vinod1
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Posts posted by vinod1
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and if true could explain why some younger people could also be at risk.
don't we have pretty solid data from two different continents by now showing us that they aren't (apart from a few isolated exceptions)?
Anecdotal, but I have two close relatives both around 40 years of age and with severe symptoms. A family member is a physician specializing in infectious diseases and helping these two relatives. Both are very healthy and with no other medical issues.
Vinod
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What do you think of the concept of Viral Load applied to Covid19? Link below has the detail and if true could explain why some younger people could also be at risk.
Vinod
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The way I see it serves two purposes
1. If we get some extreme tail event and BRK ends up at say $120 for example, a deep in the money LEAP would have resulted in a pretty big loss. Not really protecting me, other than freeing up some cash.
2. If market runs away while I am playing trading volatility and have higher cash allocation, the calls would make up for that.
Vinod
I hear what you're saying with (1). Perhaps I should rethink my options. I figure, I'd rather have that intrinsic value stored up. If I buy OOM options it frees up a bit more cash; but my exposure is very conditional.
I'm always a bit nervous with OOM options because in the case of (2), it seems like they are only useful if prices run up enough. And you have to sell at the right point i.e. maximum upwards movement and volatility - do you find these OOM calls have a limited lifespan where you can make decent money? Or do you plan to hold until expiration and count on being right on both direction & timing?
You're right on volatility - LEAPs past 2021 were very expensive today.
This is a unique subject. Personally, I prefer to cut the stock via deep ITM. How much depends on my confidence and ability to really get under the hood. Being honest with myself this usually eliminates much over the market cap of day $10B. Companies bigger than that, even ones we all know well like BRK pose zero analytical edge and even when they do, have parts that move too quick.
If I really like it but am uncertain, I try to use the ITM as a stop loss. Similar to what I did with WFC in January. $45 strike. If it goes below there, I’m out. With stuff I’m dedicated to, you go deep ITM, figure that your margin of safety, and then of, let’s say something extraordinary like this happens, and you find yourself below the strike, you should still have reasonable confidence in valuation and time sorting things out, to load the boat on those same now OTM calls. Example let’s say BRK $150 calls. In the money now, and if they ever go below, you can swing big as OTM
I would use LEAPS really rarely and only in very limited situations. Financials in 2012/13/14 time frame is about it. Do not remember using them after that.
My own belief and I might be wrong, is that occasionally in times of really great uncertainty like 2008/9 in all stocks, financials in 2011/12/13 & 2016 and now, there is no need for any analytical edge. It may be because so many people and institutions are selling for reasons other than their estimates of value or future prospects, but prices become ridiculous in many cases. Then it is actually a matter of what businesses you have a handle on and keep buying them.
Vinod
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The way I see it serves two purposes
1. If we get some extreme tail event and BRK ends up at say $120 for example, a deep in the money LEAP would have resulted in a pretty big loss. Not really protecting me, other than freeing up some cash.
2. If market runs away while I am playing trading volatility and have higher cash allocation, the calls would make up for that.
Vinod
I hear what you're saying with (1). Perhaps I should rethink my options. I figure, I'd rather have that intrinsic value stored up. If I buy OOM options it frees up a bit more cash; but my exposure is very conditional.
I'm always a bit nervous with OOM options because in the case of (2), it seems like they are only useful if prices run up enough. And you have to sell at the right point i.e. maximum upwards movement and volatility - do you find these OOM calls have a limited lifespan where you can make decent money? Or do you plan to hold until expiration and count on being right on both direction & timing?
You're right on volatility - LEAPs past 2021 were very expensive today.
I would not use OOM options either the vast majority of the time. In this particular case it seemed more appropriate.
Given the amount of volatility, what is in the money can quickly become at the money or even out of money in a matter of a day or two.
I bought $180 strike calls on Monday when stock is around $160s. They are not a bad risk/reward by themselves, but if BRK spiked up a bit, it would allow me to unload the stock and hold ATM calls. When it spiked right the next day, I sold and that freed up cash. I might not get lucky next time, but even if not I would be happy to hold those calls and likely be able trade those for a profit.
The worst case for me with these calls is that, BRK stays close to $180 all the way through end of 2021 without much volatility. Then I lose the entire premium. I got $174 from sales and paid $20 for calls, so I would end up $154.
I am betting that would not be the case, but even if I am wrong, my guess is that I would earn enough on the $154 on other things to cover it at least.
