How I invest (part 2 of many)

My goals

  1. Achieve a consistent 20% return on my investments (this is a very high bar!).  In both bull and bear markets.
  2. Avoid blowing up, otherwise I have to get a real job.
  3. Know that I am actually good at investing.  This means a track record of a lot of trades.  I will achieve this goal faster if I focus on shorter-term trading.
  4. Not expose myself to hidden risks or a very small chance of catastrophic losses.

Avoiding blowing up

I don’t want to have a devastating financial loss if I am wrong about my investments.  I try to structure my portfolio so that I’m not that exposed to crazy, unexpected events (some people call them “black swans” or “fat tails”).

Short selling and selling call options exposes you to unlimited downside.  I usually limit these positions to 2% of my portfolio.  If I lose 900% on one of these positions, then my portfolio is only down 18%.  I can live with that.  Even this might not be a great idea as there have been stocks that have gone up over 10 times in a short time period.

Also, I try to avoid being heavily exposed to a sector that may implode like how technology stocks imploded after the Tech bubble.  But I’m probably just saying this and not actually practicing it, because my portfolio is heavily weighted towards commodities.

But actually I’m crazy

I take pretty large positions in individual stocks.  I had/have 30% of my portfolio in QXM.  I had/have 25% of my portfolio in CREE put options.  If both of these positions go to 0 then I lose 55% of my portfolio.  While the CREE put options can easily go to zero (I am OK with losing 25% if the reward is high enough), I see it as highly unlikely for a cash-rich company like QXM.  I don’t worry about car crashes and I don’t worry about QXM going to 0.  I would be much more fearful owning a 30-year variable rate mortgage.  But I am probably crazy.

Making very high returns… even in falling markets

Because about half of my portfolio is in options, I should gain money if crazy things happen and lose money if they don’t.  Chances are good that crazy things won’t happen and I could stand to lose money on my options.

Current strategies

  1. Bet on a shady pump and dump company (QXM) going up.
  2. Bet on shady companies (CREE and several others) going down.
  3. Bet on junior mining companies going up.  Junior mining is pretty shady and extremely speculative.  Almost all of this is in QMI.TO (Queenston Mining).
  4. Companies with honest management that can grow earnings fast.  MCF, CMG.TO.
  5. Special situations.  Spinoffs, tender offers, etc.  I don’t have large positions doing this right now.

Strategies that I am fooling around with:

  1. Shorting pump and dump penny stocks.  I have been burned by this in the past as other people engineer buy-ins to force short sellers to cover their positions at a loss.
  2. Shorting companies where long-term/activist investors give up their board seats.  This can happen when the investor knows that the proverbial excrement is about to hit the fan.  To sell their stake in the company, they have to give up their board seat first.  e.g. David Einhorn and New Century, Ontario Teacher’s Pension Plan and Maple Leaf Foods.  I have no trades with this so far.
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