Been getting lots of good questions by email lately.
music selection: “All The Girls Love Alice” — Elton John
weigh-in: 196.4 +0.8
1) How can a Canadian investor investing in USD hedge currency risk?
First of all, the need to hedge against CAD/USD moves is small. The currencies are both “hard” and rarely make large moves against each other. You can gauge whether the CAD is going to make a large move based on oil prices. Most of the demand for CAD is for oil and that drives the exchange rate. If you insist on hedging, I recommend a broker that has low interest rates like Interactive Brokers. You then short the amount of USD you have exposure to and buy the corresponding amount of CAD. You will pay interest to borrow the USD and receive interest to hold the CAD making your cost to maintain a hedge on net, trivial.
2) Recommend any books for newbies?
There are lots of standard investing texts. One I like is “Quality of Earnings” by Thorton O’Glove. This is a layman’s guide to understanding accounting statements and detecting when they are being manipulated by management.
3) Does paper trading options to get started make sense?
In my opinion, it is hard to get a real feel for options by paper trading. You won’t experience the true nature of wide bid/ask spreads, and you’ll never be assigned early while paper trading. Best to jump in with small position sizes and a small allocation so you can learn your own investor psychology when things go against you.
4) What are you going to do in a bear market?
First of all, I keep a minimum of 40% allocation to debt and debt like securities. This provides ballast as well as income. The income is enough to cover my annual budget ensuring I never *must* trade to pay the bills. The best traders are always the ones who don’t need the money and can afford to wait for fat pitches. Be like the anaconda. The world’s largest land predator is notoriously patient and never attacks until it is certain it can get a kill without injuring itself. Safety first and then ruthlessness when you have a “gimmie”.
Second of all, the options investing on the rest of the portfolio is built for bear and high volatility markets. The premium you receive upfront lowers your risk versus just buying the underlying. The premiums you will get in a declining or bear market will be higher than during good times. Fear, as measured by the ^VIX drives options premiums higher. I expect to do better, not worse income wise during a bear. Also, I follow 25% trailing stop losses on most positions to ensure I preserve capital in the case of a 40% or greater market wipeout.
5) Where can I research Closed End Funds?
Nuveen puts out a free web based tool called CEF Connect. It has essentially every CEF on the market in the United States. It can be filtered by security type and is sortable on several metrics. I scan this regularly looking for sweet opportunities. It can be found here: https://www.cefconnect.com/closed-end-funds-screener.
6) Lizard King? Seriously?!?
When I first came up with the idea to share my approach via blogging, I wanted a URL on the theme of “Financial Escape Velocity”. Every conceivable version of that theme was already taken. I was grousing to a friend about my sour luck and she blurted out “Yes! You must do the Financial Velociraptor!” (Alcohol may have been involved.) I decided I like that and that Lizard King would capture the essence of the velociraptor while also making an oblique reference to Jim Morrison. You all know how much I like classic rock…
7) Is there an email list?
At the top of the sidebar, bottom of each post, and in the page footer is a signup for my mailchimp distribution list. I currently send a Saturday email with links to the previous week’s posts. There may eventually be give aways that are only available to email subscribers.
Devour your prey raptors!