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Managing Risk with Warrants, Options & LeapsDudley Baker Regardless of what the markets are currently doing, now, more than ever is the time to take action to protect your portfolio. Over the last few weeks investors have been very very surprised at the performance of virtually all of the markets with the big initial shock coming from the 9% decline in the Shanghai markets overnight. Many analysts have had some great insight into what the problems are, the effects of them and how investors should approach the markets. Unfortunately, we have many different opinions from these analysts. While differing opinions are great to read it can and does create much doubt in the mind of the average investor. This is truly a time that you, the investor, must firmly believe in your investment philosophy or at a minimum attempt to protect yourself in the event you are wrong. We personally follow many of the top analysts and also read as much as possible on websites for information and conflicting opinions. While, yes, we have our own opinions much is based upon the collective views of some of the top analysts in the world. When our favorites are not on the same path we attempt to evaluate the risk of our investments and how to manage this risk with long-term warrants, options or Leaps. Recently Jim Rogers, which I like to refer to respectfully as Mr. Commodity, was quoted as, predicting "a real estate crash that would trigger defaults and spread contagion to emerging markets... You cannot believe how bad it's going to get before it gets any better... It's going to be a disaster for many who don't have a clue about what happens when a real estate bubble pops... the crisis would spread to emerging markets which now faced a prolonged bear run... .This is the end of the liquidity party... Some emerging markets will go down 80 percent, some will go down 50 percent... some will most probably collapse." Dr. Marc Faber says, "most investors are heading for huge losses... but gold to outperform." Richard Russell says, "... gold looks fine. Stop worrying." Chris Laird speaks of a, "World Liquidity Crisis Emerging." Another analyst writing on these websites which I respect is Adam Hamilton. Adam sees the possibility of a 2 year bear market in the equity markets similar to the 1973 - 1974 with a drop of approximately 45 - 50% in the Dow by the end of December 2008. On the other hand he sees gold, silver and the commodity sectors increasing as eventually the fear and the fleeing money in the equity markets will find a new home in the commodities. He sees this commodity cycle, by historical standards, as being only about half over with much more excitement to come. Short-term we did have all markets recently going down together - equities, gold, silver, mining stocks, etc. This has now scared many precious metals investors into thinking that if the equity markets collapse, then so will gold, silver, and the mining shares. This we believe, however, will be only a short-term disconnect before the money goes into the commodity sectors. A few of the mine fields in the investment arena today:
Any of the above could bring down the entire house of cards as we know it today. Scary times? You bet. I personally suspect one day an event will occur in the derivative markets or with the unwinding of the Yen carry trade. These are areas of which the average investor has absolutely zero knowledge other than perhaps hearing the terms mentioned in the financial press or on CNBC. Think about it, investors would not even know what hit them nor be able to explain it. Like being hit by a truck and not even seeing it coming at you. At least it will be quick but the financial pain could easily last a lifetime if you are not properly positioned. With the above gloomy backdrop, what is the level of risk you are willing to accept? Remember as investors, each of us must make this decision each day in the financial markets. The decision of risk is ours and ours alone, not our brokers or advisors. The ultimate responsibility lies with each of us. At the end of the day, if our investments do not perform, we must take responsibility for the losses ourselves. Should we as investors be concerned about unfolding events? Should we be fearful? Should we be running for the exits? Maybe all of the above are appropriate as this is surely a time for immediate reflection on our investments and the protection thereof. Allow me to address briefly how two different classes of investors could address this financial dilemma:
Will the current storms pass
without incident? Perhaps, but financial well being and decision
making are now front row center. For our subscribers of record as of this Sunday evening at 7:00 CST, we will be sending out our personal and specific plan for dealing with the management of risk. Mar 22, 2007 Dudley Baker is the owner/editor of Precious Metals Warrants, a market data service which provides you with the details on all mining & energy companies with warrants trading on the U.S. and Canadian Exchanges. As new warrants are listed for trading they alert you via an e-mail blast. You are provided with links to the companies' websites, links to quotes and charts, tips for placing orders and much more. Precious Metals Warrants do not make any specific recommendations in their service. They do the work for you and provide you with the knowledge, trading tips and the confidence in placing your orders. For those investors seeking more knowledge on warrants do visit the Learning Center at Precious Metals Warrants, where you will find much more information and examples to enhance your learning experience. You may also sign up for The Warrant Report free weekly email. Disclaimer/Disclosure |
