Following what Hussman has done, I was going to implement the exact same strategy for my own portfolio. Essentially, he was long in stocks, and short in puts and also short by writing deep-in-the-money calls.

Just to illustrate what is going on, I took a snapshot of XHB options (XHB closed at 35.04 on last Friday) (Click to open the Excel file):

Assuming that if you hedge your stocks by selling calls at strike price of 33, and buying puts at strike price of 35, you will actually end up with (2.5 - 0.8) = 1.7 per share of XHB or $170 per 1 contract of call sold and 1 contract of put bought (using the last price instead of taking the worst case with bid/ask). Sounds like a great deal, eh? Hedge while earning money?

Of course, there is never free money in the stock market or anywhere. If XHB closed at $35 on May 19th (when May options expire), your sold call will have a value of $2, and you will have a paper loss of ($1.7 - $2) = -$0.30 per share of XHB. If XHB closed at $37, your sold call will have a value of $4, and you will have a loss of ($1.7 - $4) = -$2.3. Only when XHB falls as you expects, for example falling to $33, you will have a paper gain of $1.7 + $2 from puts = $3.7.

Notice that because your hedge is done with both calls and puts, per share -wise, the delta increase/decrease is roughly $2 per share for every $1 price movement within the band of strike price between $33 for call and $35 for put (gain/loss at $33 is $3.7, and gain/loss at $35 is -$0.30, total of $4 for $2 price movement). Beyond the price band, either call or put will expire worthlessly. So the additional price delta beyond the band will be $1 instead of $2.

Because of the doubling of the price movement to gain/loss, your risk/opportunity is really TWICE per share of position. In order to compensate for this factor, I STRONGLY advise anyone to reduce the option trading size by HALF. Supposed you hold 200 share of XHB, and want to hedge it, you should sell 1 contract of call and buy 1 contract of put.

In what aspects is this strategy better than other bearish option trading strategies such as simply selling calls or simply buying puts or creating a bearish spread? In my opinion, this strategy is better for the following reasons:
1. Comparing to buying puts alone, you are not penalized by the time premium of $0.80 so much. Get partially compensated from writing calls. However because your calls are deeper in-the-money, the time premium will be increasingly less as the calls go deeper in-the-money. It is a trade-off that you must make between how low you think the market may go to hedge your positions.
2. Comparing to selling (covered) deep in-the-money calls alone, you have a 50% downside hedge from the puts (if you use half-sized option positions). This is an additional downside protection when the market falls lower than you expects from your sold deep in-the-money calls.
3. Comparing to bearish call spread (at 33 and 35), you will pocket initial premium difference of ($2.5 - $0.9) = $1.6 or $3.2 per 2 contracts executed (this is also your maximum gain). Your maximum loss is $1.6 - $2 = -$0.4 or -$0.8 per 2 contracts executed. In comparison to $3.7 and -$0.3 from 1 call and 1 put done by Hussman, not only your gain/loss is lower, but also you don’t get the additional 50% downside protection.
4. Comparing to bearish put spread, your maximum loss is the initial premium deficit of $0.2 (I’m using the ask at 33) - $0.8 = -$0.6, or -$1.2 per 2 contracts. Your maximum profit is -$0.6 + 2 = $1.4 or $2.8 per 2 contracts. Again, you don’t have 50% additional downside protection from this case.

I don’t know whether it’s always true that 1 sold call + 1 put will always give you a better gain/loss at the two strike prices, but comparing the bearish call/put spread strategies, it always depends on how bullish the market sentiment is. If the time premium is bigger in calls than puts, then usually it’s better to do a bearish put spread.

In any case, the additional 50% downside protection from the put that you have really comes at the expense of additional 50% potential loss for your hedges when the market goes higher than you expect. Nothing is really “free”.

You don’t necessarily do 50:50 call/put split. You can do any percentile splits if you like, depending on your confidence level on the two strike price.

Also note in this not-so-good example, you are actually much better off if you simply sell 200 shares of your current XHB shares per every 2 option contract executed. If XHB falls from $35 to $33, your loss is really total of $4, bigger than any of the maximum profit potential listed above.

