Problem is that almost any product that has an unlimited upside and limited downside will be statistically rich unless there are natural barriers to entry of some sort. The old adage is that "the cheaper the option, the more overpriced it is". A lottery ticket is an ultimate example of asymmetric payoff with very negative expectation. Now, if there are structural reasons why you are the only one who can get this optionality for cheap...
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Global Macro Trading Journal
- Thread starter Daal
- Start date
Daal, the news coming out of Brazil seems to be uniformly bad, other than on the currency.
Could I ask for your views as someone who is actually there?
http://money.cnn.com/2017/03/07/news/economy/brazil-gdp-2016/
https://www.bloomberg.com/news/arti...l-over-brazil-braces-for-the-end-of-the-world
I'm looking beyond the sensationalist headlines and trying to get a feel for what this all means is real terms.
Yes the economy sucks. GDP is down ~7% from the peak and per capita GDP is down ~9% from the peak. Its the worst recession on record. But as I mentioned, I think of stocks as a forward looking investment with exponetial payoffs.
I'm told by a macro research firm that Brazil corporate profits margins are very depressed historically, you get a recovery going and margins are likely to expand
They will go higher by an uncertain amount during an uncertain time frame. And they can only go down so much. If margins improve, the PE ratio of the market (around 14 now) will go down to 4-8 and things will look pretty cheap and that will grow overtime. So the upside is huge
The downside is that fiscal reforms stall and Brazil enters a fiscal spiral that ends up in inflationary default or outright default (of domestic debt). This would hurt the banks and the indexes because they own a lot of banks.
Its a very binary situation (although the bull case does offer a much higher payoff). I plan to control my risk through the use of moving averages to get in and out (or a similar indicator). That's the nice thing about those strategies, they keep you in during a boom but get you out when things change. I will try to get out only if there is a dip that is larger than the Trump election dip
The downside of those strategies if that if the market is choppy, they involve a lot of 'gap losses' 'slippage'. But when there is a binary situation going on, I view that risk as much smaller.
Right now I think the moving averages will trigger if EWZ drops bellow $33-$32 or something like that. Point is, I want the convexity without all the downside. The best of Jim Cramer with the best of Tudor Jones
Thanks for the insight.Yes the economy sucks. GDP is down ~7% from the peak and per capita GDP is down ~9% from the peak. Its the worst recession on record. But as I mentioned, I think of stocks as a forward looking investment with exponetial payoffs.
I'm told by a macro research firm that Brazil corporate profits margins are very depressed historically, you get a recovery going and margins are likely to expand
They will go higher by an uncertain amount during an uncertain time frame. And they can only go down so much. If margins improve, the PE ratio of the market (around 14 now) will go down to 4-8 and things will look pretty cheap and that will grow overtime. So the upside is huge
The downside is that fiscal reforms stall and Brazil enters a fiscal spiral that ends up in inflationary default or outright default (of domestic debt). This would hurt the banks and the indexes because they own a lot of banks.
Its a very binary situation (although the bull case does offer a much higher payoff). I plan to control my risk through the use of moving averages to get in and out (or a similar indicator). That's the nice thing about those strategies, they keep you in during a boom but get you out when things change. I will try to get out only if there is a dip that is larger than the Trump election dip
The downside of those strategies if that if the market is choppy, they involve a lot of 'gap losses' 'slippage'. But when there is a binary situation going on, I view that risk as much smaller.
Right now I think the moving averages will trigger if EWZ drops bellow $33-$32 or something like that. Point is, I want the convexity without all the downside. The best of Jim Cramer with the best of Tudor Jones
Why not buy specific local stocks instead of the index? You can pick industries that will benefit from the recovery more.Right now I think the moving averages will trigger if EWZ drops bellow $33-$32 or something like that. Point is, I want the convexity without all the downside. The best of Jim Cramer with the best of Tudor Jones
I'm drawing from my 2009 experience. In that year, what rose the most was the crap that nobody wanted to own (banks and REITs). Same thing is happening now in Brazil. That macro research firm that I mentioned is great in their research but they are getting hurt a little because they are so underweight commodities and other 'crap' companies. They follow a Buffett type approach so buying stuff like VALE and PBR is beyond them. But EWZ owns it, and owns a lot of other stuff that people hate. I don't want to spend weeks and weeks doing research only to lag the market. So I rather just stick with the ETF, until things require a more conservative posturing.Why not buy specific local stocks instead of the index? You can pick industries that will benefit from the recovery more.
I also find ETFs psychologically a lot easier to own. When a stock drops 20-30% on me, its hard not to second guess yourself. But when a ETF does it, I don't care as much
A lottery is different because it has a limit on the upside prize (and the probabilities are known), an IPO, stock or certain options have no known probabilities (and they are impossible to estimate) and no known upper bound on the reward. This makes the statement 'this is overpriced' extremely error prone. Its very easy to be wrong saying that (and be wrong by a huge amount)Problem is that almost any product that has an unlimited upside and limited downside will be statistically rich unless there are natural barriers to entry of some sort. The old adage is that "the cheaper the option, the more overpriced it is". A lottery ticket is an ultimate example of asymmetric payoff with very negative expectation. Now, if there are structural reasons why you are the only one who can get this optionality for cheap...
