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Discussion Starter #1
Quick background: Nassim Taleb believes in the need to hedge against "tail risk" or "black swans" -- you don't just invest in the index, but also carry some kind of insurance against sharp declines. He's an advisor at a hedge fund that uses this strategy, where they carry a small amount of insurance. Compared to standard 60/40 allocation, this allows them to carry a higher stock allocation and experience greater returns in good times. When the occasional crashes, their insurance pays off big time, boosting returns. This is described well in this video from Universa, where Taleb is scientific advisor:
https://www.youtube.com/watch?v=9mfnSM0k9jY

Then I ran into something interesting, that in 2012, this same hedge fund partnered with Horizons to introduce a Horizons Universa Canadian Black Swan ETF (HUT). The ETF was terminated in 2016, and I'd like to know why, but I'm assuming it's because they performed poorly and had insufficient assets under management to make it viable. If you look at the TSX chart, this ETF was introduced right at a market bottom right before a +50% index rally. Ha! The insurance + high MER + high TER probably caused a tremendous drag and people asked, why would I bother holding insurance and killing my returns?

In an old thread here at CMF, humble_pie theorized that the ETF will be a loser because Horizons doesn't do well at options trading. Personally, I wouldn't invest in a hedge fund that promises to do this either. Hedge funds have very high fees, and who knows how well they can implement a strategy.

In any case, I think Taleb and Universa's point is still valid: it can be a good idea to hedge or insure a portfolio against declines. And it's probably better to think about this with the market at all time highs, because insurance is so cheap (nobody sees the need for it). But obviously, it's tough to implement, as evidenced by HUT's failure.

Question for all: what methods do you use, or are you considering, for this kind of insurance or black swan protection?
 

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Discussion Starter #2 (Edited)
Here's what I do by the way. My overall goal is similar long-term return as 60/40 with less risk (less draw down).

My primary method: The permanent portfolio allocation. Here, bonds/gold/cash acts as the disaster hedge. In a really bad year like 2008, those assets soften the portfolio's decline, and you end up with spare money to re-allocate back into stocks. I showed some historical performance graphs over on this page. This method currently looks unattractive because of the poor recent returns from bonds & gold (or: the hedges are cheap). This image shows my PP return since I started using it, indexed to a starting value of 100 and currently at 105.
pp-so-far.png


My secondary method: Years ago, I developed a technical analysis technique to try to spot a weakening market. If it tells me to sell and get out, then I do. It does not "intervene" too often, so it hasn't cost me much return. Whether it actually intervenes at the right time so that I can avoid a market crash remains to be seen. I use this within my permanent portfolio allocation, and I'm hoping that either my primary OR secondary method will work. During strong periods of stocks, I will forego some returns. I am reasonably confident that either my primary or secondary method will protect me from big declines during the next crash / bear market.
 

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Sounds like what I have been doing for the last 7 months.

1) Buy risky fast rising stocks

2) Protect myself by buying OTM puts

3) Defray the cost of the puts by selling OTM calls against the stock.

My rule, put no more than 1/10 of my portfolio into any one stock. And buy puts that guarantee I can't lose more than 1/10 of that. In other words my max risk on any one position is 1% of my account.

It's working pretty well so far. But my profits for the year could be wiped out by a market crash. This is not as bad as it sounds - there are years when the best investors in the business would be proud to announce that they lost no money and broke even on the year.

I come from real estate investing where nobody but a numbskull would neglect to buy insurance. Is insuring your house a waste of money? We all hope so. And most years it is. But on the off chance your house burns down you don't want to be without it.
 

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Discussion Starter #4
I come from real estate investing where nobody but a numbskull would neglect to buy insurance. Is insuring your house a waste of money? We all hope so. And most years it is. But on the off chance your house burns down you don't want to be without it.
Glad you posted, I was thinking about you when I created this thread. My "secondary method" is somewhat similar to the T/A technique you posted earlier.
 

