The Best Hedge May Be Time and No Leverage – My Approach

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

Otherwise, enjoy the column!

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FEBRUARY 22, 2020

MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN TSLA, MA, NFLX

Join me on February 27 at 12 PM ET for a FREE webinar hosted by Interactive Brokers. I will cover why I think the S&P 500 is rising to 3,600. Sign up

Investing is never easy, and then layer in uncertainty, and it makes it just that much harder. But that is why sometimes taking a longer-term approach to investing can be advantageous as opposed to short-term trading. It isn’t to say I don’t have a trading account, because I do, two different accounts, two different styles.

The blogs, commentaries, and articles you read from me every day focus on these short-to-medium-term trading tactics, but surprisingly or not, my true love is finding the next big theme and the investments that go with them. The cash-less society, the on-demand generation, the rising global middle class, are just some of the themes I follow closely and have invested in a big way in.

mastercard, ma

Time and No Leverage

But believe it or not, the most common questions I get asked is how I hedge my portfolio, and I have two fundamental beliefs that have served me well, and I think I have been able to demonstrate over the past five years’ works: time and no leverage.

Thematic Portfolio

I started the Thematic Portfolio in August of 2014 after a long career as a buy-side trader. I was able to observe the success and mistakes of others, and in the end, what I concluded was that while trading can create plenty of rewards, it also creates a lot of unneeded stress. While a longer-term approach seems to generate a lot of wealth, with a little less stress, this, of course, is through my casual observations, and no actual scientific data to prove otherwise.

tesla

No Leverage 

Leverage is an excellent profit enhancer and can make an ordinary year look extraordinary. Who wouldn’t want to buy a stock for half the needed cash and borrow the rest of the money required at a low-interest rate and be able to keep all the profit? However, when the market gets volatile, margin calls can be brutal, making you sell stocks at the wrong time, and of course, take losses. No margin means the market will never force you to make a lousy sale, so as long as you can withstand the sight of your accounts declining.

Time

Time, on the other hand, is something that comes as the key benefit to not using margin. Because with a long enough timeframe, history has proven that stocks generally go higher. They did in the years after all the significant market crashes, wars, recession, and even depression. That is not to say all companies will survive because they don’t, but that is where you, as the stockholder, has the power to sell at any time.

I do not hedge, and that is because I do not have to hedge my portfolio; I use no margin and every stock I buy is with the intention of holding it for the next 5 to 10 years, and in some cases, potentially forever.

Learning From Mistakes

The great thing about my performance, which is very satisfying to me, is that I have done it all unleveled, and it has, for the most part, allowed me to sleep well because I know the companies I invest in very well, and I believe in their future and their vision. It isn’t too say that I haven’t had my struggles, because I have, with a terrible 2016, that put me badly behind the S&P 500. Even worse, it came early in the portfolio’s life, so the compounding effect has been great. Some stocks did not work the way I intended, coupled with an unexpected reflation trade at year-end. Regardless we all make mistakes, we all can be wrong, but it is what you learn and how you move forward that matter.

For me, my best hedge has been time and perhaps patience. As long as there is no leverage involved, time does heal all wounds, even in investing.

Have a great Saturday

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.     

 

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