The Long Term Investor

For those that just CAN NOT look away from the TRAIN WRECK......here is one last article on the recent HEDGE FUND IMPLOSION. The VILLAIN in the situation......besides the hedge fund......the much dreaded.......(GASP)......DERIVATIVES.

Billions in Secret Derivatives at Center of Archegos Blowup

https://finance.yahoo.com/news/billions-secretive-derivatives-center-archegos-102415242.html

(BOLD is my opinion OR what I consider important content)

"The forced liquidation of more than $20 billion in holdings linked to Bill Hwang’s investment firm is drawing attention to the covert financial instruments he used to build large stakes in companies.

Much of the leverage used by Hwang’s Archegos Capital Management was provided by banks including Nomura Holdings Inc. and Credit Suisse Group AG through swaps or so-called contracts-for-difference, according to people with direct knowledge of the deals. It means Archegos may never actually have owned most of the underlying securities -- if any at all.

While investors who build a stake of more than 5% in a U.S.-listed company usually have to disclose their position and future transactions, that’s not the case with stakes built through the type of derivatives apparently used by Archegos. The products, which are made off exchanges, allow managers like Hwang to amass stakes in publicly traded companies without having to declare their holdings.

The swift unwinding of Archegos has reverberated across the globe, after banks such as Goldman Sachs Group Inc. and Morgan Stanley forced Hwang’s firm to sell billions of dollars in investments accumulated through highly leveraged bets. The selloff roiled stocks from Baidu Inc. to ViacomCBS Inc., and prompted Nomura and Credit Suisse to disclose that they face potentially significant losses on their exposure.

One reason for the widening fallout is the borrowed funds that investors use to magnify their bets: a margin call occurs when the market goes against a large, leveraged position, forcing the hedge fund to deposit more cash or securities with its broker to cover any losses. Archegos was probably required to deposit only a small percentage of the total value of trades.

The chain of events set off by this massive unwinding is yet another reminder of the role that hedge funds play in the global capital markets. A hedge fund short squeeze during a Reddit-fueled frenzy for Gamestop Corp. shares earlier this year spurred a $6 billion loss for Gabe Plotkin’s Melvin Capital and sparked scrutiny from U.S. regulators and politicians.

The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets.

While the margin calls on Friday triggered losses of as much as 40% in some shares, there was no sign of contagion in markets broadly on Monday. Contrast that with 2008, when Ireland’s then-richest man used derivatives to build a position so large in Anglo Irish Bank Corp. it eventually contributed to the country’s international bailout. In 2015, New York-based FXCM Inc. needed rescuing because of losses at its U.K. affiliate resulting from the unexpected de-pegging of the Swiss franc.

Much about Hwang’s trades remains unclear, but market participants estimate his assets had grown to anywhere from $5 billion to $10 billion in recent years and total positions may have topped $50 billion. Hwang didn’t respond to requests for comment.

CFDs and swaps are among bespoke derivatives that investors trade privately between themselves, or over-the-counter, instead of through public exchanges. Such opacity helped to worsen the 2008 financial crisis and regulators have introduced a vast new body of rules governing the assets since then.

Over-the-counter equity derivatives occupy one of the smallest corners of this opaque market. Swaps and forwards linked to stocks had a gross market value of $282 billion at the end of June 2020, according to data from the Bank for International Settlements. That compared with $10.3 trillion for swaps linked to interest rates and $2.4 trillion for swaps and forwards linked to currencies.

Regulators have begun clamping down on CFDs in recent years because they’re concerned the derivatives are too complex and too risky for retail investors, with the European Securities and Markets Authority in 2018 restricting the distribution to individuals and capping leverage. In the U.S., CFDs are largely banned for amateur traders.

Banks still favor them because they can make a large profit without needing to set aside as much capital versus trading actual securities, another consequence of regulation imposed in the aftermath of the global financial crisis. Among hedge funds, equity swaps and CFDs grew in popularity because they are exempt from stamp duty in high-tax jurisdictions such as the U.K.

