To Hedge or Not to Hedge
To Hedge or Not to Hedge
As outlined in a recent article in Barron’s, famed hedge fund manager Bill Ackman recently turned $27 million of portfolio hedges into a $2.6 billion windfall, helping his fund cushion the blow of Q1’s market swoon. Especially in the wake of COVID-19 and the damage inflicted to stock markets across the globe, a hedging strategy can appear to be a cure-all, allowing investors to participate in bull markets without the worry of a deep sell-off during times of crisis. We’re not so sure. A hedging strategy is simply insurance by a different name. Like most insurance products, you hope to never need them. Since predicting the next market crash is next to impossible, an investor would need to pay for “insurance” every year to protect his or her portfolio. Portfolio insurance has a real cost, and it represents a non-trivial drag to portfolio returns. In our view, a better strategy would be to own companies who can take advantage of severe market dislocations. While the stock prices of most companies have been hurt in the short-term in the recent market drawdown, only a select few will emerge as stronger companies as they take advantage of weaker competitors. At First Fiduciary, we target those companies. By owning industry leaders with great balance sheets and maintaining a long-term view, we think we can best help our clients navigate the short-term market disruptions that will happen from time to time.
Noteworthy Articles We’ve Read:
Black Hole pictures
A year after the first photograph of a black hole was taken, a team of scientists is learning even more thanks to much improved photo resolution technology. The improved pictures could help fundamentally change everything we thought we knew about our universe.
Charles Portis obituary
A glowing tribute to one of America’s greatest writers. More on Portis later.
"Essential" Retailers
Are you wondering why lottery tickets and cannabis are considered essential businesses in some states? This article from The Economist explores how various states (and countries) have different ideas about how “essential” is defined.
Starsky Robotics
If you’re early, you’re wrong. No one knows that better than Stefan Seltz-Axmacher, the co-founder of Starksy Robotics, a self-driving truck start-up. In this post, Seltz-Axmacher details the difficult decision to shut his company down.
The Woman Shaking Up the Diamond Industry
Very long read on the diamond industry from The New Yorker, highlighted by the discovery of the largest diamond in over 100 years, a 1,758 carat monster.
How Biogen Conference Spread Coronavirus
This feels like it happened six months ago in the time-compressed world of COVID-19, but it was not even 45 days ago that Boston became the epicenter for the virus on the east coast.
Books We’ve Read:
Dune
by Frank Herbert
Long considered one of the best science fiction novels of all time, Dune has been on my to-read list for years, and I finally decided to dig in. The story, set 20,000 years in the future, takes place on a desolate, water-starved planet that doubles as the only source of the most valuable spice in the universe. Part coming-of-age tale and part revenge story, the series of three books is Tolkien-esque in the scale of its world building. Ultimately, 18 books were written within Herbert’s massive Dune-universe. As far as science-fiction books go, Dune is more geared toward the fiction aspect. The characters and the relationships drive the plot while science gadgets remain in the background, though they are present. I wish I hadn’t waited this long to read it. Recommend. – AG
The Dog of the South
by Charles Portis
Portis, a writer in the vein of Mark Twain with his own claim to the title of America’s greatest writer, died in February of this year. His book, True Grit, is widely considered one of the best Western novels of all-time. The Dog of the South is one of his lesser known books, but it is nonetheless very entertaining. A “road trip” book, Dog is the story of a man who leaves Arkansas in search of his runaway wife and ends up in Central America. Along the way, he interacts with a cast of screwball characters who both help and hinder the search for his wife. The highlight of this book, though, is its subtle humor combined with Portis’s rich dialogue. Recommend. – AG
Recipes We Like:
With many of our favorite restaurants closed due to social distancing measures, we thought a recipe would be more appropriate.
With two small girls (ages 2 and 4), the priority in my house at dinner time is speed. This spin on an old favorite, the cheeseburger, certainly fits the bill. From celebrity chef, J. Kenji López-Alt, comes the ultra smashed cheeseburger. The genius in his recipe is the splitting of a traditional quarter-pound bigger into two separate two ounce patties. This doubles the amount of browned burger crust and greatly reduces the cooking time (only 45-60 seconds per side). Make sure you choose a cheese that melts easily, and finish the burger how you like. My family prefers a toasted bun, pickles, and mayo. The smashed burger has become our go-to meal before Family Movie Night. – AG
More Than a Trusted Investment Advisor
We are happy to consult with you or your friends & family about all things related to growing & securing wealth. Recently, we had a discussion with a retired client who has a large Required Minimum Distribution (RMD) from his IRA account. Typically, he takes a monthly distribution that exceeds his spending needs in order to meet the RMD. He was aware that the recent CARES stimulus package eliminated required minimum distributions for 2020. We recommended that he temporarily use the excess cash reserves in his non-qualified account for a portion of his monthly expenses while significantly reducing his IRA account distributions. In doing so, he will lower his tax burden in 2020, while allowing more of his retirement funds to remain invested.
Tell us your issue and we will find a creative and effective solution.
The data contained within this newsletter is for informational purposes only. The information contained herein should not be considered investment, tax or legal advice.
This newsletter contains links to external third party websites that are not affiliated with First Fiduciary Investment Counsel. FFIC does not control or direct the content of the information contained on these websites. Information contained on the third-party website is relevant on the date the newsletter was published but may be changed or revised by the third parties without the knowledge of and/or notice to FFIC.
Statistics and other information have been compiled from various sources. First Fiduciary Investment Counsel believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
Past performance does not guarantee future results. The mention of securities or types of securities in this newsletter should not be considered as an offer to sell or a solicitation to purchase or sell any securities mentioned. Neither First Fiduciary nor the authors hold positions in any of the stocks mentioned unless otherwise stated.
First Fiduciary Investment Counsel, Inc. is a registered investment adviser with the Securities and Exchange Commission. A more detailed description of the company, its management and practices is contained in its firm brochure document, Form ADV, Part 2. A copy of this form may be received by contacting the company at: 6100 Oak Tree Blvd., Suite 185, Cleveland, OH 44131; Phone: 216.643.9100; Email: ffic@firstfiduciary.com.