blockhead's Blog

Australian Aboriginal art offers excellent opportunities for financially rewarding investments. Like all investment decisions, however, successful investment in Aboriginal art demands that the investor be well informed, has access to good advice, and takes a suitably long term view. The added bonus of investing in Aboriginal art rather than property or shares is that the investor can enjoy the aesthetic beauty of the art work while secure in the knowledge that the investment will produce a sound financial return.

The first essential ingredient in making sound investment decisions is information. Investors need a good general background knowledge of Aboriginal art and culture. There are a wide range of excellent books available on the subject, in addition to specialist magazines and auction catalogues. The internet is also an increasingly rich source of general information, in addition to specific information about particular artists.

Armed with solid background knowledge, the second essential step in the information gathering process is to find opportunities to view a wide range of Aboriginal art. The most effective places to do this are, not surprisingly, major public art galleries. In Australia, particularly good collections exist in Sydney, Adelaide, Canberra, Darwin and Alice Springs. Commercial galleries also frequently exhibit interesting work by both well-known artists and emerging younger talent.

There are several important factors to consider when considering investing in a particular painting. First, consider the reputation of the artist, the period of the artist's career in which the work was painted, and the relative quality of the work with respect to the artist's overall output. Also determine whether the artist's work is held in major national and international collections. This is where a solid background knowledge of the Aboriginal art world pays off. Next, consider the general condition of the work, and it's age and size. Remember that early work, such as that painted during the 1970s in Papunya, can be very valuable. Finally, determine the provenance of the work, ensuring that documentation is clear and indisputable.

Investment strategies for Australian aboriginal art should be discussed with a professional investment adviser. One common strategy is to avoid acquisition of paintings by currently popular artists such as Rover Thomas, Emily Kngwarreye and the older Papunya Tula artists, instead seeking out quality artists whose work is currently out of favour or not yet in great demand. The advantage of this strategy is that less capital is required than for strategies based on acquisition of work by well-known artists. Many investors have succeeded financially by following a more personal strategy based on both background knowledge and instinctive good judgement, acquiring works with strong personal appeal where the artist clearly possesses a distinctive style or vision.

Before committing to Aboriginal art on any significant scale, potential investors are advised to discuss their plans with a financial adviser who can elaborate on the advantages and disadvantages of different types of investment. Having taken the decision to invest seriously in Aboriginal art, investors should also seek out professional art consultant and art investment advisers as well. Aboriginal art constitutes about 25% of the Australian art market, which has an overall estimated value of around AU$500 million per year. Most estimates of the average annual increase in value of premier Aboriginal art works range between 6% to 10%, though increases of up to 90% over a 5 year period are commonly reported.

We are currently in earnings season - a time when companies announce their earnings results from the past quarter. These much awaited announcements can cause quite a bit of volatility in the markets, especially when the results are something other than expected. But, as a trader you can learn to capitalize from this volatility and profit from some unique trading opportunities.

Before a company ever announces its earnings, analysts are out there interpreting information and doing their best to predict what that company's earnings will be. If the actual earnings are much different from the estimated number, we will generally see a gap in the stock. That gap occurs because investors were blindsided by what the actual earnings were and will either sell that stock in droves, (causing a gap down), or buy that stock, (causing a gap up). The direction of the gap will not always make sense. For instance, we will have instances of a company beating their earnings estimates but their report may contain some information that can be interpreted as a slow-down in sales in the future. That slowdown may be the piece that investors focus on and they sell their stock because of that forward-looking guidance. Although the earnings were good the future-looking guidance was bad, so investors may feel it is best to sell their stock. And the larger than usual selling pressure may cause the stock to gap down regardless of the positive earnings. We will also see instances of a reverse situation. Bad earnings accompanied with some good information may, at times, attract enough interest in the stock to cause a gap up. The point is that even if you knew exactly what the earnings would be for a company, it still would be difficult to predict what the investors would focus on and what direction that stock would move. This can make holding a position over an earnings announcement very risky but there are ways to take advantage of all that uncertainty.

When the situation is right, I will create a strangle over an earnings announcement. A strangle is a hedged play in which you purchase an out of the money call option and an out of the money put option on the same stock. The idea is that if the stock gaps big after the earnings announcement, you will lose on one side of the trade but make money on the other side. If the gap is big enough, your profits from the winning position will offset your loss and leave you with a net profit on the trade.

