Risky Investment Ideas or “Don’t risk your home equity shorting stocks”

[powayseller]

Daniel posted some interesting investing ideas.

1. Take the short side on CME San Diego housing futures, that’s a first no
brainer.
2. Short the stock market indexes (either SPY or the cubes, they’ll all drop
like stones in the upcoming recession).
3. For more bang-for-the-buck, take the short side on S&P E-mini futures.
This is the same as #2, but with a lot more leverage.
4. Buy some out-of-the-money puts on the builders, as they’ll certainly go
under.
5. Since you also KNOW that long-term rates are low and will certainly go
up, profit from that knowledge in the interest rate futures market.

These ideas are wonderful, but come at a high risk.

CME – was discussed at length in previous posts. Trader Chris Johnston warned of the risk in trading this with the current volatility.

Shorting – you can lose your money in a sucker’s rally, Fed-is-done rally, or value investor purchases. Timing and rallies within a downtrend can cause you to lose all your money.

The SPY and emini futures provide leverage that is similar, one is the stock equivalent of the other. You can
trade with much smaller margins in futures, but then also have to put up
additional margin if something goes against you.

Puts – Most options expire worthless. You can be right on your investment and take a 100% loss if the crash does not occur right when you need it to. The options “could” expire worthless, only to have the stocks crash a week later.

Futures market – per Chris Johnston, “One thing to keep in mind, we are having a big rally in interest rate
futures. Those betting on higher rates there are getting killed right now. I
am one of them who is currently short (the current trading service trade)
and getting hit hard. Long rates are dropping right now. The high in rates
was made July 5th. As you have seen, trading interest rate futures is not
easy money. They can be very volatile.”

I do not want to risk my home equity in this manner. Puts, options, shorts is very risky. Again, some people might borrow against their home equity or retirement accounts to make those purchases, but I will not.

The way I am putting my money where my mouth is:

1) Sell my custom built stapathya veda house (vastu house, only a few exist in this country)

2) Rent until market corrects; signed 2 year lease

3) Sell 95% of my stocks, index funds, mutual funds, and get out of the stock market

4) Sign up for newsletters with investors that I respect: Chris Johnston, Bill Fleckenstein, Zeal Intelligence, Yamamoto Forecast

5) Read economists I respect: RGE (Roubini Global Advisors), Dean Baker, John Talbott, Joseph Elliott, and more

6) Follow advice of investment professionals whom I pay, which means intelligent trading and preserving capital. I have 10% of my money for trading and stocks (Zeal and Chris), the rest is in cash (Yamamoto advises on 100% cash).

7) Decide what forms of cash to hold: Treasuries, gold, euros, Canadian dollars, Swiss francs? Keep learning about the cash position and the 10% investing/trading positions.

Yes, I put my money where my mouth is.

[lindismith]

Namaste Powayseller.

Yeah, those were all good ideas he posted, but they are all super high risk.

I think shorting would be more prudent in the Fall when more numbers are in. The whole idea of them still sounds really scary to me though.

[bubba99]

There are other safe plays for the upcomming real estate led recession. One would be foreign denominated bonds. Buy fixed interest bonds in Euros of Swiss Francs. You get a guaranteed fixed return and the only risk is currency exchange. If the US dollar reverses its slide against foreign curriencies, you lose. If it stays the same you get the fixed rate of return. If the $ continues its slide you win big.

[PerryChase]

PS, i see your point. And yes, capital preservation combined with a good return is the best way to go.

I think that Daniel was saying that if you were 100% sure of your predictions, you’d risk all because there’s zero downside. If you were clairvoyant, you could easily make the Forbes list in a short time.

Don’t worry if people don’t take your point of view. If they think that houses are always a good buy, let them buy. They are not sure either so that’s why they are here.

Tell us more about your previous house. What is a Vatsu house? I love architecture and good designs so I’d love to know more.

[Daniel]

Powayseller,

As you no doubt realized, my 5 suggestions were half serious, half tongue-in-cheek. They should be considered only by investors absolutely certain of the coming crash. You sort of fit that profile.

