<<<I couldn't sleep at night putting the majority of my net worth on the line>>>
Neither could I. The majority of my net worth is in FDIC insured savings accounts and real estate. I don't think I could sleep at night if the majority of my net worth was in the stock market, period. One Black Tuesday type event, and that's all she wrote.
<<<To generate a 300% return in one year, you have to take a risk profile that value investors would never take, period.>>>
Actually it was a combination of put options on a company I had been studying for over two years, plus the fact I was almost all cash on September 11 and had my pick of cheap stocks to look at. Money managers seem to like to do most of their window dressing in the fall ahead of tax loss selling, so my focus at the time was to go to the side lines and wait for a market bottom. Market news on the economy was looking pretty grim, so it seemed like a good idea at the time. I've noticed the market seems to go through some kind of "crisis" about every 12-18 months and the usual result is you can just about close your eyes and pick something out of a hat for at least a double in the following 3 months.
Which is more risky? A diversified portfolio with total market exposure 365 days a year, or a portfolio that is all cash most of the year, except for heavy concentrations of a few issues immediately after a major market event, then back to cash? I realize it's an unorthodox approach, and I'm open to discussion, but my theory is it involves less risk, and past experience has told me it's what I should have been doing all along. I don't think it's contrary to a value oriented strategy other than it adds cash to the definition of value.
As far as the put options are concerned, you're welcome to read some of the analysis I posted on the SEI board. Everyone knows options involve a high degree of risk. And everyone knows they should NEVER have a high concentration of options in their portfolio. In the past 6 years this is the only time I've ever had more than 5% of my account in options. I suppose you could call it dumb luck that after studying the company for several years I accidently bought too many options at the right price and time to see a nice return on trades that took place over a 4 month period. Risk is nothing more than a way to calculate the degree of ignorance involved in predicting future events. The higher the level of uncertainty, the higher the risk. If there's a point to any of this, it's my belief that ignorance is a generally curable condition and cash is a good investment at times when there is no cure. |
