Catching a Falling Knief..........

When an investment (stock or real estate) is falling down from the very peak, we tends to think that "wow, that's a bargain price, time to jump in." But do we really know the price is already hit the bottom and ready to bounce back , or is it just the beginning of the price's free fall and price is going to get even lower. This is the questions most of us will face in our investment decision. Let's buy it now, this is a great price, 20% below the peak! Na, the price will come down more. Which one is right and how do we know? The fundamental answer lie in the approaches: Predicting or recognizing? Every can predicts things, I can predict predict stock market is in upward trend next month, while you can predict it is the other way. This is purely 50-50% chance to get it right, just luck. If we're lucky, we can make some nice profit. But if we guess it wrong, we're catching a falling knife that is going to hurt our wealth further and further. In recognizing, we 'll look into the price pattern, the chart, the market, the demand and supply, the trend, the news, and even the economy, the purpose is to collect as much information possible so we can make a more informed decision. We still couldn't get to 100% right, but it definitely will increase our 50% position to high level by adding the odds on our side, and our chance of winning. Avoid the falling knife! Learn to recognize rather than predict to build it right.

House Price v.s Rent

Tonight, I want to share an interesting relationship I learn between house price vs rent. In the area I live in, the house price has increased dramatically over the last three years. In this year, house price have been stable. In the same time, rent is pretty flat , if not declining over last three year. But this year, the rent has increased quite a significant amount. I find that this is also true in another area that I invested real estate in. House price and rent has a inverse relationship. When price increase intitally, there will be more people interested to buy house, this reduce the number of renter in the market. When the price has increased a significant level, house become less affordable and lesser buyer are interested or qualify. When it happens , the renter increase and drive up the market's rental value . Therefore, the rent is always lag the house price. As a investor in real estate, this is quite a good news. This means that the rent we're able to collect is likely to increase in the next few years down the road since house price in most area tends to become stable over next few years. This will certainly help our cash flow position.

Use limit order when you sell to close option contract

Few months ago, I start to learn investing option thru various sources. I make my first purchase back in sept (check it out) and result has been very rewarding so far. The more I understand and trade option, the more I view stock as riskier business. I 'd devote more of my energy and capital in fine-tuning my option method in the next few months. Tonight, I want to share one of the idea I learnt when I sell option. It is a bad idea to use market order when you sell to close option contract because you never know what exact price your broker offer you. The spread (difference between bid and ask) could be huge and you may end up not making much profit if your broker offer you a low bid price as your sold price. The better way is use limit order. You enter a price in between the bid and ask as your sold price. Your broker may not be able to sell it for you right away, but the advantage is that you know exactly how much price you sell for and your bottom line profit. This is my real life example of a option I just bought for $2.00 per contract
Bid : $2.10
Ask: $2.40
As you can see, the spread is $0.30. If I put a market order , I'd be most likely get a sold price around $2.10. This means my profit is only 5%! Not too attractive. Instead, I put a limit order with a price $2.30. The order didn't go thur immediately. It takes about 2 hours. But I 'm able to make 15% return of investment once the order executed.

Magic Formula Investing works like Magic for me!

Tonight, I want to share my experiencing using Magic Formula Investing concept to buy and profit from stock market. The Little book that beat the market, arguably the best stock investing book ever written from Wall street Analysts. This is a very easy to read and understand stock investing book I'd recommend to people. Basically, the concept is followed: Mr market is a very emotional guy, his decision in short run may not make sense, but in long run, he is a logical being. This means that sometimes he offer a stock at a very high price, but other time, he will offer you a bargain. It is magic formula's mission to find good company at bargain price. It is that simple!
How do we define good company?
According to magic formula, it looks at how much the return is generated from the invested capital or the return on assets (ROA). The higher the better.
How do we define bargain price?
Magic formula look for company's earning from the price, or earning yield, kind of like the reverse of P/E. Again, the higher, the better
Magic formula look for the universe of stocks and rank each company based on the above two measurement. Every day, it will update the list on the website: http://www.magicformulainvesting.com/
I've been buying stock from the list for the last six months, and the result has been very rewarding. So, tonight, if you've free time sitting at home watching TV, I highly recommend you go get this book to learn magic formula and how it can help you possibly achieve the north 20% annual return to build your wealth tonight.

Value Beat Growth!

There is always a debate in stock market to invest either in value or growth type of stock. Value stock emphasize on the fundamental date, ie, earning, return on assest. An example of value stock is UST. Growth stock focus on the stock price's growth above average of the relative industry. An example of growth stock would be goog. Few days ago, my company's 401k provider come to my company and give a presentation of the overall stock market over last 20 years. There are an interesting data which compare the performance of value and growth stock. Check out the above table.