The bias that random people have with wanting to get involved in IPOs or hyped up stocks is a similar bias that skeptical wall street types have with wanting to short them (directly or through bearish statements). They both get their emotions involved
Except that the avg person is buying an asset with an historical long-term return, no known probabilities and no known upside and that helps them (its antifragile). Furthermore its tax efficient, if the investment works out, one can hold for a long-time before paying taxes, boosting the compounding effect (relative to other investments). Meanwhile the wall street type is betting against premia, with massive tail risks, risks he cannot estimate even remotely accurately, with payoffs he cannot estimate, with a tax disvantaged system (short-term capital gains or capital gains that are realized more frequently than 'hold it forever' long positions) and frequently a borrow associated with the short sell.
Who's smarter?
Except that the avg person is buying an asset with an historical long-term return, no known probabilities and no known upside and that helps them (its antifragile). Furthermore its tax efficient, if the investment works out, one can hold for a long-time before paying taxes, boosting the compounding effect (relative to other investments). Meanwhile the wall street type is betting against premia, with massive tail risks, risks he cannot estimate even remotely accurately, with payoffs he cannot estimate, with a tax disvantaged system (short-term capital gains or capital gains that are realized more frequently than 'hold it forever' long positions) and frequently a borrow associated with the short sell.
Who's smarter?
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The funny thing is that the Wall Street types will frequently just say bearish things about the company, they won't put a real short on. That is because in some level they understand this risk management issue. They understand that they don't know the probabilities and the payoffs in the non-baseline scenarios, as a result, they just talk. The random guy who wants to buy the IPO in some level knows that too, they just got 2 different personalities and apply that unconcious knowledge differently.
But there is a lot of wisdom in those behaviors, its like Taleb says, a lot of the time when researchers say 'people are acting irrationally' its not that they really being irrational, its that there is a more complex and richer model guiding their decisions. Its the researcher that has a poor model and hence, he finds irrationality everywhere
But there is a lot of wisdom in those behaviors, its like Taleb says, a lot of the time when researchers say 'people are acting irrationally' its not that they really being irrational, its that there is a more complex and richer model guiding their decisions. Its the researcher that has a poor model and hence, he finds irrationality everywhere
I was thinking about one thing the other day
Becky Quick told Buffett that she invests all her retirement money in the S&P500. In a lot of ways, this is genius but not for the reason she thinks. Thing is, CNBC is naturally hedged against a bear market as financial media tends to boom during chaos. I believe 2008 was a record year for them (in terms of viewership and I would assume ad dollars). ZeroHedge also should be fully long everything as their google ad words revenue should skyrocket should be a bear market occur. In fact, it might even be prudent to get involved with ES futures and use some leverage
This sort of 'natural' hedge can make one take a risk that ordinarilly looks reckless but when combined with a natural hedge, it makes a great deal of sense.
A trader has some of this 'natural hedge' as bear markets tend to send volatility up, offer more opportunities and disruption. An astute observer ought to be able to profit from that.
I do some version of this on FNMA,FMCC, FNMAS. I'm long FNMAS and when this thing dumps big (due bad news), its great because it offers very good daytrading opportunities with a lot of volume and that are quite predictable (on the common stock). So I'm naturally hedged there (and if it soars, great)
But this is sort of a concept that books, articles and blogs don't talk about. There are probably deeper implications and way to 'produce' natural hedges that I'm not even aware. Its something to think about more because its so powerful when you are naturally hedged. It should enable one to do all kinds of 'investment engineering'
Ironically, this sort of 'natural hedge' ended up hurting me on VRX. I could have probably made a good deal of money daytrading the short side and sometimes the long side if I didn't had a long position in the first place. But in that case I hesitated and second guessed the trades too much, I would short and cover minutes later on any kind of pop. What is the difference to the FNMAS position?
I can think of this: when you are long one security in one account and short the same in another, this confuses your brain, it makes you feel strange about what you are doing. This induces mistakes, doubting of your trades, failure to pull the trigger etc. You think, if I'm bullish on this account, why am I bearish on this other one? There is a natural bias that you will have to fight against. This was compounded by the fact that I had defended the stock in public, this makes even harder to fight the natural bias. It was further compounded by the fact that I was long the stock in more than one account, this confused my brain even more.
Recently, I sold my stake and switched to a smaller position in 2019 calls (a different security), and publicly announced that. That reduced that natural bias a great deal. When Trump tweeted that drug pricing was going to come 'way down' for americans, I immmediatly shorted VRX for a day trade (pre-market) and didn't even sweat much. Ended up covering on the way down and was out after the first hour.
Because I was using a different securities and had toned down my public opinion, my natural biases come down and I was able to apply my 'natural' hedge that comes from daytrading/swing trading skills.
So that an important lesson there. I got to apply the same idea of a bullish posture in US stocks (and brazilan stocks), I got to find ways to implement a good hedge (when the time comes for that) that doesn't confuse my brain (different securities, in a different account) and be careful about not making too many public statements in order to not tie my brain to a opinion. An opinion that will contradict my trading skills and dillute those skills, to the point where they might cease to be profitable.
I suppose I need to combine statements about investments/trades with other statements talking about the exit strategy/risk management so I'm also saying that I will bail out. That and use different securities and different accounts, this makes the brain understand that one is a quick trade and the other one is a real positon.
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Also, it would be good if I could minimize the amount of accounts that I have. If I had 1 trading account and 1 investment account that would be perfect. Unfortunately, that is hard to implement because IB is so much better than my other brokers that I sorta do both there. But perhaps I can find a creative solution to this