New Harbor: Hedging 101

This week’s podcast builds on our recent report on hedging, driller deeper into how the technique can be used to offer protection against falling asset prices.

There are numerous ways to hedge, which vary in cost and complexity – with several being quite simple and low-cost (such as building cash or employing stops). But many investors don’t practice them, mostly out of unfamiliarity. Which is a shame, as often a small degree of defensive planning can provide substantial avoidance of large losses. (In fact, our recent poll has discovered that one of the most common and cheapest methods of hedging – setting stops – is hardly used by PeakProsperity’s readership.)

In this week’s discussion, we review the pros and cons of the most popular hedging techniques, as well as when and for whom they are appropriate to consider. Those unfamiliar or not actively hedging currently will benefit most from listening and determining which may be worth considering discussing with a professional financial adviser.

Transparency note: As a result of our public endorsement, Peak Prosperity has a commercial relationship with New Harbor. The details of this relationship are clearly presented in writing during the referral process – but the punchline is, our relationship does NOT result in any increased fees to those who become clients.

If after listening to this podcast, you find yourself interested in connecting with Mike, John, and the rest of their team to learn more about their advisory services, please use the form here to do so.


It should go without saying: this discussion should NOT be construed as individual financial advice by those listening to it. The content should be taken as informational and educational in nature only. Investment advice must be tailored to your specific personal situation (which we and our guests are obviously unaware of) and should be obtained directly from a financial adviser you trust. Before acting on any of the statements made in this podcast, we advise you do just that.
Click the play button below to listen to my interview with New Harbor Financial (53m:34s):

This is a companion discussion topic for the original entry at

So I think the guys at NH said what I wanted to hear at the top of the show.  Paraphrased, "we use mental stops for every position we enter" - there is a defined price (or a specific market action) which if met, will cause them to bail out because the theory of their trade was invalidated.  This is disciplined trading.  If I gave my money to someone, my number 1 priority would be to have someone who said something like this. 
Their position on cash I agree with also.  Cash is a cost-free hedge.  I'm a big fan of cash too.

I think John Hussman buys a fair number of puts for his fund - perhaps we could get him on to get a sense of just what his puts cost him as a percentage of total portfolio per year, and how much downside protection he ends up having as a result.

If you do have a taxable account with a big position with large gains on it, then hedging makes more sense.  When the market starts to look iffy, you can go short an e-mini future (or short SPY) vs your long equity position assuming the dollar amounts are similar.  And you can put a buy-stop on the short so you are taken out if the market breaks higher.

Otherwise - cash is good.  :slight_smile:

You should have called it "Hedging Tools 101". The concept of hedging could have been explained better if you hadn't jumped right in and started to explain how the tools work. I was hoping you would have started with some of the basic concepts of what hedging is all about. You could have started with futures and explained how they work with commodities and a time factor. Buying and selling pork bellies - orange juice - wheat or even gold. Perhaps I'm being over critical, but I found it a bit confusing. It needed to concentrate a bit more on the basics of trading and not just on the tools.
Your guests, obviously knew their stuff, but I think they presented the material "under the gun" as things seemed a bit rushed. I know that many of your listeners have brokers working for them and that they can't be sitting next to their computer watching the action every minute. However, there are a couple of things that should be noted:

  1. Know something about the industries you've invested in and how those particular markets operate.

  2. Be diversified in your holdings and don't have all your eggs in one basket - spread the risk.

  3. Yes, have a good relationship with your broker and make sure he's familiar with your goals.

  4. Cash is great, but dividend producing stocks are always working for you despite what the market is doing. If Janet Yellen decides to "ax" QE, savings will just be keeping up with inflation.

  5. Your assets should be working for you and not just a place to retain value. Nobody "invests" in precious metals, but they invest in sound companies that are working and producing stuff. Warren Buffet knows this very well. Indexes are helpful, but be involved with your assets whether they are fruit trees in your backyard or the market. Hedging boils down to what Barnard Baruch said," I made all my money by always selling too soon!"