The bottom line is that if you cannot capture the time premium for yourself, you might as well sell your shares instead of hedging your shares. The noted exception is that you’re holding your shares for tax reason. Another noted exception is obviously that your hedge is a cross-hedge (like Hussman’s) where you believe that your holding stocks will do better than the stocks that you are shorting.

However the most important thing to take away is that hedging is equivalent to selling. If you hedge/sell, and you don’t sell at the high price, your performance will definitely suffer. As long as between the time you hedge/sell, and the time you close your hedge/short, you net with a profit, then your performance can be enhanced through the hedging.

Hedging/Selling smart is really the most difficult thing.

For more option strategy, NUMA has very good graphical illustration of most option strategies. But I do advise anyone who trade options to first paper-trade. Otherwise, when you buy/sell longer term call/put, and the market moves to your advantage, you will be saying to yourself, “what the heck, how come my options don’t go up/down as much?” This price action cannot be shown in the option diagrams unfortunately. More on this later….

Life changes rarely happen alone. I mentioned here the birth of my daughter in February. My mother-in-law has been staying with us since then. However, she’s leaving next week. After some long discussions, my wife and I decided that I’ll be the one staying at home to take care of our daughter for a couple of years.

There are many, many dimensions for this decision. Foremost on our minds is the well being of our daughter. I’m thrilled with the prospect of spending time with her and teaching her all I know. There are obvious financial implications in this decision given the loss of my income and associated benefits. Fortunately, my wife has a good job and supports my decision.

Looking at salaries alone, it would make more sense for my wife to stay at home instead if one of us has to. However, I’ve been mulling a career change and this is a great opportunity. As a research scientist I’ve built up expertise in a narrowly focused field that is, unfortunately, not very transferable. My wife, on the other hand, has a job that is in demand in most of US. Furthermore, my job demands a greater amount of time commitment than my wife’s. So we agree that it makes more sense for me to do this now and restructure our life for maximum flexibility down the line.

I’ve been writing mostly on concrete options in investing/personal finance, but big picture issues like where to live and what kind of job to take actually have far greater influence on the quality of life and overall well-being. Unfortunately, most of us are so bogged down by the pressures of daily living that we feel powerless in affecting our situation. For our working lives, my wife and I have been living beneath our means and investing diligently. We were not delaying the instant gratification of buying NOW in order to hoard, rather we were acutely aware of the freedom that a solid financial foundation can provide. It’s this freedom we’re cashing-in now.

Quit-lag mode
I’m leaving my company on very good terms. There is no sense burning the bridges even though it’s unlikely that I’ll go back. I gave more than a month of notice although my employment contract requires only two weeks. It’s also unusual that management let the news out over three weeks ago. I guess it was because I have a large number of tasks to hand over. Anyway, I have been in this quit-lag mode for a while now. This was a term that I first came across in this Business Week article. A quote:

When I went back to my desk, the piled-up papers looked like annoying debris. Now that I was leaving, my projects-in-process were meaningless to me. But I had two weeks to kill, so I went to work. I started creating a manual for the person who came after me. I wrote down procedures and lists of contacts and important events coming up in the future. That took about three days. Then I got to work cleaning house.

I threw out papers and cleaned out files. I reorganized employee records and made sure vendor contracts were current. I walked around the office and visited employees who had pending benefits issues or other matters that needed attention. Boy! they said. You are really on the ball this week! Heh, heh, I said to myself. What else do I have to work on?

I’m not sure if I was that much more efficient. But I’m certainly no longer sweating the things I can’t control. Several people commented on that I look relieved, and that’s on about six hours of discontinuous sleep per night!

Preparations for leaving
I’m not sure how common my experiences are, but I want to share my financial to-do list nonetheless.

