by Travis Johnson, Stock Gumshoe | May 14, 2021 5:45 pm
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Source URL: https://www.stockgumshoe.com/2021/05/friday-file-inflation-panic-and-some-buys-in-a-bad-week/
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Jitterbug checking in – I capitulated most of my tech stocks (not talking about Covid winners either) because I was sick of watching them drip like molasses. Just looking at sector YTD returns (https://app.koyfin.com/share/8ad105ffe3), I am afraid to buy “dips” on technology stocks, assuming the valuation and entry seem reasonable. The value/real assets/inflation narrative is very strong right now.
True enough, but I’m never very good at timing the shift in the narrative.
Yea, I hate buying dips . . . to see them dip more, but some look at it as averaging down. I read an opinion that people were selling so they could pay their income taxes, but I didn’t look for an article with the numbers. Another opinion is that there are just temporary pockets of inflation. If that is true, interest rates shouldn’t go up and we’ll all be fine.
A must-read on interest rates:
http://aswathdamodaran.blogspot.com/2021/03/rates-growth-and-value-investment.html
Good article. Thanks for the link. I might have to hedge my bets on the Nasdaq or reduce my exposure.
Your inflation ‘talk’ is just what I needed to read.
Also …”garret”..?? Well, at least we know you are not commandeering the dining room table.
…tom…
Thanks Travis for another excellent review of the current market. I liked the preamble about remaining rational, stoical and settled when the retail market seems to be hysterical. It is the best, most balanced piece of writing on this subject that I have seen lately. I appreciate that you didn’t bang us over the head with all the unctuous palaver about “staying strong, when others are weak” … blah blah . (There are times when I am happy that the gentleman from Omaha is stepping aside). I agree with you on Schrodinger, and I recently bought more of it (even though it is handing me an abundance of red ink) . The fundamentals are so propitious that I am squirrelling this one away for the long term. As for TTD and PAR, I feel that their valuations are way too rich for me. As always, thanks for all of the hard work that you do on our behalf.
Thanks wit. I guess we’ll find out what’s rational in the years to come, I’m sure I’ll get a lot of buy and sell decisions wrong (all the better reason to make most of those moves small).
Thanks for another very informative article, Travis.
Regarding your rational for protection, 1 thing was unclear to me.
When you talk about roughly that 33% of your portfolio being somewhat linked to NQ100, and being that same part your target for “protection”, then you mean the 33% of total assets, or just 33% of the stocks/options (individual equities) part?
Just the individual equities. I don’t worry about hedging my diversified fund-ETF positions.
Awesome recap and forward thinking on your market strategy Travis. Thanks for all your insight ! With respect
Thanks for the great write-up Travis. It was exactly what I was looking for as I’m holding PAR, v interested in taking up a position in Goosehead and was planning to pick up some TTD at current prices. So very interested to read your take on all three
Picked up some Goosehead for my own lockbox today. Hopeful of what the future has in store for this one. Let’s see what the next 3-5 years has in store for us!
@Travis – Thanks again for your detailed analysis.
Travis, any thoughts on home builder stocks that specialize in modular/manufactured homes like $SKY and $CVCO?
I’d imagine they would become more popular not just because they’re more affordable than typical stick-built homes for Millennials, but also because they use less wood and less labor in having them built as they’re typically made on an assembly line, sheltering them somewhat from shortages/high prices in both right now.
Thanks as always for your insights.
Have never looked at them, my only knowledge of manufactured housing comes from Berkshire’s Clayton Homes… but I’m sure they’re doing great right now, like pretty much everyone in the home building or construction business.
“nobody ever sells at the peak”
Haha, somebody did . . . .and somebody bought 🙂
not consistently
I think I got goosed by Goosehead. Gumshoe lost a lot of credibility with me an this one. I’m too old for this. I’m out.
Glad to know that you have a handle on where your pain point is.
As to credibility, well, I don’t know where Goosehead is going next month any more than I knew last month, but I’m very confident in the strong growth of the underlying business. We’ll find out in a few years whether that confidence is misplaced. I have bought and I’m sure I will continue to buy stocks that fall in value sometimes, and I make lots of mistakes.
Sorry this one didn’t work out for you, I don’t much enjoy seeing my portfolio drop, either.
Curious about Nomad buying a royalty in Chile… can anyone share their experience owning Chilean precious and base metals stocks…
Chile is one of the world’s major producers of copper and lithium. Don’t know much about Chilean companies as investments, specifically, but mining is a meaningful part of the economy.
Taking a header today, with worries that the surprisingly large upset in the Chilean elections will likely lead to a big increase in mining taxes. We’ll see how it goes.
Travis. Just curious about your hedging strategy. I get the concept very well. Just curious instead of using options, why not use reverse ETF’s. You might have a bigger capital outlay to get the same hedging protection but options that are not exercised expire worthless and you lose all that you invested but you still own the ETF and it has some value if your hedge is incorrect?
Mostly just because the capital outlay for a substantial amount of “protection” is much smaller with options.
$ENZC – Intel just said they are part of a Trifecta with Enzolytics!!!!
https://twitter.com/distractor_the/status/1393425208057421825?s=20
Best to ALL!
White paper : https://www.intel.com/content/www/us/en/healthcare-it/resources/enzolytics-whitepaper.html
In your example of buying options to cover a drop….
If QQQ is $325 and an option is 100 shares , isn’t the cost of the option $32,500?
