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Simply having a one way bet is suicidal – it is like standing in front of a moving train. Now this train may be on the wrong track or driving too fast but you can’t stop it – don’t be a missionary! Don’t think that your bet will stop a rampaging market!
Right or wrong the markets will do what they may. Nothing wrong with having an opinion, but it is when acting on that opinion is where most people get into trouble.
On numerous occasions I hear people express an opinion on a stock or commodity or equity market or sector that is often hearsay or is something they want to hear. We all have biases which are formed out of our past history. A friend of mine worked in insurance for many decades and was extraordinarily successful in what he did. Like so many of us in another side of his life he was a trader and I suspect a successful one. BUT he was dead against the insurance sector – phew - could see no good in it. Too many hidden surprises he’d claim. What about all those asbestos claims etc., etc.,. But take a look at what insurance stocks have done over the last few months. He may ultimately be correct but he has foregone some great profits.
So how can we temper our strong views? One of the simplest ways is too listen to the market. If you have a strong view that this current market is due for a major correction then by all means maintain that view and be vigilant. But whilst the trend of the market continues then there is nothing wrong with just going with that trend.
The alternative is to hedge. The NAB FX dealers apparently had a strong view about the dollar but rather than “go naked” they also could have merely hedged. Hedging can be described as a means of protection or defence, against a potential financial loss or it is simply a transaction that controls the risk on an existing investment position.
“Going naked” on the other hand is where the buyer or seller has no underlying security position and bets all, that is they bear their all and leave themselves well.....naked.
Hedging is really having a “bob each way” and if properly set up you will at least win one way or the other. That is why options have become so popular as when properly used they offer a “win win”. Even the most conservative of investors are now looking at puts to protect profits from a long run up in the market. They can lock in the now relatively high prices so if the market falls they are guaranteed that price but if the market continues to climb they still win. Yes you can have your cake and eat it!
Next week the TT team return after a well deserved break so you can look forward to reading once again strategies from your favourite columnist! For those of you who have been away welcome back. The sun shone brightly this summer and for those who are trading the equity markets it looks like the sun will shine for some time yet. Regardless of what markets you trade, from all at TT we wish you the greatest of success in this coming year.
Tom Scollon
Editor
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