Latest memo from Howard Marks: There They Go Again...Again

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#21
(30-07-2017, 04:20 PM)Temperament Wrote: 2011 James Montier on tail risk

i admit i don't really comprehend completely what he is saying.(Aka my maths is too elementary).

i only understand he favours cash as tail risk hedge.

And i think WB calls cash as option without expiry date.

i only have to understand what WB said and try to put into practice when i think the time is suitable.

If i am wrong, i only lose abit to inflation lol.

Capital still is intact is the most impotant to me.

It is then possible for me to see what i can do next.

Wanted to get a bit technical here for accuracy. Technically a hedge for an asset is an instrument that falls when the asset rises and vice versa. A hedge is a perfect hedge when it tracks the underlying asset exactly but negatively, and is a imperfect, or risky hedge when it doesn't do it perfectly. Usually, a perfect hedge is of no use, you might as well sell the asset. So, when people talk about hedges, they usually mean risky hedges. A basis hedge is when your hedge asset roughly tracks your underlying asset, but has the risk of something else going wrong.

By this definition, cash or holding SGS bonds (which someone else mentioned), is not a hedge. It is merely a diversifier. If your diversifier is good, hopefully, it holds its value when other parts of your portfolio is going down. You can then realize the diversifier to buy assets on the cheap (rebalancing). But it is not a hedge. In a tail risk scenario, it has been known to hit most assets. Even cash is not entirely safe in a tail risk situation - it depends on where you keep your cash (banks and money market funds have been known to fail), and the value of your currency (for example the Indonesian Rupiah during the Asian Financial Crisis).

Holding a short S&P position is a risky basis hedge for SGD investors who are mostly on the SGX. It presumes that the SGX stocks and the S&P are highly correlated, and needs to take into account the USDSGD exchange rate. But as a tail risk hedge (when you presume stocks everywhere are heading down), it might be acceptable. Holding a short STI index futures position is a partial hedge for someone holding a STI ETF (partial because you need to roll the futures position eventually) and is a basis hedge for someone who also holds non STI component stocks.

Holding a VIX position is a partial hedge on the S&P500. It is also a non-linear hedge (meaning the degree it covers the S&P500 will vary).

Lastly, all hedges have costs. A short position has funding costs. A position in a VIX futures contract has (big) time decay costs (due to the VIX depending on the S&P option basket and on the futures roll and other issues). A long put or call option has time decay costs (you pay a premium and lose that premium at option expiry if it is not in the money).

Nothing is perfect. But there are choices of cheaper or more expensive hedges. Risky or less risky. Short term, or long term.
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#22
Good post! But too cheem for me.

Don't want to take on so much risk? Sell some.

I feel that unsophisticated investors such as myself are better off not trying to engage in costly and risky hedging operations.

Just focus on value and price.
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#23
Ma, Ma, Fu, Fu, can understand in theory.

Put into practice "Chiat Luck".

Even can be scary.

Count me one Simple Simon in the stock market too.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#24
Can someone explain why every day STI stocks are shorted quite heavily?

Is some BIG FISH(aka Instituitions or who?) hedging or what?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#25
Since i am simpleton in understanding the "Wisdom of Finance",
i recommend people to read:-

"Wisdom of Finance"

By Mihir Desai
Professor of Finance
Harvard Business School
Published may 23 2017.

i think it's fund to read because the wisdoms of finance are presented with anecdotes and some true stories.

Not bone dried data, fomula, theory,...
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#26
"Can someone explain why every day STI stocks are shorted quite heavily?

Is some BIG FISH(aka Instituitions or who?) hedging or what?"

My thoughts is this someone must be treating "short sell" as buying long.

Another words he has very little to zero stocks holding.

Is it worth for us to do it?
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#27
Howard Marks' latest memo, some sort of like a quick follow up from the previous. I like the part about bitcoin and helped one to look/think into the pros/cons of bitcoin seriously (rather than just brushing this "asset class" off with our BS detector)

Yet Again?
https://www.oaktreecapital.com/docs/defa...-again.pdf
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#28
Howard Marks has talked a lot about what is risk in his memos and so I will put it over here.

I thought OPMIs could get a reminder about maintaining discipline in our own risk management in the greater scheme of things.

Allianz fund collapse ends in guilty plea, US$5.8b deal

The funds were marketed as “providing broad market exposure while maintaining specific risk protections to safeguard against losses in the event of a market crash”, according to Tournant’s indictment.

But in late 2015, Tournant allegedly grew frustrated with the cost of hedging, which was eating into returns. The fund “abandoned the promised hedging strategy and instead began to purchase cheaper hedges that were further out of the money, and therefore less protective in the event of a market crash”, according to the indictment. That change was not disclosed to investors, prosecutors allege.

https://www.businesstimes.com.sg/banking...us58b-deal
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