Over the last few weeks, nobody seems to be talking about Gold anymore. Optimism has indeed returned Wall Street and many are now turning bearish on precious metals and commodities. However, just as what I have been anticipating all along [1], Crude Oil and Natural Gas remain in a nicely profiting uptrend. Even after the recent rally in the US Dollar, we are still seeing Crude Oil at $110. How many "experts" out there have called for Crude Oil to tank? There are so many of them and I can no longer remember them all. In fact, Boone Pickens now believes Crude Oil is going to back off, probably retracing to $85 (this was on Bloomberg TV yesterday but there's no corresponding news article to confirm), after citing his bullish outlook of seeing $150 not too long ago [2]. I am not sure if Pickens has hedged his position or he might have reversed his position, again. Personally, my position is not hedged. I should have, but I didn't. So, there's a bit of carelessness in my part.
Is not meaningful now for me to say this, but I believe is educational for new traders/investors. I am not sure if you guys are aware of this: next time when you see Jim Rogers on TV, listen to what he says carefully. You will hear the maverick of Wall Street going like this: "I don't want to sell. I am always hedged." Ever asking yourself what does Rogers mean? Definition of hedging from wikipedia [3]:
In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge. Holbrook Working, a pioneer in hedging theory, called this strategy "speculation in the basis, where the basis is the difference between the hedge's theoretical value and its actual value (or between spot and futures prices in Working's time).
Rogers will certainly has his own way of market timing and evaluation. Suppose you entered into a long position with Crude Oil at $100.0 of an actively trading contract month. The price rocketed subsequently and hit $120.0. You figured it is going to pivot before making a temporary retracement. With this conviction, you can hedge your position by entering a short position @ $130.0, for example, of a later contract month. This way, when the market retraces as you had anticipated to, say, $110.0 or even $80.0, your profit will still be protected at the $120.0 level. In fact, if you can foresee it going below $100.0 just before it does, you can "release" the long position at $100.0 and changing your net position to a short from $130.0 of a later contract month. I have talked about this before in [4] and [5].
Gold is now trading around $850.0. I believe the best in Gold is yet to come [6], and I will be going against Robert Prechter [7] on this. I have high regard for Prechter, but I don't think the deflationary scenario as described by Prechter, in which case all assets down and there will be no safe haven [8], has arrived.
In the world of financial markets, you don't win by following what the others are saying. You focus on what you can understand. With an on-going liquidity problems as well as contracting US economy and rising inflation, I don't understand how on earth can governments make bonds more attractive than "real assets" [9]. This is a conviction I have arrived at based on a form of the Federal Reserve Model, one that I steal from the greatest investor of all time -- Warren Buffett. In essence, is a matter of looking at just 2 lines crossing each other on a given chart. You see, charts are an extremely powerful tool if you know what to look for and even the greatest of all time makes use of them at times.
Some years ago there's a book by Altucher, which rounds out the standard picture of what the world's most successful investor actually does with his time and money. The picture Altucher paints is of a multi-talented investor who applies his unique gifts of analysis to a wide range of different instruments and situations, nimbly adapting his approach to the prevailing market conditions.
Buffett tends to debunk attempts at market timing, but there have been at least six occasions in his career when he has effectively timed the market to great effect - for example, when he skilfully switched the bulk of his holdings from equities into bonds, and again in 1974 when he made his famous comment about feeling like "an oversexed man in a harem", because stocks were so cheap. As to buy and hold investing, apart from his core equity holdings, the likes of Coca-Cola, American Express and so on, now so big as to be virtually illiquid short of selling the whole company (as has happened to Gillette), there are many examples of big equity positions Buffett has taken that he has closed out within a much shorter period. Altucher lists 17 big equity holdings that Buffett held for one year only, and others (including Guinness, his first unrewarding foray into the UK market) that he held for 2-4 years.
When forming his broad market calls, Buffett appears to use some derivative of the so-called Federal Reserve Model, which relates the prevailing bond yield to the earnings yield on the stock market. In 1969, the year that Buffett famously liquidated his investment partnership and returned the money to his investors, it was the first time for many years that the stock market's earnings yield had fallen below the prevailing bond yield.
His "oversexed man in a harem" comment in the mid-1970s was made when the ratio had swung violently back in the opposite direction. Since then, in general, there has been something of a "regime change" in the relationship. Nevertheless, says Altucher, the Fed model continues to provide a reasonably sound signal when considering market timing calls.
The one constant idea that Buffett has retained from his time as Ben Graham's student, concludes Altucher, is the Grahamesque notion that investors must have some sort of "margin of safety" when investing. In Buffett's case, as the size of his empire grows, his margin of safety stems from his ability to control or change the management of the companies he has invested in, rather than from the cheapness of the valuation at time of purchase.
References:
- Boone is Now with Boon, Part II
- Hedge (finance)
- Gold: Update
- Gold
- To Jay
- Prechter: Gold and Silver
- To Zoe_H
- To Jay
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