Investment Diary: 29/1/2020

I've been meaning to write for awhile now but with a newborn and my return to investment (for my own account) time has been scarce.

Firstly an overview of the last 5 months. I'd ramped up my effective equity exposure to ~45% since Dec 2019. The reason was a combination of: a) bottom up stock picking: 40% of my equity exposure is now the Chinese equities - the things I'd previously researched and liked but couldn't own previously due to my work trading restrictions, b) further easing in liquidity conditions: the Fed made it clear they would keep interest rates low and liquidity spigots on for the foreseeable future.

Two new things I'd put into play in my portfolio:

1) Short Puts on Individual Stocks: targeting long exposure at discount. This is a strategy I've particularly like for deep value cyclicals where premiums are extremely high. For example for the offshore oil-rig companies I could get 10-20% off the price selling at the money 2-3month Puts and 30% off (Valaris) for 4-6month Puts. I'd also used this for other equities where I'd set the breakeven price of the option to be my target entry price. This has helped earn some returns in the bull market where I've been reluctant to chase prices. Needless to say I'm happy if these Puts expire in the money for Buyers as I would have been a willing investor in these stocks anyway.

2) Short at the money and Long out of the money Puts on Stock Indexes/ETFs: hedging part of my equity exposure. Although in the past I'd cleared out my portfolio derivative protection I decided to put them on again given how quickly markets have been climbing since Dec 2019. These derivatives are setup to be at expiry: cost neutral if markets rise, experience max loss with benign falls in the market (roughly mid single digits) and pay-off for markets drops >10-15% on ~200 day duration protection. Maturities are staggered but currently the Max Loss of these positions is ~2.3% of my Equities (1% of Total Port) while Effective Protection is ~43% of my Equities (19% of Total Port). I'd bought derivatives primarily on the Hang Seng Index and Nasdaq (QQQ ETF) with a few SPY and VIX options in there too. My portfolio is very different to these Indices but I'm okay with the mismatch and I like how these derivatives hedge against the risk that large caps have been overbought due to passive investing.

My portfolio performed well but I slowed my purchases in late Dec 2019 simply because prices ran off too fast for me to be comfortable chasing. The raging bull market saw a sudden reversal last week due to the coronavirus outbreak in China. I think fears are overblown and have continued adding to my equity long positions either directly or via derivatives. To put it into perspective:

1) SARS lasted 9 months (Nov 2002 to July 2003) and killed ~770 people. During that period the Shanghai and Shenzhen composite indexes fell -13% peak to trough and Hang Seng fell -18%. All indices recovered to prior levels within 1yr of the outbreak.

2) Coronavirus damage: each year China has 80-90k and USA 12-60k influenza related deaths vs ~130 reported coronavirus deaths today. The infection pace is very quick but this time the Chinese government responded quickly and forcefully to contain the problem. Globally the response and co-operative seems to be strong at finding treatment and containment.

I think the actual economic impact of this is outbreak is likely to short lived and while liquidity conditions remain easy, I will continue participating in markets. Over the past week I've added most to the likes of JD.com, Maoyan, Macau Casinos and my offshore oil-rigs. In each of these cases I think the impact will be transitory or much less than the market anticipates. I'll continue adding slowly to all positions and assess the price and news flow after 4Q results are out. For the time being, I don't see this as the event that pops the bull market - Equities remain rational within an irrational financial conditions world.

Happy New Year! This will be an interesting year and decade...