Spread 'em!!!

As I am in danger of being viewed as the forum ‘poet’, I thought I would write something a bit more practical and I hope I have chosen the right forum for it to be posted in ?

There seems to be an age-old debate about whether shares or property are the best investment vehicle. Rather than mow the same lawn twice, I thought I would just add some personal experience as food for thought.

One of the bottom line arguments is that you can gear property to a higher level than shares. Up until recently this has been so (at least in the UK, where I am from – but don’t hold pomminess against me!). So, if Mr Likely racks up with $10k in his pocket, he could quite feasibly get a $90k mortgage and if capital growth is say 8%, his property would be worth $108k at the end of a year. If you were looking at a return on investment (ROI), I think that would be 80% on his actual input of $10k (any number-heads please correct if using wrong terminology – ta). If you try and gear into shares with that same amount, you would be able to maybe get a bank to loan you another $10k perhaps – giving $20k in total to be invested. If shares were returning 16% growth, they would be worth $23.2k a year later – giving an ROI of 32% (hope I haven’t wandered off the road here?!)

So, usually you are presented with figures that show property gives a higher rate of return on your actual invested dollars, banks contribute a larger portion of funds and property is more stable. Sounds good. Maybe the major downside with property is that it is relatively illiquid and doesn’t always initially provide a great cashflow? That’s debatable.

Part of the argument against shares is that they are considered volatile, you are a very, very small player in the huge pond of the share market and therefore you have almost zilch control over your investment. Plus there are the numerous horror stories of people losing not only their shirts in the market but having to self off their firstborn too!

There is only so much you can do with money – spend it, save it, waste it or invest it (there may be more!). I was initially deterred from the stock markets by one over-riding emotion and that was – FEAR. Most attitudes to it are based on this…..you can’t control it (invokes fear), it’s very volatile, you could lose it all – just look at HIH et al (fear that I may make a bad choice)…the list can go on …… but thankfully I won’t! There are also people out there who feel that way about the property market but if they were to ask any of us, we wouldn’t have that overwhelming sense of dread as sound information, careful analysis and competence gained by experience push back those bogey-man boundaries and allows us to see that the risk in property can be minimised very effectively.

Even though this is a property forum, the real purpose of most of us investing is not property per se but the acknowledgement that property is perhaps the easiest and most available vehicle for achieving long-term wealth that is available to us average Joes (and Joesettes). If our real goal is long-term wealth creation, then to deliberately avoid the stockmarket out of FEAR of yourself and your capabilities with it, is to handicap yourself (in my ever so humble opinion!). If we choose to avoid it through a deliberate choice based on careful thought, a reasoned approach as to why it is unnecessary and we can show ourselves that our wealth creation will not suffer from non-involvement, then ok. But if anyone is at all like me, it’s your own fear and foibles that keep you out of this end of the investment pool – and it’s a shame, as property and shares working together form a good team – sorta like Batman and Robin!

The really good thing now, is that there are ways to take the advantages of the leverage available with property and use them in the share market too, thus reducing your risk. One of the main problems with using shares to create a cashflow throughout the year to supplement capital growth achieved through rental properties, is that you really needed gobs and gobs of cash to start off with. If you wanted to increase your yearly cashflow by, say $24k and shares were on average returning 12%; you would have to start off with $200k to achieve this. Seems a poor use of capital.

To make your capital work that hard to achieve a monthly income of $2k is where risk comes in. However, if you had $500k and still only wanted to earn $2k per month income from it, to supplement your salary and income from properties, then your money wouldn’t have to work so hard and therefore, you reduce the amount of risk you expose it to. In order for $500k to produce a yearly income of $24k, it only needs to produce a return of 4.8% - a lot more achievable than 12%.

For those interested in adding to their wealth creation, there are now systems that allow you to receive good returns without exposing yourself to the risk that is inherent in making your money work too hard. I use a UK based company and it lets me buy or sell shares with only 10% of the actual cost (5% if they are US or UK shares). Here’s an example from when I first started:

I wanted to begin by making a very modest monthly cashflow of $1,000 to start with. I decided to commit just $10,000 in my newly set-up trading account. Using a normal trading account, to get that monthly return from my initial investment, I would have had to get a monthly return of 10%! For me, that would have meant too much exposure to market risk (i.e. it could go all over the place!). However, through leverage @5%, I can buy UK or US shares worth $200,000 and in order for me to get my $1,000 from that amount, I would only need a monthly return of 0.5% - far easier to achieve.

