We should stick to low-risk investments

[wahkao]

Let say you start trading with a $10,000 capital. If you loss 20% on a trade (ie your trading account drop till $8,000), you will need to make a 25% profit on the reminder capital ($2,000/$8,000) to come back to breakeven.

If you loss 50% of your initial capital, you will need to Make a 100% Profit from the Remaining Capital so that you can restore back to the initial capital ($5,000/$5,000).


Below is a chart showing the different percentages of loss and how much gain (in term of percentages) is required to restore back to the initial capital.

[Image: jbkaQrgUPCRIx0.png]

From the above, you can see that to make up for any loss taken from the stock market, you will need to make a higher percentage of gain then the loss incurred.

http://www.trade-stock-option.com/money-...-tips.html

The Larger the amount you LOSE, the Greater the IMPACT on your ability to earn money in the future.

- The Tao of Warren Buffett

[Image: jbh2byNkZhNcXt.png]

Variance drain sounds so chimp. Basically it is that upside and downside returns are asymmetric

A stock lost 50% and gain 50% does not go back to par. That's why absolute return strategy makes sense

yes this problem exists. Is there a solution?
what should we do about this situation?

[corydorus]

Do not be fooled by Maths due to %. Which makes it sounds scary.

If you look at historic Index chart, this is unlikely to happen for index. A 50% down can easily result gained more than 100% gain when recovered. We may not even need to beat index to return to original level.

If the unfortunate situation happens, probably your risk level on types of stock you choose and basket size is skewed.
I would say selection of high risk stocks and high concentration.

[gautam]

hi wahkao,

maybe i could share with you my thinking,

one solution is to look for dividend rich stocks in companies which are undervalued, esp those which are able to pay a higher dividend over time.

3 senarios:

market bull run: rising tide will carry most boats and most stocks will go up. capital gain will occur. dividends will be an added bonus here.

market move sideways:
1) dividend will make waiting more bearable, to me anything 3-6% at entry price, is a good figure.
2) no one knows exactly how long market will move sideways, in meanwhile cashflow is still maintained. this can be used to purchase more shares in the same counter or in another. say if market move sideways for 2yrs, at a modest 4% yield, if just going by the dividends, one would have collected 8% while waiting.
3) counters which pays an increased dividends over time: even if market move sideways, as one's cashflow actually increases over that time when market moves sideways.

market goes bearish
1) dividends will guard downside to some extent. so this protects the capital to a certain extent
2) the cash flow from the dividends could be used to purchase a even greater number of shares at the depressed prices or enter into another more undervalued counter.

most times people also dont know where market is heading. bear and bull market will come and go, but over a long period of time, what you would have built up is a large "army" of money producing "soldiers". of course one will need to control his greed and fear factors over this period of time. to me, keeping myself very busy with day to day activities, including doing housework, is the best distraction against these two emotions.


gautam

[arriyana]

Adding on to guatam, unfortunately, because of Fed's money easing policy, we see several strong dividend yielding companies being driven up by funds seeking better returns.

Most funds can borrow at ~2-3% interest rates, hence with returns of 4% dividend, they profit 2% without real capital. Compounded with the fear factor since 2008, we see very little strong dividend shares being available to invest it. That is indeed a trouble.



[Admin's note : No need to manually add the link, you can make the link available via the Website and Signature fields. Check out the details at User CP.]

[specuvestor]

What Gautum has described is a very viable long term strategy of asset accumulation. Problem is not many of us has Buffett kind of patience. Cashflow also gives you optionality of deploying cash without selling the asset, and also reduce your risk to that asset

Variance drain sounds so chimp. Basically it is that upside and downside returns are asymmetric

A stock lost 50% and gain 50% does not go back to par. That's why absolute return strategy makes sense

yes this problem exists. Is there a solution?
what should we do about this situation?

Please see my post #21

Most funds can borrow at ~2-3% interest rates, hence with returns of 4% dividend, they profit 2% without real capital.

This is not a riskless arbitrage trade... alas from LTCM to CDO crisis, some people thought it is.

[opmi]

Most funds can borrow at ~2-3% interest rates, hence with returns of 4% dividend, they profit 2% without real capital.

This is not a riskless arbitrage trade... alas from LTCM to CDO crisis, some people thought it is.

When u use margin debt, no need market price to drop to kenna margin call. The banks just assign ZERO collateral value to your shares, even if your LTV is 10%. Heard that during 09 crisis, a certain Mr Eng kenna that for his Msian shares, forced to sell off his DBS shares at the low.

[arriyana]

That argument holds true for most investors but not for funds and the major houses. They are the ones who set the rules to begin with and the ones that dictate the majority direction of the flow. As of now, it is of very high likelihood that they are vested with the carry trade.

[specuvestor]

^^^ Actually I agree with u ... but that does not mean they are doing it right or learning from past mistakes. It's all about their incentive structure. If blow ups only occur 1 in 10 years, their consideration is very different if it is 5 blowups in 10 years.