An put warrant loss, solace in Graham philosophy

On a certain day during last week, I have purchased a put warrant on STI when STI drops around 80 points. The original intention of the purchase is to hedge my portfolio. At the end of that day, I feel like a genius as my put warrants show a significant profit.

And in the next day, I was made to feel like a fool when I disposed my put warrants at a significant loss. As the US markets had recovered overnight, the STI on the following morning followed the US markets and jumped around 40-60 points. To cut the possibility of further losses as well as to remove the hedge, I dispose of my put. This experience or hedge set me back by around 800 dollars.

On further post evaluation of the put warrant incident, I figure that I am bounded to have expected losses in warrants if I am to invest or speculate in warrants. This is because I lack a strategy to derive positive expected profits in warrants. Assuming that the market is close to random and warrants are priced at a premium, my probability of wins would be around 50%. Losses are almost certain if I continue to persist in warrant operations. And given the leverage inherent in warrants, it would not be surprising if the warrant operations bankrupt my portfolio in due time.

This unprofitable warrant trade also shows me realistically that hedging may be costly. And it leads me to re-think on whether I need to hedge my concentrated portfolio or not, if my portfolio consist of no leverage. At this moment of time, I think that I may not need the hedge, after considering that my portfolio is based on value investing philosophy.

Furthermore, a re-read of a chapter in Benjamin Graham’s book “The Intelligent Investor” reminded me that a value investor would lose his significant advantage if he is to let the market prices dictate or affect his investing decisions. As such, according to Graham’s philosophy, an investor should ignore the market prices and at an opportune time, take advantage of the distressed or over-optimistic market prices.

On hindsight, I will suffer fewer losses in my portfolio at the present moment if I adhere to Graham’s philosophy when the market corrected two weeks ago. It may not be too late for me to adopt his philosophy now. Yet, I guess that if I have a heavily leveraged portfolio, Graham’s philosophy has to be abandoned.