Since almost all closed-end funds tend to sell at a discount, it can appear obvious that there is no reason to purchase closed-end funds when they are selling at a premium. Sometimes a special feature, for example, a closed-end fund having a private placement in its portfolio which is about to go public as a hot issue, may justify purchase at a premium. Otherwise, it is difficult to make a case for paying a price higher than NAV.
Central to the advantages of closed-end funds is the discount; both as to dividends and as to pricing variances. Read the rest of this entry »
In the published common stock portfolio modeling the Continuous Full Investment portfolio models were included to function as a control to allow objective comparisons with the market timing models.
Although intended as a control, allowing demonstration of the validity of the timing technique, the Continuous Models have significantly outperformed the broadly based popularized market averages. The reasons for this superior performance are twofold. First, the rigid requirements for stocks to qualify for the Master List results in the stocks comprising the Continuous Models to be of usually superior fundamental quality, thereby giving the group an upward bias relative to the overall market. Second, the Continuous Models change positions in a gradual, relatively slow process in which new positions are selected that are among the most discounted (low-priced relative to the others) on the list. In effect, a rotational process adds those that have become more discounted and deletes those less discounted. Read the rest of this entry »
Currency swap: Contract that commits two counterparties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.
A currency swap has three stages:
An initial exchange of principal: the two counterparties exchange principal amounts at an agreed exchange rate. This can be a notional exchange since its purpose is to establish the principal amounts as a reference point for the calculation of interest payments and the re-exchange of the principal amounts.
Exchange of interest payments on agreed dates based on outstanding principal amounts and agreed fixed interest rates.
- Re-exchange of the principal amounts at a predetermined exchange rate so the parties end up with their original currencies.
- Again this may be done to hedge risk, to speculate on changes in exchange rates, or to attempt to lower the cost of borrowing by borrowing in the currency in which the most favourable interest rates are available and then swapping into the currency that the firm needs to carry out its business. Whether this will be cheaper will depend among other things on the bid—offer spread.
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You need to be concerned with the psychological aspects of investing in a managed futures program from two distinct points of view. First, what type of investment best meets your needs? And second, if you’re going to personally interview and select a CTA, what psychological characteristics should you be looking for?
The type of futures investment you are suited for depends on your attitude toward risk. If you are an aggressive risk-taker, you might be looking for an emerging CTA with a short, but incredible, track record. A moderate risk-taker might select a seasoned trader with a five- to ten-year track record in the moderate volatility range. Safety-conscious investors prefer to define their maximum risk in advance. They look for limited partnerships and “guaranteed” funds. We’ll have a discussion of the various types of offerings later in this text. Read the rest of this entry »
A group of 10 investors decide to form a limited partnership to trade futures, but none of them has the time or experience to act as general partner (GP). Nor does anyone want to assume the unlimited risk that falls on the shoulders of the GP. They take this challenge to a commodity pool operator (CPO).
A CPO is an individual, corporation, or organization in the business of operating and promoting commodity pools. On occasion, a CTA can also be a CPO who promotes his or her own trading programs. In this case, our investors seek a CPO independent of CTAs. They take this approach to get an unbiased analysis of potential traders. Read the rest of this entry »
For the fourth scenario, we chose a qualified pension plan for the following reasons:
- A lot of very well-known companies are adding managed futures to their investment portfolios for the reasons already documented in this book, particularly because they can often increase the overall return while reducing risk. For example, some of the corporations currently using managed futures are Intel, Libby Owens Ford, Weyerhauser, World Bank, and Virginia Supplemental Retirement System.
- These plans are highly regulated by the Department of Labor, IRS, SEC, CFTC, and state banking, insurance, and securities agencies. All these organizations scrutinize the investment practices of these plans for the protection of the employees who invest. If managed futures can pass the muster of all this regulatory oversight, there must be something worth consideration for just about every serious investor.
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Here we review some of the terminology used in the swaps market and explain how swaps are quoted. The date that the counterparties commit to the swap is called the trade date. The date that the swap begins accruing interest is called the effective date, and the date that the swap stops accruing interest is called the maturity date.
Although our illustrations assume that the timing of the cash flows for both the fixed-rate payer and floating-rate payer will be the same, this is rarely the case in a swap. In fact, an agreement may call for the fixed-rate payer to make payments annually but the floating-rate payer to make payments more frequently (semiannually or quarterly). Also, the way in which interest accrues on each leg of the transaction differs, because there are several day-count conventions in the fixed-income markets. Read the rest of this entry »
Delta Delta peaks in between the two strike prices (i.e. near the money)—notice the difference
between the one-month Delta profile and the one-week delta profile. This shows us that small movements in the underlying stock price at these levels will have a more dramatic impact on the value of the Bull Put position. Delta becomes much more sensitive as time decays. This means that the Bull Put risk profile itself becomes much more sensitive as time decays. This is because Time Value is depleting to negligible levels, and so the stock movement is being followed almost exclusively by Intrinsic Value at these levels. Notice that as the stock price veers away from the money (on both sides), Delta is hardly sensitive at all and that the most sensitive Delta action is occurring close to the two strike prices.
