Ultra Long Gold and take advantage of bottoming

Just got into DGP by a small amount of money to test the water. That is ultra long gold. It is a new ETF issues by Deutsche Bank. Got in about $26.

Today mark another big down day. And where does it come from? REITs. You look at them, they all dropped 20% or more today. There are two pieces of news about mortgage-back securities management firm (Carlyle Capital and Thornburg) could not meet margin requirement.

This is again one of the domino effect. I still hear that the global economy is okay, just slower growth, not recession. Well I don't have more data to prove it right or wrong, probably it's not my biggest concern anyway.

Again I want to say, focus on how the news affect your investment, not the news itself. Anyone has the right to interpret the news the way he likes, but the market is the final place that reflect how he thinks. How many times since last November I heard people said the economy is okay but only to see the market dropped again and again?

I understand there must be a bottom. I do not know where is it, I can only express my opinion on how to take advantage of bottoming.

In a commercial world there are two sides, price-setters and price-takers. If you have the bigger bargaining power you are a price-setter. To make the money at a higher chance and highest profit, there comes in the distressed debt funds.

The story is very simple. A company is now in a distressed situation, take something as an example, CFC, as this is a good example these days. In this case, DON'T BUY THEIR SHARES BECAUSE IT DROPPED BY A LOT. It may go back up in value but that's not how you should play, particularly when you are very wealthy, like an institutional fund. In fact, you should purchase most of its debts, approximately 2/3, decline their restructure plan, force the company to liquidate itself, wipe off the stockholders. Now you become the shareholders of this new company and you have better control to move this company back up.

Under this scenario, you act more like a price-setter than a price-taker. You have better control on what price to pay to the debt holders. The worst case is you couldn't purchase enough to wipe off the original shareholders, but your potential loss is already calculated and estimated. Anyone who is interested in this topic I suggest them to read books about distressed debt.

The lesson is very simple, in the long run you definitely earn much more as price-setters and price-takers. Same idea as you can never earn more money by gambling than the casino.