Mea Culpa on 2019
Boy was that a rough last three months of the year for someone who was so sure about going short the semiconductor market the entire year. The semis, it turned out, was the best sector of the year and the one stock I had conviction in, on the downside, made me eat humble pie and then stuffed me with some more just to prove a point. The stock was AMD and that script took me to the woodshed on the short side. The last three months was a brutal run to the upside. So I make no excuses for the extent to which I was wrong on that whole industry and I have the losses to show for it. So what next?
Well the year in itself was not too shabby. With my initial goal of staying long the market and using hedges to protect the downside, my portfolio (sans the hedge) beat S&P by about 5% points and with the hedge lagged the S&P by about 6% points. So though I am not happy about the underperformance it is the price I pay for staying engaged in the market. The levels of hedge seem to be symmetrical the last couple of years where last year (with the late selloff in the market) I beat the S&P by about 6% and this year (as the market rallied) I was down about 6%. With that in mind I plan to continue the hedging to stay long the market.
Some lessons learnt in hedging:
- An all short hedge may not be the right strategy and I am going to try options on the long side as well just in case the market keeps marching along
- Need to build hedging positions rather than buy in heavy lots. Being wrong a couple of times makes it hard to go up the option ladder if you are already heavily bought in on the script
- Stop pressing shorts when they work. This was especially true in April and August when my options were working very well and I kept pressing further rather than selling out and waiting for another entry.
Things that worked:
- TGT and TGT. That was a script that really saved my skin in the costly hedging experiment. Though I had thought that this was a good hold I was not expecting a double in 2019. At a cost yield of over 4% and a 120% return on capital nothing to do here in the foreseeable future.
- FIT worked out okay. I am a little disappointed with the GOOGL buyout at 7.35. Was expecting a takeout around 3 Billion and so was hoping for about 8$ price target. I was levered on call options for it but that ended up being a dud. My FIT stocks finally returned about 50% over a period of 3 years so not too shabby.
- GE came back about 50% this year from the dead. I did not add stock but I did buy options for 2021 at 8$ strike. I need to get out of those (too much capital) and roll it up to maybe a 2022 $15 strike. Hoping for a pull back in early 2020 to do that.
- AAPL and MSFT: Need I say more!!!
- PSX: I am so tempted here to add more. I just might if it breaks 110 to the downside.
Looking forward:
Hedges for 2020:
- Short Semis again. Still in the AMD puts because 200 times earnings still seems unreasonable. MRVL puts as I am calling BS on their turnaround based on 5G.
- Short home builders. Mainly in ITB puts. With a 60% rally and interest rates creeping up I think it is due for a pull back.
- VXX calls. Volatility will need to pick up for this to work Did not buy the VXX script because from previous experience, the decay on those notes are too much to hold for very long.
Stocks for 2020:
- Looking to add to PSX and IBM. I think IBM will falter early in 2020 as the Red Hat acquisition will not show fruit yet and the lack of buy backs (halted due to the acquisition) will weigh on the bottom line. But eventually RHAT will work for IBM and so I would buy in below 130$ in 2020.
- Hoping upon hope that LYFT will start working after all the tax loss selling and lockout period and a positive turn in sentiment on ride sharing/car rental market.
- Adding to GE while protection to the upside with call options in case the stock runs away from me.
Looking forward to a new decade of learning the market.
Well the year in itself was not too shabby. With my initial goal of staying long the market and using hedges to protect the downside, my portfolio (sans the hedge) beat S&P by about 5% points and with the hedge lagged the S&P by about 6% points. So though I am not happy about the underperformance it is the price I pay for staying engaged in the market. The levels of hedge seem to be symmetrical the last couple of years where last year (with the late selloff in the market) I beat the S&P by about 6% and this year (as the market rallied) I was down about 6%. With that in mind I plan to continue the hedging to stay long the market.
Some lessons learnt in hedging:
- An all short hedge may not be the right strategy and I am going to try options on the long side as well just in case the market keeps marching along
- Need to build hedging positions rather than buy in heavy lots. Being wrong a couple of times makes it hard to go up the option ladder if you are already heavily bought in on the script
- Stop pressing shorts when they work. This was especially true in April and August when my options were working very well and I kept pressing further rather than selling out and waiting for another entry.
Things that worked:
- TGT and TGT. That was a script that really saved my skin in the costly hedging experiment. Though I had thought that this was a good hold I was not expecting a double in 2019. At a cost yield of over 4% and a 120% return on capital nothing to do here in the foreseeable future.
- FIT worked out okay. I am a little disappointed with the GOOGL buyout at 7.35. Was expecting a takeout around 3 Billion and so was hoping for about 8$ price target. I was levered on call options for it but that ended up being a dud. My FIT stocks finally returned about 50% over a period of 3 years so not too shabby.
- GE came back about 50% this year from the dead. I did not add stock but I did buy options for 2021 at 8$ strike. I need to get out of those (too much capital) and roll it up to maybe a 2022 $15 strike. Hoping for a pull back in early 2020 to do that.
- AAPL and MSFT: Need I say more!!!
- PSX: I am so tempted here to add more. I just might if it breaks 110 to the downside.
Looking forward:
Hedges for 2020:
- Short Semis again. Still in the AMD puts because 200 times earnings still seems unreasonable. MRVL puts as I am calling BS on their turnaround based on 5G.
- Short home builders. Mainly in ITB puts. With a 60% rally and interest rates creeping up I think it is due for a pull back.
- VXX calls. Volatility will need to pick up for this to work Did not buy the VXX script because from previous experience, the decay on those notes are too much to hold for very long.
Stocks for 2020:
- Looking to add to PSX and IBM. I think IBM will falter early in 2020 as the Red Hat acquisition will not show fruit yet and the lack of buy backs (halted due to the acquisition) will weigh on the bottom line. But eventually RHAT will work for IBM and so I would buy in below 130$ in 2020.
- Hoping upon hope that LYFT will start working after all the tax loss selling and lockout period and a positive turn in sentiment on ride sharing/car rental market.
- Adding to GE while protection to the upside with call options in case the stock runs away from me.
Looking forward to a new decade of learning the market.
Comments
Post a Comment