MY COMMENT

I dont think there is a lot of SYMPATHY for any hedge fund or family office that ends up in this situation.....either from the general public or from their fellow.....ELITES.

Just as we saw in the past........the near collapse of the entire banking system in 2008/2009......these sorts of derivitive products are RADIOACTIVE. Mess around with radioactive material and sooner or later you WILL get burned. these sorts of products are IMPOSSIBLE to understand and IMPOSSIBLE to predict how they will actually work in real life compared to finaicnail theory.

UNFORTUNATELY......the ELITES.....are given free reign to mess around with out financial system with this sort of product. AND......if they happen to take a BIG HIT.........if the hit is big enough....they WILL be bailed out.....especially......if they are a big bank that has exposure. UNFORTUNATELY....for this little family office....no bail-out for you.

 

This article is a CLASSIC.

How To Invest Cash When Markets Are Volatile

https://finance.yahoo.com/news/invest-cash-markets-volatile-094253313.html

(BOLD is my opinion OR what I consider important content)

'Lower expenses and fears about valuations and financial markets' volatility have prompted liquidity to record levels. At the end of February, in Italy, resident customer deposits amounted to 1,746 billion, 10% more than the figure recorded the previous year. In times of uncertainty, liquidity is reassuring, but short-term security has a price, strategists at AllianceBernstein Holding L.P. (NYSE: AB) remind. With interest rates at historic lows and negative rates prevailing in many developed markets, liquidity pays almost nothing. On the contrary, by clearly defining long-term goals, they explain, investors can safely re-employ unused liquidity, despite uncertainty about the path to recovery.

High Valuations Do Not Always Prelude Disaster: For many investors, the high valuations reached by financial markets represent an obstacle to investing liquidity. In particular, the U.S. stock exchanges have marked new historical highs. However, AllianceBernstein's analysis reveals that equity investments have provided solid returns over time, even to investors who entered the market when the shares appeared overvalued. Starting from 1950, investing equal amounts in U.S. shares each time the market reached a new peak would have resulted in an average annual return of 9.6% — 1.9% less than it could have been obtained by investing at each bear market bottom.

Three Questions To Find Appropriate Investments: Investors should consider a broad array of active options suited to their individual needs, risk appetites and personal views about markets. In order to identify the right investment options, AllianceBernstein suggests asking oneself firstly, whether the investment horizon is shorter-term or longer-term, secondly, whether investments must be liquid and accessible or if one is able to tolerate illiquidity, and thirdly, whether one prefers consensus opportunities or is comfortable investing in unpopular, out-of-favour, assets that may offer better valuations.

Choosing Between Consensus And Contrarian: Investing in growth stocks, for example, was especially successful — and popular — in 2020, but this part of the market poses the most acute valuation concerns. In fact, high-yield fixed income offers access to an asset class that tends to be uncorrelated with equities and offers better downside risk reduction, as well as higher return potential than the broader bond market. On the other hand, for those willing to swim against the tide, underperforming value stocks which have been traded at a discount compared to growth stocks could trigger a more marked rebound if the economic recovery accelerates. Even non-US stocks and small-caps often offer more attractive valuations than US peers. Investors with longer-term time frames might want to explore illiquid options such as private equity portfolios and hedge funds, or they could include contrarian options such as securitized assets and private credit.

It Is Impossible To Forecast Market Reversals, Better Stay Invested: AllianceBernstein experts' conclusion is that, over time, most asset classes are likely to do better than cash, especially at today’s rates. And since it’s nearly impossible to time market inflection points, it’s better to be invested in the market rather than not — even in today’s fluid conditions. With risk-aware, active, investing approaches, investors can redeploy cash with conviction to selectively capture diverse sources of return potential, even as concerns about the future remain unresolved.

MY COMMENT

YES.......invest at the total market top......every all time high since....1950. AND.....you end up with a return of 9.6%.....per year. ONLY......1.9% less than some......MYTHICAL MARKET TIMER.....that ......was able to call EVERY bear market bottom and invest at the absolute bottom.....every time.