• I got supplemental disability insurance. The disability coverage (65% of income, to age 65) I receive through my employer will end shortly, so I work with an agent (my sister-in-law actually) to get some supplemental insurance. You may have to do this well ahead of the final date.
• I re-read my employment contract so I’m clear on my rights and obligations.
• I still have company stock options that I have 3 months to exercise after departure. I have been exercising them gradually this year. I will continue with cash-less exercises at certain price targets. I decided against exercise-and-hold because of the AMT implications and the high expense of put options I would need to purchase to guard my profits.
• I set aside one year’s worth of cash needed to pay for living expenses (in addition to my wife’s income) and put it in our HSBC online savings account.
• I started investigating income generating securities. [If you were wondering why I was writing about those high yielding closed-end funds, this is why.]
• I started a self-employed 401(k) account at Fidelity in preparation for rolling over the 401(k) at work. [See why I’m not rolling it into an IRA here.]

Friday is my last day at work. This is going to be a whole new experience for me. Wish me luck!

I have been contemplating how I can hedge my portfolio with less risk. I decided to take a look at how Hussman mutual fund managers do it. Using from their semi-annual report, I found out that they had the following outstanding option positions:
Effectivley Long: Call on 10000 S&P 500 index option, expiring 2/17/07 at $1420 strike price.

Effectively Short:
1. Put on 8000 Russell 2000 index option, expiring 03/17/07 at $780.
2. Put on 10000 S&P 500 index option, expiring 03/17/07 at $1330.
3. Put on 6000 S&P 500 index option, expiring 03/17/07 at $1400.
4. Sold Call on 8000 Russel 2000 index option, expiring 03/17/07 at $700.
5. Sold Call on 6000 S&P 500 index option, expiring 03/17/07 at $1250.
6. Sold Call on 10000 S&P 500 index option, expiring 03/17/07 at $1330.

Whether Hussman had gains or losses from these trades, it really depends on how well he timed the market. First, I’m just going to study the hedging strategy these options provide to his portfolio.

His long position basically cancel out short position #2, without regard to the difference in the calendar dates. The rest of positions, only Put can provide full downside protection. Selling calls only allow your downside protection to the strike price. The thing to note here is that at the time when this report is out (12/31/06 I supposed), the price for S&P 500 was at 1418.30, and Russell 2000 was at 787.66. If you take a look at the calls that were sold, all of them were deep in the money. When deep-in-the-money calls are sold, it basically amounts to short-selling with less time premium (but more downside protection to the strike price). The puts that were purchased were mostly at-the-money. With this combination of calls & puts, Hussman is able to provide a downside protection from both of his calls & puts, assuming that S&P 500 stays above 1250/1330, and Russell 2000 stays above 700. The total hedging power assuming that S&P 500 stays above 1330 would be roughly (6000 + 6000 + 10000) * $100 per contract * S&P 500 value + (8000 + 8000) * $100 per contract * Russell 2000 value = 4.38 billion. (S&P 500 and Russell 2000 values are from 12/31/06). Or 2.96 billion if S&P 500 falls below 1330, but stays above 1250. Since the total NAV is 2.84 billion, and total common stock value is $2.89 billion, Hussman had his portfolio fully hedged.

Now if I look at the actual gain/loss from his positions, his effectively long position lost about $5.8 million, and his puts lost about $5.1 million, while his sold calls lost about $8.8 million. If he has not closed out his hedging positions since 12/31/06, his hedging positions would be losing more money by now since overall the market has moved higher. Obviously, his long stock positions are moving higher too to counter the losses from the hedges. But with a total loss of about $19.7 million, he is able to pretty much fully hedge a portfolio value of $2843 million or 2.843 billion. That’s a loss of about 0.7% (on 12/31/06).

Such hedging strategies definitely provide a very good protection when the market falls. However, because of the hedging, Hussman strategic growth fund has been underperforming the general market in the last 2 to 3 years. Such is the cost of being a market timer when the market does not cooperate with your actions.

In the next post “The price of a free(?) hedge”, I will look at my own hedging strategies using stock options of calls & puts in a similar fashion that Hussman has done. It’s certainly much easier to study what others do than putting everything in action. One can be so grandiose about the term hedging, but after all, what it really means is selling out in a certain way. Whether this “certain way” is smart or not, the performance will speak for itself.

