In a post on CriticalMAS called True Job Insurance Means Shorting Your Own Company the author puts forth the interesting concept of hedging your employment risk by betting against your industry via puts.
I think he’s onto something. In the dotcom days I was a part-time (and highly delusional) daytrader. I was up 1000%. Yes, you read that correctly, 1000% gain in just 18 months. My extraordinary gains were due to daytrading dotcom stocks during the historic dotcom bubble. My day job also happened to be at a dotcom. Being a diligent hardworker I was under deadline for a big project and putting in 16 hour days for a week straight. As a result I didn’t watch the news or follow my portfolio during this critical time.
This critical time happened to conincide with the dotcom implosion. After the project was complete I logged into my portfolio and I had lost 30% of my net worth. I was shellshocked and in disbelief. Denial is a strange thing and I rode the market down another 30% before I bailed to 100% cash. It was a painful lesson and it still haunts me. For the mathematically challenged, losing 60% of your 1000% gain is mind numbing.
Shortly thereafter I was laid off. Luckily for me I found employment easily, but working in the dotcom field and investing in dotcoms left me doubly exposed when the market crashed.
Fast forward to 2003 and I am working for one of the largest subprime lenders. I left that company in 2004 and predicted a subprime crash. I was several years ahead of the curve. Their stock rose 100% over the next 12 months as I watched in further disbelief. Around the same time, I picked up a mortgage company as a client in my new consulting business and continued to watch their unabated growth, knowing that I predicted a crash several years earlier.
At the end of 2007 the lending industry started to unravel. With all of my experience in the subprime industry and my close association with a subprime lender, I was still slow to react. I joked that if my house hit a selling price of $500k I would sell. It hit $485k, then ran off a cliff.
During this time I’ve worked hard at my business, considered myself to be an intelligent and shrewd investor and sat on my hands while the market has crashed around my feet. As the housing market ran off a cliff I found myself frozen yet again, unable to pull the trigger that I knew should have been squeezed until my hand went numb.
I can admit that I was blinded by greed. I wanted $500k and held out for that magical number. Had I followed the advice outlined by CriticalMAS in the article above my paper losses would be offset by handsome paper gains from shorting the lending industry.
There’s hardwork, there’s intelligence and then there’s cold hard profits. When the profits are staring you in the face and you know it’s too good to be true, it’s time to sell.
I won’t be fooled again.