So, as I was just starting out, I took a middle road approach and only used my leverage up to $100,000 worth of shares. Even with Aussie shares, it’s comparatively easy to make a $1,000 return over just a few days. Below is my first trade as an example:

Day 1
Sold 50,000 VOD shares @ 1.06 each – my cost is (1.06 X 50000) X 5% = 2,650

So, I sold 10,000 shares of Vodafone (worth $53,600) for a cost to me of just $2,650.

Day 3
Bought back those same 50,000 VOD shares @ 1.04 each, which cancel my position and leaves me to work out the difference as my profit.

(1.04 X 50000) = $52,000.

So the difference between what I sold for and what I bought back at was (53,600 – 52,000) = 1,600.

I’ve also deliberately shown an example that highlights an advantage in shares that property (to my knowledge) doesn’t have…you can profit when the market goes down. I sell something I don’t own in order to buy it back later.

I have been trading this way for a while now and while no system is perfect and yes, the share market is a volatile creature, it does allow me to use minimal capital for maximum leverage in order to achieve what is often so difficult in just using property only as a wealth creation tool and that is cashflow. I hope that by trading for at least two years, I will be able to show lending institutions that it can be regarded as a ‘reliable’ income. This allows me to invest in property for capital growth and trade shares for cashflow. I know there are some very able folk among us who can achieve both through property – my hat is off to you. I am not using myself as an example to push any system or say that it is better, rather just to say that for me at least, I view both as being integral to my financial future. I no longer argue as to which is best – everyone has to take a view. Like myself though, it’s always useful to check that your view is based on a considered view, rather than fear of your ability, knowledge or sense of competence….all these can be worked on….fear cannot.

As I am sure more regular posters will say (even if they consider this to be promotion of a system), if the personal plan is for wealth creation, then the WHOLE investment spectrum should at least be considered….why go through life thinking it is always an either or scenario?! If I lived in years gone by, I would rather have two strong horses pulling my cart than just one …. horses can suffer temporary lameness (can’t they?!).
 
Now, I am not a stock market guru by any stretch of the imagination, but it seems that what you are doing is called "selling short". You are selling shares which you don't have.

If that is the case, then you should be aware that selling short carries the potential for unlimited loss.

It doesn't surprise me you are doing it in the UK, because I don't think many Australian stockbrokers permit short-selling, and even then, I believe the range of stocks is very very limited.

You sell Vodafone at 1.06, and then buy them at 1.04 to provide them to the original buyer. You've made 2 cents per share on 50,000 shares, or $1000 roughly.

What would happen if instead Vodafone stock rises to $1.10. I don't know how much time you have to acquire the shares, but that has just lost you $2000.

When you buy a share, the most you can lose is the amount of the share. When you sell short, the most you can lose is unlimited.

What if Vodafone announced they were going to build some mega new technology and their share price rises to $2. You've just lost $50,000.

The stockmarket is indeed risky, and this technique is right up there.

I think you have also missed another important point. What you are doing is not "investing", it is "trading". Investors look for long term growth/income prospects which makes them a different animal to those looking for a quick buck.

Just out of interest, how many of these deals have you lost on and won on so far?
 
Thanks Kevmeister for your reply,

I should have maybe placed a few 'beware' signs throughout my original post, as you quite rightly pointed out that there is potential for huge losses (as well as gains) in any interaction with the stockmarket - whichever flavour of trading you undertake.

The only thing I would point out though, is that it is very easy (as I have done in the past) to recite what you believe to be true and not revisit this arena to test if those same warnings are still applicable in every situation.

I think you have also missed another important point. What you are doing is not "investing", it is "trading". Investors look for long term growth/income prospects which makes them a different animal to those looking for a quick buck.

Yes, this is true. When I buy an investment property (and I usually choose to negatively gear) I do so as a long-term investor, trusting that my purchase will provide capital growth and also eventually a positive cashflow. Because of this, I do trade in the stockmarket purely for cashflow, not to invest in a favorite company. The stockmarket provides a much easier means to accomplish this than does property. I look at it like the story of the hare and the tortoise. Stock trading for cashflow zips along while investing in property finishes the race but does so at a more modest pace (although the tortoise seems to have found it's legs in the current climate!)

Investing in residential property is relatively easy and someone who is quite wet behind the ears can have a good chance of getting it right. More seasoned investors learn to refine and finesse their deals over time and become very savvy. Not so with trading. It is far more brutal and novices will be severely punished. Lady luck isn't a long-term partner. HOWEVER, most people won't allow themselves to go past that, as it seems as if that is an insurmountable truth - but I pressed on and have found that what is really required is not only to understand what you are doing but to develop some sort of intenstinal fortitude and tame the twins of fear and greed that lurk in everyone to some degree. That's where you find your real success, when you begin to master some very strong emotions that can make you do all sorts of risky things.