P.S. By the way, the pricing/cost between options on futures market and options on stock market is similar (or else someone can arbitrate between the two). The only difference in cost may be simply the brokerage commissions.

Lihir just offers to raise A$1.2 billion cash through share dilution. The good thing about this is that you as the shareholders at least won’t be diluted theoretically. Any existing shareholders can buy 1 share at about 33% discount (about $US 18 to $19) for every three shares that they hold. This is NOT nice, but at least so much better than having the company selling shares at a market discount and have your own shares sacked down in the market, such as the recent offer from NG (falling from $17.40 to $16.05 after the announcement).

So remember to take up this offer if you are a shareholder (like I’m). You don’t want to be left out and eat up this loss.

My wife is a great bargain hunter. We get most of our clothing at Macy’s, pretty much brand names below Costco’s price. She always shops ahead of time, meaning that she will be buying next year’s clothes this year. This way, she has plenty of time to wait and shop for bargains.

Over the weekend, we got a bunch of young children clothes, each piece ranged from US$3 to about US$4. My Calvin Klein’s jacket cost about $20. The original price was about $100. This is a pretty good price, but still not a steal yet. To beat $3 a piece for children’s clothes, the only way is to go to Asia and buy them from there. Even then, this price is still cheap by Asian standards (not comparing the quality yet).

How does she do it? Special one day sale + early bird + sale items + 20% off coupon.

These prices that we got are below the regular prices at Costco, Walmart, Target, or Sear’s. The quality/brand is also better. Certainly, you won’t be wearing another Costco’s shirt.

And another trick that she uses is that she would buy items that she want before the sale is on. Within a 10-day period (for price adjustment, varies from store to store) after the sale is on, she would go back and do a price adjustment (and you just need to bring your receipt, not the items at Macy’s). This way you don’t need to rush with all other people, and still be able to get the things & sizes that you want.

Now, I only wish that I can do price-adjustment when I buy my investment stocks, . Some price guarantee for my stocks would certainly be nice.

We also went to an outlet this weekend, just for fun rather than for shopping. Normally we can’t find any deals at an outlet. Really cannot understand why people are buying there.

Have a shopping tip to share? I would certainly look forward to hear about it.

As they say, demographics is destiny. One big theme I have tried to keep in mind is the aging Western population and the need for quality fixed income securities. In this vain, I wrote a while ago about closed-end muni bond funds. Today I’ll discuss some other classes of high yield closed-end funds and highlight, as I always do, several personal holdings.

Equity income
This class of closed-end funds invests primarily in high yielding stocks or preferred stocks. Some funds may hold a minority of corporate bonds as well. Yield to common shares may be further boosted by using leverage (similar to muni bond funds but through preferred shares). My favorite in this category is the Evergreen Utilities & High Income Fund (ERH) which sports a 2006 return of 65%. Its main holdings are in the utility and telecommunication services sector. Both Yahoo Finance and ETFconnect show a yield of 8+% based on a monthly dividend of $0.20, but that is not the whole story. ERH has given special annual dividends for the past two years, e.g. $1.398 for 2006, that significantly increases its overall yield. I also like its country diversification: 47% of the fund is invested outside of the US. The utility sector has demonstrated tremendous strength lately and ERH out performed XLU in the past year. There is one draw back however: the fund currently trades at a premium of 13.8%.

An aside on closed-end fund premium/discount
Although not an iron-clad rule, I avoid buying closed-end funds at a premium. I’ve had to relax this rule somewhat recently as this link shows the overall discount for all closed-end funds has disappeared (again). I have some doubts of the utility of this indicator since the correlation to S&P is almost non-existent.

Global bond funds
As the name suggests, these funds invest in global fixed income securities. Leverage may be employed as well. In terms of risk profile, there is a full spectrum ranging from AAA rated sovereign debt from developed countries to foreign corporate debt to emerging market bonds. The instruments may be denominated in US$ or some other currency which may be a plus in this falling dollar environment. An example is the Aberdeen Asia-Pacific Income Fund (FAX, yield 6.4%) that has 50% in Australian government debt. AllianceBernstein Income Fund (ACG, yield 7.2%) is another name. It has a small amount of foreign exposure, a more stable price and a higher yield. For now I’m avoiding concentrated bets on emerging market debt because I do not feel the the risks sufficiently compensated by returns.