OF course........we know that calling EVERY bottom is IMPOSSIBLE. I have NEVER seen any investor of any sort that called.....every....bear market bottom........and.......had to nerve and foresight to invest at that bottom.

SO.......the bottom line.......you will PROBABLY......do better to just invest when you are ready...regardless of what is going on short term.

OF course.......this research and data that is constantly confirmed by study after study......does not match up with your human brain behavior. The same human brain behavior that tells you that ten coin flips at heads.....means that the eleventh time is somehow different odds. Or that six times on red in roulette somehow means that the next roll is better odds to hit black.

We......ALL.....think that somehow the investing rules and PROBABILITIES......dont apply to us. "I" will be the person that calls EVERY bottom. "I" will be the person that is the perfect market timer. "I" will be the one in a million person that is a perfect market timer.

NO........."you" will be the typical person that severely lags the markets year after year.....due to......your "own" investor behavior. BUT......."you" will NOT recognize your own behavior.....there will always be some reason or excuse or issue for"your" under-performance. OR......."you" will happen to leave out some of your worst trades when thinking about "your" results. OR...."you" will NOT take into account fees and short term taxes at regular income tax rates.....for "your" short term behavior.

There is ONE WAY to avoid all this......"I", "I", "I".......and...."you". "you". "you"....type behavior and below average investor returns. Invest for the long term.......as soon as you are comfortable.

 

POOR TESLA......pushing down toward $600. A FOUR MONTH low. Even though I own the company.....luckily not as much as I used to since I took my initial investment PLUS 50% of profit off he table......I believe there is POTENTIAL for another $100 to $150 drop over the next 4-12 months.

Will it happen? I dont know. But I think the potential is definitely there.

I DO believe that the next time period for nice gains will come when ALL of the factories and facilities that are currently under construction.....come on line. Some time in about 6-12 months.

I am pretty comfortable siting on TESLA for now. ALL my shares have a basis of $277 and were purchased at the time of my second buy in. BUT.....like ANY holding.....even though it is for the long term......I am NOT married to any of them.....for life.

 

Ok.....another day in the bag. Green today....moderate.....but green. AND....a good beat of the SP500 by .32%. Eight of twelve positions UP today.

Tomorrow is a new day. Plus tomorrow we will have the Family Office block trade drama out of the way. The big banks have now indicated that they have no exposure. SO....hopefully we start CLEAN tomorrow

 

YEAH....boring markets are a big danger for long term investors. They produce the temptation to......do something.

Sorry Emmett.....I have ZERO skills that Tesla would want......BUMMER. Perhaps I could be a lot-boy...driving cars or trucks off the line to the storage lot. I dont know if I could figure out how to operate a vehicle that just has a computer screen and no.......KNOBS or BUTTONS.

 

This article is a little sad.....just about makes me feel sorry for them.

One of World’s Greatest Hidden Fortunes Is Wiped Out in Days

https://finance.yahoo.com/news/one-world-greatest-hidden-fortunes-002617417.html

(BOLD is my opinion OR what I consider important content)
"From his perch high above Midtown Manhattan, just across from Carnegie Hall, Bill Hwang was quietly building one of the world’s greatest fortunes.

Even on Wall Street, few ever noticed him -- until suddenly, everyone did.

Hwang and his private investment firm, Archegos Capital Management, are now at the center of one of the biggest margin calls of all time -- a multibillion-dollar fiasco involving secretive market bets that were dangerously leveraged and unwound in a blink.

Hwang’s most recent ascent can be pieced together from stocks dumped by banks in recent days -- ViacomCBS Inc., Discovery Inc. GSX Techedu Inc., Baidu Inc. -- all of which had soared this year, sometimes confounding traders who couldn’t fathom why.

One part of Hwang’s portfolio, which has been traded in blocks since Friday by Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co., was worth almost $40 billion last week. Bankers reckon that Archegos’s net capital -- essentially Hwang’s wealth -- had reached north of $10 billion. And as disposals keep emerging, estimates of his firm’s total positions keep climbing: tens of billions, $50 billion, even more than $100 billion.

It evaporated in mere days.

