Markets go up, markets go down. No news there.
To stay ahead of the game, make sure you’re prepared to make aggressive, calculated moves during both…
…unlike Bill Hwang, who lost $20 Billion in TWO DAYS because he did several of the worst things possible all at once (leveraged several-fold his starting capital, the opposite of asymmetric risk, and no hedging, like, at all).
7. Keep Enough Cash on Hand
When I get excited about something, I’m all in. This has helped me in the past to ride the wave up on something.
However, I stayed rational enough to know when to draw back on something I sensed was about to have the bottom fall out.
I know I can weather 50% drops as long as I’m liquid enough.
If I’m liquid enough to not need any cash in the near future, or better yet, buy back in at the bottom, I’m feeling neutral-to-great when the markets drop.
After decades of investing, a big part of Buffet’s strategy is exactly this. He’s smart, undoubtedly, but a big part of his brilliance is being able to pull away from the herd emotionally, staying cash-heavy when everyone else is overleveraged to the tits.
Want a good deal? Be ready and able to buy when everyone else thinks the sky is falling.
6. Buy an Option(s) to Actually Hedge
It’s funny. The original stated purpose of call and put options was to allow holders to hedge against falls in their investments. So you buy 100 shares of ACME and one put at a similar strike price just in case your investment tanks.
Nowadays, with the derivatives market value around 12% of the actual stock market, and over 600% the notional value, it is safe to say derivatives don’t merely exist as a hedge, but as a wealth acquisition strategy.
That’s how I’ve used it mostly (even if it’s just writing calls).
That said, don’t forget the original, humble, reason for options—hedging.
5. Set a Stop Loss
A good rule of thumb: unless you’re sold-out for an investment (AKA you would buy more if it tanked and you were down 90% on it) then set your stop loss at 8%.
4. Prioritize Assets That Preserve Capital
Cash is OG. The market tanks, your cash stays the same (aside from inflation).
Otherwise, this is why I like real estate with rental income. Even if the market tanks, you’re not just underwater until it climbs again.
You’re making money while you wait.
3. Uncorrelated Returns
If you’re in wealth preservation mode (AKA you’re already rich) then seek uncorrelated returns.
Note: this is not for getting rich. Just protection. Focus is what creates wealth.
Uncorrelated = when one drops, the others won’t. So if you’re getting 10% returns in the market, and you’re getting 10% in a Christmas tree farm, those would probably be uncorrelated returns.
The thing that will affect the market most (e.g. Fed tapering) would probably not affect the Christmas tree market the same way (e.g. beetle blight).
So those may be two good things to invest in—again, in preservation mode.
2. Look For Asymmetric Investments In The First Place
Let’s say you find a beautiful property in the Rocky Mountains. You’ve got a friend who does geological surveys, and she thinks there may be a palladium mine on that land (I know, just go with me for a second).
You, on the other hand, have been interested in a nice second home. Maybe you get a vacation home and rent it out to other people when you’re not there. Maybe you list it on Pacaso and do a bougie timeshare with other rich folks.
If you can stay unemotional, then maybe you tell yourself you are buying a property to build a vacation home. But before you do, you get a proper survey to determine the mineral wealth of the land.
Then, if you find something, you sell the land to a mining company with a cut of the mining revenue on-site (or whatever those deals look like). Worst case scenario, you decide to go ahead with your vacation home.
I know it’s not that simple if you have a family you’re building it for, a spouse whose expectations you’re trying to manage, etc.
But that’s just meant to be one type of example of how you look for asymmetry.
You don’t find these deals with conventional metrics, but by deeply understanding the trends, technology, and unfair advantages around an industry.
1. Stop Using Margin
Margin, debt, loans—terrible ideas for volatile investments.
Similarly, if you’re long on options instead of just buying shares, yes your returns will increase faster, but they’ll also drop at a greater rate when your underlying stock has a sudden dip.
If you’re using loans for largely stable investments (e.g. creating a business with strong upside potential from zero, or buying real estate you intend to generate income from) then you’re good.
If you’re using margin to buy stocks Bitcoin or anything else whose value may double or cut in half in a day—you’re dumb. Just dumb.
What else do you do to hedge the downside?
I want to hear from you—drop a comment below and I’ll respond.