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: it can be a good idea to hedge or insure a portfolio against declines. And it's probably better to think about this with the market at all time highs, because insurance is so cheap (nobody sees the need for it). But obviously, it's tough to implement, as evidenced by HUT's failure.

Question for all: what methods do you use, or are you considering, for this kind of insurance or black swan protection?

The method I use is the same as most other investors, and that's asset allocation, as it's probably the best and easiest hedging strategy. Fixed income provides the protection needed in a bear market and offers lower volatility overall. I see no other reason to add expense by using any sort of fancy hedging or black swan protection.

ltr
 

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Sounds like what I have been doing for the last 7 months.

1) Buy risky fast rising stocks

2) Protect myself by buying OTM puts

3) Defray the cost of the puts by selling OTM calls against the stock.

My rule, put no more than 1/10 of my portfolio into any one stock. And buy puts that guarantee I can't lose more than 1/10 of that. In other words my max risk on any one position is 1% of my account.

It's working pretty well so far.


Rusty by your own admission this is *not* what you are doing in BABA, where you have posted in another thread that investors can collect 8% sure-fire returns in BABA by following your strategy.

let's look at the partial data you've supplied so far. You said you bought BABA in june/17. By a speculative piece of good fortune, the stock then rose nicely. Last month - roughly 2 months after the stock purchase - you then bought long BABA puts to protect your speculative gain.

there's nothing particularly unusual about this. Probably more than half of all cmffers - by conservative estimate - have nice gains in one security or another over the past 6 months.

it's a common occurrence, repeat 500 million times. One buys stocks. Stocks then rise. One looks around for an efficient hedge in case markets slide or - worse - collapse. Some folks sell. Some folks decide to buy puts.

bref, you benefited from a speculative rise in the risky stocks you were buying. Months later, as an afterthought, you bought some protective puts.

alas what you keep advocating though is some kind of fairytale sure-fire 8% return from an entirely different strategy that's known as a collar. Collars are long-stock-long-put-short call, all put on at the same time. They are designed to protect high dividends.

collars never result in big capital gains because the short call will always abort the long stock position & this will destroy the gain potential.

on the other hand, collars never lead to big capital losses either, because the put position offers a close-to-cost exit door.

rusty might i challenge you to find even a single collar position - what you are advocating as in buy stock today, buy put today, sell call today - that will ever amount to more than a 1.5-2.5% return over time.

plus let's not overlook that some collars actually lead to slight losses, which some professional managers believe is OK if the underlying dividend is a great big fat rich dividend .:peach:


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^+1 Like_to_retire.
I don't have the time or inclination to be hedging, using options or trying to time the market. Average market returns will suffice.
Let the companies I own run their business, let the market run its rollercoaster, I don't need to get off for many years and can pick the times I do.
 

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james, with respect, you are a number mystic ... you aren’t alone, the search for the infallible investing theory marches on and powers a substantial portion of the internet devoted to investing

i suspect that in the case of the video presenter, and you, and most other people that the portfolio drag produced by the never ending search for the perfect hedge will cancel out its (the hedges) value over time ... we see it in the good and bad years that hedge fund managers deliver time after time

all of it involves predicting the future and nobody does that well

why not have a diversified portfolio, a good asset mix, a balance of growth and dividend stocks across most of the sectors, a healthy mix of bonds and most important of all ... enough cash to avoid a liquidity squeeze

your opportunity cost because of your cash and gold allocation to 50% of your portfolio is simply too high and i don’t have to look at any numbers to know that

for the average small investor, good diversification ... and liquidity ... are the much simpler keys to long term investing success
 

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your opportunity cost because of your cash and gold allocation to 50% of your portfolio is simply too high and i don’t have to look at any numbers to know that

for the average small investor, good diversification ... and liquidity ... are the much simpler keys to long term investing success
+1

ltr
 

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a tiny question for the folks who are so tranquil about a possible black swan financial collapse:

were y'll so calm like this in late 2008/early 2009?


(notice that these folks all tend to say they are well off) (notice how at least one maintains a cash dam that was - best i can recall - equal to 2 years' worth of expenses) (if that isn't a black swan protector then i don't know what is)

.
 

