by Travis Johnson, Stock Gumshoe | February 9, 2018 1:13 pm
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Source URL: https://www.stockgumshoe.com/2018/02/friday-file-lessons-for-a-volatile-week-plus-two-buys/
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Just curious what you are using as a hedge position? Perhaps you wrote about it previously and I missed it. Thanks for the update!
Charlie
Friday File Part One: Hedging $SPY
https://www.stockgumshoe.com/2018/01/friday-file-part-one-hedging/
#Best2ALL!
I’ll dig up a link and edit it in here, but I believe he bought $SPY puts…
EDIT: https://www.stockgumshoe.com/2018/01/friday-file-part-one-hedging/
(protective hedge using S&P500 ETF (SPY) put options (Jan 2019 $230s))
Travis, you make many good points in your discussion of managing risk and managing your mind as we go through this correction. Thank you for that thoughtful reminder that markets will always have periods that test our resolve.
In keeping with these strategies I am reminded of a quote by one of the early “Baron Rothschild” bankers. He advised that “one should never be caught without a loose million” for use when an opportunity suddenly appears. In other words, always keep some cash on hand for times such as these. Now, “a million” may be a bit more than most of us manage, but whatever amount an investor can afford still applies. And given the huge success that the Rothschild dynasty has achieved over the past couple centuries, it would seem rather wise to pay attention to how they did it.
“This too shall pass”
Great analysis Travis. However, I have never regretted taking a profit even when my friends made fun of me for bailing too soon. Did you ever own Level Three ($LVLT)?. Isn’t the correct version of the old adage, “buy low sell high”? If those who hold make more money than me, I expect them to buy the drinks next time and I am happy for them. If it goes my way I try not to say, “I told you so” and usually buy the drinks. I made a nice profit on BRKB and can now spend some of it. I expect it to be pretty flat for a while, but I’ll watch it. A round trip costs only $10 plus income tax, and I won’t miss any dividends while I wait.
Can’t wait to see your bargain-buy wish list for the year, planning on challenging myself to improve my investing patience and land better entry points this year.
Just curious Travis; When Buffett and Munger pass from this mortal coil, will you sell your Berkshire shares, or re-evaluate the company based on who takes over? Or do you believe the fundamentals of the company are that strong?
I don’t think there’s much of a “Buffett Premium” in the shares at this point, and expect the culture will survive their demise — I expect I’ll continue to hold, but will have to see what actually happens in the transition.
Just to speak for myself – if BRK is down any substantial amount (say 5% or more) on the news of Buffett or Munger’s deaths, that’s a buy in my book. Pretty likely that every active manager in the world will pounce and bid it right back up!
The number of investment bankers banging on the door in Omaha urging Berkshire’s board to spin off assets or break up the conglomerate will be overwhelming when Buffett passes away… particularly if the stock goes down by a meaningful amount. I expect them to try to resist that pressure, but they will probably end up paying a dividend if Buffett and Munger are no longer there and they continue to have this crazy $100+ billion war chest.
I’m hoping Buffett has one more ugly bear market in which to acquire assets and make great deals for us before he retires. We’ll see.
UPDATE ON WB AND BH:
BUFFET HAS PULLED$ 109,000,000,000 FROM THE MARKET AND IS SETTING ON IT. HE SMELLS BLOOD IN THE WATER BECAUSE MR BUFFET DOESNT GIVE UP $5BIL IN RETURNS FOR NO REASON.
Travis and others: What are your thoughts on GE? I am not really sure why it has dropped so and was considering buying some; I have tried to “catch the falling knife” before which did not work out well for me.
$GE I bought some last month when I had my rose colored glasses on and hoped their report might give them a boost, also thought it would find some support and hold above $16/share but ultimately decided I hadn’t done enough homework once it broke down through that and took a very small loss on it when it had an up day.
Im far from a financial expert, but I think $GE is fighting some big unknowns and it’s unsettling investors. A little research you’ll find a lot of articles about how the huge pension debt they’re facing down and decades of past, hidden mismanagement surprises are still slowly being shaken out by the new regime. You’ll also find a few articles with positive outlooks, but nobody knows when any positives will help GE emerge from the looming shadows.
Certainly an interesting watch.
I should have mentioned, the main thing that put $GE on my radar is the possibility of them being a very big name in the #blockchain wave of the future.
https://www.ge.com/reports/tag/blockchain/
I have owned GE in the past and bought it ~$20 and $17. I’m holding it. At the time I first bought, I considered KSS and KR on their dips, but chose GE. Should have stuck with the companies where I spend money, but forgot that simple Peter Lynch lesson!
Here is Cincinnati you can get a decent impression through word of mouth from GE Aircraft engineers — one friend summed up GE as a “sh*tfest” and I think that’s probably pretty spot on analysis 😉 However, I believe to a degree this is one of those situations where it’s easy to beat a stock while it’s down. Aircraft is a solid and valuable business. Power is stuck is a huge rut, but global urbanization should eventually work in their favor. Long story short, it’s about buying while others are selling, and I figure it’ll at least come back up to $20 even if it takes a while. Not one of my best trades, but you learn something from all of them.
GE is the only company that was on the original Dow that is still there. There is talk of removing it. GE has also recently cut its dividend in half. There are lots of better choices around right now. Choose a company that is growing!
Travis, when you buy Altius Minerals do you use the Canadian exchange or the Nasdaq?
I noticed my bid was not shown on the Nasdaq.
Good timing for hedging recommendations. I jumped in as you suggested and shorted spy just before the multiple drops. Does feel good to see my losses in stocks being cushioned by my hedge position. Are additional puts you would recommend other than SPY for hedging?
Everything got expensive with the rapid rise in volatility, but hopefully complacency will settle in again and the cost of protection will drop — we’ll see. What makes sense as a hedge is what most closely matches your portfolio — so if you own mostly big tech stocks, maybe a hedge against the QQQ would more closely match your needs than a hedge against the S&P 500, but any more precise hedging like that is likely to be more expensive than just hedging the overall market (because any particular sector or segment is likely to be more volatile and risky than the S&P 500 overall, the cost of options on that sector ETF will be higher).
The higher volatility makes for a good environment for selling options, given the propensity to be more averse to losses than attracted to gain.
If there is a price point where I will buy a stock, I sell a put at that price. Receive a little cash while you are waiting for it to go down.
FYI, interesting piece from CNBC that pulls some of Buffett’s historical commentary on “investing during inflation” in the late 1970s and early 1980s: https://www.cnbc.com/2018/02/12/warren-buffett-explains-how-to-invest-in-stocks-when-inflation-rises.html
I took a beating in the first week of February after building up some impressive returns. I wasn’t holding anything that I felt was in imminent danger or that I was
unimpressed with so I just held on. The Nasdaq dropped every day starting the first tuesday and went till the following Friday