by Travis Johnson, Stock Gumshoe | April 3, 2020 6:15 pm
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Hello Travis. I am using your microdosing strategy and buying companies that I know and understand at hopefully good prices. My strategy is to buy more if they fall to 10% , more at 20% and 30%. If this doesn’t happen then just buy in intervals like once a month or every couple weeks. Thank you for sharing your knowledge with us in an honest matter.
About your first thought of what you called a “Great Cessation”, my personal opinion is that this won’t happen. And I say this as someone who has been in quarantine for 3 weeks already (the first one for personal and family safety and the rest strict government mandated) and who will keep doing one more month of quarantine. I am just eager to go back to the streets, travel, do business, work, eat at restaurants, cafes, watch a movie, live, you name it. I am already sick of being at home, and I think after the first few weeks of panic, anxiety, depression and stress there comes just boredom because nothing happens. You don’t get sick and people you know don’t get sick, and that is a good thing, but it also makes you just feel like you need to take advantage of the time you do have once you have it back and make it count. My opinion is that the economy will tank, and we will probably see another bottom or two, but it won’t be very big ones, and when this virus is contained, there’s a reliable treatment and people can go back to the streets it will be a very quick recovery.
second your feelings in the second paragraph. Here in the UK and been in quarantine for two weeks (roughly) and cannot wait to try and get life as back to normal as quickly and as safely as possible – including buying, travelling, seeing people.
I hope so. Glad you’re still healthy!
Thanks for that Travis. Really enjoyed that!
What about CFDs as a way of hedging? Thats what I use.
Also would love to hear your take on commodities like oil and silver one day? Not sure if they are your expertise but I am sure it would a be great read.
Thanks again,
Will
CFDs are illegal in the US
They’re not as widely used here on the US, so I have no experience with CFDs… if you want to run through the mechanics of that hedge I’d love to hear a real-world experience.
Good stuff, Travis.
You didn’t mention one strategy that I think is great when times are uncertain: selling covered calls against long positions in the portfolio.
At the best of times, selling out-of-the-money calls can generate healthy cash, especially as part of an income-oriented investment portfolio. But if a (further) market drop seems likely, then selling at-the-money or even in-the-money calls can be a great hedge.
As a theoretical example, suppose a stock is priced at 50 but looks vulnerable. Selling, say, a two-month call at 45 — contractually agreeing to sell that stock at 45 between now and the expiration date — pays 6.50/share (which depends on the time factor and the volatility and market expectation for the stock). If the stock stays over 45, but not too much over 45, then before the expiration, the call could be “rolled” out another month or two, generating more cash. If the stock is below 45 at expiration, then the 6.50 is kept as a hedge against the fall in the stock price. If the stock goes way up, then the stock is “sold” at 45, netting 45 + 6.50 = 51.50. If nothing else, the latter outcome would be higher than selling the stock today at its price of 50.
Good point, lots of people use those for “income” purposes but they do have a general smoothing effect on a portfolio.
Marry your shorted stock to a OTM call to limit loss. e.g. sell 1000 APO @$31 and buy 10 June $32 Calls.
Good point, that’s how I generally hedge individual stock shorts.
Thank you Travis for your wisdom!
Thank you Travis. It’s very calming to be in a bullshit free zone with excellent analysis and explanation and sensible and honest thoughts. Especially when the world around us is a tornado of cacophony and crisis. Keep up the good work!
Is it weird that in my head, because of the Gumshoe theme, I always read the Friday files as Travis giving us a dark, moody noir monologue in a trench coat and fedora from behind a dimly lit cluttered desk in a cramped office?
I like it… disturbingly close to reality, I guess I should be doing these things via video!
Another gem!
Can’t believe you didn’t mention selling call options as a hedging strategy. That is the ultimate bet that a stock won’t go up…
Any thoughts?
Dear Travis,
Thanks for the article.
I have two questions.
