Finance Risk Management – Get in the Know

An interview between Stuart Mcphee and Ray Barros on finance risk management.

Stuart: I understand early on that you were almost forced to recognize and appreciate how important managing risk was. Was that position sizing, was it where do you set your stops or all of the above?

Ray: I didn’t manage the stops initially and then you read every book to put the stops in but then I didn’t manage portfolio risk. You are spread over a number of instruments and even if you risk 2% per instrument then you leave twenty instruments open. You know suddenly you have got 20% open you got to have that. You got to have risk for trade, how many contracts are you going to take so all of those things I had to learn the hard way.

Stuart: I am sorry to hear that. A lot of people make a lot of mistakes early on and it’s only through making those mistakes yourself. I mean you can read twenty books that say you know position size well and do this and do this. You go through and make all those mistakes and it hurts and what you say was since your wife funded you early on, that probably didn’t sit terribly well with you so it forces you, I guess.

Ray: Yeah, and I think early on you know a couple of times I have mentioned to you that I have an excuse to say, back in my day no one was there to really assist. I mean the stuff we had then is nothing compared to the assistance you get today. I mean you get some really good people out there trying to help.

Stuart: Okay, so it’s real big difference. About finance risk management, and you know about how important that is, and I hope others realize how important managing risk is. But a lot of questions we get from clients, it’s all about entry and you do the seminar thing and someone will talk about managing risk and you might have a good size audience but then someone else is talking about entry and in the room there is standing room only. Because this is the key to success. What are your thoughts on entry and why people focus on that so much and do you have guidance to people about entry and methodology and setups.

Ray: I think they have a place. I think your trading rules have probably the least important part. In my view identifying what are the trends, where you are going to take a trade and whether that trade is setting up, it’s much more important. The entry almost necessarily follows those things.

Secondly, I can’t remember when I brought the lower. I don’t think I have ever done that so at some point after entering the market you are going to take some heat. So you need to know with your methodology how much heat is normal. John Sweeney wrote a book called Maximum Adverse Excursion and Maximum Favorable Excursion. I would recommend that to anybody who is talking about trading and talking about entering because that approach tells you statistically how much heat you ought to be able to take in your system and it will still make a profit.

If you know that, it takes the pressure away from you. I have got to buy the exact low I want to buy within two ticks or sell it within two ticks and often some systems just aren’t geared for that sort of thing. So the beginner trader must quickly come to terms both with the rules for entry and finance risk management.


The Basics Of Financing Real Estate Deals – How To Keep Investing In Today’s Market

Every investor needs to be familiar with the different ways of financing real estate deals. The primary methods are traditional mortgages, hard money loans, private investor loans, partnership deals, owner financing and lease options.

Traditional mortgages are how most people get the money to buy investment real estate. However, with the recent tightening of standards to qualify for a loan, and Freddie Mac’s announcement that beginning in August, they are reducing the total number of loans an individual investor can hold from ten to four, other financing strategies are important to have in your investor toolbox.

Hard money loans are typically short-term loans at relatively high interest rates. They typically come from people who are in the business of lending money. Most investors use these loans with a plan either to flip the property or to get new financing on it in the immediate future.

Private investor loans usually have better terms and can be used long-term for an investment property. These lenders are not in the formal business of lending money and are usually individuals who are looking for a better return on their money than, for example, certificates of deposit can offer.

Partnership deals are a great way to get around Freddie Mac’s new four loan limit. These types of deals can be structured in many ways, but basically, one partner finances the deal, often through a traditional mortgage, and the other partner manages the property on an ongoing basis. If you have already maxed out your four loan limit, but have the time and knowledge to find good deals, than this is a great way to increase your portfolio with a partner.

Owner financing is simply asking a seller to “carry back.” The seller acts like the bank and you pay the seller regular payments on the purchase price of the property. This is another good way to get around the Freddie Mac loan limit.

Lastly, lease options provide investors the opportunity to control property without getting any type of financing. The seller of the property would give you a lease – just like a rental agreement – for a specified period of time, and you would also get an option contract that gives you the right, but not the obligation, to buy the property anytime during the lease. In an uncertain market, this is a great way to stay active as an investor, but with limited risk, since you can always walk away at the end of the lease.

In conclusion, there are many ways to keep investing, despite tougher lending conditions. As investors, we must keep in mind all of our options when it comes to financing new deals.