On a more serious note, I think your asset allocation is just fine, given your view of the world (although I would stay away from gold, but, as I said it before, that’s just me). You may also want to take a position in Berkshire; they’re sitting on a pile of cash, and waiting to deploy it. They should come out of a recession rather well, actually.

[waiting hawk]

Peter Schiff goes on Kudlow and Company today at 5:30EST (2:30 PST) on CNBC

My website tracking Temecula and South Riverside County

[SDbear]

bubba99,
How and where do we buy foreign currency denominated Bonds?

[Anonymous]

90% cash? I’m surprised you even take the risk to walk outside of your house poway seller (just kidding). Really, if you are putting 90% of your money in cash, you are surely not going to build on your wealth. That is the safe play (asset preservation) if you are unsure about the market direction but it will not grow that way. As Daniel says, if you are so sure about the crash, then investing on the downward side (i.e. puts, shorts, etc) is not really risky.

But regardless of what we think about your hyper-conservative investment strategies, you at least did the smartest and most important thing already and that was to sell your house.

[bubba99]

Most of the big brokerage houses handle. I buy through Morgan Stanley. I use a Choice account which carries an annual fee, but pays no transaction fee on individual purchases or sales.

[lindismith]

It’s risky if you do it at the wrong time. Despite a decline, there are going to be small peaks and valleys along the way.

[EJ]

Powayseller,
I didn’t see this thread when I started the other with questions about the positions suggested by Daniel. I think you answered all my questions. I see these are much higher risk than I originally had thought.

Daniel,
Now I see why you were half-joking about the positions.

I have a lot to learn before I start making risky investments.

[Nancy_s soothsayer]

PS – I feel like I am in the same boat. After sinking 250K in the house (hard asset)I live in, that I don’t think will depreciate much, paying full cash and no mortgage, I am still sitting on $300K CD earning 5.12%p/yr that is just “burning a hole in my pants” not knowing what to do with it with the huge recession/stagflation staring me in the face. I feel paralyzed into inaction. I keep reading economic blogs and this blog to discern whatever the best minds have in mind to guide me along and get me some strong validation to some specific action — but to no avail. I am still with no answers for myself. I feel that my money in CD’s is like a wasting asset with the misreported inflation rate. Sorry for my ramblings. And to be brutally honest, I hate those critics (esp. Dr. Pangloss) who get so condescending and resort to personal attacks,like I am doing now, of course…but here goes: I want to share that I have entertained these wealth preservation ideas personally, all of them kooky:

Perhaps withdraw some good amount and plow it in fishpond lands in the Philippines (that was where I came from). I already started a small amount in this direction ($20K) and bought me 1.5 hectares worth of fishponds. After all, if America goes into the pits and start behaving like a third-world country like the Philippines (I don’t wish it because I am an American Citizen and try to embrace the flag like the NeoCons do),no?, then it is not bad to retire 6 months each year in the Philippines –Art Bell of Coast-to-Coast–was setting an example here. Pick your third world country perhaps and invest in feeding the world that suffers in Depression, no?

Now, what would I do with the rest of my money? Shoud I invest in uranium (maybe Cameco?) because I find investing in gold and silver just plain silly. What do gold jewelries do to add to humankind? Miniscule to me. OTOH, Uranium demand might continue its upward trajectory in the future because people will need more nuclear plants — Peak Oil is the reason, no? China is definitely building more nuclear plants to power up all new empty buildings they own and needs more uranium if oil slows to a trickle….

Now, what if uranium is not ok? Should I take my money out of US CD’s and take it accross border of Canada and buy Canadian CD’s to be sheltered from vagaries of depreciating US dollar? Would Canadian banks let me, a US citizen, do that? I don’t know… Has anyone tried? How about liquidity in such should I want to withdraw it fast? These are personal questions I ask myself only–no need for others to go get answers for me.

Should I continue keeping $50K in stocks? I haven’t sold my stocks in Pfizer, Verizon, AEP, Wyeth, and CMS yet. Although I have lost money in them because I bought them in 2002 and have not seen profits at all… I still own them. (Duh!) Should I sell them all now at a loss after holding them so many years? My stocks in Honda, Mittal steel, Consol coal, BEAV aerospace – all bought in 2002, have been good to me, however. Should I continue keeping them? Again, these are personal questions I ask myself –not asking others to go get answers for me.

