How does it work exactly?

What do you actually do if the market suddenly drops by 15% or 20% overnight? How do you protect yourself against that?

The answer surprises most people: I don't. I don't hedge. Not at all. And I'll explain why in a moment. But first, let's briefly clarify what we're actually talking about.

Hedging means protecting yourself. You own stocks, and you establish a second position that makes money when your stocks decline. If the market falls, the hedge offsets some or all of your losses.

What matters is how much money

To understand that, you need to know where I'm coming from. I'm an investor. I don't buy stocks because I hope to sell them later at a higher price. I buy them because they generate income for me: through dividends and because I actively manage them using options.

My portfolio isn't a store of value. It's a source of income.

That's why it makes no sense for me to sell something simply because the price falls. I wouldn't be avoiding losses—I would be turning off my cash flow.

There's an analogy that makes this click for most people.

Imagine you own a fully paid-off apartment building. Ten apartments, from the ground floor to the top floor. You have excellent tenants who pay their rent on time every single month. That rental income is what you live on.

What matters most to you about that building? Not its market value. What matters is how much money.

One million dollars

Now imagine a real estate agent visits you every day with an offer.

One day he says, "I'll give you one million dollars."

It's a good price. But you're not interested because you want the rental income.

A few months later he comes back.

"One and a half million."

Even better. But what would you do with one and a half million? You'd have to find another property to replace it. So you keep the building.

Then the real estate market crashes. Everyone panics. The agent returns and says,

"I know things look terrible. I'll give you $500,000."

You go home, check your records, and realize your tenants are all still paying. Every month. On time. The same financially stable tenants.

So why on earth would you sell the building for $500,000?

Nobody would do that.

When it comes to real estate, everyone understands this immediately.

I don't worry about whether the market will crash.

Yet in the stock market, people panic as soon as prices decline.

In reality, it's exactly the same. If you own businesses that pay reliable dividends and have solid business models, why should you care whether the market values them at 100 today, 150 tomorrow, or 70 the day after?

The tenants are still paying.

"But you could sell at 100 and buy back at 70."

Yes, in theory that's true.

And that's exactly where the mistake lies.

That assumes you can consistently time the market.

Nobody can.

Just look at the S&P 500 over the past several years. There have been countless warnings that the market was overvalued. Plenty of predictions that a crash was imminent.

And what happened?

The market kept rising.

Those who tried to time the market have spent years selling, only to buy back at even higher prices.

You sell at 100 hoping to buy back at 70.

The market goes to 110.

You buy back.

You sell again.

It rises to 120.

Eventually, the correction does come.

But you've been wrong so many times along the way that the entire exercise never pays off.

That's the point that's rarely discussed honestly in conversations about hedging.

Protection isn't free.

If you want to know how we do it, feel free to subscribe to our newsletter.