What Now Wednesday – Powell Sends the S&P 500 Back Below 4,000


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Well, don’t say I didn’t warn you.  In fact, when we asked Bing to summarize what I said in yesterday’s morning report, he was quite clear about it:  

🤓 Here is a summary and analysis of the article:

So this would be a good time to look at the hedges in question.  Our Short-Term Portfolio is mainly in CASH!!! and CASH!!! is, itself, a good hedge but we did also have net $537,375 worth of positions as of our Feb 14th Review, and we made no changes as we calculated that we had about $5M worth of downside protection and that’s more than all of our long positions.  On that day, the portfolio looked like this.  

The S&P 500 was at 4,126 on the morning of the 14th and yesterday we fell to 3,986, which is 140 points (3.4%) and those untouched positions in the STP jumped to $748,805, which is up $211,430 (39.3%) – so it does seem like our hedges are working just fine.  

STP March 8 2023

For small dips like this (3.4%), the main function of our hedges is to allow us to ride out the bumps without worrying about our long positions.  Our Long-Term Portfolio (LTP) paired with our Short-Term Portfolio (STP) had a peak combined balance of $7.5M and they still do – the positions have just switched and now the STP is bigger than the LTP.  

Should there be a real market disaster, we would then use some of that CASH!!! from the STP to buy more longs, closer to the bottom but, in the 3 years we’ve been running these portfolios, we haven’t had to make a transfer yet as the market keeps recovering before we need it.  That’s why we have so much CASH!!! sitting in the STP.   The cash in the LTP is at 66%, simply because we don’t trust the market that much.  

We would, in fact, do better if the market fell 20% than if it went up 20% at the moment – so we’re a bit bearish but the overall stance is what I like to call “Cashy and Cautious” as we were not that impressed by Q4 earnings and there are too many headwinds to expect the market to move much over that 4,000 line in the near future – so we’re in no rush to deploy our capital.  

Having a well-diversified portfolio with good hedges allows investors to be more bold during market dips.  As Buffett likes to say, “Be fearful when others are greedy and greedy when others are fearful.”  By having good hedges in place, investors can be more confident in taking advantage of market dips, knowing that they have protection in place in case they are early.

Poets&Quants - Where Top MBAs Work In Hedge FundsThe classic hedging strategies are to use options, such as buying put options or selling call options, to protect against downside risk along with using inverse ETFs or short-selling to profit from market declines.  As you can see in our STP, we combine them to teach our PSW Members very powerful hedging strategies.  However, it’s important to note that these strategies can be complex and should only be used by experienced Investors who understand the risks involved and have put in a good portion of Gladwell’s 10,000 hours of practice in the craft.  

Having good hedges in place can allow Investors to be more aggressive during market dips, while still protecting against downside risk.  By diversifying across different asset classes and sectors, and using options or other hedging strategies, Investors can take advantage of buying opportunities when they arise, without worrying too much about short-term market fluctuations.  As Buffett also says: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” 

With good hedges in place, investors can be ready to put out the bucket and take advantage of those opportunities when they arise.


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