If BRK ends up at $180 at end of 2021, would I be really be happy owning the stock all the way through?
On the other hand, if BRK ends up below $155 or above $200, I would have been better off with the calls anyway.
Still trying to think my way through.
Vinod
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I gave Trump credit for 3 things he has done
1. Take China as a serious threat and go after their companies and defend long term US interests.
2. Relax overly aggressive regulation in many industries.
3. Highlight the issue of illegal immigration and how it might be impacting lower income US citizens.
Even on Covid-19, I give him a lot of credit for how quickly he imposed restrictions on travelers from China. I bring up this up to highlight that I try to be objective.
Look at his other actions:
1. Dismissing the virus as the Democrats "new hoax”
2. John Bolton’s decision to scrap the nsc’s dedicated pandemic unit
3. Where is an action plan to get companies to produce PPE, testing kits, etc? How many masks are being produced per day today?
4. The half hearted attempts at containing the spread. No decisive action at the Federal level.
Trump maybe an advantage when dealing with say North Korea or even in a war situation - if the other guys thinks you are narcissist it might deter them from some things.
If there is a super intelligent creature (God) who understands Trump and designs a test that preys on his weakness, I cannot think anything better than a pandemic from something like Covid-19. It cannot be bullied, immune to twitter attacks, he is unlikely to heed advice of experts and need to take actions that might be contrary to his own interests.
I really hope and wish that he is supremely successful and luck favors him in containing the virus. But, I think it is looking increasingly likely that he is going to cause grievous harm to a lot of citizens with his approach. It would be a terrible price the country would be paying for electing someone like him.
Vinod
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Trying to buy puts on MA, and a couple of others. The implied volatility is way up. The cost is more than the other day, when the stock was higher. Option sellers are expecting a quick reversion right back down. Todays market rise is in response to the expected stimulus plans. Once they come out and eveyrone realizes the economy is operating at 70% things may really drop.
I am sitting out Leaps for now until this volatility settles down to a lower level.
Hi Al,
Good to see you posting again after a long time!
Agree Leaps are expensive, putting in stink bids hoping to get execution, but not much luck.
Vinod
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The way I see it serves two purposes
1. If we get some extreme tail event and BRK ends up at say $120 for example, a deep in the money LEAP would have resulted in a pretty big loss. Not really protecting me, other than freeing up some cash.
2. If market runs away while I am playing trading volatility and have higher cash allocation, the calls would make up for that.
Vinod
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Have been trading BRK and GOOG the past two weeks with good success with about 20% of my cash pile while also establishing a long position. A bottom is a best guess at this point. Near term, the only thing that seems likely to continue is high volatility. Why not use this to your advantage on stocks you would feel comfortable holding?
Anyone else on the trading?
Yes! Moved a few positions from stock to LEAPS, to free up cash to play the volatility, protect downside in case I am underestimating the severity while also locking in attractive prices if there is a sudden positive catalyst.
This strategy has been very profitable in 2008-2009 but then the volatility is so much more at that time. From purely financial perspective, let us hope the volatility lasts for some time.
Vinod
Hi vinod,
Are you buying LEAPS ATM? I am doing a similar strategy buying deep ITM.
Hi LC,
Did not fully flush out my strategy. With kids home, too little time to think!
But I bought $180 strike out of the money BRK 2022 calls yesterday. Exited long term BRK stock today.
Planning to do opportunistic changes as LEAP spreads are pretty high and I have to put in a few bids at different strike prices before something gets executed.
Vinod
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Have been trading BRK and GOOG the past two weeks with good success with about 20% of my cash pile while also establishing a long position. A bottom is a best guess at this point. Near term, the only thing that seems likely to continue is high volatility. Why not use this to your advantage on stocks you would feel comfortable holding?
Anyone else on the trading?
Yes! Moved a few positions from stock to LEAPS, to free up cash to play the volatility, protect downside in case I am underestimating the severity while also locking in attractive prices if there is a sudden positive catalyst.
This strategy has been very profitable in 2008-2009 but then the volatility is so much more at that time. From purely financial perspective, let us hope the volatility lasts for some time.
My daily prayer: Lord, I am not asking for a bull market and I am not asking for a bear market, but is it friggin too much to ask for some volatility. (Minus the virus part)
Vinod
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I have put together a short note and tried to identify the various factors that we need to monitor to understand risks. None of this is original, it has all been discussed in various places. I just tried to put together in one place all that I think are going to be important when analyzing a business. This is old news to most of the members of this site but you never know if someone might find it useful.