Option buy/write
Roger Nusbaum has been writing about this funds which generate a steady income from option premium. The simplest example of such a strategy is would be a covered call. Obviously, there are far more sophisticated variations. According to Mebane Faber, hedge funds employing this strategy are among the most consistent performers. My choice here is the Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW, yield 9%). There are other funds with higher yields, but at larger premia than the 0.8% found in ETW.

A covered call offers little protection against a serious market down turn. These funds may be more sophisticated than that but this is something to be kept in mind. I also like ETW because of its international exposure (10.4% Japan, 11.7% UK, 24.2% other).

Floating Rate Loan Participation
This is an interesting category that’s currently missing from my portfolio. Jeff Saut mentioned floating rate loan participation closed-end funds (FCT in particular) in last week’s missive. These funds pool together various floating rate debt instruments. The point is that the dividends from these funds adjust upwards with increasing treasury yield thus providing a welcome negative correlation with other fixed income plays. Another example in this category is PIMCO Floating Rate Strategy Fund (PFN, 8.9% yield, 4% premium). The chart below shows that they are negatively correlated with TLT, the long bond ETF. Moreover, they are expected to be poorly correlated with equities.

Others
ETFconnect is the place to do research on closed-end funds. If there is one class of funds I’m avoiding right now, it’s anything having to do with mortgage backed securities. An example is the Hyperion Total Return Fund (HTR, 8% yield, 1.2% premium). I would also avoid anything having to do with credit default swaps.

Conclusions
There are a large variety of closed-end funds with yields in the high single digit range and above. Some of them provide equity exposure while other are uncorrelated with equities or negatively correlated with bonds. They are riskier than treasury ETFs, but for those willing to take the risk and needing yield the options are there.

Disclosure: Of the names mentioned, I currently own ERH, FAX, ACG and ETW.

Just when I’m going to write for Friday’s post, reflecting on the market actions, international markets threw another curve ball. Nikkei plunged by 2.3%, down by almost 400 points, while other major Asian markets followed with some 1 to 3% loss.

Will US markets open tomorrow with a loss?

Will the Euro and UK Sterling keep beating up on $US, which just broke $1.36 (Euro) and $2 (UK) levels?

Will gold ascent continue, or be hammered again (for the fifth time on HUI) by the invisible (Fed) hands?

Will uranium spot price continue its parabolic ascent after breaking $100 barrier? Yup, my U.TO (tied directly to the spot price of uranium) has returned 70% in less than a year.

Where was the subprime panic after all? Countrywide (CFC) now is back up to $38. I really wonder who is that stupid to buy those billions of subprime TOXIC loans from Fremont (FMT) and Accredited Home Lenders (LEND)? The only news is that they were sold at a discount (without a doubt). How can there be not a single trace of the loan buyer at all?

In the meantime, my short positions are definitely hurting. I just closed more with a small loss. I still have outstanding 5 short positions in QQQQ, XHB, GM, etc. I was approved for naked short-selling calls, which is allowing me to short stocks that are already on the FTD (Failed-to-Deliver) list via option markets. The advantage of selling calls versus buying puts is obviously that you benefit from time premium. The disadvantage on the other hand is obviously that your profit is limited, while your loss is unlimited.

Despite my short-selling, my net worth on 4/18/07 is just 0.18% below the “all-time” high since I kept a record on this blog (the all-time high was the very first date 5/9/06 quite ironically). My own saving and investing have made up almost 11% shortfall from my company holdings.

Despite all the complacency in the stock market, I’m spending 3+ hours everyday watching the market now (and therefore less time for blogging). This is one of the most dangerous time and my eyes and ears are paying full attention. I fully expect the housing slowdown to hit stock market this calendar year, and I have no time nor mood to cheer the market advances.

