ni-co

I liked Confessions of a Real Estate Entrepreneur by James Randel. http://www.amazon.com/gp/aw/d/0071467939/

The most efficient way to hedge market risk without selling your stocks is the futures market. With options, you're always taking a stance on future volatility (expectations) and timeframe for a potential decline — which can be just what you want, just be aware of it.

There shouldn't be a difference between owning a call + cash vs. owning equities + put. It's the same trade (unlimited upside + downside limited at the strike price).

…and, tadaa, you're long again! ::)

Ok, sorry for watering down this thread. My mistakes worth mentioning: JCP: This was largely a sizing issue and also being seduced by a great thinker (Ron Johnson) and large asset values into a shitty declining business like department stores (the old Buffett saying, you know…). I also bought into SHLD but don't regard it as a mistake because after the JCP debacle the high risk of failure was obvious from the start to me and I sized it accordingly. In both cases, large names brought me to the ideas but I don't regard this as a mistake either since I didn't follow them blindly. Value investing + options is a mixed bag for me but since this thread is about mistakes, I certainly made a lot in this area. The most important ones in order of importance to me: - Underestimating liquidity constraints. You can be right but a 50% bid/ask-spread doesn't let you exit a position while time decay is eating you alive. - Oversizing has been mentioned several times here. Rightly so! I oversized option positions many times. That said, there is one non-obvious thing that hasn't been mentioned. Apart from total loss — which is the obvious risk — there is also the risk of success! With options, there are opportunities with 5:1, 10:1 or even larger payouts and mathematics tell you to apply something like the Kelly criterion to them. Of course, I don't know my odds exactly so I have to adjust my position size downwards anyway and I also have size limits for my initial positions (depending on how much I'm prepared to lose). That said, there is a problem I incurred a few times: If your position goes into the right direction it suddenly becomes a large part of your portfolio and this, as a result, becomes very volatile in total. Usually this is also the time when the expiration date is near, so that your portfolio returns become more and more dependent on pure chance (i.e. weekly or even daily price fluctuations). In the end, I always ended up cutting my position at least once, sometimes several times. This is all fine and dandy but since I calculated with, say, 5:1 odds at the beginning, I was now cutting my odds, too! So your seeming 5:1 odds may really be only 2:1 if you want to do it in size. I underestimated this problem several times when initiating positions and I'm really struggling find the right balance. - In general, it's very easy to overpay for options on single volatile stocks. What I learned from those mistakes is: Volatility is your biggest enemy. When buying into options it seduces you to overpay and even if volatility is increasing only after you bought, while theoretically good for your options, bid ask spreads often widen immensely, thereby reducing your gains if you want to exit your position before expiration. So be prepared to hold those LEAPs until expiration (and to encounter the chance problem mentioned in the paragraph above).

+1. Though this analogy has many (poker-specific) problems I can relate to that. Selling a position at a loss doesn't mean you made a mistake; selling it at a profit doesn't mean that you're a genius. When your chance is 50:50 to make 10x your money or to lose it all, having lost it all doesn't mean that you are stupid. However, you're an idiot if you put 100% of your portfolio into it.

If he really believes that I have the feeling that this is going to be a very painful trade for Hall. I don't know how he's positioned exactly but I think he's overestimating the strength of the global economy. Of course, I might be wrong, but it won't be nearly as painful for me.

We live in interesting times. By now, it seems quite obvious to me that there was some common ground reached between the central banks at the G20 meeting. Draghi and Kuroda both have restrained from weakening their currencies further and the Fed seemingly decided to not only talk down the US dollar but to do a 180 with regard to raising interest rates—even in the face of rising inflation data which allegedly was the only data point they'd been waiting for. Dalio was right, again. If it's playing out like he predicted then what we saw in December was already the peak of the "hiking cycle". However, I think that the risk of a shock for the global economy induced by a CNY deval hasn't gone away. IMO it's now even more likely. It seems to me that what Kuroda, Yellen, Draghi and Zhou are doing is preparing markets for a CNY devaluation. At least, this is my hypothesis for the moment. If it's correct, rising commodity prices and currencies/weak USD should be short-lived. However, since I may very well be wrong and since it's very difficult to estimate how long this rally is going to last before the next shock will inevitably set in, I became very careful and cut back my exposure to everything but gold.

I know this is not the gist of your question but in German cities "car sharing" is the obvious choice for value investors. ;) BMW and Mercedes have very good car pools here.

I don't get it. Where's the advantage over just the market price of those stocks? Sports leagues don't have a market price—that's why it makes sense there.

I'm not talking about the bankrupt companies but the ones that are going to go bankrupt. I think we haven't even started. Do you really think that on average the remaining companies are in such a strong balance sheet position that they can sit this situation out if it goes on for another year or so? A lot of those equity values are going to be a zero. If you invest into companies via an ETF and they go bankrupt your money doesn't somehow magically pop up in another newly added company in the ETF – it's lost forever. With regard to SA—we'll see. I think they have a lot more leverage here and are committed to give Russia and other oil countries a lesson thereby not only bankrupting the momentary shale oil companies but also the first round of distressed debt investors who buy their bonds. To be clear, I'm not betting the ranch on this scenario but I think it's the most likely and bought some puts. I think the situation has to get much worse before it gets better. And the first ones to suffer are the equity investors. There are large assets in the US but I don't think current equity holders will realize any of those values. They will go to the bondholders.

I'm short paper (XOP) as well. I've come to the realization that Saudi Arabia probably won't give in before the US shale oil industry will be completely destroyed – including the financial support structure. In other words, I think we'll have to see many more bankruptcies before we'll see a production cut otherwise they will have achieved nothing.

I agree with petec. The economy doing well is a concurrent necessity for rates to rise. You can't help the economy by raising rates, on the contrary, you would choke growth by doing that. This is why Dalio is talking about monetary policy losing its effectiveness to the upside only. It remains very effective to the downside, i.e. the Fed could kill the economy immediately if it liked to.

You can't argue with one micro scenario when it comes to a macro decision like cutting or raising interest rates. This is the paradox of aggregation. Higher interest rates may lead to higher income for savers, but for creditors they naturally have the opposite effect; they tighten credit and this – in aggregate – slows down the economy and leads to less spending. Though I doubt that negative interest rates would be very effective I don't think that central bank are so clueless that they accidentally tighten monetary policy when they want to ease it.

These would seem the logical outcomes and are what the central banks are looking for. The question is why haven't they shown up? Or is it just a matter of time? Invert...always invert: 1. Since I won't get interest I need a lot more money to retire. 2. So save more, buy less 3. Less demand I think this is a chicken/egg confusion. Inverting your statement: Would you say that higher interest rates lead to higher demand?