Peter M.: ‘I was short NTMD like you but covered at a loss when it broke above 23. Now I am long it. Can’t beat them, join them. I will ride it till before the conference call on July 15th. Eventually I would like to short this baby again. How about your short? Are you gonna ride it till NTMD comes home to roost?’
☞ Peter and I have a different strategy. I like to buy undervalued stocks and short overvalued ones. It’s boring, but the odds in the long run are pretty good – or they would be, anyway, if I could reliably identify over- and undervalued stocks. NTMD, which I believe is overvalued, closed last night at $21.86, so Peter took a loss when it went up and now has a small paper loss, as it’s gone down. This may impel him to take that loss as well and go short again. It’s called ‘getting whipsawed.’ I have no idea what will go on during the conference call. (I didn’t know there was a conference call.) I assume the company will be brimming with optimism. But I expect the analysts on the call may ask pointed questions. E.g., why will patients and insurance companies pay six or seven times the price for a pill whose two components are readily available separately for a tiny fraction of the cost? And how will you make money on the many patients to whom you’ve pledged to give the pill free?
Mark L: ‘The recent postings about the real estate bubble got me to thinking about getting a second mortgage. I bought my first house, in Northern California, just over a year ago, thinking I must be buying at the top of the market, but lo and behold the house has appreciated about 25% – slightly more than my 20% down payment (which was a huge chunk of my savings, and still is). We got a 30-year fixed mortgage at 5.5%, which is a great loan, and I don’t want to mess with it. I’ve been wondering for a while how to hedge against (what I think is) an inevitable drop in real estate values and thought of a second mortgage. I can pull out my entire down payment, plus a little extra, at a 7% interest rate (the lender on the second will allow us to borrow up to 90% loan-to-value), which would give me a “blended” rate on the two loans below 6%. If you had told me last year that I could finance 100% of my house at under 6%, I would have jumped at the chance. So shouldn’t I do it now? I should hasten to add that I have no intention of buying a boat with the proceeds! It would just be nice to have a liquid cushion instead of most of my savings tied up in the house. I figure I could invest 1/3 of the proceeds in short term treasuries, 1/3 in a domestic equity index fund, and 1/3 in an international index fund. Simple, inexpensive, and much more diversified than having all that money in one thing (the house). Obviously I’m paying a premium for the liquidity, and it’s another sizable (though partially tax deductible) payment we’ll have to make every month, but if short term rates keep climbing, even a 7% loan may look very cheap in a few years. Any thoughts?’
☞ I’d consider setting up a home equity loan that allows you to borrow against the value of the house, should you really need to. But would I actually borrow money at 7% today? Being a conservative type – no.
You’ll lose money on the Treasuries, and what if the stocks drop instead of rise? Eventually, they would likely come back; but might you be too scared at that point and sell out at a loss? (See: Whipsawed, above.)
Why not take the payments you’d make on the second mortgage and just put THAT straight into the index funds each month? (Or build a rainy day fund with it first if you prefer.)
Vive la France!
Quote of the Day
Men never do evil so completely and cheerfully as when they do it from religious conviction.~mathematician Blaise Pascal, 1670
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