“I’ve never seen anything like this -- how quiet it was, how concentrated, and how fast it disappeared,” said Mike Novogratz, a career macro investor and former partner at Goldman Sachs who’s been trading since 1994. “This has to be one of the single greatest losses of personal wealth in history.”

Late Monday in New York, Archegos broke days of silence on the episode.

“This is a challenging time for the family office of Archegos Capital Management, our partners and employees,” Karen Kessler, a spokesperson for the firm, said in an emailed statement. “All plans are being discussed as Mr. Hwang and the team determine the best path forward.”

The cascade of trading losses has reverberated from New York to Zurich to Tokyo and beyond, and leaves myriad unanswered questions, including the big one: How could someone take such big risks, facilitated by so many banks, under the noses of regulators the world over?

One part of the answer is that Hwang set up as a family office with limited oversight and then employed financial derivatives to amass big stakes in companies without ever having to disclose them. Another part is that global banks embraced him as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.

A disciple of hedge-fund legend Julian Robertson, Sung Kook “Bill” Hwang shuttered Tiger Asia Management and Tiger Asia Partners after settling an SEC civil lawsuit in 2012 accusing them of insider trading and manipulating Chinese banks stocks. Hwang and the firms paid $44 million, and he agreed to be barred from the investment advisory industry.

He soon opened Archegos -- Greek for “one who leads the way” -- and structured it as a family office.

Family offices that exclusively manage one fortune are generally exempt from registering as investment advisers with the U.S. Securities and Exchange Commission. So they don’t have to disclose their owners, executives or how much they manage -- rules designed to protect outsiders who invest in a fund. That approach makes sense for small family offices, but if they swell to the size of a hedge fund whale they can still pose risks, this time to outsiders in the broader market.

“This does raise questions about the regulation of family offices once again,” said Tyler Gellasch, a former SEC aide who now runs the Healthy Markets trade group. “The question is if it’s just friends and family why do we care? The answer is that they can have significant market impacts, and the SEC’s regulatory regime even after Dodd-Frank doesn’t clearly reflect that.”

Valuable Customer

Archegos established trading partnerships with firms including Nomura Holdings Inc., Morgan Stanley, Deutsche Bank AG and Credit Suisse Group AG. For a time after the SEC case, Goldman refused to do business with him on compliance grounds, but relented as rivals profited by meeting his needs.

The full picture of his holdings is still emerging, and it’s not clear what positions derailed, or what hedges he had set up.

One reason is that Hwang never filed a 13F report of his holdings, which every investment manager holding more than $100 million in U.S. equities must fill out at the end of each quarter. That’s because he appears to have structured his trades using total return swaps, essentially putting the positions on the banks’ balance sheets. Swaps also enable investors to add a lot of leverage to a portfolio.

Morgan Stanley and Goldman Sachs, for instance, are listed as the largest holders of GSX Techedu, a Chinese online tutoring company that’s been repeatedly targeted by short sellers. Banks may own shares for a variety of reasons that include hedging swap exposures from trades with their customers.

‘Unhappy Investors’

Goldman increased its position 54% in January, according to regulatory filings. Overall, banks reported holding at least 68% of GSX’s outstanding shares, according to a Bloomberg analysis of filings. Banks held at least 40% of IQIYI Inc, a Chinese video entertainment company, and 29% of ViacomCBS -- all of which Archegos had bet on big.

“I’m sure there are a number of really unhappy investors who have bought those names over the last couple of weeks,” and now regret it, Doug Cifu, chief executive officer of electronic-trading firm Virtu Financial Inc., said Monday in an interview on Bloomberg TV. He predicted regulators will examine whether “there should be more transparency and disclosure by a family office.”

Without the need to market his fund to external investors, Hwang’s strategies and performance remained secret from the outside world. Even as his fortune swelled, the 50-something kept a low profile. Despite once working for Robertson’s Tiger Management, he wasn’t well-known on Wall Street or in New York social circles.

Hwang is a trustee of the Fuller Theology Seminary, and co-founder of the Grace and Mercy Foundation, whose mission is to serve the poor and oppressed. The foundation had assets approaching $500 million at the end of 2018, according to its latest filing.