I feel almost like I’m back in 1999, when I’m totally shocked by the P/E ratios of the stock markets, while everyone else keeps hooraying all the way into March 2000. NASDAQ however doubled in a single year from 1999 to 2000 during which I was totally abhorrent of the stocks.

From my own investing experiences, I tend to be right, but early (if not way too early). I will delay my own actions, but will make sure that my delayed action won’t turn into inaction.

If you have not gone partially into cash yet, I would say, watch out below. NASDAQ is under-performing SPY, and that is a sign of weakness in this market.

I am prepared to take some amount of haircut even with my shorts which cannot hedge all of my long exposure. What about you?

I’ve been engrossed with the tragedy at Virginia Tech, so I’ll keep this post short. If anything, I’m reminded again the value of life and how insignificant money really is.

I have been anticipating a meaningful economic slow-down due to the imploding housing sector. I current hold some leap puts on XLF (SPDR for the financials) but no other short positions. However, I’m constantly on the look out for the possibility of being wrong. Long story short, the signals are still conflicting, but if there is one way out, I believe it lies in growth opportunities outside the US.

Yesterday’s market rally has been attributed to the March retail sales which at +0.7% was stronger than anticipated. Since I place a lot of weight on consumer spending, this was obviously a non-confirmation to my bearish view, even though on a YoY changes basis the trend is still pointing down. Nor does the data jive with the State tax receipts reported by Russ Winter.

The entire financial sector rallied strong today on the back of earnings from Wachovia (which was strong) and Citi (not so). The following paragraphs dealt with the increase of loan loss reserves at both banks.

Like other U.S. financial institutions, Citigroup has begun taking steps to deal with weakening consumer credit.

“Credit costs increased $1.26 billion, primarily driven by an increase in net credit losses of $509 million and a net charge of $597 million to increase loan loss reserves,” the bank said. It said the $597 million charge compared with a net reserve release of $154 million a year earlier.
This included higher losses and reserves in the U.S. consumer division, Citi said, reflecting “an increase in delinquencies in second mortgages and a change in estimate of loan losses inherent in the portfolio.”

At Wachovia, the bank increased its provision for credit losses to $177 million in the first quarter from $61 million a year earlier. It said that net charge-offs rose to 0.15 percent of loans from 0.09 percent a year earlier, while nonperforming assets increased to 0.40 percent from 0.28 percent.

So loan losses are increasing. For Citi, 509 million is about 10% of the net income (~5 billion) on 25.5 billion of revenue for this quarter. Citi shot up 2.5% today following the announcement so apparently investors are saying “ho-hum” to the loan loss. But what if the loan loss continues to increase as the ARM reset schedule looms? The word “discontinuity” aptly describes recent price action of New Century, Nova Star and the like, so in my mind, this market’s pricing efficiency regarding spill-over news from the housing sector remains suspect.

On the other hand, world markets have been on fire: China, Malaysia, Germany, and Brazil, just to name a few. Both precious and base metals are doing well, while the US dollar is in the tank. The only conclusion I can draw is that the market is betting world growth to continue even if the US slows down. Whether the emerging economies can develop their internal demands quickly enough will be a key question going forward.

A reader sent me this article for 101 ways to save one dollar a week.

I am amazed by how many things I have actually done to save one dollar a week from this list. Yes, there are actually 101 ways to save, and I implemented majority of them. Here are just some “highlights” on my own “do”s and “don’t”.

Things that I don’t do:
11. Use cloth napkins, towels and diapers: I do buy disposable diapers. But I use cloth towels instead of paper towels.
15. Get an energy audit: I think my home is fairly energy efficient to the extent that I probably can’t squeeze more than 10% out of the current amount that I pay.
16. Enroll in cost saving programs: Nope. I did think about it, but I think my family deserves much better.
19. Install low flow showerheads: It’s probably a good idea, except that taking shower is my relaxation time.