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+1 ltr. Ditto here and for the same reasons you and OMO state.

j4b, just read a FP article today on 5 market doomsayers. Nassim Taleb was mentioned as per below:


Nassim Taleb

Taleb is best known for his 2007 book, The Black Swan: The Impact of the Highly Improbable, in which he warned about the inability to predict unusual events that have severe consequences. Certainly, he seems grounded, in that he says “you can’t predict what will happen” and we would agree to this completely as to the stock market, at least. His aim is to primarily sell books, but he has had some correct calls in the past. He did say that Donald Trump as president was no worry for investors, for example. Last August, however, he said that “a market crash was on the horizon,” quoting low interest rates and the fact that “you can’t cure debt with debt.”

HP, I'll bite on the rhetorical question. Put me in the group that also has a sizable cash position ~3 yrs+ expenses. The difference for me now versus '08/09 is I was 100% equities then and now about 60/40 as I'm retired, capital preservation more important, cash now earns more than bonds. So guilty if you consider that being prepared for a black swan. :biggrin:
 

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+1 ltr. Ditto here and for the same reasons you and OMO state.

j4b, just read a FP article today on 5 market doomsayers. Nassim Taleb was mentioned


however, notice that the biggest bear of all - nouriel roubini - is missing from that list

it's kind of a weird list imho. Respected economist Mohamed el-Erian - bearish for more than a year - is also missing from that list. As is his former bond-master boss.

.
 

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however, notice that the biggest bear of all - nouriel roubini - is missing from that list

it's kind of a weird list imho. Respected economist Mohamed el-Erian - bearish for more than a year - is also missing from that list. As is his former bond-master boss.

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Yes, I agree on dr doom. At least some of them will be right at some point.
 

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Hi:

I see investing as having seasons: Buy, sell, hold. The problem is in knowing what season one is in. A black swan is not a problem, but rather a very solid indicator that it would be buy season. The intelligent response is to then buy during buy season. No need to hedge something that is not seen as a problem.

Hboy54
 

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99% of these doomsayers are spectacularly correct ... one time ... and never right again

but they wisely milk that one right call into consulting, speaking and book writing for many years after

and then many of them get caught in a reputation-trap where they are such notorious bears that they can never call a bull market !
 

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The way I m protecting from the black swan event of the market bubble continuing higher for the next 10 years is to simply never put more on the table then I make from interest in GICs.

Been siting on the sidelines for @ least a year. Looking to put on a very small short position on next new high in the DJI with OTM put options in SPX Dec 2017,Dec 2018 & Dec 2019 between 1000- 500 strike & a larger short position near the top of a wave 2 correction after 5 waves down. Should probably skip the first short position though since I think the next top is going to be one degree larger then 1929 top a little concerned about catching the ABC rally as it will be fast & the 1st 5 down could be like 1929 crash though even faster so some big money can be made before the larger third wave
 

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Just a little observation, you dont protect/insure paper with more paper.

A black swan event will undoubtedly be a liquidity event and there is no guarantee that it will pay out.

A true black swan event needs gold and land as hedge.

I suggest you read Jim Rickards - not a doomsdayer, but well on guard for system shocks. He interviewed european families who held their wealth for hundreds of years through war, famine and financial calamity and they didnt do it with ETFs.
 

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"Rusty by your own admission this is *not* what you are doing in BABA, where you have posted in another thread that investors can collect 8% sure-fire returns in BABA by following your strategy."

That is not what I said at all. What I said was, that I am up 8% for the year and that the BABA trade is only one of several trades I have done. I never used the term 'sure fire'.

"let's look at the partial data you've supplied so far. You said you bought BABA in june/17. By a speculative piece of good fortune, the stock then rose nicely. Last month - roughly 2 months after the stock purchase - you then bought long BABA puts to protect your speculative gain."

