special situation vs liquidating long term portfolio?

[scorpioncapital]

Unlike the big capital firms, regular individual investors may be capital constrained.

Suppose you see a special situation with a 20% return in very short-time but you must liquidate a large part of your long-term portfolio with unrealized gains to take advantage. Would you do it?

 

 

[John Hjorth]

Joel has written a nice essay about it.

[scorpioncapital]

Thank you!

[given2invest]

Unlike the big capital firms, regular individual investors may be capital constrained.

Suppose you see a special situation with a 20% return in very short-time but you must liquidate a large part of your long-term portfolio with unrealized gains to take advantage. Would you do it?

 

use margin

[scorpioncapital]

Yeah I would...but this special situation is unmarginable (pink sheets).

[wabuffo]

Yeah I would...but this special situation is unmarginable (pink sheets).

 

Assuming the rest of your portfolio has marginable securities and this purchase would be a small percentage of the portfolio ... you could still use margin if you wanted to, no? 

 

Assuming, you don't want to sell something else, of course.

 

wabuffo

[scorpioncapital]

Possibly..but it would be too much...The question is pretty much what are the odds that the portfolio zooms up 20% in 2 months. I would say very low....but there is also the having to take capital gains. If I was living in a country with no capital gains tax it would be a far easier calculation.

[sleepydragon]

Looking back, if I have just bought all the stock that I have sold, I would have massively outperformed myself. In fact, I would have fully retired years ago :)

[cameronfen]

Looking back, if I have just bought all the stock that I have sold, I would have massively outperformed myself. In fact, I would have fully retired years ago :)

 

this is certainly true for me too. 

The general sentiment.  Im too you to young to retire even if I made lots of money. 

[bizaro86]

Depending on the rest of your portfolio, you could sell some and replace the exposure with short term options. That doesn't cover your tax issue, but does help with short term leverage. Do you have any loses you could swap out for offsetting losses?

 

On an unrelated note, once you have your position would you mind sharing the special situation? Even if only after it closes as a case study.

[SharperDingaan]

You own high quality securities so that you can do exactly this.

Avoid having to sell, and the ability to margin against the existing pile to buy something that ISN'T marginable.

 

Is that 20% return enough for the higher risk that you are going to take on?

Is it going to move the needle enough to even warrant leveraging to begin with ??

What if if takes longer than thought, or doesn't work out as anticipated?

 

If that 20% gain results in a meaningful change (mortgage paid off, down payment on a house), maybe its worth it.

But if you're already wealthy & it just results in a bigger pile, why even risk the shop at all? You're just bored.

 

Different strokes.

 

SD

[Rod]

I would calculate how much tax I would pay on the sale of the existing stocks. Obviously that depends on the size of your unrealized gain as well as your tax bracket. If it is over 10% I probably wouldn't do it. You are trading a certain loss (taxes) for an uncertain gain.

[scorpioncapital]

I'm reminded of Buffet's partnership letters that in years when the market could be flat to slightly down, arbitrage was what gave the partnership a positive year in an otherwise negative year. Obviously he can't do that anymore with a giant ship but you and I can. I already use a little leverage so I could deleverage. The middle ground seems to be to take a balanced approach. Neither maximum nor minimum. Will check back if it works out and post an analysis. It's a case of dissenters' rights, not arbitrage. The only way I think it fails is if the action to be taken is cancelled all together but I believe there is legal incentive not to cancel either.