Stress testing AAPL Portfolios for Black Swans

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    Posted: 25 August 2012 03:33 AM #16

    cb, to each their own and good luck to all.

    It’s a function of risk profile.  At my own peril, my preference is lower amounts of money at higher risk.

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    Thanks, Steve.

         
  • Posted: 25 August 2012 11:59 AM #17

    Mav - 25 August 2012 06:31 AM

    That doesn’t like a cure.  Maybe management wink

    It’s more like “a hair of the dog that bit you..”  I just wish I had bought more hairs at the close.  :wink: 

    Interestingly, few see this verdict as having any possible downside for Amazon. I think it does. 

    In the AH, AMZN lost 4 cents.  If the market gives me a chance on Monday, I’m shorting this oinker.

         
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    Posted: 25 August 2012 03:04 PM #18

    Mercel - 25 August 2012 02:59 PM
    Mav - 25 August 2012 06:31 AM

    That doesn’t like a cure.  Maybe management wink

    It’s more like “a hair of the dog that bit you..”  I just wish I had bought more hairs at the close.  :wink: 

    Interestingly, few see this verdict as having any possible downside for Amazon. I think it does. 

    In the AH, AMZN lost 4 cents.  If the market gives me a chance on Monday, I’m shorting this oinker.

    Some speculation in the press that Amazon could and should be a primary target for Apple. The “forking” of Android presents just as many violations and the AMZN model bears done of the development costs.

    Go get Em, Mercel!

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    Posted: 29 August 2012 12:03 PM #19

    Mav - 23 August 2012 08:05 AM

    TL;DR

    Point taken LOL

    OK, in all seriousness?  My answer:  Nimbleness.  We don’t shoot skyward in a day and we don’t fall off a cliff in a day either.

    Yes we do!! *

    * in case of a real Black Swan event, that is

    Please see quote from Gregg quoted in my first post. He lost 80% of his portfolio in a day. Now, that’s Gregg (and Gregg 1.0 at that, I know Gregg 2.0 has more cash on any given day now). My point is, nimbleness won’t cut it, IMHO.

    And you brought it up yourself, actually:
    Cash:  The Ultimate Hedge(tm).

    Yup, maybe it’s as simple as that. What’s not simple is forcing oneself to always have *some* cash (say, 10%) for a Black Swan. That means one’s “100% invested” becomes “90%” actually invested. I’m still guilty as charged: I don’t follow my own mantra, and have no protection at times when I’m truly “100% in”.

         
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    Posted: 29 August 2012 12:09 PM #20

    cbongiova - 25 August 2012 04:19 AM

    I do deep in the money long term call spreads.  If AAPL drops to $500 tomorrow (~25% haircut) there are spreads that will return about 25% annualized and still protect you if Apple drop very rapidly.  An example of this is a 475/500 Jan 2014 call spread.  This pays about 40.8% return which is about 27% annualized return.  If you panic and sell from my calculations you’ll only lose about 35% which isn’t much worst than the stock itself and much better than 95%.  If you are worried about a black swan event I’d move a lot of my funds into this type of strategy or instead of cash use this strategy instead.  27% annualized doesn’t seem like much but do that for 30 years and that’s about 130,000% gain.

    Interesting take! But is this really better than just holding common? A significant drop (say, 50%) over a medium-term period of time (say, 1 year - both plausible in case of a severe recession, for example) would actually wipe out even the conservative spreads, yet leave half of the common intact. Common also gives you the ‘nimbleness’ that Mav talked about. Nimbleness doesn’t work on 1-day periods, but certainly over LEAP-type periods.

    Not trying to discredit the strategy, just want to press a little to see how robust you think it is. Have you used it in 2007-2009?

         
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    Posted: 29 August 2012 12:16 PM #21

    Mercel - 25 August 2012 06:21 AM

    ...Black Swans are like the boogeyman, more imagined than real.

    Mercel, I have to credit you with an almost perfectly 100% opposite interpretation than the definition origionally offered by N. Taleb. smile

    Wikipedia quote:

    [Black Swan event is] an event that is a surprise (to the observer), has a major impact, and after the fact is often inappropriately rationalized with the benefit of hindsight.

    Of course, the definition also implies that the event is very real if and when it finally happens.

         
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    Posted: 29 August 2012 12:26 PM #22

    My own take: The exceedingly reasonable P/E ranges that AAPL got down to since late 2008 provide the best confidence ‘floor’ for me to keep investing. That greatly reduces idiosyncratic risk on Apple (the company) since it has to really screw up to fall down completely. What remains is systematic risk (e.g., a bubble we didn’t notice popping in China, US defaulting on its debt, etc) - but even then AAPL is sheltered better than any number of stocks, starting with Mercel’s favorite AMZN.

    Speaking of idiosyncratic and systematic risk, Horace had a post at Asymco a few days ago that sums up nicely why betting on a few things is a good idea. I feel like AFBers at large are doing precisely that with AAPL.


    P.S. I didn’t sell those Jan’14 $790 calls. Instead, legged in by selling 850s on Monday (after the verdict) and got that spread at a negative cost basis.
    lovemyipad, am I a good disciple or what? smile
    I’m also ~25% cash at the moment.

    [ Edited: 29 August 2012 12:37 PM by Roman ]