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Hedging in this crazy market


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not sure how many have thought about hedging the profits

 

It's fair to say the market is at least fairly valued. Let's say the long term rate will be permanently stuck below 1% for 10y and if we add 3% risk premium we get 25pe as reasonable for the market. Good bluechips with strong moat can have some premium and this put a cap at 30pe for bluechip with a little bit growth prospect (sth like Apple). Apple is already above 30 now. And this applies to most other new era bluechips

 

It's also fair to say that without the liquidity the market would have been gone that high. Both liquidity and long term rate are close to the extreme they can get (they can certainly go more crazy - rate can go to 0 or slightly negative, but I see that as the last leg). I am reluctant to sell my positions for two reasons: 1) most have good moat and in the long run they will still compound 2) most importantly, I don't want to incur the tax

 

So this leaves me with the only option. To begin to hedge. But I cannot find a good hedge here. Most leap puts are very expensive now (just check tesla puts...) I don't want to short anything in a straight way. I am actually thinking, if the main reason of this bull market is liquidity, is there a cheap way to hedge against the eventual liquidity ramping off? (I don't want to bet against the long term rate, imo the long term rate may just be stuck at a low level for a long time)

 

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Ive always found selling ITM calls, preferably longer dated can act as a reasonable way to hedge. Ive never had issues with them being exercised mainly because the folks who buy ITM calls, like me, are simply looking for cheap leverage and dont want to outright own the underlying. On a decline you just buy it back or let it expire while keeping your long term basis in the underlying.

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You say , most importantly #2 - tax. Never let tax dictate an investment decision. Besides the point that half the world has no capital gains taxes, even if it did, sell if this is the #1 reason.

"Good bluechips with strong moat can have some premium " - my experience is the opposite happens. Good blue chips have eroding moats with low or negative growth and become value traps with even lower P/E ratio over time than smaller, faster growing stocks. Not all but many...There was a good book by a business professor in Utah, can't remember the title, but the point was that success breeds eventual stagnation and erosion of moats. Not much lasts forever. Competition is fierce. Some companies reinvent a portion of their business or break-up and become more nimble. I do worry large profitable blue chips may actually one day trade at a discount.

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You say , most importantly #2 - tax. Never let tax dictate an investment decision. Besides the point that half the world has no capital gains taxes, even if it did, sell if this is the #1 reason.

"Good bluechips with strong moat can have some premium " - my experience is the opposite happens. Good blue chips have eroding moats with low or negative growth and become value traps with even lower P/E ratio over time than smaller, faster growing stocks. Not all but many...There was a good book by a business professor in Utah, can't remember the title, but the point was that success breeds eventual stagnation and erosion of moats. Not much lasts forever. Competition is fierce. Some companies reinvent a portion of their business or break-up and become more nimble. I do worry large profitable blue chips may actually one day trade at a discount.

i wonder if you mean The Innovator's Dilemma by Mr. Clayton Christensen, a rare example of these theoretical books that use real-life examples and that can find practical implications for specific investment theses (long term moat point of view).

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