Wealth preservation is a hard thing for me indeed. I don’t mean to gloat…just to share and bounce my ideas to others in case the right person comes along to give me more kooky ideas to entertain.

Powayseller, pardon my musings, I admire you a lot. With your so-called “bluntness” and “blanket-ness”, those only add to your appeal to me as reader. Thank you for the so-many substantive posts you have done in the past. I don’t have the same long patience and forebearance you inherently possess. I tire and give up easily in debates. I don’t like to engage Dr. Pangloss and the likes of him, hence, I only like to read sensible posts from many others and especially yours. I didn’t intend to post much. I am by nature a wallflower or a fly in the wall given to delusions of having the same skills as Nancy’s soothsayer in the other white house. I long for reading more of your posts and wish for your continued success at increasing financial security. And I wish Good Luck to all, also.

[powayseller]

Daniel, I would put all my money on the homebuilders and lenders going down, but I am not skilled enough to navigate the stock market’s up and downs in the interim. Long term trend is down, but one good rally, and I lose it all…. Timing is everything, and something like 75% or 90% of options expire worthless. My two stocks are Berkshire Hathaway and Conoco Phillips. I will add more stock positions in energy per Zeal’s recommendations- I think oil is more valuable than gold.

How can you buy swiss francs? I e-mailed my family in Switzerland about this, and have not heard back yet. I am sure they are checking in to this, and I will post back what I find out.

nancy_s_soothsayer – yes, I have these same questions. The economists that I so much admire, give these brilliant insightful predictions, and then stop. That’s like having sex without an orgasm. Why can’t they just finish the job…I mean, tell us what to do with our money, for crying out loud. Even Nouriel Roubini, who charges $3,000 annually for his commentary and news reports, does not give investment advice. If you are interested in energy and metals, subscribe to Zeal Intelligence. They have done very well in that sector.

Perry Chase, I will start a separate link about vastu houses.

[Anonymous]

PS, you clearly don’t understand the short process if you think you’ll lose it all with one rally. There is no way the homebuilders are going to rally that much. The key is to not over-extend yourself. You’ve been scared off by too many risk-averse advisors. If you limit your short exposure to 40% of your portfolio for example, you could weather approximately a 40% rally before getting a margin call. There is no chance the homebuilders are going to rally 40% in the next couple of years and you know that. Even if you get a margin call, you have to cover some of your shorts at a loss, but that doesn’t mean you’ll lose everything.

As for puts, I recommend going for more long term expiration dates (Jan08 and beyond). With this time frame, short term rallys will have no affect on your portfolio as long as you don’t need the money in that timeframe. I suggest droppping maybe 10% of your portfolio on puts. This way, absolute worst case you lose 10%, bid deal. But the potential upside gains are enourmous. You have to take a little risk if you want to make money, that’s how it works. But 10% of your portfolio is not much of a risk. Plus, you’ll enjoy watching the housing crash even more if you have a little money bet on it.

[Anonymous]

Chris Johnston

There is a reason why some of these people do not give investment advice. They have no “skin in the game.” In general only take that type of advice from people who also have risk financially in their advice. These economists are notorious for being inacurrate, so if they can make a living with broad brush statements with no risk, why not do it.

I take plenty of heat for trade recommedations that I make that do not work out. It is much more stressful than just writing a newsletter and going away. The only way I mentally can justify it is that I know I lose alot more money on failed trades than those who follow me who take the same trades. This is true because my positions are much larger.

I personally could not live with myself if people lost money on advice from me, and I made a fee and took no losses when I was wrong. As a result, be careful with people who make recommendations, who are not actually taking them on personally.

This is a tad off topic, but does address a couple of recent posts on this thread. I would not be classified as an addict here, but I do think this blog is the best one on the net. I do read it almost every day even though I do not post that much. So many of you have such a keen intellect in such a wide variety of things. This is what sets it apart. Differences of opinion are inevitable and healthy IMO.

I will leave everyone with this thought, if everyone agreed on everything prices would never move on anything up or down. As a result, disagreement is a necessary part of the investment world.

[Author]

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