“It’s not all about the money, you know,” he said in a rare interview with a Fuller Institute executive in 2018, in which he spoke about his calling as an investor and his Christian faith. “It’s about the long term, and God certainly has a long-term view.”

His extraordinary run of fortune turned early last week as ViacomCBS Inc. announced a secondary offering of its shares. Its stock price plunged 9% the next day.

The value of other securities believed to be in Archegos’ portfolio based on the positions that were block traded followed.

By Thursday’s close, the value of the portfolio fell 27% -- more than enough to wipe out the equity of an investor who market participants estimate was six to eight times levered.

“You have to wonder who else is out there with one of these invisible fortunes,” said Novogratz. “The psychology of all that leverage with no risk management, it’s almost nihilism.”"

MY COMMENT

GO BIG.....OR GO HOME. Pretty sad. Also pretty sad that the BIG BANKS seemed to have no issues working with him....including GOLDMAN when they (allegedly) caved to keep his business from going elsewhere.

 

The story above makes me think of something I learned when we lived for 10 years in a high end corporate neighborhood. I was a LOWLY small business owner......but due to my MSFT stock trade and other investing.....we were able to live among the CEO's and professional athletes. There were some really nice people there.......and.....some real A-holes.

I saw over that time span that wealth and success were very much..........TRANSITORY. People would be riding high for a while and than they would have problems.......or........get fired.......or.......lose everything and they would be gone. It really drove home to me the fact that there is........JUST AS MUCH.......downward mobility in our society....as upward mobility. Wealth and money can disappear very quickly......and often do.

It ALSO....drove home to me......what I already knew. When you see the data about all the people with great wealth in our society....it is often NOT the same people. It is not a constant. People are CONSTANTLY moving up.......and.......also down. We tend to think that the data about how many millionaires there are is counting the same group....but it is often not. It is very fluid......with people moving in and out.

LIFE HAPPENS.

 

I like this article and the way it looks at investing and life. SO.....one last post tonight.

The True Cost Of Investing: Opportunity Cost

https://www.forbes.com/advisor/investing/opportunity-cost/

(BOLD is my opinion OR what I consider important content)

"Whether it means investing in one stock over another or simply opting to study for a big math exam instead of meeting a friend for pizza, opportunity cost pervades every facet of life. That’s because each time you choose one option over another, you’ve lost out on something.

Opportunity Cost Definition
Opportunity cost is the value of what you lose when you choose from two or more alternatives. It’s a core concept for both investing and life in general. When you invest, opportunity cost can be defined as the amount of money you might not earn by purchasing one asset instead of another.

“Opportunity costs means “What else could I have done with my money?” and “Am I properly allocating my capital?” says Adem Selita, chief executive officer at The Debt Relief Company in New York, N.Y.

Opportunity costs may have explicit financial costs, like when you choose to use your dollars for one thing instead of another, or implicit costs. The latter won’t hurt your wallet but will cost you the chance to do other things with your time or energy, which actually can have indirect impacts on your finances.

Here’s another way to think about opportunity cost, from legendary value investor, Warren Buffett. “The real cost of any purchase isn’t the actual dollar cost. Rather, it’s the opportunity cost—the value of the investment you didn’t make, because you used your funds to buy something else.”

How to Calculate Opportunity Cost
The basic formula for opportunity cost is the same in academic economics as it is in everyday use—it’s just expressed differently.

“In economics, opportunity cost equals the expected return on the Forgone Investment Option (FO) minus the expected return on the Chosen Investment Option (CO),” says Todd Soltow, co-founder of Frontier Wealth Management, in Houston, Texas. The opportunity cost formula is:

Opportunity Cost = Forgone Option – Chosen Option

When it comes to investment returns, you’ll just need to sub in the expected rates of return of each option. If, for instance, you’re deciding between an exchange-traded fund (ETF) with an expected return of 10% and a rental property that will provide a return of 8%, your opportunity cost of choosing the rental property over the ETF is 2%.