So for me, I set about trying to see if i could break through some long-held assumptions (all the ones you pointed out) and see if there were ways to overcome them - and that is exactly what I have done. I don't trade shares at all - I use an instrument called "contracts for difference" (CFD's). I am not required to pay broker charges, fees and at present, the UK doesn't require tax to be paid on the profits (although this may change) as you are not actually physically buying shares. The ATO hasn't clarified this yet, so I am enquiring on this, as my account is held in Sydney.

The old saying "one swallow a summer does not make" seems apt for your last question Kevmeister, as it would be unfair for me to present win to loses ratios, as I don't consider that I have been doing this for long enough, therefore it would be too short a sample period. Suffice to say, that over the past month, my ROI has been over 30% - and this is all due to using margin very, very wisely - and not allowing greed to induce me to bite off more than I need to, just becuase I can.

Over the past two weeks, I have undertaking 6 trades - 2 lost a little and 4 made some, giving me my overall 30% return.

Just to finish off (long-winded as ever!) here is an example of how
I deal with those scenarios you present. I will use buying then selling to make it easier (at least for me!):

If I buy 50,000 VOD shares @1.04 that would cost me $52,000 plus any fees, so it's quite a chunk of money. But I don't do that.

I buy 50,000 VOD CFD's which only requires me to outlay 5% of what would be the total cost, so that is $2,600.

I guess what I am attempting to do technically is what is known as 'scalping' - I just want to skim off the smallest movement in the stockprice. So, if VOD move up to 1.045 say two hours later, I then sell 50,000 for $52,250. Therefore I have made a modest profit of $250. No fees, no brokerage - it's all mine to keep.

To protect myself from sudden large and unexpected movements (which do happen) I pay a small premium (maybe $30) to give me a guaranteed stop loss @ say 1.03 - total I would lose would be $500, no matter how far they went down.

So, all I need to do is perform this same trade say twice per week for a profit of $500, which over a year would give me my modest income of around $24,000.

As said, I am not advocating everyone go and do this - it takes more study, skill and application than when initally entering the housing arena, as we have all got 'lucky' when we perhaps bought our first IP without knowing as much as we do now. But for those that believe utilising BOTH of the best investment mediums around to have a balanced wealth creation program, if they invest the time and effort to become competent, then there are now systems out there that allow us to make 'compartively' safe returns from the wild and wooly world of the stockmarket! This wasn't true even a few years ago - so the landscape has changed dramatically. the question is - are we willing to change also?

My attitude to risk is that it is primarily ME who creates risk - not the market, not the property outlook, but my own fears, worries, self-doubts etc. The more I have learned to 'know' my current limits and to control greed and fear especially, the 'safer' my choices have become.

So thank for pointing out some of the deficiencies in my original post Kevmeister - hope this redresses a little ?!
 
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Oh, and as a short aside, this style of trading is available in Australia and is regulated by ASIC. As I mentioned, because you are not actually buying or selling shares, it seems to fall under the category of a 'bet'?!?! I am trying to clarify this position, as the UK doesn't tax proceeds but the ATO might....:(
 
Value adding with shares

Hi Clay and Kev,

A good discussion so far.

I won't comment on short selling, suffice to say that I do employ a form of this concept within a normal trading regime in the primary market. (Actually buying and selling the shares as apposed to taking a position.)

What I wished to comment about is ratification of Clays thoughts that using both property and shares simultaneously certainly does allow one to value add to your portfolio.

A sound base might well be to purchase an investment property.
Theoretically, you might then wait for the property to accrue some capital growth and then use the extra equity as the deposit for the next property purchase and so on.

The real point is that throughout this (duplication) process, you can value add to the accruing equity, by drawing down and investing the extra amount in the stock market.

Example:

Property purchase at $400,000 growing at an average of 5% pa.

$400,000
$420,000 end year 1 :- Draw down equity and place in shares for next 9 years.
$441,000 end year 2 :- Draw down equity and place in shares for next 8 years.
$463,050 end year 3 :- Draw down equity and place in shares for next 7 years.
$486,202 end year 4 :- Draw down equity and place in shares for next 6 years.
$510,512 end year 5 :- Draw down equity and place in shares for next 5 years.
$536,038 end year 6 :- Draw down equity and place in shares for next 4 years.
$562,840 end year 7 :- Draw down equity and place in shares for next 3 years.
$590,982 end year 8 :- Draw down equity and place in shares for next 2 years.
$620,531 end year 9 :- Draw down equity and place in shares for next 1 year.
$651,557 VALUE at end of 10 years.