First, how likely (if possible to see in your crystal ball) is the threat by legislators to force insurance companies to go beyond their contracted insurance coverage and make payments to insured entities? Even if the insurance companies legally challenge the planned measures, which I think will not be upheld because of contractual law, the optics would be bad for the insurance companies.
Second, what is the ‘extraordinary hedging trade that [Pershing Square] used in March’ that you cited in your article?
Thank you.
I don’t think it’s very likely that insurance will have a catastrophic outcome like that, which is why I’m willing to hold and buy more of some of these companies. I’m not worried about reputational risk for insurance in general, since it’s not an optional product and I expect all major insurers to stick together on this.
Ackman used cheap credit default swaps for his hedge, we learned after the fact. Very low cost, and that was in the first couple days of March before the US investors were really worried, so it worked out insanely well — something like 100:1 returns. Probably even better than what you would have gotten by buying “the market will fall 35% in a few weeks” puts at the right time in late feb or early March when nobody expected a huge move, timing a big move very well is almost impossible and requires luck or great prescience, but the returns are massive if you get it right.
Of course, those hedges are far more expensive now. You have to be worried when nobody else is worried to get the cheap hedges.
hi chengunlam; here is more info on Bill Ackman’s hedging trade.
https://markets.businessinsider.com/news/stocks/billionaire-bill-ackman-denies-coronavirus-warning-profit-2020-3-1029039279
Per the above article, I would argue that his remarks enabled him to unload the rest of his hedge for another 1.3 billion after the interview. This guy makes big bets!
WOW…What a great Friday File! I really enjoyed it! A couple of questions after reading it:
1) In the one paragraph where you talked about a 30% and 70% decline, how exactly did you calculate the value of the options contracts? Please let me know. Thanks!
2) As for the Pershing Square Holdings (PSH.AS, PSHZF), what is the difference between the 2 tickers? Is the discount to NAV the same in both? I bought PSHZF this last week too in my IRA when I was reading an article about this favorable discount. I was not aware that this investment is a PFIC (not exactly sure what that is). What are you doing about this (PFIC) because you also bought in a tax deferred account like me? Please let me know. Thanks!
Again, Great Friday File! Have a great week & stay healthy & safe!
Thanks Bry.
1 is just simple math, assuming “at the money” pricing for the options contract without any additional premium (though if markets are falling, put options would do better than that because there would be a premium on the price). For example, if you buy 10 contracts on the SPY $200 puts, and the SPY is at $185 when you want to sell them after some future collapse, then each contract is worth $1,500 ($15 per share X 100 shares per contract).
2. PSHZF is just the OTC representation of Pershing Square Holdings, which is primarily listed in Amsterdam at PSH.AS (it also trades in London, PSH.L). The shares are the same, regardless of where you buy them, but the price may differ on different exchanges — the Amsterdam and US listings are priced in US$, London is in pence. Usually when there’s decent liquidity the prices will be within 1% or so of each other.
Personally, I am not doing anything with the PFIC status because I don’t think form 8621 is required for those holding a PFIC in a retirement account. I could be wrong, so ask a tax expert you trust before making decisions. Sometimes the PFIC can be a benefit, too, for those who elect QEF status, but it gets complicated quickly. The Investopedia PFIC page is a nice quick explanation, and the IRS page is here.
Travis, thank you for your article. I look at hedging with options as an alternative to paying an advisor. Even the best advisor in the world cannot protect me from major corrections like we just experienced. So instead of paying that person 1% to manage my assets I do it myself and I put about 1-2% in options. They generally expire worthless and help to offset short term cap gains. Sometimes they make me some money but they alwasy help me sleep better.
Trade Note:
This one probably won’t be a surprise, but I reviewed the short attack on iQiyi and the response from the company, and decided to sell my small position as a result.
