Sunday Morning Coffee

I had several good questions come in on this week's video looking for a little clarification on some points. I'll try to accommodate here.

The first question was from Ulli asking, essentially, why I believe in taking a gradual approach to defensive positioning.

Well, a few things. I don't really want to sell a lot of stocks that have not changed, IMO, fundamentally. This creates more commissions, tax issues (depending) and then uncertainty about when or how to get back in. As a matter of philosophy I don't care about one stock going down (assuming the fundamental story has not changed) I care about the entire portfolio.

If the market is up 5% in six months and your portfolio is up 4-6% in the same time period does it matter if one stock in that mix is down 12%?

From the no one can get them all right file, a portfolio is a mix of holdings that are going up and down. This also makes for better diversification. It seems to me that individual stocks go down for short periods all the time with no change in the business. This sort of normal movement is not something I try to trade around.

Steve.scoot asked about gold going down with stocks and whether cash is the only true hedge. First things first, I view gold as a way own something that has a chance of going up when the market suffers some sort of external shock like a terror event. I am far less confident that gold will zig to the stock market's zag when there is a market event that hits stocks. The thing in February and the thing this week were both market events.

I know the fundamental story about why gold should go up but my take is that the reality will not be as good as the story. If I am wrong, fine, I own gold across the board.

Put options, used correctly make good hedges but of course like all products they have some drawbacks. Inverse funds make good hedges but of course like all products they have some drawbacks.

Tomk doubts that market timing can improve returns, he says it is better for managing volatility. I don't think of what I am talking about as market timing. I am not saying it isn't market timing I am saying that is not my mindset.

The big idea is that when there is a problem with demand for equities, regardless of the reason, I want to reduce exposure. Problems with demand are what lead to down a lot, in a very simplistic way of thinking.

The picture is from Friday night. My brother Larry and I went to see the Red Sox play the Diamondbacks down in Phoenix. Larry went down to the stadium a couple of days before and got insanely good seats. There seemed to be more Sox fans than D-back fans. It was a great time. You can read a little more about it here if you are so inclined.