Speculative Alternatives Updates, 6 Month Review, And Some Thoughts on Benchmarks

Once again I’ve been horribly late in updating the speculative alternatives portfolio.  Two positions have changed since I posted about it last:

  • Nov. 26: Exit the J&J position & associated hedge
  • Dec 3: Buy NWN and enter associated hedge

The resulting portfolio is:

  • Short 18% BMS
  • Long 12.2% SPY as beta hedge for BMS
  • Long 18% NWN
  • Short 4.7% SPY as beta hedge for NWN
  • Long 18% SPY as trend follow
  • Long 15% GLD as trend follow

The SPY positions sum – total is 25.5%.

Here are all the transactions to date: Transactions 2012-12-11

Current value of the portfolio as of today is about $32,020 – a 6.6% gain from portfolio inception.

I want to discuss a little how the portfolio has been doing.  We’ve gone 6 months now and held 13 stock positions (two still open) and changed the direction of our gold position twice. Continue reading

A Speculative Alternative To Investing Part 5: Dividend Stocks, Program Trading, and Picking our Spreads

(part 1, part 2, part 3, part 4)

Last time we determined that beta neutral spreads are the perfect instrument to use in our speculative portfolio.  Now we need to decide which spreads.  Sadly, that’s as open ended a question as “Which stock should I buy?”.  What I’m going to share with you here is a technique I’ve developed that seems to give good returns on relatively low risk. Continue reading

A Speculative Alternative To Investing Part 4: Hedging & Beta Neutral Spreads

( part 1, part 2. part 3)

Before continuing, you need to have a solid grasp of alpha and beta – otherwise the rest of this article will make no sense.

Back in part three, we developed a method for trading the S&P 500 for use in the long term speculative account.  In other words, we’ve figured out how to trade beta.  That’s good, but one of the goals of this speculation method is to limit beta exposure to +- 20% of the account value.  The purpose of this limit is to mitigate account damage in unexpected crash situations (when long) or boom situations (when short).  Since I’ve allocated 20% of the portfolio to beta trend following (which could thus produce betas between +-20%), ideally everything else in the portfolio should have a beta of zero.  That’s a difficult requirement for stocks, however, because they essentially all have a positive beta, and in most cases that beta constitutes at least half of the stock’s movement.  What we need is something that acts like a stock, but with no beta component. Continue reading

A Speculative Alternative To Investing Part 3: Grabbing The Easy Money

( Part 1, Part 2)

In part two, we looked at stock market inefficiencies and how the Shiller PE allows us to spot them.  Now that we know there’s inefficiency, the question becomes how to grab some of that cash for ourselves.  In other words, we need to figure out how to be a contrarian and profit from the hordes of people consistently mis-pricing the S&P.

The only problem here is that actually taking a contrary position, in the right way, at the right time, is not easy.  Everyone thinks they’re a contrarian, but by definition only a few people actually are.   It’s not immediately obvious how best to go about it, so I’m going to suggest some options, look at their pros and cons, and then finally settle on one of the components of our speculative portfolio. Continue reading

A Speculative Alternative To Investing Part 2: A Theoretical Foundation Based on Valuation

(Part 1)

If we’re going to achieve the relatively dramatic speculative goals laid out in part 1 of this series, it’s going to be essential to find financial instruments which are incorrectly priced and for which we can thus predict future price movement.  But before we can do that, we need a solid understanding of the source of those pricing mistakes and how to detect them.

Thankfully, this is not a place where we have to re-invent the wheel. Continue reading

A Speculative Alternative To Investing Part 1: Goals

If you’re a long term reader of this blog, you may be aware that I’m anti-investment.  It’s not so much that I’m opposed to the concept, but I do not believe any of the typical investments in the first world (roughly: stocks, investment grade bonds and real estate) are likely to fare well over the next decade or three.  If you haven’t read the linked article above, I suggest you do so – the rest of what I’m going to say here won’t make much sense if you haven’t.  Similarly, you need to understand how I use the terms “investing” and “speculating”, since there is some diversity in how they’re used and we need to be on the same page.

Now, I’m well aware that the majority of people reading this blog do not share my negative opinion on investment or have never really considered the subject.  That’s OK.  I’m not necessarily trying to convince you.  I just want to expose you to a different way of thinking about your long term financial security – one that is not dependent on the end-game performance of any financial instrument or macroeconomic factor. Continue reading