When calculating opportunity costs, it’s important to consider more than just flat returns, however. You should also weigh the level of risk involved in your choices.

In general, the greater the risk that you lose money on an investment, the higher returns it provides. It can be difficult, then, to compare the opportunity costs of very risky investments, like individual stocks, with virtually risk-free investments, like U.S. Treasury bonds. On paper, there might be a huge opportunity cost of opting for Treasuries over stocks, but the security the former provides might make them preferable depending on the situation, like if you needed access to that money in the short term.

Opportunity Cost Examples
Opportunity costs are embedded in the fabric of everyday life. Everyday examples of opportunity costs might include choosing to commute using public transit for 80 minutes instead of driving for 40 minutes. You might save on the cost of gas but double the trip length and miss out on other things you could have done during that time.

When it comes to your finances, opportunity cost works identically. Each choice you make has positive and negative repercussions and may cost you in different ways. Robert Johnson, a professor of finance at Creighton University, points to a classical example of the returns caution-minded investors miss out on when they downplay stocks in favor of more secure investments long term.

“A prime example is the opportunity cost of holding cash,” Johnson says. People like to think cash is king, he says, but holding exclusively dollar bills long term all but ensures you’ll experience large opportunity losses.

Johnson points to historical data on stocks versus bonds to illustrate the missed financial opportunities. From 1926 to 2020, large capitalization stocks, like those in the S&P 500, have seen average annual returns of 10.2%. Long-term government bonds averaged 5.5% annually whereas Treasury Bills returned 3.3% each year on average.

“To put it in perspective, A dollar invested in the S&P 500 at the start of 1926 would have grown to $10,896 (with all dividends reinvested) by the end of 2020. That same dollar invested in T-bills would have grown to $22. Thus, the opportunity cost for conservative investors would be $10,874,” Johnson says.

And that’s not even considering inflation, or the steady loss in purchasing power cash falls victim to over time. If you choose to stay in cash long term, not only are you missing out on the opportunity to grow that money in the stock market, but your dollars are also losing value by around 2% each year.

How Opportunity Costs Impact You as an Investor
It’s obvious that decisions around what to invest in are inherently informed by opportunity cost. But once you understand opportunity cost is a factor you should weigh, the amount of opportunities to consider may seem intimidating. You don’t want to choose the wrong investment option and incur the wrong opportunity cost, after all.

“The next step naturally is to evaluate the potential return on every stock, bond, piece of art, non-fungible token (NFT), and cryptocurrency available for investment” to try and optimize your returns, says Doug Milnes, a chartered financial analyst (CFA) at MoneyGeek.com in New York, N.Y. “Thankfully, years of research and analysis have given us portfolio theory, which allows investors to skip the effort of evaluating every investment opportunity.”

Carefully constructed portfolios provide guidelines for the percentage of each type of asset you should hold to help mitigate the uncertainty of any one asset or asset class doing very well or very poorly over time. “This reduces the investor’s decisions from looking at every opportunity to a manageable question of ‘How much of each asset class should I hold?’” he says.

These asset allocations are normally based on your investing timeline and desired level of risk. You’ll generally want more conservative investments, like bonds and bond funds, the shorter your timeline. But for longer-term goals, you can introduce increasingly greater percentages of riskier investments, like stocks and stock funds, to position yourself for higher returns.

And remember, regardless of your choice, you’ll incur some sort of opportunity cost. Even making no decision is itself a decision with costs, especially when you consider the sleeper costs of inflation.

“Resources are limited in life; especially with goods, services, money, and time,” says Sweta Bhargav, a financial advisor at Advisor Wealth in Philadelphia, Pa. “There’s always a trade-off.” Opportunity costs, then, are simply a matter of deciding which trade-offs you can live with.

MY COMMENT

As I said......LIFE HAPPENS. Investing is all about choices. Some are easy.....some are difficult. For me....being a long term investor makes the choices easier.......and lessens the risk of FAILURE.

 

HEY Emmett

YOU got the markets today......do your magic. I am going to be out of touch till later today so.......we are all counting on you to make us some money and keep the markets UP. Dont let us down......no pressure.