I started buying BABA June 19 and bought it over a period of a couple of weeks. I actually started buying BABA in April but got stopped out in early June. This was one of the experiences that led me to start using protective puts as insurance. I have had the protective puts on since June. First I used ITM puts then changed to OTM when I figured out the ITM puts were too costly.



"there's nothing particularly unusual about this. Probably more than half of all cmffers - by conservative estimate - have nice gains in one security or another over the past 6 months.

it's a common occurrence, repeat 500 million times. One buys stocks. Stocks then rise. One looks around for an efficient hedge in case markets slide or - worse - collapse. Some folks sell. Some folks decide to buy puts.

bref, you benefited from a speculative rise in the risky stocks you were buying. Months later, as an afterthought, you bought some protective puts."

That is one way of looking at it. It's not what I said, not what I did, and not what I am suggesting but it is one way of looking at it.

"alas what you keep advocating though is some kind of fairytale sure-fire 8% return from an entirely different strategy that's known as a collar. Collars are long-stock-long-put-short call, all put on at the same time. They are designed to protect high dividends.

collars never result in big capital gains because the short call will always abort the long stock position & this will destroy the gain potential.

on the other hand, collars never lead to big capital losses either, because the put position offers a close-to-cost exit door."

Again, not what I said at all.

"rusty might i challenge you to find even a single collar position - what you are advocating as in buy stock today, buy put today, sell call today - that will ever amount to more than a 1.5-2.5% return over time.

plus let's not overlook that some collars actually lead to slight losses, which some professional managers believe is OK if the underlying dividend is a great big fat rich dividend .:peach:"

Fair enough. Would you like me to tell you about positions I already have on, that have proven profitable? Or would you prefer that I tell you about the next one I put on ?

Let me explain once more what I am trying to do.

1) Buy "Hot" stocks that have the potential to rise 50% or more in a year. You can find them at Investor's Business Daily. They publish a list of their Top 50 picks. Some of them are dandies.

2) Protect myself from loss by buying puts equal to the amount of stock. Try to keep the max loss to 10% or less, including the cost of the puts. Buy puts about 6 months out. I buy the put the same day I buy the stock.

3) Defray the cost of the puts by selling OTM calls against the stock. I will usually wait a few days before selling the calls if the stock is rising. I want to sell the calls at the end of a rise. Calls that are 2 weeks to a month to expire and with about an 85% chance of expiring worthless. If they go ITM be ready to roll them up and out. Worst case, I am forced to sell my stock at a profit.

That is the whole gag. Make money by buying stocks that go up. Buy insurance in the form of puts. Defray the cost of the puts by selling calls. It's a bit complicated but seems to be working so far. I can't guarantee it will work for you or anyone else. I don't know if it will keep working for me. But if the market bombs I know beforehand what my max loss is. It happens in BABA I have a 160 put on stock that I paid an average of under 150 for so I don't see how I can lose.

If you want more examples of the kind of stocks I mean, right now I own ANET ATVI BABA SQ TAL and YY. Previously I had positions in CRUS COR GRUB NVDA NFLX PI VEEV and others but got stopped out.

I hope to hold stocks longer than 6 months and will be happy to keep them a year or several years if they keep going up. If a position is working I plan to roll the puts at least 30 days before expiry. Selling the old ones and buying new ones farther out in time and with a higher strike.

I will post a trade I started a couple of days ago in a new thread if you are interested.
 

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a tiny question for the folks who are so tranquil about a possible black swan financial collapse:

were y'll so calm like this in late 2008/early 2009?
For sure. I remember backing up a truck in 2009 for beaten down preferred shares. Nice profit a few years later.

(notice that these folks all tend to say they are well off) (notice how at least one maintains a cash dam that was - best i can recall - equal to 2 years' worth of expenses) (if that isn't a black swan protector then i don't know what is)
I certainly keep two years of expenses in cash. That's called asset allocation to cash. It's about 2-3%. This is reasonable insurance against any black swan event. Paying for insurance in the form of asset allocation is a far cry from buying Horizons Universal Canadian Black Swan ETF (HUT)

ltr
 
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