It's clearly shows that value beat growth in every size of market. This is a good indicator that for long term success in stock market, we should focus on value than growth.

Just Trade It!

If you want to become professional golfer, what would you need to do? Just Swing it! It takes practise , practise, and practise to improve your golf skill to achieve a higher and higher level and become good at it. No one is born as a Pro. That's the reason Tiger Wood become #1 ==> because he practise golf every single day. To become a successful trader in stock market, what would I need to do? Just trade it. Make mistakes, correct it, improve it and become a smarter and informed trader next round. Few weeks ago, I was reading about the subject writing covered call to generate extra income for the stock I already bought. The idea sounds enlightening. But I tell myself, if I don't do it, I won't learn it. So last week, I jump in and write my first covered call for this stockAHR Even now, I still don't know sure if I make a right decision by writing 2 contracts on this stock. Regardless of the result of this trade, I"m learning and I practise. I get to see how broker credit premium to my sold options. The options will expire in few days and it seems that most likely the option will expire worthless. This means I could have the opportunity to write again next month! So, whenever you learn idea about investing, the best advice to start small, expected to make some mistake and correct from it. This learning process is priceless to build your wealth tonight.

Covered call Vs Call option

Tonight, I want to share some of my research on investing stock options. In particular I focus on CALL options, which is generally works the best when market condition is a rising bull market. You don't want to do CALL option when the market is sinking downward.
Price: For writing covered call purpose, first you must own the underlying shares of stock. Because each contract require 100 shares, the amount required to invest is reduced if the stock price is lower (<$20). Plus, the power of leverage will work better. For call option, you want the stock price higher (>$50) because they are less volatile on downside and solid on the up side.
Option Period: You don't want your option to be "call out" when you're writing covered call, so you'd like the period as short as possible. On the other hand, you want to give it more time to comes up in value when you're buying option call
Risk Level: Covered call is less risk since you're owning the actual stock. You can always wait for stock to bounce back. But in call option, when stock price drops, AND you're near expiration day, you could have high probability of losing your entire investment (premium)
Type of stock: You want a slow price appreciation in covered call because you don't want to get call out. But you want the fast price appreciation type of stock in buying call option to get the maximum gain
Potential return: Every time you write a covered call, you have limited the gain you could make. Your gain is equal the sum of premium you receive plus the difference between strike price and your purchase price. In option case, your return is unlimited, depending on how much stock risk before your options expire
Strike price: The closer the current price, the more premium you will received in covered call case. In opposite, the further out of money, the less you 'll pay for the option premium.
That's all the points I 've summarized as a guideline for investing call options. Hope you'll find it useful.

A must read for flipping real estate

Flipping: A buyer purchase the property, fix it up, and put it for sale for profit in a short period of time. I have done a flipping deal two years ago. I bought this run down property and intend to fix it up and put it on market for sale for profit. I did my homework and estimated the potential profit by estimating all the number: the cost to fix up, the buying and selling cost involved, the purchased price, and finally, the projected selling price. It turns out that all the amount I estimated are pretty close to the actual number. I thought I did great and I've made the projected amount of profit. However, I found that I've missed one important number in my original profit calculation: The CARRYING COST! From the time I acquired the porperty, fixed it up, to the time I sold it for a profit, it took total five and half months for the whole process. In the meantime, I'm responbile for all the holding cost that a normal buyer are responsbile: the mortage, the insurance, the tax and the utility. Each month, these cost add up to over $3000 dollar in my case! $3000 X 5.5 month =$16500! This is almost half of my profit! This is a big mistake I 've made but I learn from it and I'd do it differently if I do a flipping real estate again in future ==> Instead of closing the deal 30 days (normal real estate transaction), I'd ask for a longer closing time, say 3months. In the meantime, I ask for seller's permission to get in the property and do fix up and rehab to increase the value. Once the rehab is finished, I'd bring in an appraiser to appraise the property. Certainly, the new appraised value would increase. Then, I'd obtain a mortgage based on the new appraised value. Once 3 months period reached, I then acquired the property. Immediately, I'd put it back on market for sale. In essence, I will be minimizing my holding period, reducing the expense, and potentially get a better mortgage rate to further reduce the expense and increase the bottom line profit.

The better way to get Home equity line of credit (HELOC)?

