To help curb much of the anxiety and uneasy feelings of financial markets today, we can take a lesson from Mark Cuban on protecting our invested assets. In 1999 Cuban sold Broadcast.com to Yahoo! in a deal valued at $5.7 billion dollars. As part of the deal, Cuban ended up with around $1.4 billion in Yahoo! stock that he was not allowed to sell for a few years. With so much of his net worth tied up in one stock, Cuban probably felt many of the same anxieties as current investors. With the help of some savvy Wall Street investment bankers, Cuban was able to put together a protection strategy on the Yahoo! stock.
The protection strategy Cuban deployed used put and call options. This allowed him to participate in some of the upside performance of the Yahoo! stock, but much more important to him, created protection to the downside. Looking back now we can see this deal was just before the dotcom crash so Cuban was extremely wise to create this protection on what could have cost him hundreds of millions of dollars as the Yahoo! stock fell hard.
Financial markets have seen quite the run up over the past decade. As a result, many people have seen their investment portfolios grow to new highs many times the last few years. While that is great, for many people along with it comes an increase in anxiety and fear from the responsibility they feel for correctly managing their money.
Traditionally, the answer to reducing risk in investment portfolios for most investors has been diversification by using tons of different stocks as well as adding in safer assets like bonds. Options strategies, like the one used by Cuban was only cost effective for the ultra wealthy because of the transactional expenses created. However, thanks to technological advances in the industry, these strategies have become extremely effective at all levels. Many people think of options just as risky derivatives however, when used properly they are extremely useful and can be used many different ways for protection.
Taking traditional diversification approaches, and combining them with innovative protection strategies we can materially improve the risk adjusted performance of investment portfolios. If you have experienced financial anxiety over your investment assets, please reach out to learn more about how a protection sleeve could benefit your portfolio.