Now the point really is that at 5% pa capital growth, the property has accrued an extra $251,557 of value.

This will occur, whether or not one value adds with shares.

The VALUE ADD equation:
$20,000 at 12% for 9 years = $55,472
$21,000 at 12% for 8 years = $52,004
$22,050 at 12% for 7 years = $48,753
$23,152 at 12% for 6 years = $45,704
$24,319 at 12% for 5 years = $42,847
$25,526 at 12% for 4 years = $40,169
$26,802 at 12% for 3 years = $37,657
$28,142 at 12% for 2 years = $35,302
$29,549 at 12% for 1 years = $33,095

Total Amount drawn down against the property = $220,540
Total amount accrued in share growth = $391,003

The cost of the draw down dollars (deductible) is offset by franked dividends.

The net extra gain is $391,003- $220,540 = $165,463!!

$251,557 from the property growth
$165,463 from the share growth

Total growth = $417,020

A whopping 65% Value added!


Regards,

Steve
 
Hi Steve,

It's quite an interesting premise. Perhaps you can elucidate on something...

How do you reconcile whether it is "better" take take $N of equity from an IP and put it into shares and the limited potential leverage which it provides, versus the stronger leverage provided by taking that $N of equity and putting it into more property.

In other words, $1000 of equity buys you into $2000 of shares perhaps, maybe even $3000 for blue-chip stock, but $1000 of equity buys you into $5000 of property.

Is the whole point of buying IP in the first place the ability to better leverage your initial $, so if it is good in the first instance why not continue the same game plan?

Thanks

Kevin.
 
Hi Kev

Don't misunderstand my intention here:

You would value add with shares only until you have accrued enough for your next property deposit.

Then you have equity growth on TWO assets to value add towards the next property and so on. The compounding effect is phenominal!

Regards,

Steve
 
hi Steve would it be possible to expand a little and show figures like u have above in this thread for shares, re pulling out deposits for the shares when large enough for properties say still valued at 400k& at 5% growth.
It would make for interesting reading.
You say the compounding effect is phenominal,but would love see this example.
Also Steve i guess in a wealth building stage like this there wouldnt be much room for passive income.
Stay at work while this system kicks into gear.


thanks Darren
 
I have been following this thread and it is really the eternal question... Shares or Property? I think one word describes it... Diversification.
Both Property AND shares will provide wealth, it all depends on whether your risk profile is suited for the Shares (and in the case of the thread, Short selling and/or Derivivities) Its a matter of choice

Kevmeister...
You said "If that is the case, then you should be aware that selling short carries the potential for unlimited loss" I think you should qualify this comment as it is a Theoretical unlimited loss and practically not possible. (If you do know of a stock that rises to an infinite value please tell me. )
Yes the Losses can be large but that is what an exit/trading plan is for. If your property is suddenly infested with termites and there is a biker gang in there trashing the house and your landlord insurance broker is HIH.... You don't just sit there and watch your investment disappear, i think you would do SOMETHING to fix the situation/get out etc. The losses are POTENTIONALLY similar as Stock...

I can say Property can have unlimited losses... ie
1. A tenant dies from a fault caused by a dodgy reno. Lawsuit
2. The house is destroyed by something you are not insured for.
3. You get one of those 'tenants from Hell you see on ACA.
etc

Gee i should not invest in property...

As most of us know there is a way to avoid the above problems... Same with share investing..

For example, if using options in conjunction with a share portfolio can protect you against ANY situation presented... Not something you can do with property..
Can you protect against a downwards trend in price? (options YES)
Can you liquidate quickly in case of a mistake (shares YES)
Can you switch to a different sector ie residential/commercial quickly and easily (shares/options YES)
You can even invest in Property (share Property listed trusts)
Can you buy Shares on 'layby'? (Warrants YES)
Can you lock in the purchase price and buy it later (CALL option yes)

And by the way you CAN leverage much higher then with Property... 1 option contract equals 1000 shares...

===========================
For example...

You think BHP is going to go up all the way to june2003.

The Numbers:

Buying the shares...
10,000 BHP @ $9.57 = $95,700 (Fridays closing prices)

or

buy 10 June03 $9.49 CALL options @ $0.93 (x1000)
=10,000 * $0.93 = $9300 (Fridays closing prices)

If the Stock goes up above ($9.49 + .93 = $10.42) by June03 you make a profit...

To make it more advanced...

