Minyan Mailbag Grab Bag
...there are basic premises which could help anyone navigate the future twists and turns.
If you should stand then
Who's to guide you?
If I knew the way
I would take you home.
Let me start by saying how much I enjoy the 'Ville. You guys are putting together the best--which is to say most honest--financial content on the Net. I feel glad to have found this community.
You've spoken numerous times (most recently in your post titled, "Wow-atility") of the impending unwelcome return of volatility to the equity markets. However, if I believe Profs McGuirk and Sedacca, I should be suspicious of stashing monies in corporates, agencies, mortgage backed securities and possibly even Treasuries. I'll be honest, I don't see these scenarios leaving me a lot of options.
I've been long metals and energy for a number of years now and have traded quite prosperously around the tops and bottoms as warranted but is that it? I mean, if we assume a bad end to the global liquidity glut, what options do we have short of hoarding a pile of gold ducats, two years worth of MREs and a couple of Glocks? I'd be most interested in your opinion as someone who seems to split the difference between the super-bulls and the super-bears. And don't worry--I'm not looking for advice. You don't know my time horizon or risk profile, after all.
You've really hit the nail on the head as this is the crux of the question at hand. To that end, I plan on shooting this thread to our network of professors to gain their insights and perspective. For my part and from my perch, I'll try to offer some broad based value. I'm prolly not the best person to ask regarding an asset allocation model and, even if I were-and as you said-I don't know your subjective situation. Still, here goes:
- Awareness is an option that typically arrives with hindsight. We spoke about the "Wow-atility" the day before a 20% pop in the VXO (better lucky than smart). Still, it could very well be the tip of the iceberg. I was talking with those "in the know" last night and they told me income funds continued to sell volatility. I liken this to a mutual fund buying stocks on bad news because they're so big, they can't sell it without taking a major hit. I linked a chart of the VXO on yesterday's Buzz for a little perspective. When real volatility comes back, it'll make yesterday's price action look like a pimple on an elephant's arse.
- So how do you prepare for both motion and movement? Simple-reduce the size of your bets and, if appropriate, widen the stops on your risk management approach. Traders-from the multi-billion dollar funds to the stay-at-home day traders-have been conditioned to increase their "size" (and the use of leverage) to capture increasingly smaller moves in their underlying bets. That's likely why we saw forced liquidation--alotta hedge funds weren't prepared for the increased commodity volatility. Be proactive in your expectations and mentally prepare for lost opportunity costs. That's the other side of 'that' trade.
- Identify secular winners and understand the difference between relative and absolute performance. One of my primary bents is that stuff we "need" (education, energy, healthcare) will trump things we "want" (plasmas, TV's, cell phones). I have two-sided exposure on such that I'm not beholden to any one directional bet. I wanna buy the former on dips and sell the latter on blips although, again, that's not for everyone, particularly if you've got better things to do than stare at (eight) screens every day.
- Finally, and consistent with some thoughts I recently offered in a speech, there are basic premises which I believe will help anyone navigate the future twists and turns.
- Be aware and alert of the evolution around us and don't get caught up in the next best thing.
- Make sure that your risk-profile and time horizon are in complete sync.
- Save when you can and avoid debt that is tied to variables outside your control.
- Hedge potential dollar devaluation with silver and gold exposure.
- Don't let the definition of an investment be a trade gone awry.
- Allow for an ample margin of error regardless of your aggregate view.
- Make capital preservation a priority as it's the first step towards prolonged profitability.
- Don't let the fear of missing trigger emotional financial decisions.
- Be mindful and balance-easier said than done when your "success" is measured by a daily P&L.
I pulled the trigger on SunMicrosystems (SUNW) < $6.00 after reading your comments (not advice, right?) on the Buzz. At this point, I have enough paper profits to renew my Minyanville subscription for the next several decades. I'm still going to use trailing stops per your discipline doctrine. Thanks again for all of the fantastic content, particularly the great humor from Dupree and Macke.
I know you're busy - no need for a reply. Proud to be walkin' the MVille road with you guys.
No need for snaps, my friend-it was all you! As you said, we're not an advice service so we can't accept praise or blame. We're just sharing our processes with hopes that they add to yours. It's the whole 'give a man a fish, he'll eat today-teach a man to fish and he'll eat forever' thang we strive for.
On behalf of all of us-including Dupree!-happy hunting!
In the MVTV video you talk about being long volatility. How is this accomplished?
Thanks for all the educational information!
A few ways, Bill, although the general 'rule of thumb' is 'long options' (puts and/or calls). I must say, however, that the derivative market is challenging (I know alotta pros who are having a tough go of it). So, unless you're well versed in the risks of option trading, please be very, very careful.
Professor Succo wrote a GREAT tutorial on options. That's a strong start to understanding option trading.
Thanks and good luck!
Dear MV Maven,
Regarding your "We used to play for dollars, now we play for dimes..." vibe -- Is that how you see SunMicro's (SUNW) recent move or are you holding out for dollars? And can you explain how the KKR investment may impact the stock price? Your insights are always appreciated.
As discussed on the 'Ville, after scaling into a position last week, I have not sold my SUNW into this pop. In fact, I used the quick dip under $6 to buy a bit more yesterday.
I try to look at trades/investments through the lens of the four pillars. This one seems well set, with technicals (breaking out above $6 with initial resistance at $8), improving fundies, structural underpinnings and--perhaps most importantly, shifting psychology. The KKR investment has planted the private equity seed in this stock and alotta sell-side firms are still on the sidelines.
Hope this helps and many thanks for the continued Minyanship!
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