No. of Recommendations: 5
My expectations:
Several outcomes are of course possible but the one that looks more likely than it normally does is this.
During the course of the next year or two, the fear gauge is switched from nervous to panic. We are at extreme levels on so many factors and usually something gives. The fragile nature of the economy and markets from extreme Fed intervention, combined with the interconnectedness is a potentially lethal combination. It just can’t be this easy to avoid pain. The price of our failures as a responsible society have to be paid and once that narrative is out of the bottle and fear takes hold: as we saw a few weeks ago, things can move very quickly.
I tried a few hedge techniques this year, buying a VIX futures funds and got really lucky to get out of it during the recent spike, without having too much of my capital eaten by premiums. But despite a massive surge in the VIX, within a few months of placing the trade, it was a waste of time (time and premiums and low probability of picking the right exit point being huge hurdles to success. Not suitable for holding for any length of time).
I think Berkshire is probably a great equity to own for what might lie ahead, as everyone here does. However, it will be far from immune from short term pain coming from market price declines, should we see that. It will just get to a lower price to book. Berkshire will do some allocating but nothing on a scale that will matter much in the short term. Swinging for the fences, at this stage, is not likely. The attraction to Berkshire, for me, is that I can remain in equities to an extent and benefit from what happens in the really long term and try to survive the potential coming big storm until it eventually passes. But it will be a painful time ahead, if expectations are high.
I have some cash but not nearly as much as I’d like. Buffett liquidating large parts of the equity portfolio, is important and indicates higher taxes to come. That alone, is a major problem for equities and the whole economy.
I like the idea of waking up some day and seeing my equity portfolio down 50, or 60% and seeing what my reaction is. Have I prepared financially and emotionally.
I plan to continue raising my cash levels and may buy some market insurance in the form of out of the money, long dated puts on the companies that might not fare well at all in a melt down (hype, high leverage, grand future promises, poor governance). Puts that would 5x more if the market tanks. It may give me some comfort, as the rest of my portfolio including Berkshire takes a beating. And then I could close out and buy more quality at more reasonable prices.
Plan:
Berkshire & other equities
Cash
Puts (less than 5%)