You need to be careful with this because if the stock does not gap far enough, you will end up with two options that are worthless. You need to set this trade up on those stocks that have the potential to gap big after their announcement. Here are the guidelines that I use to help get me in those trades with the highest potential to gap big. The first thing I am looking for is a stock that has an average daily range of $1 to $1.50. This ensures that I am doing this trade on a stock that can move. The second piece is that I prefer to do this on a stock that has recently been in a strong uptrend. It seems that stocks that have really been in favor can create even more excitement around earnings. If the overall news is good, you can see even more buying pressure into that stock causing it to gap up and if the news is bad all those buyers who had been attracted into that stock during the uptrend panic and begin to sell causing a big gap down. Remember, we need to see a big gap in either direction to offset the side of the trade that will go against us.

The more money we spend on our options the more difficult it will be to make money on this trade. We are buying out of the money options on this trade and to keep the cost of the trade down, I prefer to buy as little time as possible. My third criterion is that I do this trade on companies that are announcing the week or two before options expiration. We will only be purchasing a small amount of time in this case and thus increasing our success rate on this trade.

Now that we have narrowed down the group of stocks on which to implement this strategy, let me show you how it works. Let's take a hypothetical example of XYZ stock that is announcing earnings on the Tuesday evening before October options expiration. The stock has been in a strong uptrend and has an average daily range of $1. It meets all my criteria so I can go forward with setting the trade up. XYZ is trading at $72 and we want to purchase an out of the money call and an out of the money put so the trade will look like this:

Purchase 10 Oct. 75 calls @ 1.20 Purchase 10 Oct. 70 puts @ 0.75 This trade will cost $1.95 to put on and you can enter the trade anytime before market close on Tuesday. I generally exit this trade the next morning within the first five to ten minutes of the trading day by selling both options. If the stock gaps up, my puts may be worthless or have only $0.05 in them. I will take the money for the puts if there is any there, and if not, I will hang onto those puts until expiration in the rare case that the stock may sell off and those puts may have some value on expiration Friday. If the gap up was big enough, I will have enough profit from my call options to offset the loss in my puts and come out ahead on the trade. If the stock gaps down, I still sell both options. If there is no money in the calls, I will hold onto those until Friday in the rare case that the stock rallies and I will be able to sell the calls on Friday.

One important piece to keep in mind is that when you buy these out of the money options, you are buying all time value. When the markets open after an earnings announcement, the market makers usually take all that time value away. One way to gage how far the stock needs to move before you will be profitable on the trade is to take your total investment, (in this case $1.95), and add it to the call strike price:

75 (strike price) + 1.95 = 76.95 XYZ must gap up to $76.95 before you are break even on your trade. That means that the stock must gap above $76.95 to make money. If there is a major resistance level around 75, this is probably not the stock to do this strategy on because it will be too difficult to make money.

If the stock gaps down, it must move below the put strike price minus the cost of the trade before you are break even:

70 (strike price) - 1.95 = 78.05 Because the market makers take away all the time value that you purchased, you will hit the break even mark if XYZ gaps down to 78.05. You want to make sure that the stock has the ability to gap below that price before you put the trade on. Make sure there is not a major support level between where the stock is currently trading when you put the trade on and the price at which the trade will be profitable for you. If there is a major support level somewhere near that profitability, your best bet is to find another trade.

This is a trade that I will do once or twice an earnings season, only on those stocks that meet my criteria. Take an earnings season or two to practice trade this strategy. If you will follow these guidelines I've set up in this article, you will be able to profit from some of the volatility and uncertainty during earnings seasons.

-- Markay

Advice about your investing is difficult to give without knowing exactly what you are investing for. I mean, some people save because they'd like to be able to plan to retire early, while others want to build for their future of buying a bigger house and raising a family, and still others are looking to pay for their child?s education.

But whatever your particular goal in your savings life, a basic understanding of financial management is important. After all, you are putting your future on the line or risking next month?s mortgage payment even.

The following tips are some of the basics that you really should be aware of when considering investing, specifically outside of your retirement account.

1. Increase your savings rate:

It is difficult sometimes to raise your savings rate as you alternate between the ideas of cutting expenses and picking up extra hours at work. But the likelihood - unless your Bill Gates - is that pure saving your money will be the biggest key to you hitting your financial goals. Some simple changes and adaptations can give your savings a huge boost though, such as cut out the coffee shop in the morning, don?t eat out, or hit the sales and put the difference in your account. (I know you'll look at the coffee idea and think 'What is he on......?' but think for a second. I used to buy a latte every morning for $3.50. That worked out at $17.50 a week on a 5 day week, $70 per month - $840 a year. That's close on $1,000 extra going into my savings accounts every year - and my waist line isn't missing the extra inches either!)

2. Emergency cash reserve:

Put an emergency cash reserve of a few months worth of living expenses into something like a no penalty, instant access money market fund. Don?t be caught in the cold in layoffs happen, which they inevitably do but don't have money sitting around in bank accounts that pay a pittance of an interest rate - make it work for you at every opportunity.