That doesn’t mean the short attack is necessarily fair or complete (some of it’s based on conjecture which could easily be wrong, some on limited survey data, for example), but I did find enough to be concerned with in there as it relates to IQ’s accounting and, most importantly, to the user growth numbers at IQ, to sell. This is essentially a Netflix model the company is using, trying to build up inexpensive paid subscribers to become dominant, but it has always been a bit challenging because unlike in Netflix’s early days, there are several competing options. The prime reason to own IQ is because of the large number of paid users, and the strong growth in that user base… so if that user base is not actually paying, or is not using the service as much as IQ says they are and building up a fan base, then this isn’t going to work.
Netflix looked terrible in the beginning too, to be clear, their revenue was weak and made it hard to justify their huge investments in original content. So it’s entirely possible that IQ gets through this OK, but I found some of the metrics that the Wolfpack/Muddy Waters researched to be of concern enough to reduce my risk. Because I’m still aware of the high growth potential if they do get this right, and there are reasonable explanations for the numbers that look fraudulent or misleading, I did decide to be a bit wishy washy and effectively create a 20% stop loss from here — I used about 20% of the proceeds of selling my shares to buy a roughly equivalent position in out-of-the-money call options for 2021. If they fail, I’ve limited my loss to roughly 20% of my original investment (IQ right now is right near where I first bought), if they succeed surprisingly well I’ll have exposure to that. This won’t have a huge impact either way, it was less than a 1% position, but I don’t like to linger when the reporting is in question — and for IQ, it’s not the audited financials that really matter, it’s the use statistics and the size and growth of the paid user base, so if there’s some real question about how much we can rely on that it’s prudent to reduce risk.
The flip side? Baidu is weak these days but remains a strong partner and controlling owner for IQ, and the market for streaming content in China is, of course, tremendous… and the opportunity to buy a leading entertainment brand in China shouldn’t be completely dismissed. And it might be that IQ can more specifically refute many of the conclusions in the Wolfpack’s report and explain why they are misleading or wrong, though so far their denial has been of the less-convincing “blanket” variety (“The Company believes that the report contains numerous errors, unsubstantiated statements and misleading conclusions and interpretations”).
Trade Note
I’ll write about this some more tomorrow, but I reduced my position in Innovative Industrial Properties by a further 50% today. This follows the bear attack on IIPR by a short-seller outfit, and while I am not convinced of the validity of the short analysis when it comes to the basic business model, I am concerned enough about their research into IIPR’s largest private tenants and their ability to pay the rent to further reduce my position (I took profits on a smaller part of the position because of concerns about what the impact of coronavirus might be on their tenants a couple weeks ago).
So that’s the quick story — reduced my IIPR holdings by roughly 50% in the $75 neighborhood, though the stock price has not at this point reacted to the short attack in a meaningful way so other investors might not be concerned about the points that caught my attention. More tomorrow.
Thanks Travis.
Your suggestions always appreciated . I have no investing tech expertise so I look to you, Yahoo Finance, and a few others before making a gut decision. IIPR @ $75.72 is up 9.5% today, was $68 last Friday. Tipranks 3 analysts estimate the 12 month share price @ $91.50 ; Yahoo 5 analysts @ $100 As of yesterday Zacks rating was “strong buy”. I got in at $42 in 2018 so now am debating your action to sell off (some) profits vs. optimistic hold for growth.
(I also hold shares of the preferred, IIPRA, which is back at $27 after a dip 3 weeks ago, but as a preferred should be more stable than common stock, and pays a hefty div.)
It’s a complicated story, and the short report is mostly dumb and is, of course, very slanted… but there were enough points in there that touched a nerve with me to help push me to cut my risk a little. I’ll write in much more detail about that tomorrow.
Thanks for the heads-up Travis, …. one of big reasons I’m an Irregular. I look forward to tomorrow’s discussion in the Friday File.
Travis do you have any interest in BX, I had a hard choice with BAM and BX and eventually went with both.
Owned it years ago, but haven’t looked closely recently.