Can also SELL 10 $9.26 June03 PUT Options @ $0.595 (per share)
Then the numbers look like:

= 10,000 * $0.33 ($.93 - $0.595)
= $3,300


So if the Stock goes about $9.82 then you make a profit...


So for $3,300 you can effectively buy $95,700 worth of BHP in 8 months time. (and you really don't even have to buy the stock you can just sell the options for the same profit)

The leverage of this is a 3.4% deposit... Not bad i reckon.

============================

I believe the timeframe of the two 'vehicles' just highlight the 'higher risk' associated with share investing... The long time span of holding property (ie 10+years) easily offsets the mistakes and poor choices in the property purchased. (ie. Logan City many years ago???)

To not invest in one type of investment can cut you off from a lot of $$$$.


Some data
=========
Optionable stocks ~68
Short-sell capable stock ~180 (you would only want the top ones anyway)


Looks like short selling has more selection then options trading and FAR FROM " I believe the range of stocks is very very limited"

Be careful when you say through-away lines like above.... Please know what you are talking about first.


At the end of the day... Whatever suits you..

My $0.02c

DaveJ
(Property investor)
(share investor)
(Options trader
 
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The whole point of the thread was an attempt to say that the arguement of whether shares or property are better is a very simplistic question.

If we are attempting to do more than Joe average, then BOTH shares AND property should be considered and can be complimentary (as Steve's example showed). The great thing is, property and shares can both be utilised in such creative ways, that there is no need to ask "which is best?" A better question is "How can I creatively use them BOTH in my situation to get better result than just using one?".

I used to use options trading as Dave but found it didn't suite me as I found it a poor use of leverage (didn't like naked calls and puts etc). I absolutely would not say though that it was bad or that Dave is wrong (good on you Dave...hope it goes well for you). I had to find a system of use of capital that better suited me. We shouldn't have the tunnel mentality to consider something is either right or wrong. I think everyone should attempt to tailor their WHOLE portfolio of investment strategies to concepts they understand and can live with comfortably.

As you pointed out Dave, many people make statements and assertions that are often based on little more than what is read in the popular press, what a family member tells them or what is perceived to be the commonly held view. If we all went along with commonly held views, I guess we would all be looking forward to a nice big pay-off from our super funds?!?!
 
BOTH shares AND Property

Originally posted by beech
hi Steve would it be possible to expand a little and show figures like u have above in this thread for shares, re pulling out deposits for the shares when large enough for properties say still valued at 400k& at 5% growth.
It would make for interesting reading.
You say the compounding effect is phenominal,but would love see this example.
Also Steve i guess in a wealth building stage like this there wouldnt be much room for passive income.
Stay at work while this system kicks into gear.


thanks Darren

YES!

I am working on it and will post the full spreadsheet of the compounding effect.

It IS possible too, to use leverage with the share 'value add' (all a matter of personal risk profile) and to build in a passive income stream!

Regards,

Steve
 
DaveJ:

You might recall that my opening line to my initial comments where I said I was no stock market guru by any stretch of the imagination. But I have read enough to understand its mechanics, even perhaps if I am not creative enough or game enough to apply them yet.

I don't believe anywhere in my comments I suggested that shares were bad - I was merely trying to add balance to Clay's comments which seemed to show only the "upside" of the equation.

Yes, short-selling carries theoretically unlimited losses, but practically not. Perhaps I should have said more correctly is that short-selling offers the potential to lose more money than your original capital. Is that helpful to you? Maybe even that is a falsehood, because perhaps the shares available for short-selling are very very very unlikely of having this happening - I don't know.

Yes, there might be more stocks available for short-selling than there are optionable stocks, but once again my comment was not making a comparison against the number of options, it was making a comparison against the overall number of stocks available on the ASX and the number that are accepted for short-selling. In that regard my comment was not unreasonable.

I think the gist of my comments were quite adequately presented without me needing to resort to pedantic language, do you?

That said, your comments have been very informative and contributed greatly to the discussion.

But, for everyone's benefit, why don't you balance your comments a little and show the other side of your equations when BHP *does not* reach $10.42 or $9.82 and show what the gains/losses would be in each circumstance?

This would make the thread much more educational since it will indeed serve to highlight any inherent risk and present a balanced view of the share investing process.

Since shares are perhaps more "technical" than property I think it makes sense to point out their machinations more explicitly than property. I think any Blind Freddy can see quite obviously that a bad tenant can trash your property and leave you with losses. On the other hand, a newbie property investor may not have considered the potential losses resulting from a public liability claim or termites - both good points.

Cheers

Kevin.

PS: I am neither anti-property nor anti-shares.
 
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