Global Macro Trading Journal

jj90 said:
I'll throw my 2 cents in on RE. Renting is not necessarily bad, and you cannot look at it from a purely financial standpoint.

I agree that from a financial view owning RE is like owning equities, if you can handle the drawdowns, you should always be long. Even more so for RE because it's illiquid and tends to throw off cash(rent).

But if you don't care about money or value freedom more than money, a house will lock you down for the foreseeable future. This point is immensely crucial.

And there's the timing thing.?
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Indeed, the argument for renting own'smainresidence is better than Daal makes of it. One keeps more mobility when renting, but depending on onessituation there are also regulatory and tax advantages at renting over buying, and one beeing priced out of the market is not a given, it remains to be seen wether theRE prices over time increase more than one's income.
Besides the ratio purchase price/rental price varies widely across the world, when thisratio is very high one can see better investments for his money than paying the house cash or paying a mortgage higher than a rental for the same property.
Ratio was vey high when i moved to my present House btw, and i could see better investments, but in retrospect it was probably a poorchoice with the RE prices going ballistic in the meantime. Soon after 2008 it was the other wayaround though.
Anyway I ve always been renting and know a bunch of people themselves renting and doing well, it s not because one rents that he is planning poorly and gets outpriced of the posh areas.
Obviously i also know landlords who rode the price increases and got rewarded hamdsomely, and are still beeing rewarded. Many ways to.skin a cat, or to plan one s investments.
 
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luisHK said:
Indeed, the argument for renting own'smainresidence is better than Daal makes of it. One keeps more mobility when renting, but depending on onessituation there are also regulatory and tax advantages at renting over buying, and one beeing priced out of the market is not a given, it remains to be seen wether theRE prices over time increase more than one's income.
Besides the ratio purchase price/rental price varies widely across the world, when thisratio is very high one can see better investments for his money than paying the house cash or paying a mortgage higher than a rental for the same property.
Ratio was vey high when i moved to my present House btw, and i could see better investments, but in retrospect it was probably a poorchoice with the RE prices going ballistic in the meantime. Soon after 2008 it was the other wayaround though.
Anyway I ve always been renting and know a bunch of people themselves renting and doing well, it s not because one rents that he is planning poorly and gets outpriced of the posh areas.
Obviously i also know landlords who rode the price increases and got rewarded hamdsomely, and are still beeing rewarded. Many ways to.skin a cat, or to plan one s investments.
More...
It sounds like you are in a special situation, that one that I'm in myself as well. We can AFFORD to get squeezed in real estate. We can just say 'screw it, I will just pay the higher rent and continue to live here'. I'm still hedging as a matter of discipline but if I get squeezed like you was in HK I could still afford it. But that is not the case for a lot of people. A lot of people would have to move if their rents popped by 50% above inflation, which leads to a cascade of consequences in terms of lost contact with family, friends, higher chance of death etc, etc
 
Soros says on Alchemy of Finance that a loose fiscal policy + tight monetary policy is bullish for a currency. That seems to be playing out classically on the USD right now
 
Asness paper about international stock diversification
http://www.retailinvestor.org/pdf/ForDiversify.pdf

What they find:
-Global diversification improves risk metrics over the long-term but can actually worsen some of them short-term. This makes sense, if you want 40% of your money in equities and split it between 20% domestic and 20% foreign, sometimes that foreign allocation will drop more than the domestic when global markets are crashing together (sometimes less, but it's the skewness of the results that will be worse). Its this tendency towards markets crashing together that creates this issue
-Long-term, this tendency matters less and what is important is the economic performance differences and there is a big benefit for those that diversify

We never hear about the "Warren Buffett of Greece" that's because he probably is broke as was anyone that levered 1.5x in equities there. International diversification to me is huge
 
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Over the last 4 years I have done a lot of short selling in my day/swing trading (I'm looking to move away from that but thats for another post).

One of the things that I've learned is that the results of someone who does a lot of short selling aren't just the "accumulated profits" that trader/investor has. If you only look historically, you will miss out the 'black swan' factor. When a huge short squeeze occurs and the person is forced to get out either because of risk management, margin calls, broker buyins, portfolio rebalancing (as the short position becomes larger as % of the portfolio) or any other reason. So whatever the results that guy has, you got to discount by some amount in order to take into account that the guy took that tail risk but was fortunate enough not to get taken to the cleaners. As a day trader, that risk is severly decreased because you can always bail out of the short as the squeeze starts. But when you carry positions overnight (like the long-short funds do) that risk just increases massively