I'm looking to get a home equity line of credit for a while. Because mortgage broker didn't make any money (not even a dime) to get you the HELOC, most broker is not very motivated to do this as a service. I call the broker I used in the past, but it seems that they don't care much about my HELOC as compared to refinance or purchase I did. After weeks of waiting, I got pretty frustrated for no responds from my broker, and I decide to go directly to the bank. I went to Wells Fargo and sit down with a investment advisor. After I explain what I needed, the person seems to be helpful. Except she won't tell me the rate until I "initiate" the process with the bank. She recommends me open a bank account with Wells Fargo and I did. Today, she finally call me and let me know the rate. It was a pretty ridiculous high rate "PRIME + 2" This is almost as high as a personal loan I can get from a credit union! Well, it seems like the lady is more interested to get me open an account than getting me the competitive rate of equity line I wanted. After some research, I learnt that http://www.bankrate.com/ actually offer a list of bank with interest rate sorted in order. I 'll give this list a try tomorrow and call the lowest rate company to get started. Hope I can find the right lender to get me the HELOC. Share your experience if you have a better way to get HELOC?

EX DATE is coming..

Since I decided to dedicate a portion of my stock investment into high yield dividend stock, I started to pay attention to EX DATE. In order to get the dividend payout for the quarter, I learn that I must buy the stock before EX date to be eligible to received dividend. Anyone buy on EX date or after will not get the dividend income. Right after EX date, I can sell the stock and I can still eligible to receive dividend. The interesting pattern I found is that the stock price will "automatically" reduced by the dividend payout amount on the opening of EX DATE, then the price will go back to normal after few days trading session. This could be an opportunity to buy the stock if your stategy is to ignore the dividend but betting purely the rise of the stock. One of my favoirte dividend payer stock FRO , which have a yield >15%, will have EX DATE tomorrow (10/10/07). The payout amount is impressive $3.25, or 6.25% assuming stock price $50 dollar. I bought this stock few days ago anticipating receiving this handsome amount of dividend. It'd be interesting to see how FRO trade tomorrow morning. My plan is to sell one or few days after ex date at the price I bought so I can receive the full amount dividend (6.25%) owning this stock just a week or two.

Things to consider when you particpate a lending project.

Recently, I was introduced to a real estate developing company around the area I lived. This developer is looking to build a 300+ high rise condo building in the downtown area. As far as I know, the developer already have a option fee to purchase the land. All they need right now is to raise funding to do a rezone of the land from residential to commercial so they can put a high rise building on it. They're looking to raise 4Million plus from investor and they offer excellent 50% return guaranteed by the company's trust to investor in 12 months. The minimum contribution is $100,000. This is definitely sound very attractive. If you lend them $100,000, after 12 months, they will return you $150,00. Once the rezone is done and approved by city, the developer plan to get a construction loan to pay back the investor principle plus interest. I'm reviewing their contract to consider this investment opportunity. These are some risk to consider:
1)What if the rezoning fail for some reason, the land cannot be rezone to build high rise building?
If the developer fail get the rezone approved, they obviously cannot get the loan to pay back the investor. As a investor, we have to check how strong and experienced the company and their team has done this kind of project before to weight the risk.
2)What if the builder don't pay back investor?
Well, according to the contract, investor's principle and interest is guaranteed by the company's trust. If the builder fail to get rezoned approved, they must liquefy their assets to pay back investor. The builder can show their financial statement to investor. As a investor, we need to check their financial strength (ie, how much networth the trust has)
3) What if the builder bankrupt?
That's obviously the biggest risk to consider! If the company do bankrupt, investor could potentially lose all the investment and need to file ligation to claim the return of money. Again, as an investor, we need to weight how reputable and likelihood the company may bankrupt.

50% cash on cash annual return is definitely attractive. But there is risk involved. I will have to do more research, meet with the officials of the company, check their financial strength by looking at their financial statement, check their previous works and references, to decide whether to go for the lending opportunity. Any one has experience of involving in any lending project in the past? Any insight to share?

Interest rate is creeping down

I have a mortgage which has a variable interested APR rate. My APR = Index + Margin. The index used in my mortgage is 12 Month Treasury average. Every month, my APR change according to this index. Tonight, I just check the trend of index last several month and it is decreasing. Since the FED reduce the prim rate in August, many index has started a trend of decreasing. This is certainly a good news for real estate market since the cost of borrowing is reduced and hopefully, it can help more people to afford the mortgage payment. A great reference you can find updated rate information is located at http://www.moneycafe.com/library/mta.htm

Don't Diversifiy, Concentrate into high perofrmance investment

Many people said diversify is the key to succeed in investing world. I do not completely agree with it. Especially, when you're young, you should consider take more risk since time is on your side. I'd rather concentrate my capital and energy into some higher risk AND potentially higher reward investment. For example, let's say you have a set amount of capital (say 30,000) to invest in Mutual Fund. It's normal for most people to invest 5 or 6 Fund to diversify. But I believe the more effective way to build wealth in a shorter period of time is to concentrate into high performing Fund. I'd do the research and analyze which fund will have a higher chance to increase in value. After I'm confident on my research, I'd concentrate all my seed money in it. I 'd buy no more than 3 Fund and watch how good or bad my picks are. I will go back and learn the mistake I make from the research and analyze if my fund go down in value. So, next round I can be more informed and make a better selection. So, diversify is the easy and lazy route. You could reach your goal when you're 65 or 70. But if you want to build wealth tonight, we should learn and train ourselves to select right investment with the right market to maximize our return.

