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Anyone planning to make money from market recovery?

Discussion in 'Trading Strategies/Systems' started by temp, Jun 1, 2008.

  1. temp

    temp

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    Hi, have been looking for a thread on this, but can't see one... thought I'd post to see if anyone has similar thoughts...

    I know there is general gloom and doom re. share markets and world finance etc., but more and more there is talk of a recovery. (Also, in terms of market pullbacks... this is a substantial one, but not as bad as some... so we can assume it will recover and go on to new highs in time.)

    So... using the 'buy while there is blood running in the streets philosophy...', what do we do?

    My current thinking, general strategy.

    1. Assuming we have funds available - either cash or real estate LOC
    2. Buy quality shares - bias toward ones with rebound potential (fear oversold) and strong dividends to service loans (franked or un-franked)
    3. Margin loan... at 1:1 gearing (conservative) - can double the initial investment.

    Few more thoughts...

    a) If we use all borrowed funds... say LOC + margin loan... then need to service the loans (as close as possible anyway)... could look at shares such as major banks CBA, WBC, ANZ, also, property trusts such as GPT, MGR, MCW, MOF, IEF, ILF. Far as I can see they are maintaining their distrubutions... (could be wrong, but can't recally reading anything saying they were cutting...).

    b) As per the 'Bank Holiday' newsletter from Eureka Report (saw on this site), the major banks at least have a history of increasing dividends... so time makes the repayments easier.

    c) Large companies are down a long way basically due to fear it seems... all the codes listed above are very low compared to October 2007, and would represent substantial gains to get back there... even something like CBA for example... now about $43, if recovers to $60, that represents close to 40% gain... for a massive 'darling of the market' company!

    d) Even if it takes 2 or 3 years for some of these companies to fully recover... doesn't matter much if we're close to funding the investment with dividends.

    e) Re. fear of margin call... i) the LOC/cash part of the investment would not be exposed to a margin call; ii) the margin loan part could of course be exposed... however, if borrowed at 50% against shares that are 70% LVR, need a 33% fall to trigger margin call (I think that is right... haven't confirmed, sorry if a little out)... NOW, it is a 33% fall from CURRENT prices... if that happened, it would be in order of a 50% fall from October 2007... like 1987, 1929 situation... certainly possible... but... worth taking a chance on?
    ===

    Applying some real dollar amounts to this... if could access say $200,000 of cash (say via LOC), margin loan out another $200,000... have $400,000 exposure to crashed market shares... hold on for several years... if could get 40% gain overall... looking at $160,000 gain... for doing nothing much except sitting on a group of shares... and it's using all borrowed money (OPM)... money out of nothing. (Maybe another form of 'living off equity' too for the people from real estate perspective.)

    Anyway... sorry this is a longer note that I would have liked, but needed to explain the idea enough.

    What do people think of it? Sensible? Or is there a chink in the armour I haven't seen?

    Thanks for that... Ilori :)
     
  2. So_Cynical

    So_Cynical The Contrarian Averager

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    I think the blood stopped running a few weeks ago...maybe even a month ago
    so in most stocks your a little late for the bottom.

    Good luck.
     
  3. Wysiwyg

    Wysiwyg Everyone wants money

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    Yeah, if anything the bounce off the bottom has met some profit taking and caution.







    .
     
  4. temp

    temp

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    Thanks guys,

    I'm a bit new to this... but why do you think it's too late now? As long as I'm buying somewhere near the bottom wouldn't my strategy still work?

    I would have thought most of the big banks, property trusts etc. were still well down and had a long way to recover.

    Appreciate your thoughts.

    Regards,
    Ilori :)
     
  5. So_Cynical

    So_Cynical The Contrarian Averager

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    Not saying its to late at all...just saying the bloods not running, still plenty of
    long term upside in many stocks that were hit hard.
     
  6. AlterEgo

    AlterEgo

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    Sounds very, very risky to me! You're talking about using an LOC on your home loan - so basically you're betting your house on this scheme working. But if that wasn't risky enough, you're talking about taking out a margin loan as well! If the market behaves as you expect, you could make quite a bit of money on it, but if the market moves the other way...... well basically you could be committing financial suicide and wind up bankrupt. That's not a risk I'd be willing to take!

    And can I ask how much experience you have at share investing/trading, and what sort of annual % return have you made on the markets over the last few years? You need to be very, very sure of your strategy before risking EVERYTHING on it.

