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An idea for a framework on how to "value" cash. Some general ramblings... Cash is just an extremely long dated option, giving you optionality to buy during a drawdown, while also suffering from theta burn(CPI/M). Optionality is convexly proportionate to the decline in price.. 1/x https://twitter.com/cap_zay/status/1344381102555848705
Think about it this way. If you have an opportunity with a 15% IRR over a 5-year period, a 30% decline in the stock price today more than doubles that 5-year annualized return to ~30%. Same way overpaying by 30% gets you to 15%-->5%.. So I think the proper framework should be...
What is the weighted probability of different market return scenarios in the next [1,2,5] years and how much that expected possible discount can improve the IRRs of your worst risk-adjusted investment's forward return. This can be done using historical return distributions for ex
I have a formula I am working to encapsulate and systematize this in my approach... but then the bigger question became, if I can borrow with $IBKR at 1.5% or less, and I have a strong view about firms I own providing double digit returns, the game changes..
Why not borrow at below inflation to buy real productive assets that provide you positive carry with a yield? Did you know you can ever write off the interest on your personal taxes if you use the capital for dividend/interest income in Canada? It really is free money.
You have so many forces playing in your favour. The borrowed liability is losing value in real terms faster than what it costs to service, if you DYODD the equity is growing in value and the carry is repaying your loan slowly. As the equity grows your leverage ratios declines.
A dangerous game, perhaps. But in this world, I don't see why a ~130% long portfolio wouldn't make sense given everything in the above. Personally, I levered up aggressively earlier this year, I have a high risk tolerance & this isn't for everyone. 0% cash is now the 15% cash imo
Once you run out of ideas - backfill leverage with your earnings. I don't know what the right valuation is for markets, but you'd better believe in a stabilized post-COVID world there will be an aggressive reach for yield. You saw a preview of this post-election - I spoke on this
You'd better believe post-2022, especially once VIX comes down and vol targeting/option writers/cash holders need to deploy capital flows will come into some of the assets discussed in my feed and many more.