Things that I (and my family) do:
39. Combine errands: This is a good way to save both time and money.
62. Look for sales: My wife saves me countless bucks by going through sale and clearance items. And she always enjoys the treasure hunt.
75. Catch a matinee.
77. Don’t buy popcorn: I refuse to buy way over-priced items.
90. Pay off the balance: I always pay them off whether it’s 24 cents or 24 hundreds.
97. Take your lunch to work: Why pay $5 to $10 for lunch when I can bring a healthier lunch to work?

This long list can provide very good ideas for someone who is not frugally minded. But if you get into the habit of saving, many of these things would come naturally to you. And if you think saving is being too cheap, I suggest you take a look at my definition of being frugal.

In any case, what’s good for your wallet is good for you. If you don’t save the money for yourself, who will? Are you going to count your retirement on the inheritance from your parents, money from your grown-up kids, or the so-called social security money in the “locked box”? Self-reliance and fiscal responsibility is probably a much better way to go.

For me to come out and recommend a real estate fund, you know this mutual fund needs to be more than truly outstanding. I’m very bearish on real estate as the regular readers know very well. But this real estate fund, plus its other fund offerings in other categories are simply outstanding. In fact, I should say that it is one of its kind, so outrageously probabilistically impossible.

I first noticed this mutual fund back in year 2002/2003, when I was studying various funds for asset allocation. Certainly, real estate must be an essential element to anyone’s portfolio, especially if you don’t own your home. At that time, I noticed that this fund had a very good performance record. Not only that, when I compared its major holdings with other real estate funds, its holdings are wildly different. Most real estate funds hold companies that hold residential or commercial rental properties, collecting rents to produce their yields. This fund however held mostly home builders. Well, from year 2003 to 2005, home builders had great returns, probably out-beating 80% of the stock selections that you can ever pick yourself. But today’s CGMRX holding has not even a home builder stock in its top ten holding, keeping its 20% annual return for the past ten years completely intact.

The fund manager Heebner of this fund company Capital Growth Management is no doubt a VERY smart investor. Here are some highlights of his recent words:

[On housing markets] It will be the biggest housing-price decline since the Great Depression,'’ Heebner, 66, said today in an interview in Boston. Prices may fall by a fifth in some markets….That would leave home prices at levels last seen in 2003 and 2004, the middle of boom that lifted prices to a record in 2005. The damage from high-risk mortgages will slow the U.S. economy, though not enough to send it into a recession….
[On financial brokerage stocks] The investment banks and brokerage firms that package and sell these products won’t get hurt because they have passed on the biggest risks to the investors, “They know the product is toxic; they’re not going to get caught,'’
[On mining, China, infrastructure plays] He is buying shares of mining companies that benefit from growing infrastructure needs in India, China and Russia. CGM Realty Funds also holds shares of Las Vegas Sands Corp., the casino operator that is developing real estate in Macau, China, and Mexican homebuilder Desarrolladora Homex SAB.

On very few occasions, you can witness such a smart investor. Keep him on your list to watch. Take his words and regurgitate during your contemplation. And if you really have to buy a real estate fund, CGMRX is probably one of the better choice. In this particular case, I would really say “FORGET about the low fee Vanguard”. Here is the comparison chart between VGSIX and CGMRX. Don’t use Yahoo to plot because Yahoo plotting doesn’t take into account the almost 20% capital distribution/dividends in the last couple of years by CGMRX. The following plot uses the price on 12/31/1996 as 1. CGMRX returned almost 7 times or 700% in the last 10 years. (I mispelled CGMRX as CMGRX in the chart.)

On the last note, CGMRX and its other offering are mostly concentrated bets and non-diversified. You will be taking higher than normal risk when you buy one of his funds due to its concentrated bets. But given its past record, although there is no guarantee for the future, I would probably still lean towards buying any CGM funds.

I currently have no holding, but I’m really going to seriously consider CGM funds (not necessarily CGMRX), especially after I’ve missed the entire ramp-up in the most recent real estate bull market (which has probably turned into a bear market already).

Its CGMFX Focus Fund returned 24.7% from 1/3/06 to 4/9/07, and 17.9% from 1/3/07 to 4/9/07, very good this year, but not so good last year. This uncorrelation to the general market is an excellent choice for asset allocation.