From the comment thread of Fred Wilson’s post Apocalypse and Bubbles:
Me:
[Quoting Bob Warfield] “This one is self-referential because Thiel uses Bubble Logic to argue that you’ve got to bet on the next bubble. Why? Because the alternative is all-out Global War and nobody survives.”[/Quote]
There would seem to be an obvious third alternative (actually, there are additional alternatives, but let’s run with this one): bet on the bubble and hedge. This has the advantage that the bubbliest asset is often relatively cheap to hedge, since more folks thinks it’s going to keep going up.
For example, I just checked Portfolio Armor to see what the optimal put option contracts would be to hedge positions in, respectively, the ETF that tracks the S&P 500 (SPY) and the one that tracks gold (GLD), and what the cost of those optimal contracts would be. The cost of hedging against a greater-than-20% decline in the S&P 500 ETF over the next six months is 3.43% of the position value; the cost of hedging against the same percentage decline in the Gold ETF over the same time frame is .092% of position value. Gold may be a bubble — some would disagree — but it’s pretty cheap to hedge it at the moment.
So a simple investment strategy would seem to be to pile into GLD and hedge.
i love the idea of portfolio armor as a service. great idea. the gold example is a perfect sales pitch.
Coincidentally, Seeking Alpha published this article today: “Why you should consider hedging if you own gold” (in a way, a specific case of the general point about why it’s good to buy umbrellas when it’s sunny out).
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