brewer12345
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Mar 6, 2003
- Messages
- 18,085
Now that the immediate flames appear to be out (still lots of smoldering going on), I have been thinking about what lessons I can take from the recent debacle in pretty much every market there is. No doubt there are lots and you guys can offer more lessons learned, but these are the ones I take away from the last year and a half:
- You jump in while things are still falling at your peril: I was early and often and suffered for it. Simply put, next time I wait for things to convincingly bottom before jumping in and pulling out the stops.
- Make sure you are reasonably diversified: I had no real big positions blow up and go permanently away, but I did have a couple smaller ones do so. In the future, I will be more diversified even wen I find something to be compelling.
- Buy insurance: After several years of throwing money away on index puts as a hedge, I finally gave up and stopped throwing money away. Bad idea. I drifted away from the fundamental bargain of insurance: as the buyer of protection, you willingly lose small amounts in normal times so that you don't lose big amounts in the bad times.
- Consider your whole personal balance sheet, not just the portfolio: I had the right risk tolerance for my portfolio, in hindsight. I knew in a big downdraft I would lose a chunky percentage and I was OK with it. What I failed to fully consider is that my job was also quite sensitive to market downdrafts and economic slowdowns. With the benefit of hindsight, I would have reduced risk in my portfolio or bought more hedges to offset the employment risk.
- Be certain of your e-fund and liquidity: This one I got right. I wasn't unemployed for that long and I actually only collected unemployment for two months, but having a healthy e-fund to fall back on was a great comfort. I also had an untapped HELOC which I drew down on when I thought I was in danger of losing my job, although I never ended up touching any of the funds.
- Leverage has its uses, but act like a commodity producer: Commodity producers (at least the ones that survive for any period of time) are countercyclical in their use of leverage. When times are good, they pay down debt and pile up cash. When times are bad, they use their strong balance sheets to expand on the cheap so they can benefit from the next up-cycle. I have been steadily paying down my mortgage (took a 15) and that's my only debt aside from a trivial amount of student loans. I should have been more aggressive in my paydowns, though.
Hopefully we have seen the worst of it for this cycle. Now I just have to remember this stuff when the next down-cycle comes around.
- You jump in while things are still falling at your peril: I was early and often and suffered for it. Simply put, next time I wait for things to convincingly bottom before jumping in and pulling out the stops.
- Make sure you are reasonably diversified: I had no real big positions blow up and go permanently away, but I did have a couple smaller ones do so. In the future, I will be more diversified even wen I find something to be compelling.
- Buy insurance: After several years of throwing money away on index puts as a hedge, I finally gave up and stopped throwing money away. Bad idea. I drifted away from the fundamental bargain of insurance: as the buyer of protection, you willingly lose small amounts in normal times so that you don't lose big amounts in the bad times.
- Consider your whole personal balance sheet, not just the portfolio: I had the right risk tolerance for my portfolio, in hindsight. I knew in a big downdraft I would lose a chunky percentage and I was OK with it. What I failed to fully consider is that my job was also quite sensitive to market downdrafts and economic slowdowns. With the benefit of hindsight, I would have reduced risk in my portfolio or bought more hedges to offset the employment risk.
- Be certain of your e-fund and liquidity: This one I got right. I wasn't unemployed for that long and I actually only collected unemployment for two months, but having a healthy e-fund to fall back on was a great comfort. I also had an untapped HELOC which I drew down on when I thought I was in danger of losing my job, although I never ended up touching any of the funds.
- Leverage has its uses, but act like a commodity producer: Commodity producers (at least the ones that survive for any period of time) are countercyclical in their use of leverage. When times are good, they pay down debt and pile up cash. When times are bad, they use their strong balance sheets to expand on the cheap so they can benefit from the next up-cycle. I have been steadily paying down my mortgage (took a 15) and that's my only debt aside from a trivial amount of student loans. I should have been more aggressive in my paydowns, though.
Hopefully we have seen the worst of it for this cycle. Now I just have to remember this stuff when the next down-cycle comes around.