I am most interested if others can chime in on all the other risks that I am sure missed to capture.
I help out a few of my friends with their portfolios and all have the same questions, should I sell or should I buy? Rather than talking and explaining to each individually, I am sending them this along with general message of sticking to plan.
Thanks
Vinod
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Updated for real time info
Perhaps some actual numbers to inform the discussion.
SPY currently at 280.17
Dec 2022 $225 calls (~20% from here) are quoted at $69 at mid. 225+69 = 294, so let's call it $13 of premiums and $55 of intrinsic value. The way I think about that $13 is that's how much I'm paying to borrow, on a non-recourse basis, $225 bucks for ~2.75 years. If shit hits the fan and it goes below 225, I'm fine as that's my stop loss.
Another way to get long exposure is to short the puts, as suggested above. So Dec 2022 $350 puts (~25% from here) have a mid of $90. So intrinsic value of $70 bucks and $20 the premium. You get upside until 350, after which you get paid nothing, but you have full downside and get paid 20 bucks for it.
As mentioned above, the deltas on these things are not 1 (though close), so on a daily MTM basis you will not gain/lose the same amount vs. the underlying. However, if you do intend to hold until maturity, the MTM question is irrelevant if you pick the strike prices as to your liking. So the question is - do either options outlined seem "expensive?"
They way I approached options and my portfolio was almost entirely in options on financials, BAC, AIG, etc. in the 2011/2014 period, was more along the lines of what I am likely to gain per $1 I invest and what I am likely to lose.
Take a very simple case in which there are only two scenarios
A. An expected S&P value would be 3300 in that time frame
B. An expected S&P value of 2500 in that time frame
So if I invest $69 in the option, I would have a gain of $36 in (A) and -$44 in (B).
Since we are modeling this very very simply we assume each has a 50% probability.
Now if you are going to invest, I would want to model it with 10 scenarios and assign probabilities to each of them.
Then do an estimate of what my gain is and what my downside is. Using the simple example, the upside and expected return does not seem all that good for using options. Since you are risking $69 and the likely upside seems to be about 50% gain.
So personally I only use options when upside is pretty extreme and I can think of potential scenarios where I can imagine the investment going to be zero however unlikely it might be. So we had 10 to 1 or 5 to 1 odds many times with BAC for example and that worked out.
You need to be in a position to play this game at least 3 times, so that would inform your limits as well. You need to think about what happens if it ends up being somewhere around 2300 in that time frame and you lose pretty much everything. You need to be able to go for another round. And plan to leave enough cash for another round at least.
Again, this is my own personal preference.
Vinod
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Amazing what Infovirus can do.
You have people who watch a few YouTube videos, follows a few Twitter threads and some news, This it seems enough to make them ready to offer specific steps on how a large country should go about containing the virus.
Look at what Buffett, Ray Dalio and Howard Marks said about the virus. They keep saying, "I dont know." "Maybe this, maybe that."
Here we have a level of conviction that I cannot even muster even for things I know something about.
I can understand someone with a background in epidemiology making some informed suggestions. I see some board members do have that background and it is helpful to get their views.
I keep thinking about what Buffett said about big events like Pearl Harbor, Cuban Missile Crisis, Arab Oil Crisis, Vietnam War, etc. etc. I can only imagine what this message board would be like in those situations.
Vinod
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For the last 4 months I am coaching my son's school team on Disease Detectives for Science Olympiad. This is basically training to be an epidemiologist. So had been spending quite some time last few months on CDC's and WHO's text books on epidemiology.
Only have the most basic knowledge, but everything I have seen of the response from US is following the textbook to near perfection. They way they quickly stopped flights from the affected areas, to the quarantine of those coming back, to the quick public health warnings, etc. is pretty impressive.
You always have to look at 2nd order and 3rd order effects and so on. If you take a look at CDC protocols and their approach, they think about these.
Take an example from Fukushima nuclear power plant disaster. From Factfullness book:
People escaped the province as fast as they could, but 1,600 more people died.
It was not the leaking radioactivity that killed them. Not one person has yet been
reported as having died from the very thing that people were fleeing from. These
1,600 people died because they escaped. They were mainly old people who died
because of the mental and physical stresses of the evacuation itself or of life in
evacuation shelters. It wasn’t radioactivity, but the fear of radioactivity, that
killed them.