3. Paying off consumer debts:

Consumer debts - i.e. credit card balances - are not tax deductible and are kind of like getting a negative 10% annual return. Pay them off and then save the difference in your investments. This is not good debt, it never saves you money, only costs you in the end. Get rid of it FAST!

4. Paying down your mortgage:

This is sometimes not the best idea, being that this can actually be a tax deduction if you pay as usual. Contribute more to your retirement and keep this as a tax deduction. This is something that is not popular to a lot of people because most don?t like debt, but this debt actually saves you a little money every year.

5. Contribute to your retirement accounts:

Take advantage of the tax benefits of your retirement accounts. If you are in a 30% tax bracket, for every $1000 that you contribute to your retirement account, you've instantly saved $300. In addition, any profits inside your retirement accounts (dividends, interest) grow without taxation until you withdraw your money after age 59?.

If your fortunate and work for a good company that matches what you pay as a certain percentage of your pay and makes their contribution as a pensions payment, you should aim to contribute at least enough to receive the maximum company match. I mean, come on, we're talking about getting free money here. This is similar to making 100% returns on your investment immediately.

Can you do that with stocks?

Ha - not very likely!

Think outside the box a little bit when planning your investing basics - look to take on more challenges when you develop your safety net, but still try to make them wise challenges.

It could take a few years to organize your finances and begin investing outside your retirement accounts. Don't worry.

Take as much time as you need so long as you keep pushing yourself.

Oh - and remember - diversify your portfolio, DO NOT put all you eggs in the same basket, please!

Duncan Roberts has been walking through the basics of investing and preparing for his future retirement for most of his working life. Interested in a life of relaxation and financial security he's learnt the right lessons so as to be really lazy later on. You can read more of his investing advice at http://www.theadvicecentre.info/investing/investing-advice.htm.

Does a buy and hold strategy still work well for unit trust funds? There's an argument that buy and hold is not a strategy, but is the same as not doing anything. To make it worse, your investment may 'sink'.

Given an example, let's say, you bought into an equity fund in December 1998 and kept it until December 2004 and had a return on investment (ROI) of -2%. If you had actively managed your investments and switched to a bond fund (during bull bond market) and returned to equity later (during bull equity market), your ROI would have been 15%. Thus, some analysts suggest a buying, monitoring and rebalancing strategy.

The buy and hold strategy is based on an assumption that over the long run, markets will go up eventually. It's a strategy that helps the investor save on transaction costs, taxes on capital gains and avoid the hassle of buying and selling.

There are a number of factors concerning this strategy. First, it's assumed that the portfolio is diversified into different stocks and asset classes. If the investor only invested in one stock, he won't even recover the cost today. He needs to invest across the asset classes (bonds, gold, cash etc.). In the long term, the portfolio will give good but not necessarily the best results.

Second, the investments must be fundamentally sound. In developing countries, a buy and hold strategy may not produce the best results many changes are still taking place. Thus, business cycle, the economic and investing environment and government policies will change, in line with the country's development. When change happen, you can't ignore the impact.

That being the case, investors are advised to review their investments regularly (at least once a year). But should unit trust investors try timing the market? As you know, a unit trust fund is a medium to long term investment vehicle. However, you can't just invest and forget about it. Investors should monitor them closely and not easily give up control of their hard earned money.

Not all investors are literate enough to know when to enter and exit asset classes. Investors' emotions come into play, making it hard for them to sell and take profit or cut losses, especially those who invest directly in the market. Thus, leave it to the professionals if you're clueless and illiterate about financial markets, although even professionals can't get it right all the time too as timing the market is never easy.

Another critical element of unit trust investing is to figure out if you're comfortable with the fund manager's style. If the investor were to rebalance his portfolio himself, in this case, the asset allocation decision is made by the investor himself. When markets move, he decides whether to buy, hold or sell.

For you those of you who prefer taking control of your investment, even if it's a small sum, make sure you go into a fund that charges minimal entry and exit fees or allows free switches between funds in the same company and in the same year. Only move your investments when you believe market fundamentals have changed, otherwise don't get caught up with investor sentiment.

Even if there were no changes in the investing environment, your own objectives may have changed, so it's wise to review your portfolio at least once a year.

For investors who prefers to let the fund manager decide so long as they get a reasonable return on investments, there are funds that allow you to just sit back and watch your investments grow (if you're lucky!). Go with funds and fund managers whose investment style suits your risk profile.

Finally, investors need to be educated. Get literate in your finances or make sure your investment consultant is literate.