Saturday, June 27, 2009

Fish Lighting

Yes, I know this is a forum about real estate. However, a small portion of my personal real estate is devoted to my wife's aquarium.

A couple years ago, we had been talking about setting up a nice salt water aquarium, though after much research and digging I decided that it might be better to start with a tropical freshwater setup, see how it goes, and perhaps later switch to, or add, a salt water setup. That way we would kill fewer, or perhaps less expensive fish, through the learning curve.

We initially had a small problem in that we have an odd space we wanted to use for the setup. It was good, in that there is power and water nearby, but bad because there are height limitations, and without having a custom aquarium made, it would take some effort to find the right lid and light and such.

As you can see, it is a pretty tight fit between the top of the tank and the bottom of the cabinets. In fact, the light fixture actually sits right in front of the cabinets but below the doors.
The fixture is made by Coralife, and works great! It comes with a 10K bulb and an Actinic bulb -- I love the nice blue color it gives things.

It has two F28T5 fluorescent lamps, and the ballast for them is built into the slim fixture. This is good and bad -- good because it is all self contained; and bad, because the ballast is not serviceable -- no way to replace it as it is a lugubrious mass strung together and crammed into a small space. Removal will almost always break something.

Plus, this setup seems to be unhappy with high humidity levels, as I have burned up two of the ballasts in a year.

To solve this problem, I used a ballast from GE. I also used one from Advance for a while, but I like the GE ballasts better because they drive the lamps independently, so if you lose one of the bulbs, the other one still works. With the Advance ballast, you have to play musical bulbs to see which one died. The wiring to the lamp sockets is different for the two ballasts, so keep this in mind and make sure you use the right wiring for your ballast should you attempt this yourself. The GE ballast goes for about $40 online.

If you decide to take on a project like this yourself, keep in mind that you will have to run the wires from the lamps to your external ballast, AND that these wires carry upwards of 500V, and things must stay very dry around your ballast. Finally, you need to run an extra ground wire from the fixture to the ballast. Here's the final result, my ballast lives on one side of the tank for easy servicing.

Friday, June 19, 2009

The Great Digital TV Switch

Mostly I like progress. No, really, I am a tech stuff junkie. However the switch to digital TV creates some problems for rural areas.

We have a cabin outside Phoenix, far enough out that the nearest TV station is really far away -- like 60 miles, and we could usually get 2-3 stations (well really only 1 unless you don't mind snow). But with the switch to digital TV and the digital signal, the marginal stations are just gone. The automatic hunt-for-stations sees that there is _something_ there, but it doesn't show up.

This is because analog signals are left to interpretation by the viewer, and the human mind is one of the best pattern matchers ever created. The digital signal must show up in a near-perfect form to be interpreted by the digital machinery to create that perfect picture. The digital signal is compressed, and so if you miss a chunk, you often miss frames. Even with cable service, you can often see little digital dropout artifacts.

With an analog signal, you can lose more than half the information and still be able to see the show. And the audio comes in badly, but you can understand it. On the digital side, you need substantially more signal to come in clearly, so the digital apparatus can decode, decompress, remogrify, and blend together the digital soup into an image.

So the bottom line is that for folks living in deep fringe reception areas, there's the satellite-based services like DirecTV and Dish Network. And, there is one other possibility: Some of us who are in fringe areas manage to have high speed internet, but no cable. If you have internet (NOT dialup and NOT Satellite-based), then you can buy a Slingbox from Sling Media. This nifty little device attaches to your home cable or satellite TV box and then lets you watch it on your laptop (or computer) from anywhere you can get high speed internet. This is what we use in our cabin -- In fact, we have an HD monitor there for DVDs, and I just hook the video out from my laptop to the TV and watch Phoenix cable. It isn't HD quality, but it is WAY better than the analog noise or digital darkness.

Otherwise, rent a DVD, or better yet, read a book.

Tuesday, June 16, 2009

Trading Equities

Recently I have been reading Dr. Alexander Elder's "Trading for a Living". This all started when the market changed a year or so ago, and the techniques I had been using to trade stocks (buy and hold, technical analysis) really had quit working. In fact, if you were a "buy and hold" investor, that strategy hasn't really worked well for about 10 years.

I had a few spot successes, in one instance making a 10x gain in a little over a year, and a few 2x and 3x gains -- but these events were not sustainable. More recently I got into a trade and then got out, and had I stayed in one more week I would have made another 10x in less than a month. 

