Weekly Paid Newsletter 11/14/2021
Yes, if you don't invest now you will regret it for the rest of your life. Asymmetric Portfolio +22.51% YTD.
Yes, if you don't invest now you will regret it for the rest of your life, and I am totally serious, we are facing a unique market situation ever.
Although I am sorry to tell you that you cannot buy any asset at any price. Even those companies that may be of enormous quality, such as CrowdStrike (one of the leading companies in cybersecurity), or Sea Ltd (an impressive conglomerate of companies focused mainly on e-commerce, entertainment and retail), are trading at multiples never seen before and can lose +50% of their value.
But if you know where to put your money, you can get absolutely stratospheric returns.
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price" — Warren Buffett
To understand the current market situation the US government, together with the FED have added $10T to their balance sheet account. This has caused the major indices globally to increase in value like never before.
The new monetary theory has meant that the investment paradigm of doing a DCF has lost a lot of meaning and it makes much more sense to invest guided by central bank actions rather than business perse. If you don't know what I'm talking about look at the returns since the Fed has become active and the resilience of the markets.
In addition, most central banks with the arrival of Covid decided to lower interest rates so that companies and citizens could have cash more easily, this meant that initially the money was used to pay for the damage that the pandemic had left in its wake, later the easy money was used to buy goods not so necessary, such as second (or third) homes, which increased the demand for housing.
In the very near future, the Federal Reserve will have to raise interest rates — there is a 90% chance of 3 hikes by 2022 — for this lending and easy money to stop. For if it does not stop, companies will have to shift their investments to riskier assets to avoid inflation. Imagine having an annual return of 5%, being told that you are losing 1% purchasing power (CPI around 6.1% in 2021).
In case these rates do not go up or even down, we would enter a deflationary period (don't want to imagine it) in which people would leave their money in the bank, consumption would decrease because money gains value year by year.
In the graph above we see that in those deflationary periods (1929-1933), the most severe crises have occurred. Central banks would never allow that to happen, and if they did, the consequences would be much worse.
We are living in a period of excess and fantasy, very similar to that of 1999 and 2007. But this easy money is already gradually being censored with the plans presented this week by the FED. Moreover, in those years there was room for the possible lowering of interest rates. Currently, they are at 0% so there is no margin at all.
The economy as you can see is at a point of no return and only a stock market CRASH could stop the situation. Many qualify this period of history as the mother of all bubbles.
Many of the big investors have become tremendously rich because of a black swan, and if there is a time in history when it has been possible, it is now. To put this in context, a 50% drop would leave the S&P 500 at the lows set in 2020. This would not, under any circumstances, be a strange occurrence.
Knowing how to keep our money in the right place can make getting it right once, can be enough to retire.
"In an environment where central bank reinsurance is likely to be tapered off, investors should take a hard look at the valuation of fat tail hedges in the context of their overall risk-management objectives at the portfolio level and the pros and cons of tail hedging versus a potentially time-inconsistent dynamic risk-balancing approach" — Tail Risk Hedging
One of those who has been in the world of finance for a long time, Warren Buffett, has understood what is important in this industry, and that is that no matter what happens, we do not have to lose much money (even if we stop earning it). And what he has done is to position his portfolio with more than ever before in cash.
But does the market make record highs every month? Recessions always come when the market least expects them, even if the possibility of their coming is known. The 2008 recession was on everyone's lips but people were still mortgaging, just like the .com bubble. People follow the returns of those who are still in the boat without knowing that it is going to sink. Without going any further Covid-19 started in 2019, hence the name, although the markets didn't notice until March 2020.
Elon Musk very controversially sold $5B worth of Tesla stock after taking a poll on his Twitter feed. Perhaps he too knows that the stock price is in a bubble and what he needs is cash? As good as the company is, it can still pull back 90% just like Amazon did in 2000. Can you imagine going from having $280B to $28B in just one year?
Having cash when no one else has is gold, it allows you to make investments with a very low risk/reward, plus if you leverage yourself in that situation you may never have to worry about money again.
“Cash holdings makes the portfolio more robust but does not make it antifragile because the value of the cash does not increase in value under a shock. Hedging with explicit tail hedges using options where volatility is cheap is manifestly antifragile approach. But it costs premium, low it may be today in the face of historic asymmetries. Therefore, accumulating these convex positions cheaply is key.”
I know it sounds like a movie, but that's how it is. At Asymmetric Finance, we have a portfolio for the day this happens and we share it on a weekly basis. Our subscribers tell us why we charge so little with all the value we bring, and yes it is true that we could charge as much as ($50/month) and the subscription, in the long run, would be cheap.
It may not last long at this price, but in the meantime, enjoy!
In addition, we are finishing the preparation of a new initiative that we will present to you next week.
Below our portfolio in detail...