Owning a property is one of the biggest pieces you can hold in your investment portfolio. Even the primary home you live in right now, if you own it, is an investment. You bought the home at a price you though was fair at the time and hoped that over time, it would appreciate in value – just like any other stock you trade on the markets! Lately, people have learned that buying a home is not always a guaranteed investment, its not always going to go up in value, and just like stocks, some people end up buying too high and are forced to sell low. Its part of the game.

There are different types of methods to invest in properties and for the most part, this will be geared to the smaller, individual investor. These income generating properties are bought by people like you and I, in the form of smaller apartment buildings, duplexes or even a single family homes or condominiums that are rented out to tenants for a profit.

Real estate highly tangible, you can see and touch it your property which differs from owning a piece of stock in a company like Apple (AAPL). This can instill pride of ownership, but being tangible also has its downside because real estate requires hands-on management (mow lawn, remove snow, unclog the sink!).

When you decide to invest in real estate, you need to decide what kind of exposure to the real estate market you seek. Different exposures produce varying levels of risk and return.

The first type is the most common type, the private market. In the private market, you would be purchasing a direct interest in one or more real estate properties. You would own and operate the piece of real estate yourself , and you would receive the rent payments. For example, if you were to purchase an apartment building that was leased to one or more tenants who pay you rent, you would be participating in the private real estate market.

The other type is a public market. Here, you are investing in a public company that holds properties. These are known at REIT’s (real estate investment trusts) and are something many people look at for a more simple way of investing. It requires no real hands on experience as you are just buying shares in a company that will buy and sell properties for profit.

I know this is the start, but will continue next week with the second installment of this topic.

Happy Investing!

Aman, MBA

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Trying to Break even:
When the dot-com bubble burst in the spring of 2000 and the market started its descent into a bear market, investors froze like deer caught in oncoming headlights. Many didn’t even react until the value of their portfolio holdings had declined by as much as 50-60%. If you read my “about” page, you will see that I was one of these people. I lost almost 80% of my money before I took action and cut my losses which at that point were so deep that I was broke.

There is no promise that a stock will ever come back. Waiting to break even (the point at which profit equals losses) can totally erode your returns. To show the importance of cutting losses, the chart below shows the amount a portfolio or security must rise after a drop just to get back to even.

Percentage Loss vs. Percent Rise To Break Even
10% 11%
15% 18%
20% 25%
25% 33%
30% 43%
35% 54%
40% 67%
45% 82%
50% 100%

A stock that drops 50% must increase 100% to break even! In dollar terms: a stock that drops 50% from $10 to $5 ($5/$10 = 50%) must go up by $5, or 100% ($5/$5 = 100%), just to return to the original $10 purchase price. Many investors forget about simple math and take in losses that are greater than they realize. They falsely believe that if a stock drops 20%, it will simply have to rise by that same percentage to break even.

For those that cannot remember the tech stock collapse year back, just use this table to see how far off some stocks still are. I remember other blogs trying to emphasize the foolish idea of holding stocks that people bought for $25 (like Bank of America) when it was down around $15 claiming a rally will ensue. Instead of cutting losses, and trying to get in lower, these people came all the way down to $2.73/share and have come back up but are STILL below their buy price.

Now using this example in the previous paragraph, if they sold at $15, bought back near the bottom, not only would they have broke even, but would be profiting right now. Its a lesson I took away from the dot-com collapse and hope you consider from this point forward.

Now cutting losses do not really need to take place in the first place if you apply a stop-loss to each holding. Depending on your risk aversion, this might be as low as a few % below your entry price to something like 10-15%. This can also help avoid volatile swings that some stocks produce some trading days.

A selling strategy that’s successful for one person might not work for somebody else. Think about a short-term trader who sets a stop-loss order for a decline of 3%; this is a good strategy to reduce any big losses. The stop-loss strategy can be used by longer-term traders also, such as investors with a three- to five-year investment time frame. However, the percentage decline would be much higher, such as 15%, than that used by short-term traders.

Determine your investing style. If you bought a stock because your uncle’s friends’ grandfather said it would soar, you’ll have trouble making the best decision for you. However, if you actually did research like you should when putting your money to work, the following quick steps will help.

The first question, did you buy a company because it had a solid balance sheet? Were they developing a new technology that would one day take the market by storm? Whatever the reason was, it leads to the second question. Has the reason you bought the company changed? If a stock has gone down in price, there is usually a reason for it. Does the quality you originally liked in the company still exist, or has the company changed? It is important to not limit your research to only the original purchase reasons. Review all of the latest headlines related to the company.

If after some research you see the same qualities as before, keep the stock.

If you have determined that there has been a change, then proceed to the third question: is the change material enough that you would not buy the company again? For example, does it alter the company’s business model? If so, it is better for you to offload the position in the company, as its business plan has greatly diverged from the reasons behind your original investment.

Always remember not to get emotionally attached to companies, and making smart sell positions will become easier and easier. Cutting your losses might be hard to decipher initially but hopefully after reading this article, you will have a better understanding on why sometimes is better to cut your losses!

Happy Investing!

Aman, MBA

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Question #1
When is the best time to trade during the day??

Answer
Personally, when I have anticipated an active day for a specific stock, I have mentioned how I would not buy right at the open as its the most volatile part. This is usually the most hectic part of the trading day as there is activity from the previous close, overnight news, and general buyers and sellers looking to get in at the start.

The middle of the day is typically the most calm and stable period of the average trading day. This is the time of day when people are waiting for further news to be announced. Because most of the day’s news releases have already been factored into stock prices, many are watching to see where the market may be heading for the remainder of the day. Because prices are relatively stable during this period, it’s a good time for a beginner to place trades.

Heading towards the last hours of the trading day, volatility and volume increase again. During this part of the day, traders might be trying to close some of their trades, or they may be attempting to join a late-day rally in the hope that the momentum will carry forward into the next trading day.

Depending on your risk aversion, you should see these patterns as the various opportunities to get in.

Question #2
Why are some stock quotes in bold print in the newspaper?

Answer
Believe it or not, but some people actually read a newspaper…in the traditional sense! Normally when I’m traveling or away from a computer, I will pickup the local paper and pull up the business section for my daily fix.

The quick answer as to why the font on some stocks is in bold is simple: its used to emphasize stocks that have moved upwards more than 5%. This is done to also quick prominance to those that were highly active for the day (and hence the biggest movers).

Hope these quick question and answers simplify some of the daily curiosities related to the stock market.

Happy Investing!

Aman, MBA

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