Investing

I’ve been laying low for a while now with respect to buying and flipping foreclosure properties. You might think that I’m nuts because everywhere you turn now you see and hear about the parabolic rise of foreclosures in this country and the end of the RE world. Although foreclosure activity has picked up and more houses are now being repossessed by banks, I still haven’t smelled enough blood and desperation out there yet. If you scan your local Real Estate Wanted section on Craigslist.org and search for either “short sale” or “foreclosure,” you’ll see Realtors hawking properties in foreclosure, pre-foreclosure, or subject to short sale approval. Then you look at the prices and notice that they’re not that much cheaper, they’re all at roughly current market value. ...

Every Forex Trader I know trades differently. Some are mechanical traders while others are purely discretionary in a nature. Some even use “bots” to trade automatically with little or no intervention from them. No matter what kind of Forex Trader you are, the one thing I learned in trading these insane markets is that when you find something that works, stick with it! If you’ve been following my $100 Forex Experiment, you’d know that my Forex education has had its ups and downs. You know that I experimented with a few different methods and paid the financial price. Despite my roller coaster ride, I slowly started to figure out what works best for me, my account, and my hair. Want to know what that is? ...

I’ve been following the Case Shiller Home (should be House) Price Index for a while and decided to graph the latest New York City data. What you find when you graph the data is that house prices in the NYC area made a greater than 2 standard deviation move at its peak. Since its peak, everyone starting talking of a “mean reversion” in housing prices. What the heck does that mean? The theory of mean reversion means that over time large swings of price tend to move back to their mean, unless underlying fundamentals of that market have changed! That theory begs to ask ‘have fundamentals changed in the housing market?" The likelihood is no, the purchase of houses by people who can’t afford them was a result of bad lending practices by mortgage companies and don’t constitute, in my opinion, a fundamental change in the market. A house is something you live in, raise your family in, and sell either when you move, retire, or die (typically). Unless we had an influx of millions of rich immigrants looking to buy the American Dream, then the entire price appreciation of housing was based on demand fueled by cheap money created by Alan Greenspan and company. What can we expect to happen to housing now? If the index “reverts” toward the mean, say down to 1 standard deviation, the loss from the peak of 215.83 to 156.48 would be a depreciation of 27.5%! If it continues back down to the mean at 110.72, then we’d have a depreciation of 48.7%. This is only for the New York City area, other places in the country are worse! This magnitude of loss would be catastrophic and in my opinion, create a global depression! Expect more foreclosures, further depreciation of house prices, and the creation of “Green-o-villes!” Thanks Alan, you jerk! ...

I found this very neat Kelly Formula simulator a while ago and wanted to share it with my readers. This applet is almost a Monte Carlo simulator that calculates your expectancy and position size based on your win probability and win/loss ratio. Based on my Forex Trading, my win/lose ratio is about 1.5 and my win probability is about 0.60. Based on the Kelly formula, I should bet up to 34% of my trading equity in one trade or 11.3% in three smaller trades (each). Try playing around with it, its really fun and it can really help you understand how well your trading system is working! ...

Sherry posted an excerpt from an article she read in my “Real Estate Will Get Worse” post. The author of the article, Jackie Corr, points out an interesting leveraged strategy that is very plausible why hedge funds have been posting out of control losses recently. If you buy a stock for $36 and sell it for $72 four months later, you’ve made 100% on your money. If you add $30 of borrowed money to $6 of your own to buy the stock at $36 and sell the shares at $72, your profit is $36, but you’ve made 600% on your $6 of which the hedge fund takes a percentage, roughly 2 percent or 72 cents, so your profit is now $35.24 on the $6 which is 587% and you can live with that ...

I used to flip foreclosure properties leading up to the height of the RE bubble. It was tough work finding these properties, marketing to them, and then screening the potential sellers. Since I didn’t have the capital to buy the properties myself, for cash, I had to get an investor involved and made a few bucks at it. I learned a lot but realized that it was too time consuming so I stopped. ...

My wife owns Dodge & Cox’s Stock Fund (DODGX) and its been a great performer for her account. I just wish they offered it in my 401K! Despite the nice trending chart below, DODGX is not without its risks. I ran a quick Monte Carlo simulation and discovered quite a few nasty negative return outcomes for DODGX. In fact there’s 0.04% chance for a nasty -51% rate of return over the past 10 years. Did it happen? No, but its a possibility! ...

I stumbled across a +45 minute podcast from the Royal Society of Arts yesterday which is highly entertaining, in a quantitative sort of way. The speaker that night was none other than Nassim Taleb, author of Fooled by Randomness and The Black Swan. It’s a fantastic listen to, especially when he talks about something called “Black Swan positive.” Black Swan Events (BSE) are outlier events, events that you never dreamed of occurring but they do. Sometimes these are negative events where the outcome is very bad for you. An example that comes to mind was Enron, no one saw it coming and neither did Arthur Anderson. I bet the Anderson people never dreamed that this single event, from a single client, could cause them to go out of business. ...

I went long $XLV in mid January 2007 for one of my personal IRA accounts. Its had its share of ups and downs but it doesn’t take a rocket scientist, or a fancy neural net, to figure out that health care is a long term bet. If you don’t believe me, look around for all the graying baby-boomers who want to desperately hold onto their youth. This time I’m holding XLV for a very long time and won’t be shaken out of it. ...

The inspiration for my S&P500 Volatility Timing model came from rereading portions of Mandelbrot’s book, The (Mis)Behavior of Markets, and trolling around the Internet for Nassim Taleb’s research work on risk. I think both guys push the envelope on truly understanding unseen risk and those pesky financial asteroids. Since my model is currently being developed, I thought it would be worth my while to truly learn and understand how historical volatility (HV) is calculated. I first searched the Internet for any free data downloads of HV but came across several pay for data download sites. ...