Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.
"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.
"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.
"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.
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Thursday, 12 April 2012
Investing with insurance: sell stops and puts
One thing that puts many people off investing is the fear of a stock market crash. On ‘Black Wednesday’ the market famously fell more than 22.5 per cent in a day.
And many of us cannot spare the time to be watching the market all day every day, particularly when on holiday or travelling.
An investor can insure against this risk by placing a sell stop order at a pre-determined price, so that shares are automatically sold when the stop is triggered.
The price you set the stop at is not a guaranteed worst-case scenario – if the market tanks very quickly then you might get ‘gapped’ – but if you are trading larger, liquid stocks then you will likely get something close to your pre-determined price.
Brokerage sites have become more sophisticated in recent years and it is also possible to place trailing sell stops that only trigger when a share price falls a certain percentage from a peak. This allows the investor to participate in upside potential as the price moves northwards, while retaining insurance against a certain percentage drop in price.
Sell stops can give investors great peace of mind, and force a sell if the market craters. They can also be useful for investors who lack discipline, forcing them to sell automatically rather than rely upon their own untrustworthy hands!
An alternative is to take a put option – paying a premium for the right, but not the obligation, to sell shares at a pre-determined price and at a certain future date (or, depending on your jurisdiction, on or before the certain future date).
If you have shorted the stock (i.e. bet on it to go down rather than up) then you can insure yourself with a call option, the right but not the obligation to buy at a certain price.
Volatility caused by electronic trading
An interesting effect of all this is that when the market falls sharply sell stops can be triggered widely and the market falls yet further as a result.
We went through an extremely volatile couple of months in 2011 after the US and Eurozone debt crises came to a head.
In one day the Australian stock market fell by no less than 5%, likely in part due to stops being triggered, only for the market to whipsaw back up by 6%, closing up 1% for the day.
This was a totally unprecedented occurrence in the stock market’s entire history.