Vinod
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I was also holding S&P 500 puts for last 10 weeks or so and sold them on Tuesday for a tiny profit. Then it promptly doubled in value over next 3 days.
If my timing skills are any indication, you would probably get better opportunities in next couple of days.
Vinod
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I have not bought as many stocks as I have in the last couple of days since Jan 2016. Some of them are based on valuation work that I had done last March and have not updated since, but the price are at such a discount to IV that I do not even need to make an update. Yes, they are at the epicenter of the investor fears.
I'd be interested to hear what long term compounders are trading cheaper than last March and at substantial discount to IV. 8)
I guess EXPE is but it was cheaper in November and without virus overhang for near term business.
Me too. Even summer 2019 was cheaper and Dec 2018 was much cheaper. In Addition, we now have a Real problem with the economy that we didn’t have last year. A selloff always offers some bargain, thats true, but it was way more true in Dec 2018.
I agree Dec 2018 it was much cheaper. It is mostly due to my portfolio allocation. I had sold a bunch of stuff in Nov/Dec of 2019 as the expected return on many of my investments went down to mid single digits and I am sitting on a lot of cash going into this week. I was looking at O&G and other dreadful things to invest and still did not find much.
So last week is a life saver. Nothing new. A bunch of banks that I sold became at least reasonable enough to start adding back. Also bought Booking. Smaller positions in Rolls Royce and Carnival.
Vinod
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So, just to understand where people are coming from, and despite the internet muting my tone Ill say in advance that I am not being sarcastic or rhetorical, but... we have a pandemic that may temporarily dislodge tons of very significant economic variables. We just had, arguably one of the most hellacious and sudden market declines in decades, and both a President, who clear as day can not be deemed reliable, nor a media that can be trusted; people are surprised that the Fed is stepping up and willing to take action?
Isn't this what they have continually demonstrated that they will do? In who's interest, besides that of greedy investors, is it to have everything implode?
And again, as I said before, if we are talking valuations, we have a 1.2 10 year. Where should stocks be trading? Lets say you have a 30% cut to corporate earnings this year like some are modeling, ands then a 30-50% rebound the year after, should we be gapping down to 15x? Or is 20-25x depending on the business at least justifiable?
+1 Although it would have been more fun to read it in colorful language.
They way I see it, none of this should be really having impact on earnings 5 to 7 years out. As long as we are able to buy something that is going to generate good returns over this period why worry about what happens this year?
I have not bought as many stocks as I have in the last couple of days since Jan 2016. Some of them are based on valuation work that I had done last March and have not updated since, but the price are at such a discount to IV that I do not even need to make an update. Yes, they are at the epicenter of the investor fears.
If the market tanks say 50% from here, so what. The opportunities in that case would more than make up for any losses.
Vinod
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Jurgis & MOPHF,
Thanks for the info.
So it looks like neither 401k or an IRA is directly mentioned by IRS as being exempted. I will post if I find any confirmation.
Vinod
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Not related to trading limitations but isn't Fairfax India considered PFIC? I never looked into it because of that.
Thanks
Vinod
Sure it's very likely PFIC. Only matters if you hold it in taxable accounts. Does not matter if you hold it in IRA.
Thanks! Did not know that. I tried to read up on this but not many links other than an EY document. I would research this more. Do you think it is a pretty straightforward one that it is not taxable in a 401k or a Rollover IRA?
Vinod
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Not related to trading limitations but isn't Fairfax India considered PFIC? I never looked into it because of that.
Thanks
Vinod
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Completed going over the 6 videos and I would recommend all of them. In these short videos, Mike has summarized the best available research on the subject in a concise and interesting way.
I read the book Mindset, took notes, tried to summarize it for my son and I think got through to him. But in the video, Mike has done a far better job of it and easier for kids to go through.
Thanks again Mike. Really enjoyed all of them.
Vinod
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vinod, on interest rates:
Interest rates are not a structural cause of change. Something causes interest rates to have a long-term level shift.
The FRB sets the rates, yes. But they do so in response to economic reality. The question is, what is that reality, what are its implications, and how long will it persist.
What do you think?
You are absolutely right. No argument there.
I have no idea what is causing it. I hear so many reasons - aging, economic inequality, savings glut, etc. I really think it is a mystery.