Am I missing something?
I would like to follow your lead but try as I might I’m not able to wrap my head around options math.
You also said that if the put expired worthless but your investments increase by 1%, the increase would cover the loss in the QQQ option.
I don’t understand that math either.
One option contract represents the right to buy (call option) or sell (put option) 100 shares of the underlying stock at the contract price at any time before the expiration date.
So if you were to exercise a $325 call option on the QQQ, that would indeed cost you $32,500 per contract to buy 100 shares of QQQ at $325 each. The option itself though trades at whatever price the market sets, and represents not the actual purchase or sale at that price but the RIGHT to make that purchase or sale. So I bought put options at $6 and change, and each put option therefore cost $600. Essentially, in this case I paid 1.5-2% of the current value of the shares for the right to sell the shares 20% below the current price.
In this case, I’m “protecting” only a third of my portfolio, more or less, so that’s roughly equivalent to 0.5% of the whole equity portfolio I’m putting up. That’s not necessarily a fair comparison, since the actual cost of hedging that one third of the portfolio is a little less than 2% of that third of the portfolio.
Here’s how it works: I buy a put option on QQQ at a $325 strike price for $6. If QQQ falls to $250 before December (which would be a massive drop), then I have the right to sell those shares at $325 still, and that right would be worth $75 per share. I paid $6 per share for the right (the option), so that gain of 1,100% or so on my $6 hedging investment helps to offset what would almost certainly be huge losses in the rest of my portfolio. If QQQ never falls meaningfully from here, the option expires worthless and I paid $6 per QQQ share for nothing, creating a drag on the portfolio overall of about 0.5%, or a cost relative to the one third of my portfolio that I’m actively hedging of close to 2%.
Hedging is generally dumb and expensive for long-term investors, but I do it so that I can hold on to falling stocks that I think should have enduring value… and, really, for the sake of my sanity. Every person’s sanity has a different cost, so you’ll have to make your call on that.
Thank you! Think I understand it a little better and I just bought according to your formula except I bought @ $270 strike.
My next questions will be when it comes time to sell.
Appreciate what the “Stock Gumshoe” has meant to my portfolio.
I like the notion of “buy and hold”, it is certainly easier in some ways than constantly monitoring a stock however the issue is that unless you are 100% certain of all facts, you are playing an odds game.
I will speak for myself here and say that I have selective recall about things are in so far as remembering how I feel when a stock is moving against me.
The reality is I don’t have crystal ball or full knowledge so some method of protection is required. The two possible options are
1) stop loss orders
2) Asset Allocation to ensure each “bet” doesn’t take you out of the game.
Now I have written it down, it seems so simple but it isn’t because if it was I’d be Warren Buffett.
It’s very true, getting a handle on your own emotional response to the market is far more important (and more difficult) than choosing above-average companies to invest in.
Travis, could you explain the math of how your $650 Hedge becomes worth $12,000?
What are the mechanics of cashing the PUT if you hit your strike price?
I’ve been a long time follower and really appreciate what your doing.
Chuck
Sorry, I thought my comment from yesterday did not go through. I see that you responded and I thank you.
Chuck
If you make a trade like this, it would be initiated with a “buy to open” order to purchase a put option contract, and then later, if it’s worth anything and you wish to sell, it would be sold with a “sell to close” order that closes out the contract. You can also exercise put or call options by buying or selling the underlying stock or ETF, but most people don’t do that.
I can’t give personal advice, but I can continue to tell you what I’m doing as I go. Most of my hedging positions end up being expenses, they just quietly expire as a 100% loss, but sometimes volatility picks up and I take some profits along the way. I’ll let readers know if I close out the position before expiration.
Here’s a puzzle . . . if hedge funds hedge, how could they lose so much money?
“Hedge fund” is now really a misnomer, they used to be large private funds that aimed for steady returns and promised to “hedge” to be more predictable and generate positive returns in both up and down markets. Now many of them are really just large private investment funds with large fees, and many of them take big risks to beat the market in order to try to justify their high fees.
I put in a hedge today near the top, using your idea. Now, I’m not so nervous about a crash. I don’t know if the market is ready for the big bear, but I fear we may have a correction.
Been averaging down on Galaxy and Goosehead. Your thoughts please Travis. My apologies if I already missed your take.
My thoughts on those haven’t changed. Galaxy will be levered to Bitcoin prices, which is obviously terrible today… Goosehead has enormous growth potential over the long term and I’ve bought many times above today’s price, but anti-growth-stock sentiment, mostly driven by investor fears that inflation will surge and the Fed will have to hike rates, is hurting most high-multiple stocks. Haven’t done anything with either position so far this week.
For hedging, is there a reason you choose QQQ instead of ARKK ?
Travis the comment below was for the new tease BUT this is the error I get when posting there:
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$CYTH well we got an EFFECT at 6 p.m. 🙂
Notice of Effectiveness
Effectiveness Date: May 28, 2021 4:30 P.M.
Form: S-3
CIK: 0000922247
Company Name: Cyclo Therapeutics, Inc.
File Number: 333-254496 http://archive.fast-edgar.com/20210601/A4ZZ92ZZZBQZK2Z2Z22ORLZODPT9ZZ2SV5Z2/
The acting CMO is a MD, PhD which is intriguing. Continue to DD
#ThankYOU Travis for listening to this one for us. Best Alwayz!
Ok, we’ll figure out what’s going on — thanks!