I'm none too sure if I'll ever get my head around derivatives as I had decided a long time ago when I first looked at these type of instruments that, no matter how hard I tried I wouldn't understand them let alone know how to use them. Time to learn/study was also against me.
Also when I first started investing, the first rule I used (apart from knowing oneself) was to understand my risk tolerance and "playing" with things I don't understand was clearly and firmly off the agenda and so, derivatives and the like just didn't feature on my horizon. My strategy was simple. Buy a quality dividend paying share, build the position over time on perceived lows so as to build an income stream via div's or the sold share via cash and the interest come retirement. Yes, I do have more than one stock.
I also made it a rule to have an allocation available (approx. 30%) in cash for rainy day events and for spec and penny dreadful stocks.
This has suited me fine and it's been amazing how I've turned my life of renting with bugga all savings or assets into owning outright two residential properties and a retail business along with the associated building and property. I also work within the business so have a wage to live on. Sounds impressive but remember I live in a remote/regional area so like for like, I doubt if I could do the same in the big smoke. Not that I want too, ten years eking out an existence in Sydney was ten years to many.
Options/derivatives, FX and the like to me are complex and hence I avoid like the plague. Sure I might and probably do miss opportunities but the payoff is that I can sleep well at night. Now having discovered ASF (why I hadn't seeked out stock forums in the past in beyond me, too busy working, being a dad and learning a new trade I'd say) I find myself coming back to these complex instruments.
The questions you pose and meant as lessons are fantastic. I can tell you honestly that the discussion on the potential trade stump me. I simply don't know enough about how these de-risking plays work and as such, shy away from them and any attempt to answer. My feeble attempts as you'll note have been just that, feeble. As such I doubt if I'll be able to get my head into the option/derivative space as it doesn't float my boat as much as say, T/A does.
I feel I'd be wasting my time studying option plays when I'd rather be looking more and more into the T/A side of things and just playing the long game. I accept that I may miss opportunities but I'd rather play with something I'm far more comfortable and perhaps familiar with than going out on a limp. Of course this may all change if or when I have that eureka moment. Will leave it there for now and do as you suggest because it's obvious, there is much to learn.
Thanks ever so much for stimulating and thought prodding this old clunker mind of mine, much appreciated.
Cheers!
Hi Craton,
Glad you've gotten some insight from the discussion. You are definitely on the right track there about only doing what you understand and feel comfortable with. It's part of "know theyself" in my mind.
I know this is a newbie thread and that some of what is in here can be seen as daunting and complex, but usually I'm responding to requests for information. This time I felt was important to help open the eye's to the possibilities and as JBH was a stock we discussed in detail and timing seems opportune, I jumped on the chance to discuss these issues. I intend to show what happened afterwards, but the lesson is always more powerful if you can pre-empt the trade on record before/if it happens. (You then don't get people saying prove it).
One of the things I have neglected (as simply too busy), has been a discussion around what I consider to be top tier and second tier stocks, and their impact over a longer term investing/trading horizon. I started talking about them around the #690 mark back on page....35.
I then kinda got distracted by the silly season and didn't tie the big picture of what I do all together. It's appropriate however to talk about the above transaction in context with a broader picture however, so....
Here's the model of how I invest in the share market (note this isn't the whole picture, because despite what brokers and financial advisers will tell you, the market isn't the only game out there and you need to diversify away from the share market into non-related asset classes).
Tier 1 Portfolio (Long-Term, passive, geared)
Market cycle bottom (6 o'clock - about March 2009) - I'm on record on these forums somewhere that I did indeed purchase at this time. Here you purchase core tier 1 portfolio stocks. Use margin lending up to 50%, ensure portfolio is
positively geared. I can now effectively hold these positions
indefinitely. The ability to hold them indefinitely is important because the market will undergo a period of instability and uncertainty. It's important to realize that this is simply fluctuations in capital value of the portfolio that is perfectly in line with fluctuations of the market. By positively gearing the portfolio at this time I can be a passive holder of those assets. Any capital growth during this period will lower the LVR (loan to valuation ratio) of the portfolio below 50%, so re-establishing the 50% gearing ratio by purchasing more shares (if you do not lose the self sufficient nature of the portfolio - dependent on borrowing rates and income from the portfolio) is appropriate.
Once the above is done, when you can no longer create a self sufficient portfolio of high quality stocks, the nature of the market has changed, and our actions within that market also needs to adjust to the changing conditions. For this core portfolio, it may no longer be appropriate to purchase additional shares, so debt reduction becomes important. I will use excess income from trading activities and yield from the portfolio to pay down the margin loan until my LVR is at a minimum 25% or below. (I've started this process, but it's likely to take a while). This ensures the integrity and longevity of the core portfolio. (This core portfolio in terms of money allocated to this asset class will be approx 85-90% of investment at inception).
Tier 2 - Long-term, active, geared
After the bottom of the market investors start looking for shares that aren't as high a quality as the Tier 1 stocks. They may simply be smaller market cap, or be industry centric or have other reasons behind their lack of inclusion into Tier 1. Many of them have higher yield or growth characteristics, so generally it's appropriate to look at these shares to enhance the characteristics of the core portfolio over time. These assets however an
not Tier 1 shares that I would be happy to hold across multiple market cycles. Therefore assets in this category have a greater focus upon a) risk and b) profit taking. If/when appropriate to do so I will crystallize my gains, or limit my losses in these kinds of position, and usually use the proceeds to pay down debt. That is the active component of the portfolio, but these shares can be held for quite a length of time. I've got some stats on this, but can't be stuffed looking them up (they are on the home comp anyway). No allocation of funds is made towards this area at inception. Stocks in this category are purchased with proceeds from the trading portfolio's.
Trading System - A, B, C, D I will not be sharing how they are constructed, don't ask for more detail.
Trading System
A works across all kinds of markets to a greater or lesser efficiency. As a consistent system with little time commitment it just plugs away, average months it will net 2.5%-3%, good months are 6%-8%, bad months are -2%-1%. Approximately 10% of funds will be placed in this at inception point (March 09).
Trading System
B is...well it's really not a system at all, it's simply a cash box that I use for trades that smack me across the face. This is "play money" and highly discretionary in nature. It may have nothing in it from time to time, by I like to start it with 5% of funds at inception. (I also tend to dump a bit of cash in here to pay the tax man if a Tier 2 stock is sold). It mostly sits in cash investments all the time. As you might expect, this tends to get ravaged in a trading position if I'm not careful and paying attention, (which I frequently am) so hence the tiny allocation towards it at inception. (This is however where I've made some good gains when I am paying attention).
Trading System
C is the short squeeze system I demonstrated here. This looks for outlier events within a low risk environment, and incorporates stops and position sizing methodologies. It has no allocation at inception, I will fund it from profits in the trading system. This is largely ignored in early cycle and starts to come on-stream later in the market cycle.
Trading System
D is a secret. Sorry not sharing.
Ok I posted this before I finished because the page went glitchy and I thought I lost it. Will come back to this later, but ask question if you want.
Cheers
Sir O
P.S. With the above said, into which does the JBH proposed trade fit in?