This makes me conclude that the vast majority of long-short funds results are overstated EVEN if they say 'we short small'.A 1% position can lead to a big loss, even if it doesnt break you. This is specially a concern if the fund has a focus in small and mid cap stocks, where those squeezes occur far more frequently. But even the bigger caps sometimes will take the shorts to the cleaners. Thats pretty much what happened to Einhorn on Volkswagen. But I'm thinking specifically of guys like Hempton who get involved in small and mid cap shorts, his results are almost certainly overstated given that it appears that he havent had a huge squeeze yet. I believe he got squeezed pretty hard this year on BTU (before bk), I'm not sure what his response was but if it was to just hang on tight to the short and 'let the fundamentals work out', then his results are even more overstated. I've seen a lot of shorts blow up over the years by thinking like that. While they might not blow up with 1% shorts, they will still post a huge loss at some point in the future
 
I"m not trying to pick on Hempton, I'm just raising the possibility that it might not make much sense for most people to try to reduce their portfolio risk by adding shorts, specifically if they are doing with small and mid cap stocks. The reasons:

-Its very hard to find very good shorts, the obvious ones get crowded which makes it expensive to borrow or put the shorts as a high % of the float. This is a recipe for a short squeeze
-Even if you do find a 'undiscovered shit company', a good short there usually its all about timing. If you short at the wrong time, all of the sudden you are getting squeezed hard and increasing your volatility/portfolio risk instead of decreasing it
-If you do have that ability to find them and time them, then sure, its a great way to add value but there will still a low of 'skewness' involved. You get a few things wrong and all of the sudden you are getting a 200-500% move against you in a stock. Because of this assymetry, there is not much room for error

Essentially, its a big high wire act. If beating the markets is already hard, beating doing this long-short strategy must be even harder. It doesnt take many mistakes to make the portfolio more risky instead of less. That's pretty much the opposite of what the original intention was

Alternatively, if you are looking to have smaller drawdows than the stock index but you dont want to short, there are some other ways one can achieve that without that high wire act
-Raise some cash
-Own some safe haven bonds
-Own an asset that you believe will earn something and negatively correlate to the stock market in some occasions. Gold did that early this year but now it might have lost that effect. This is a timing skill but I think that is easier to do than to find perfect shorts and time them like a champ in the small caps universe
-Shorting the index with ETFs/futures when you believe there will be a correction/crash
-Other ways that I havent though about it
 
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That Asness paper shows that internatinal diversification has worse skewness short-term but long-term they decrease risk. What these long-short funds (especially if they use small to mid caps) do is to patch up volatility problems by adding shorts. I'm sure their short-term skewness look great, if markets crash, their shorts will crash and cushion the downside. But what about long-term?

When you invest with these guys/or you try to replicate their strategy at home, you might have the following problems:

-They/you dont have the short picking ability but you get fooled by short-term success and think that they/you do
-They/you dont have the timing ability but you get fooled by short-term success and think that they/you do
-When they/you get in a bad spot (big short squeeze, which will happen at some point) they/you make the fatal mistake of fighting it. As a result you get a huge loss
-They/you lose those abilities in the future for any number of reasons (age, stress, lack of motivation) but the strategy continues to be applied for the detriment of the portfolio

If these things happen, even though the short-term skewness looks great, the long-term one will be bad and risk-adjusted returns will be worse than if you did no shorting to begin with!
 
If someone can do that long-short strategy exclusively off S&P500 stocks (or stocks with that are big enough to be there but aren't), then these concerns no longer apply as much. Its a lot harder for those companies to squeeze. Most big funds out there lend out their S&P500 shares to generate income (which keeps the borrow very avaliable), they are also so hugely liquid, shorts are not a big part of their moves. But its tough because they are more efficient also, the entire world is looking at them trying to figure out how much they are worth. If any of them is worth 50% less than where they are now, its very difficult to discover that before other people. But if someone can pull that off, then that guy deserves his 2/20
 
When it comes to these 'volatility hedges' I think one approach that can make sense is to have a diverse basket of hedges, so
-Have a balanced diversified portfolio that tries to achieve the 'efficient frontier'
-Have a certain % in cash
-Have a certain % in safe haven bonds (and what constitutes a safe haven bond is more a complex question because we cant necessarely trust history)
-Have a certain % in gold or another asset that you think will produce a return that will negatively correlate (short-term) to the stock index. This might change from year to year
-Have a certain % in the ONE best short idea you came across all year. And that % is not a significant percentage of the portfolio. Being selective is key
-Short the index with ETF/Futures when there is an exceptional short-term setup that you believe will lead to a significant drop in the index or to a small loss to the trade. Very good risk-reward short setups. Also with a limited amount of capital (unless you have a LOT of conviction on the trade, then you go for it)

That might be a safer way to produce better risk-adjusted returns
 
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