    Many people new to the markets think this share investing thing is really easy - just have to buy some blue chips and sit back and watch the money roll in. Well let me tell you, it just ain't that easy. If it was, we'd all be millionaires. A work colleague of mine was getting in to share investing last year, and was telling me how easy it would be.... I just thought to myself "you're going to be in for a real rude shock if you're approaching the market with that sort of attitude". And guess what happened? The December to March market drop caught him by complete surprise and he dropped something like 30%. He was astounded, just couldn't believe that anything like that could possibly happen. Take Zinifex for example - He thought I was an idiot for selling out at $18.50, then he watched in horror as his own shareholding of it dropped down to like $8.00 at the low (currently $9.50).

    Don't invest what you can't afford to lose.
     
  7. tech/a

    tech/a No Ordinary Duck

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    Oh god.
     
  8. cordelia

    cordelia

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    Maybe you should stop thinking and get some literature on money management and risk strategy before you consider investing. Find out how to protect what you have and make this THE priority instead of profit being your main focus.

    After all you can't make a profit unless you have capital....

    There is a good thread on the forum which suggests resources for learning and training. Some of the books that have been recommended are fantastic.

    Cheers
     
  9. vida

    vida

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    I would suggest stay clear of margin lending. That has been the downfall of this market and of many investors recently, costing them dearly. I have had debt burdens in my past life and now have none, and can recommend a debt free portfolio as the best way to go. I have never taken up margin lending offers and never will. The rewards may be tempting but risk is too massive and losses can wipe you out when the call comes in falling market which can creep up on us at any time as it did recently... wow was that a surprise but not to some who sold out in time. I am sitting on a loss of profit at 100% but my original capital investment is intact at the moment and future looks good even though I didn't sell out in time to crystallise profit I topped up my investments at near bottom SP and now its coming up again. I could have used better strategy but I will do ok as market improves and I make up losses of proft as my recently purchased top ups at bargain SPs keep rising and its begun...
     
  10. temp

    temp

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    Thanks again guys,

    Really apreciate your thoughts... when I wrote earlier that I was new to this... I was meaning this particular strategy that I wrote about in first post. Have been investing for number of years... real estate buy/hold and also renovate/sell... also 'slow share traded' with written plan and have an appreciation of money management and risk management. By slow share trading I mean basically holding strongly trending shares while they continue on the trend... then sell when trend drops off or the hit trailing stop... also strong emphasis on risk management... position, 2%, portfolio etc.

    Only reason for outlining above is that not going into this as complete novice to investing and money management... but I'm new to the idea of taking a position to gain from a market crash.

    The backbone of the shares would be the main banks - from what I read... CBA and WBC are strong, ANZ may have some loans exposure, NAB seems strong but dividends not as appealing. Have some SGB already which are at premium, but takeover will make them effectively WBC soon I assume (unless someone else makes a bid or regulator disallows).

    The LPT/A-REIT shares are ones which appear strong and actively managing risk - reducing LVRs, selling some assets where required, securing leases and aware of loan refinance horizons... I agree they are more risky than the banks... but some of them are significant companies... or the LPT is backed by large parent company.

    Re. the margin loan risk... yes, there would be risk of a margin call on that part of the borrowing... but, we'd need significant falls from the current crashed state for that to happen. The LOC borrowings would be secured against real estate and not subject to margin call.

    (In worst case scenario... if a catastrophe did occur... I have the 'slow share trading strategy' - which is very separate - and that could be used to save the buy/hold strategy... possibly.. if that made sense at the time.)

    I do appreciate your words of warning... and don't take the exercise lightly... but I would say there are big players already positioning themselves for gains out of this crisis... and would be good to do something similar (but on much smaller scale of course).

    Is anyone thinking of doing this?

    Thanks again...

    Regards, Ilori :)
     
  11. AlterEgo

    AlterEgo

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    Ilori,

    From your first post I assumed you were new to the stockmarket. That's good to hear that you'll be using a trailing stop and implementing a risk management strategy. It still seems a little risky to me, but if you are confident that you have allowed for the risks, then go for it. I was just making sure that you were aware of the risks involved.

    I can't really advise on your strategy, as I have a much shorter term approach to my trading then you are talking about.
     
  12. temp

    temp

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    Thanks again,

    I appreciate the warning and note of risks... genuinely appreciate it... certainly I've thoughts about the risks nearly every day for the last couple of months :) It's very much at front of my mind. Raising the discussion here is part of checking futher... see if someone comes up with something that is a show stopper for the strategy.

    Anyway, thanks again... regards, Ilori
     
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