Healthy >> Wealthy.

As we discussed before, for someone who has a 9 to 5 job, in order to get out the rat race, he or she must use the 5 to 9 during the evening time efficiently and effectively to build wealth. You may choose to go to seminar to learn about investing, network with successful investor or business-man or business -women, driving around your target area with your agent to look for property, or meeting client for presentation if you have a business or in network marketing business. Each task require dramatic amount of energy, especially we just spent 8 hour in our daytime job. We could get tired and lack of energy and it will affect our physical condition to build our wealth. Tonight I want to share few things I do to keep in good shape and health, so I can have the energy to continue to build wealth tonight. No health, no wealth. Health is your greatest resource , take good care of it!
1) From time to time (if I'm not in hurried), I park my car purposely few block from the company when I go to work morning. So, I have 10 min walking each morning to work. When I leave, I also get another 10 min walking. Total I can get 20 min right there walking as exercise.
2) I go to do YOGA at least once a week during lunch time for 45 min to 1 hour. YOGA is excellent especially if you have back or neck pain.
3) I put 1 litter of water in my cubicle each day. I force myself to finish it everyday before I go home.
4) I do swimming once a week.
Discipline is the key. You can come up your own tasks. When you can practise and develop good habit to build your health, I'm sure you chance of success will be increased when it comes to your wealth.

Wrong questions to ask lead you wrong result!

Five years ago, I purchase my first stock thru an online broker. I have no idea what I'm doing. I get curious about stock market when everyone around me is talking about how easy to make money. Without any knowledge in stock investing, I remember I will ask people I ran into, my boss, my doctor, my neighbors, and even the person who cut my hair this question " which stocks I should buy?" Everyone around me seems to be expert and they will tell me a list of stock symbol to buy. I collect this list and buy these stocks. As you may guess , my return is pretty ugly. I think I've lost a couple grand just by asking this questions to people I ran into.

I didn't let this setback discourage me from investing stock. I just know I need to become more educated. I read books, I attended seminar, I listen to educational program to learn how to make money in stocks. I figured out I 've asked the wrong question in the beginning and that's the exact reason why I lost money. Now, I learn to ask the right questions to people I ran into : "What system (method) I should use to screen, time in and time out stock?" Interestingly, almost on one around me can tell me any thing or don't have clue what I'm asking. The amazing things is after I learn the screen method that fit my investment style, the time in to buy and time out to sell (either capture a gain or minmize a loss), my return has been gradually increasing. If you're interested to learn what are few of the system I'm using (maybe not be the best, but it's making money consistently for me), simply leave a comment and say "529pm, tell me more!". I'd love to share what I know (my stock investing method) to you if you're interested to know. I'll reveal my method when there are 10 comments to this post. Will you comment? $D

A creative method to buy property with Nothing Down

Tonight, I just have a dinner with a successful real estate investor. Remember I blog earlier, your net worth is determined by your network, it is always great to hang around with smart and successful people to learn their wisdom. Basically, he share with me his experience of one of his new real estate investment. The coolest part is he is able to buy this property with NOTHING DOWN payment. This is the step he took
1) Target Bank owned (REO) properties. Bank is more willing to negotiate than a seller in general.
2) Identity fixer upper property that need some paint or carpet to bring to livable condition. The asking price of this type of fixer upper is usually 5-15% below market value.
3) Negotiated with the Bank to accept a even lower price offer PLUS three months period for closing
4) Ask for permission from the bank to enter property during the three month to do rehab and repairs
5) As soon as the repair are done, he brings in an appraiser to reappraise the repaired house. The appraisal value come out to be about 20% over his purchase price.
6) He bring this appraisal report and get a 80% Loan to Value Loan base on the Appraised price.
7) He bring no money down at the close of escrow in three months to close this transaction.
This is a very creative method to buy property with nothing down. Traditionally, the bank can only loan you 80% of the purchase price. In his case, he is able to buy the property lower value, delay the close of escrow period, fix up the property in the meantime, and get a loan using the new and higher appraised value. This is an excellent example of create value in real estate.