Gamma The acceleration and deceleration of Delta is reflected in the Gamma values. As you would expect, Gamma peaks in positive territory where the stock is just below the lower strike price and troughs into negative territory where the stock is just above the higher strike price. Read the rest of this entry »
I am always amazed when investors fail to consider after-tax returns in assessing their performance. Perhaps this oversight is a direct result of the sin of pride—they can’t puff up their feathers and crow as loudly with an after-tax return number. Perhaps it’s a result of envy—they are driven to brag about their great results and lesser results won’t allow them to respond effectively to their feelings of envy. Perhaps it’s simply sloth— they are too lazy to think about the difference between after-tax returns and pre-tax returns or to do the math. Whatever sin causes them not to obey this commandment, they end up deluding themselves about how well their investments are doing.
Similarly, some investors sell a stock before it becomes eligible for capital gains treatment. For investors in the highest tax bracket, the difference is 15 percent instead of 35 percent if they hold the stock for a year and a day. Gluttons, of course, lack the patience to hold their stocks for that long. Angry investors, too, may be so upset that a stock has failed to meet their expectations that they may sell it because they have so much animosity toward it, heedless of the tax consequences.
If you want to adhere to this commandment, ask yourself the following questions:
- Am I using every possible dollar in tax-deferred, retirement-type vehicles, such as IRAs or 401 (k)s?
- Am I taking full advantage of 529 college savings plans?
- When thinking about fixed-income investing in a fully taxable account, am I aware of all my tax-exempt options and what the net yields are?
1. Lose Money
Like Maria, most gluttons rationalize their investing behaviors. They equate action with money: You’ve got to play if you want it to pay. This may be true if you are a trader in Chicago Board of Trade, but for the rest of us, frenetic investing usually results in losses rather than in wins. Gluttons invest burdened by four weaknesses that they may be unaware of or that they may discount. Let’s examine these four vulnerabilities and why they should not be discounted: Read the rest of this entry »
As you read through the descriptions of the sins and the accompanying monologues, it’s likely that you had an inkling of the ones to which you are most vulnerable. You may have found one or more than one, seeing your own investing behaviors in the descriptions. While it’s important to be aware of all seven sins—most of us fall victim to all of them during the course of an investing lifetime—pinpointing the sins that are most likely to hurt your investing performance is key. To help in doing this, I keep a journal of my trading activity. In the journal, I note where and when I first heard of a particular company, what research I did into it, the reasons behind my decision to buy it (or not buy it), why I sold it, and so on.
To help you pinpoint your vulnerabilities, I’m going to list some common investing mistakes and the specific sins that catalyze these mistakes. As you’ll see, more than one sin can cause some mistakes, so you won’t always find a one-on-one relationship between mistake and sin. Still, this exercise will help you hone in on your vulnerabilities, narrowing the list down from seven to one, two, or three. Read the rest of this entry »
It’s likely that most investors, at some point in their investing careers, buy and sell much too quickly. Perhaps they get caught up in a market upturn or downswing or they are going through a difficult period in their personal lives and turn to day trading as a form of escape. If overactive trading is an anomaly rather than a pattern, then you probably aren’t guilty of this sin. On the other hand, if you find that you periodically fall into the habit of overactive investing, gluttony may be a problem you need to address. Read the rest of this entry »
Certain types of investing seem to trigger anger in certain investors, and if you’re vulnerable to this sin, you should do everything possible to avoid these types. Specifically, don’t:
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SEEK HIGHLY VOLATILE, MICROCAP STOCK INVESTMENTS
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Institutions obtain administrative and, sometimes, taxation benefits by using mutual funds to manage their own assets. Such funds are invariably not available to the general public. Funds that are authorised to be promoted to the general public (frequently referred to as ‘retail funds‘), usually extol the benefits to the private individual, namely:
1. Small investment required
Although both minimum holdings and minimum initial amounts are usually required, individuals can invest comparatively small sums of money in mutual funds, particularly through plans that accept regular subscriptions. So-called ’small investors‘ can thereby obtain the benefits of worldwide economic activity (hopefully growth) rather than allowing these to be enjoyed by the banks (and their shareholders) and others with whom they deposit their funds in return for an interest income. Read the rest of this entry »
