Thursday, August 7, 2014

Drinks with the Dragon: Life, hedging, junk bonds and more

Hey guys, I know it has been a very long time since I last updated my blog. It’s just that I didn’t have much to talk about and I didn’t want to put out half-assed articles. Anyway, this article is called “Drinks with the Dragon” as I will just be shooting about random finance related stuff as if I were in a bar with a friend. I have to be honest though, you won’t see me doing vodka shots or chugging down a jug of beer in a bar. You will probably find me drinking a coke or sipping on some girly cocktail as I don’t like the taste of alcohol.

My life: Things are starting to pick up for me lately. I passed my CFA level 2 exam which is awesome. I’ve also been kept busy analyzing some pretty interesting investments. If the recent pullback in stocks continues, I just might be able to scoop up these investments at a good price. But I think that right now the pullback is still too small to offer up many good bargains.

Hedging: Recent events such as Argentina’s technical debt default and the bailout of one of Portugal’s largest banks really highlights the need for investors to hedge their risks.  I personally am trying to increase my cash holdings so that I can take advantage of buying opportunities during the next major correction. I’m also thinking of adding some gold to my portfolio to hedge against the shit storm that will eventually happen as a result of the retarded easy money policies of the Fed, ECB and other central banks.

Position sizing: I think most investors would be better off limiting each of their positions to a certain percentage of their portfolio. I don’t think any position should exceed 5% of the portfolio, except maybe for very safe blue chips bought at a reasonable price; even then, I don’t think any position should exceed 10% of the portfolio. Warren Buffett said that “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” However, it’s fact that a lot of investors don’t really know enough about evaluating businesses to bet 40% of their fucking portfolios on a single counter. I obviously think that I know what I’m doing as I don’t really do position sizing for my own portfolio. But time will tell whether I’m “The Shit” or just plain shit when it comes to investing and capital allocation.

Junk bonds: Yields on junk bonds are at stupidly low levels. I don’t think the current yields on junk bonds are nearly enough to compensate bondholders for the credit risk that they’re taking on. I think that the junk bond market is a disaster waiting to happen. Now, I don’t know when it will happen (I don’t even know what the fuck I’m having for dinner tomorrow), but I do know that a market can stay in full retard mode forever. I’m interested in an ETF that shorts junk bonds, but I need to do more research before deciding whether or not it’s a good investment.

Pulling the trigger: I have been guilty of waiting around for a stock to drop a few percentage points more even though I knew that the stock was a screaming buy. The stock would then go up and I would just ignore it even though I knew it was still very cheap. I missed out on a lot of money doing shit like that. I didn’t buy Harley Davidson, American Express and etc. in 2009 because I was waiting for those stocks to drop another 50 cents or something. When I look how far those stocks have ran up today, I can’t help but think that I was an absolute fucking moron back then. I really need to start having more trust in my analysis and stop focusing on nickels and dimes when there’s a truckload of money sitting right in front of me.  


I will try to prepare the first annual performance report of the Greedy Dragon portfolio early next month, and to be honest I’m kinda anxious to see how I do. I know that short-term results shouldn’t mean much, but it’s the first year of the Greedy Dragon portfolio and I want it to kickass (unfortunately, I think it’s unlikely that I will beat the S&P 500 this time around). Anyway, I hope I can come up with more ideas for articles so that the blog will be updated more frequently. Thank you for reading. Take care and stay rational.    

3 comments:

  1. Warren Buffett did position sizing when he was managing partnership fund. It was in the list of rules between him and his partners.

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    1. While that may be true, he stopped doing that later on in his career. I think he even wound down the partnership because he wanted to bet big on Wal-mart (I can't remember where I read this so it might not be accurate).

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  2. He still do position size if he were to manage fund. However, it shouldn't view as diversification entirely.

    He changed the rule of position size when he want to buy American Express in 1960s and got permissions from his partners. Essentially, position size is proportion of your conviction of the investment.

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