The Importance Of Going Down Less

Quick hit Saturday.

Matthew Tuttle made an interesting comment on Twitter about liking to use put options on the ARK Innovation Fund (ARKK) for hedging purposes. There is an inverse ARKK ETF that trades with symbol SARK. Can SARK play a role in volatility management in a way that is similar to ProShares Inverse S&P 500 (SH) or any of the other inverse, broad index funds? SH is a client holding. 

And the year by year;

Tuttle is onto something here. SARK has benefited of course from a really dreadful and prolonged run for ARKK. Of course the reason anyone cares about ARKK is how fantastically well it did for about a four year run starting in early 2017. The risk to using SARK would be that the underlying ARKK once again rips higher like it once did, even worse if that potential rip higher occurred during a serious drawdown for the overall market. 

Barron's wrote about the impact on Federal workers from the current job cuts that appear to be happening. The context of the article was in terms of people in their late 50's, into their 60's possibly having their hands forced into retirement.

A couple of interesting points were made but I wanted to touch on the following. Craig Copeland from EBRI is quoted as saying “Once you get into your late 50s, early 60s, it’s really hard to get another job, and certainly a comparable job.” 

While that isn't a new idea to the conversation we have here, it is yet another call prioritize resiliency and optionality. I think the easiest path to resiliency is living below your means so you can maintain a high savings rate. A relatively simple path to optionality is having varied interests that could be cultivated into income opportunities if ever needed. The way these ideas marry together is that the high savings rate lets people off the hook when as Copeland says, they can't get a comparable job which I take to mean a comparable income. 

Friday night, my wife and I went to Whiskey Off Road which is an annual pro mountain bike event here. There are mountain bike races on Saturday and Sunday and Friday night there is the men's and women's criterium that the pros ride in through the downtown. 

I ran into a buddy who I worked with 30 years ago. We keep in touch on Facebook, he works at a large investment advisory but I am not clear on what he does other than he is up the management chain somewhere and may play a role with investment strategy. 

We chatted for about 10 or 15 minutes and he shared his concerns about what is going on right now, the extent to which external factors appear to be influencing capital markets and a little about what the firm is suggesting its advisors do. 

I didn't really respond so much as acknowledge what he was saying. They may turn out to be totally correct about this getting much worse. It wasn't clear to me what they had done in portfolios but I think the thesis involved making predictions. Again, they could be completely correct but I don't know and that is the point. As opposed to embedding predictions into the process and overly relying on being right, I think it is much simpler to continually assess where the risks lie and hopefully mitigate those risks early on. Maybe those risks will have consequences or maybe they won't but client outcomes aren't driven by getting predictions correct. This a bit of process I take from John Hussman, weighing out the risks. 

Most of the following are repeats but I bought SH for clients right before the election, expecting Harris to win and thinking there would be some sort of J6 repeat but then decided to hold on to it. Right after the election I sold Nike which I'd held for 17 or 18 years believing the company was the most vulnerable to tariffs in the portfolio. A few weeks ago I sold BKLN in case this correction/bear turned into a credit event. BKLN wasn't the only source of credit risk that clients owned but removing the fund significantly reduced the credit risk they were exposed to. 

None of these trades were a reaction to price declines. None of the trades when placed had any sort of immediate impact on the portfolio and for now, the BKLN sale hasn't proved out as being needed and if there is no credit event that comes from this, that sale would have been unnecessary. Necessary or unnecessary, there's no way to know at this point. I perceived the risk of a credit event had escalated and so I wanted to mitigate that consequence before it mattered.

I believe this approach takes some of the emotion out of the process and better facilitates going down less when markets go down which I think is vital component to long term portfolio success.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.