Hi all, Let's say we entered a bear market and stocks in general are falling. Let's also assume you thought inflation was really going to take root and so you were thinking about hedging via a gold investment. Using CSSEP as my test subject, would this preferred stock that is hardly traded (37 shares traded this morning so far) and pays a 9% monthly dividend be a better hedge than gold or silver? You have the dividend, you have some protection in case the company goes belly up, you don't have to buy at a markup (assuming you bought the raw metal), nor do you have sell at a markdown (again assuming you bought the raw metal). Thoughts?
Well in 1969 a coach told me what happens when you assume. Every investor needs a context.There is the idea that investing for retirement is a 40 year train ride. We have had bear markets and bull markets. Solid principles are the best way to hedge against the ups and downs of Wall Street. The great music group from years past, BLOOD, SWEAT, AND TEARS, said "what goes up must come down". The question is can you find a painted pony to ride. Been on Wall Street since 1986. Hedge is a bit overrated when you consider a 40 year period.
Gold is ‘iffy’ during recessions: - In 1990, it lost about 10% of its value. - In 2000, it did nothing. - In 2008 it dropped 30% from its peak price before recovering and ending up 4% for the year. - In March of 2020 it dropped almost 15%. Be that as it may, for well over 30 years, at times I have owned gold stocks outright, sometimes I sold covered calls on them, sometimes I sold naked puts, and at one point I owned Krugerrands and caught the big run up in the early 2000s. All of these were done because of my outlook for gold not as some hopeful non correlation hedge. For about 20 years, I have owned preferred stocks for their income and when there has been an interest rate cycle or market turbulence, I have actively swapped them in order to bump up the yield considerably. Again, these actions were based on their (safe) static yield as well as the ability to enhance yield via swapping rather than as some hopeful non correlation hedge. Preferred stocks are by no means a good hedge during market corrections. See 2008-2009, the China tariffs correction, the inverted yield curve fears in late 2018, and last March's 35% market whacking. I'm curious as to why you selected CSSEP as a test subject (9.75% when issued). While I don't know a thing about the issuer Chicken Soup for the Soul Entertainment, I do know that riskier issues have to offer higher yield in order to place IPO shares and 9.75% is way up at the high end. I'm more comfortable with companies that I know are highly likely to be around for the long haul, particularly since the majority of preferred issues are perpetual with no maturity date. Lastly, if you're going to hedge and you're willing to make/accept the trade offs, hedge with the options of the underlying so there's direct correlation not a maybe 'iffy'. There are a number of low cost ways to do so and in a drubbing like 2009-09 or last March, you'll be able to SWAN (sleep well at night).
I went with CSSEP solely because of the dividend (was solely focused on dividends) and at the time, I didn't know better. I only knew it paid better than O (Reality Income) and being preferred stock, I had some protection if the company went belly up. I stayed with them because the share price is up 15%. The way I think now, I probably wouldn't have invested in CSSEP but I'm not going to get rid of it as the price is doing well. I have done more research and while the company is risky due to their debt load I think the business overall is sound and not likely to crash in the next year. I'm a mid-term length investor (3 to 12 months) so that's as far as I look out.
This may sound contradictory but I don't have a problem with buying some of the higher yielding preferreds when they go public, especially in the grey market if they're trading at a discount because those seeking income are being squeezed by low rates as well as the significant number of higher yielding issues that have been called and many more that will be called this year. Many new issues do well right out of the gate. IMO, after that, the decision is whether you want to hold higher risk issues or hold quality. I prefer the safety of the latter. If a company goes belly up, the higher standing of a preferred stock owner over the common share owner is likely to be meaningless.
