An investment strategy I have been trying to develop is leveraged hedging. The basic concept is to short a stock you expect to go down, and to use the cash from the short sale to go long on a stock you expect to go up. By being conservative in using margin, that is staying under 35%, hedging appears to reduce the risk of aggressive investing.
I have been looking for shorts and longs in the same industry, an industry that I expect to be strong over the short and intermediate term. For example, long on WCOM and short on T; or long on TXN and short on INTC; or long on SUNW and short on MSFT. If the industry in which the hedge is executed performs strongly, the long stock should appreciate faster than the short stock. Conversely, if the industry or the market performs poorly, or the overall market has a down cycle, the short stock should decline in value faster than the the long stock.
If one believes that telecommunications is a growth industry; that WCOM's strategy in buying MCI combined with the trend toward consolidation in competitive local exchange carriers will erode ATT's market share; and that T lacks a strategy or management for this new marketing era; then the T/WCOM hedge is appealing.
Similarly, if one thinks Sun is going to win the war with MSFT; and that the relative P/Es of the two companies favor Sun; then the MSFT/SUNW hedge looks good. The problem here is betting with one's head rather than one's heart.
The INTC/TXN hedge is a harder call, but if one believes that Intel's dominance in microprocessors is ending; that Intel is lagging in copper circuits; and that TXN's leadership in DSP's has positioned that company for superb performance, then that hedge would be of interest. Another possible hedge here would be INTC/MOT.
Anyone have other candidates? |