(You are reading these numbers right, not 10%, but 10 times -- one was 3 to 30 and one was 0.33 to $3.45). 

What I have come to realize, though, is that this has been about 75% luck and 25% maybe I sort of know what I am doing. I want to change that ratio dramatically, so it is more like 75% knowing what to do and 25% luck. And, I want to improve my winning trades ratio so I win at least 60% of the time. In the past I have won about 40% of the time, but when I won it was often big, and these were all multi-year holds, not short term trades. My short term trades have pretty much all been losers except for rare occasions when I got lucky.

So Dr. Elder's book talks about trading being similar to alcoholism. He says the best thing a starting trader can do is go to an AA meeting and substitute "loss" for the word "alcohol". Because trading is like drinking, I suppose, in that you can get a huge thrill from it and then it is hard to stop. I never had this problem -- when I start losing, I quit trading. 

Maybe it is because at the DMAS class taught by SRI coaching, Steve Linder asks a bunch of hypothetical questions, and in particular, once you have decided to buy something and the price starts to drop, he asks when you would sell. In this exercise you have a partner, and each time the price drops and you don't sell, your partner slaps your hand, a little harder each time.

Eventually most people get the idea. If the market is slapping your hand, get out! Some people stay in thinking it will come back. OK for value investing if the reasons you bought in are still valid -- not so good for technical trading.

The more important things I have learned from this book (so far) involve risk management. Some really simple steps can dramatically improve your performance. In my buy and hold strategy, I always used market orders, and generally risked a similar dollar amount on any given stock. Unless the fundamentals changed, I held the stock for the long term. And I watched as many of my holdings went between being down 50% and up 100% -- over a period of 5-10 years. Ultimately I sold most of them for substantial gains, so I'm not complaining.

Today, I almost never sell or buy without using a limit order. And most of the time, I exit a position because I was stopped out -- I don't mind being stopped out, because I move my protective stops regularly. These things, though, are tactics -- my trading has improved because I am careful to employ good tactics. It is even more important, though, to implement a great strategy. My strategy is one of risk management. 

Many people talk about managing your risk in investments, whether they are real estate or equities or anything else. It can be straightforward to quantify your risk in the stock market. Here's how:

First, identify a situation in which you think you can profit.
Second, identify these things:
1) Entry point
What exactly has to happen for you to decide this is the time to buy?
2) Initial risk
Where will you put your initial stop compared to your buy point?
3) Potential gain
If this trade works, what is the most likely profitable outcome?
4) Risk management strategy
As the trade starts to work, how will you move your stop to protect gains?

Now it is time to analyze the risk: What is the risk/reward ratio? If you don't stand to make at least 3x (I like 5x) whatever it is you are risking, then look for a different trade.

Here's an example: Let's say stock XYZ has been trading in a channel (oscillating up and down between two relatively parallel lines). At some point, you think the stock will either break above the channel or fall below the channel. For some reason you think that, if it falls below the channel, it will continue down below the bottom of the channel the same distance as the channel height. So maybe the stock was trading between $30 and $38 in the channel, and this morning it opened at $29.

You "sell short" the stock at $29, and place a "stop" at $31, above the bottom of the channel. Your potential loss is $2. If you think it might fall below the channel as much as $8 (the height of the channel) then you could make up to $7 per share (if it falls to $22). So your risk is $2, and your potential reward is $7; your reward to risk ratio is 7:2 or 3.5. This is better than 3, so this is an acceptable trade.

[I apologize to those of you who are confused about a stock short sale, if you email me I will send you a description of that process].

If you have a strategy in which at least 50% of your trades are winners, and you keep your risk/reward ratio at 3:1 or better, then you will consistently win in the market. 

There are lots of other rules to follow. You never want to risk more than a certain percentage of your entire portfolio. So for example, if you have a $10,000 trading account, maybe you establish a rule where you never want to risk more than 2%; so your risk amount should be no more than $200. In my buy and hold strategy, this would mean I would only buy $200 of any position. Here, though, since we are risking $2 a share, we can buy 100 shares and maintain this strategy. So for 100 shares which cost us $2900, we are risking $200 for a potential gain of $700. In terms of the invested capital, we are risking 7% for a potential 24% return. Those are pretty good odds. If we consistently win only 1 out of every 3 trades (a horrible track record), we still make 3%. [This does not include commissions or taxes which affect the returns].

So let me leave you with a big question:

How do you manage risk in a Real Estate investment? Pretty hard to set a "stop"!