And its this dramatical reduction in risk that makes the decision to sell those investments require a MUCH bigger overvaluation level in order to make sense to sell. You cant look at something that is 20% above its fair value and say 'its time to sell, its overvalued', when you factor in those risk dynamics, you will need a LOT more than simple overvaluation. You got to factor in that your risks will increase when you sell then and your natural shorts increase. When I see rich, smart folks saying 'I just sold all my stocks, this will end badly' 'sell your house, this is a bubble' 'its not time to buy a home, rent, its a bubble', I dont get it. I dont think it makes sense to do that most of the time. I think they are just being sloppy and not thinking things through
This is all due to another thing that I mentioned in the past, which is that the P&L of our natural shorts only happen in math land, in the real world no one sees it. Renters in Vancouver have been 'losing money' for a really long-time, they just didnt know. At the end of the year, they might have saved C$10K after expenses, but when you factor in the natural shorts that are uncovered, their final P&L that year might have been -C$20K. And that happened year after year after year. They think they are getting richer but then one day they have to move out and all of the sudden they are living in a shitty suburban area taking the chance of getting shot/killed/robbed because they couldnt afford an apartament in the central area. Economically, all those losses added up and were converted into higher chances of death/theft, etc. I hope one day children and young people will have personal finance classes at school and learn things like that. But of course, the personal financeers dont teach that so maybe someone needs to alert them about their bad advice
This is also where folks like ZeroHedge do a lot of harm by encouraging people to sell assets and increase their natural shorts based on any pretty much any news. Even people like Robert Kyosaki harm people when he says a house is not an asset because it doesnt put money in your pocket. Its like the Matrix, some people cant see it so they act as if it didnt exist. Natural shorts are real and their P&L affect everyone, whether they see it or not
Even extremely rich people have these 'shorts'. If you recall in Market Wizards, Paul Tudor Jones was talking about how worried he was that the US was going to turn to the rich for a witch hunt and blame them for market collapses/economic struggles. Even though he could afford everything he wanted, he was still short 'civil/political unrest'. Now, thats a hard one to close!
When you combine diversification/risk parity style portfolios with natural short "covering" (covering the things that you are short naturally by tilting the balanced portfolio in a way that fits you). You got a potent way to make some money with low risk. When you add in some behavior finance (and avoiding the mistakes that people make), then it really gets powerful. That's what I'm trying to do, at least on the passive part of my allocations
I suppose a 4th layer to this is the speculative part, where you further tilt things (the allocations in the balanced portfolio) in a way that you think more money because you have a thesis. I'm doing that now with being overweight in equities, underweight in bonds, etc. Also, the components in the asset classes can be choosen speculatively if you think other things will beat the index (BRKB, PSH fund, etc). When the year ends I will see how I did versus my true benchmark, which is a standard balanced portfolio (like the Dalio one from the Tony Robbins book or the El-erian one from his book)
These 'natural shorts' idea can bring about some advanced investing techniques. For instance, if I had a kid with Duchenne muscular dystrophy I would have shorted SRPT before drug trial results. Why? Because if they fail at treating this disease, my kid will remain with the disease but AT LEAST I get paid. If they suceed, I will lose a bunch of money but I will win a cure, thats worth a lot more than the money I will lose. Everyone with or close to someone with that disease is already long SRPT synthetically, by shorting some (with the right position size), you remove that exposure, that you might not want. There a lot more stuff related to this that I havent even found out, overtime, I hope to notice more of these 'shorts' and other investing/portfolio techniques that can be developed from it
The idea is, if I'm going to be sick, at least I wanna get paid. The worst situation is to remain sick for free. And if I do lose money, at least I get something far more valuable, a cure and a better life
Sick and broke is as shitty as it gets Having a kid who is sick and you're broke is not something you want to experience.
Thats why i said you got to size it right. SRPT is one of the situations where the short didnt work but there are so many where it did. Lots of people are long those stocks in math land even if they never realize it and they can hedge out by shorting... At least partially