I pointed to interest rates because, regardless of causes, we know it is a critical variable in asset pricing. And it is going to have a major impact.
Vinod
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I was reading a book "Factfullness". In this the author pointed out how when we blame some person/establishment we stop thinking.
The blame instinct describes our tendency to find a clear, simple reason for why something bad has happened.
When things go wrong, it’s easy to assume it’s due to bad people with bad intentions.
Rosling writes, “We like to believe that things happen because someone wanted them to, that individuals have power and agency: otherwise, the world feels unpredictable, confusing, and frightening.”
“The blame instinct makes us exaggerate the importance of individuals or of particular groups,” writes Rosling. “This instinct to find a guilty party derails our ability to develop a true, fact-based understanding of the world: it steals our focus as we obsess about someone to blame, then blocks our learning because once we have decided who to [blame] we stop looking for explanations elsewhere. This undermines our ability to solve the problem or prevent it from happening again because we are stuck with over simplistic finger-pointing, which distracts us from the more complex truth and prevents us from focusing our energy in the right places.”
Look for causes, not villains. When something goes wrong don’t look for an individual or a group to blame. Accept that bad things can happen without anyone intending them to. Instead spend your energy on understanding the multiple interacting causes, or system, that created the situation.
Look at how many people blame Fed/ECB or Indexing. You don't have to ask their portfolio performance to know how they did.
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Ive been chatting with a lot of folks and most of the time the lens of investment is one of a value investor. I continue to be amazed by the abundance of traditional businesses that are "cheap" but troubled. Look at some of the threads here for example. DD, AMC, XOM, GHC, certain types of real estate...dont get hung up on the specific examples. The contrast between these businesses and the ones RuleNumberOne likes to talk about is incredible. But beyond that, it got me thinking. All the classic value investors and books about such things talk about cycles and buying when things are out of favor and then achieving these heroic returns from being a contrarian. The TBTF trade was really the last classic example of this that worked. But otherwise, everything now, for at least the last half decade if not a bit longer, IMO has just stayed out of favor and continued its decline. Almost as if cycles dont exist and just transitioned to permanent secular declines. Commodity names have sucked forever now. Miners too. Many different types of real estate. Financials, Insurance, media, healthcare, energy, auto....quite a lot here. In a market many describe as in a bubble, and a few percent off all time highs, the list of traditional businesses at shitty valuations and often described by rational investors as having "too much hair" is incredible.
So I guess the million dollar question is, do these ever become cyclical again(IE as in trade at premium valuations), or have we for some reason, maybe Fed induced, caused there to be a hitch in the way investments and businesses are valued? More or less rendering these things permanently challenged and essentially just part of some which ice cube can melt the slowest contest?
I see several things going on that explain what we saw in the markets.
The two really major structural drivers of asset market returns over the past decade are
1. Internet
2. Low interest rates
Internet is to me on the same level as discovery/invention of fire/wheel, steam engines/electricity, etc.
Just as steam engines and electricity has fundamentally altered the economic/business climate, Internet is doing the same. Can you think of any of the CPG companies (Coke, PG, Nestle, etc) without the invention of steam engines/electricity? These companies laid waste to many smaller artisan type small scale businesses. Now Internet is negatively impacting many of the businesses that value investors are fond of.
Similarly low interest rates have elevated asset valuations and had different degrees of impact on different businesses. The impact to value investors in this case is that elevated valuations is leading them to holding on to lot of more cash (it seems like 6.5% real returns for stocks are divine right for investors) or go insane (Berkowitz).
Now you have the normal cyclical fluctuations in different industries. Didn't banking go through the cycle? Many of us benefited from that particular one. Airlines, Housing to name two also went though a cycle.
If you look at Shopping (Retail as well as RE), you can see the long term structural impact of Internet . But there is some cyclical stuff that is going on as well. Same with Energy. Longer term structural impact of many alternative energy and EV is overlaid with cyclical stuff.
So I do not think anything really changed in terms of cyclical fluctuations. There are structural changes that are overlaying with cyclical changes that is hiding the cyclical parts.
Vinod
Futures Limit Down
in General Discussion
Posted
I think it is more useful to think of market drops not in nominal terms but to take into account inflation as well.
In the 73-74 market, inflation was 6% and 11% during the two years. So inflation adjusted the drop in much more than 50%.
In the great depression there is a huge deflation of about 25% so makes a big differece.
In the 2008-2009, there is almost no inflation.
Vinod