone in hoping that, once and for all, this downturn changes the world's views on personal and institutional responsibility forever.
First of all though, without wishing to point out the obvious, I have decided to start writing a blog.
It's hardly an original idea these days, but after the events of the last six months in particular, I am tired of listening to the press twittering on with its simplistic explanations to a public more than capable of following the detail. And of watching often laughable 'experts' talking about areas in which they largely know nothing about. Perhaps I find it more tiresome than most because I am in a better position than many to understand what has been going on, what is going to happen, and what to do to make money in these tough times. So that's what this blog is about.. and I'll of course update you on what's going on in the world of investment banking throughout - the kind of detail we must never reveal, naturally.
I have worked for investment banks for over a decade, and have escaped the current job "bloodbath" (to quote the amusingly overused phrase used describing any cut) while watching mostly likeable but average colleagues fall by the wayside. That's not to say I'm something exceptional, but I do work hard with the output and hours that make me useful even to my boss. The indications seem ok for me going forwards, helped because I work for one of the world's top investment banks best weathering the economic storm (i.e. it's not effectively nationalised like all the British banks). I suppose many people dream of a job like mine, but for nothing more than the pay.
But I'm far from satisfied. It's not what I want to do in life, and never was. I've ended up here more as a distraction until I can satisfy a long-standing urge I've had since I was 10yrs old to set up my own business and create something more meaningful (at least by my own definition). I'd like to do that rather than retiring as a fat, purple faced banker with a puréed liver, as most of those around me will, having been nothing more than a small cog in a very big machine.
The last 18mths have increased my desire to plan an exit by confirming what I always suspected - that the value our industry offers in providing important services is but a distraction in the pursuit of profits which are nothing more than the transfer of wealth from one party to another.
So that's what this blog is about. I'll give my opinions on current events and news, discuss what I'm investing in with my own money and why, and the latter might be most useful to you as I am absolutely amazed how few people have even an ounce of common sense when it comes to looking after their money. How much you earn helps, but it's amazing how naive most people are with their cash - and that includes my colleagues, hence the number of overpaid bankers in deep trouble now they have lost their jobs.
If you have any comments along the way then please do drop them after a post, and I'll try not to leave too lengthy gaps between updates.
First of all though, without wishing to point out the obvious, I have decided to start writing a blog.
It's hardly an original idea these days, but after the events of the last six months in particular, I am tired of listening to the press twittering on with its simplistic explanations to a public more than capable of following the detail. And of watching often laughable 'experts' talking about areas in which they largely know nothing about. Perhaps I find it more tiresome than most because I am in a better position than many to understand what has been going on, what is going to happen, and what to do to make money in these tough times. So that's what this blog is about.. and I'll of course update you on what's going on in the world of investment banking throughout - the kind of detail we must never reveal, naturally.
I have worked for investment banks for over a decade, and have escaped the current job "bloodbath" (to quote the amusingly overused phrase used describing any cut) while watching mostly likeable but average colleagues fall by the wayside. That's not to say I'm something exceptional, but I do work hard with the output and hours that make me useful even to my boss. The indications seem ok for me going forwards, helped because I work for one of the world's top investment banks best weathering the economic storm (i.e. it's not effectively nationalised like all the British banks). I suppose many people dream of a job like mine, but for nothing more than the pay.
But I'm far from satisfied. It's not what I want to do in life, and never was. I've ended up here more as a distraction until I can satisfy a long-standing urge I've had since I was 10yrs old to set up my own business and create something more meaningful (at least by my own definition). I'd like to do that rather than retiring as a fat, purple faced banker with a puréed liver, as most of those around me will, having been nothing more than a small cog in a very big machine.
The last 18mths have increased my desire to plan an exit by confirming what I always suspected - that the value our industry offers in providing important services is but a distraction in the pursuit of profits which are nothing more than the transfer of wealth from one party to another.
So that's what this blog is about. I'll give my opinions on current events and news, discuss what I'm investing in with my own money and why, and the latter might be most useful to you as I am absolutely amazed how few people have even an ounce of common sense when it comes to looking after their money. How much you earn helps, but it's amazing how naive most people are with their cash - and that includes my colleagues, hence the number of overpaid bankers in deep trouble now they have lost their jobs.
If you have any comments along the way then please do drop them after a post, and I'll try not to leave too lengthy gaps between updates.
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