random musings on finding an "alpha"
All week I've been slowly trimming shares and selling covered calls (a great tactic in my opinion) on my portfolio and bracing myself for a downturn. And I have bought some puts on select indexes, ETFs, and securities.
In my view we WILL have a downturn sometime between now and the beginning of the next great bull market, and I've become cognizant in the last 3 months about how far ahead one would become if you avoided the big steps back. And so I've begun experimenting with hedges.
Today my portfolio actually inched every so slightly forward, but on the next day we get a big dip we'll see if the hedging strategies help to ease the pain.
I'm the cat that curiosity keeps trying to kill, and the more i learn about the market and the tools it offers the more convinced I become that an "alpha" exists. There is a way to ensure gains without extraordinary prescience, and I'm going to find that sucker eventually.
Julian Robertson is maybe the most successful long term investor in market history and he once quipped
""Our mandate is to find the 200 best companies in the world and invest in them, and find the 200 worst companies in the world and go short on them. If the 200 best don't do better than the 200 worst, you should probably be in another business."
And maybe this kind of long/short strategy is appropriate. Maybe long/short based on assumptions of movements in different sectors, maybe long/short based on Zacks rank or some other system that one can come up with. Maybe long stocks you think will outperform and short the market.
Maybe long with an appropriate hedging strategy. Along those lines the covered call is quite an interesting tactic. It works like this: if you own 100 shares of, say, RCL, you can sell a $10 call ending april 17th for $0.40 today. So that means that you have two possible outcomes
1. you sell the shares for $10.40 in a month, a considerable profit from todays prices
2. you get 40 free cents, or about a 5% return on the shares you bought today (provided you bought them today). If one did this consistently over time you could in essence create dividends for yourself (and quite healthy dividends at that) OR sell shares at very favorable prices that you pre-determine.
The covered call is a nice hedge against downward movements and a potential income strategy. And its literally no risk as long as you pick an exit price you'd be happy to exit at.
Today I don't have answers, but the beauty of this is the endless complexity and impossibility of doing everything right. But I know there's a better way than I've found so far, and I'm hell bent on finding.