These days I have been doing some readings on investments. I will catalogue my insights as I read up various books.
1) A Complete Guide to the Futures Markets: Fundamental Analysis, Technical Analysis, Trading, Spreads, and Options
by Jack D. Schwager.
This is a relatively old book, published in 1984. As such, it does not have a huge discussion or some of the modern financial derivatives, like stock index futures. As the title says it does have a comprehensive introduction to the futures market, and discusses various types of analysis that you can do. One thing I liked about this book was a list of rules and guidelines that readers should try to follow, in order to pursue a organized approach towards investing. Some of the rules that I particularly liked are noted below (my comments in italics).
Diversification: This should be obvious target and probably does not need to be elaborated more.
Maximum Risk per Trade
The speculator can substantially increase the probability of long-term success by restricting the percentage of total funds allocated to any given trade.
Stop-Loss Point:
Know where you’re going to get out before you get in.
Establish a planned time routine:
It is important to set aside some time each evening for reviewing markets and updating trading strategies.
Maintain a trader’s diary. I thought this was very useful because it helped me document my thought my thought processes as I was buying and selling. I could then go back and revisit them both to educate myself and see what my strengths and weaknesses are.
The trader’s diary would contain the following basic information for each trade:
Reasons for Trade.
How the Trade Turned Out.
Lessons.
If you believe a major trading opportunity exists, don’t be greedy M trying to get a slightly better entry price. The lost profit potential d one missed price move can offset the savings from 50 slightly better execution prices.
Entry into any major position should be planned and carefully thought out-never an intraday impulse.
Do not initiate large positions when trading is going badly.
If at any point there is a realization that a trade was a mistake, either liquidate immediately
Be extremely careful not to change trading patterns after making a profit:
Do not initiate any trades that would have seemed too risky at start of trading program.
The classic debate between renting and buying a house. In the Bay area, you can hope to get a rental for a 3 bedroom house for about $2500. If you were to buy the exact same house, instead of renting it, the mortgage payment would come to $4796.40 assuming that the house costs $800,000 and you take a loan for the entire amount at 6% (The down payment does not matter much as there is the opportunity cost of investing the down payment money elsewhere). Figure in about a $1000 in property taxes and the home buyer is getting hit for $5796.40 instead of $2500 for the renter.
So why do people buy at all?
Granted that this is a crude analysis, you can get more sophisticated in the following links.
1) From a real estate agent but still quite objective here
I think in the end, it boils down to whether you think the house price is going to appreciate or not. My gut feel is that in the Bay area, at current prices, the house needs to appreciate at about 4% to break even with renting.
This is probably a hot topic for a lot of people given the crazy house prices in the Bay area. We finally decided to take the plunge and go ahead and buy a house here. In this process I learnt quite a few things. In the coming days, I will try to put some of my thoughts that came out of this.
