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Monday, 27 January 2014

You are shorting already!

For me, going long or short is no different from betting black or red at the roulette tables in the casinos

Whether you call it an "investment" or speculative trade, it's just a directional bet - up or down. Nothing more; nothing less.

Most traders don't have a problem with shorting - think about it, does it smell like a "rigged  game" if you are only allowed to bet black at the casinos?

Somehow, when it comes "investing", some politicians and "investors" go on a epilepsy fit and/or start a witch hunt whenever there is "shorting" in the market...


You know what?

Whenever you go  "long" on an asset, you are simultaneously going "short" something else at the same time.

If you are buying equities today, you are long equities - making a bet it will go up in whatever time frame you had in mind. 

You have to pay for the equities with something in exchange. And that's normally cash.

Do you see it? 

You are in fact "shorting" cash and going "long" equity within the same transaction!

You are betting that your cash will be "rotting" in your account and equities will outperform cash.


Similarly, if you are taking some money off the table or selling your equities today, you are "short" equities and going "long" cash.

You believe cash will outperform equities in the near future. Don't lose money is outperformance right?


Rotating between cash and equities is the simplest and cleanest method if you have problems using leveraged instruments like CFDs or Futures to "short" the market.


Another way instead of cash is the traditional equities and bonds asset allocation method. You are "shorting" bonds if you rotate out from bonds into equities. And vice versa "shorting" equities if you rotate back into bonds.

This is not popular with retail "investors" as most do not own bonds or are familiar with it. 

By the way, most Finance trained graduates are familiar with bonds and their relationship with interest rates. If you are not Finance trained, do bring your knowledge up to speed so that you don't bring a flick-knife into a gun fight...

There's a saying bond traders are smarter than equities traders... Don't look at me. I didn't say it!


For those die die must be 100% invested in equities at all times, there's a solution too! Especially if you know when you rotate into cash, you have difficulty getting right back into equities.

After a good run with speculative penny counters, you now want to protect the winnings. You can rotate into defensive dividend paying stocks while maintaining your pristine 100% vested at all times conviction.

Of course your defensive counters will drop in a market correction! But the key word here is relative. 

It's not so bad if your defensive dividend stocks drop 10% while you previously-owned penny stocks are now 20-30% down, is it?

And if you believe the tide has turned, you can "short" defensive dividend stocks and go "long" and rotate back into your bombed-out speculative penny stocks once again. 

Eh? Why am I hearing Katy Perry's Hot N Cold song in my head now?


Before I go, I'll leave you with one Science law and one Spiritual symbol for you to ponder on next time you say you have never "shorted": 


Newton Third Law of Motion

For every action there is an equal and opposite reaction.


Taoist symbol



10 comments:

  1. After 55, I now "short" stocks and "long" CPF and vice versa. LOL!

    ReplyDelete
    Replies
    1. CW,

      Thanks!

      How could I missed the rotation from equities to CPF!?

      It's way much better than cash!

      Thanks for pointing out my oversight!


      Although it may be more applicable to those who have worked a few more good years with a good salary where 35% of an elephant is not peanuts ;)

      And provide you have not sunk everything into property!

      For those starting our on their journey, 35% of a squirrel can't buy much equities :(

      I guess this time, mature men have an edge here?

      Must wave the cheer-leading flag for us young-at-hearts too!

      LOL!

      Delete
  2. Hi SMOL,

    Let's throw some smoke bomb :)

    There are two ways to bet that something will go up: you can either buy long or sell short. Also two ways to bet that something will go down too: you can either sell long or buy short.

    E.g. you think that SP500 is going to go down in the near future, you can either sell long (i.e. sell your positions in SP500) or buy shorts (i.e. buy those 'put warrant' equivalent to sp500).

    Same same but different :)

    As it is in stocks, so it is in life.

    ReplyDelete
    Replies
    1. LP,

      Still remembering your warrants trading days?

      And you can to the same with inverse ETFs to muddy the water even more ;)

      It's difficult to fly with 1 wing....

      Delete
  3. Hello SMOL :)

    How have you been doing? - hope you still remember me.

    Wishing you all the best in 2014!


    Cheers,
    Ken

    ReplyDelete
    Replies
    1. Hello KT Wealth,

      Of course I do.

      I remember you as the career coaching guy ;)

      Thanks and have a super year of the horse!

      Yum Seng!

      Delete
  4. For shorting with CFDs and Futures, what did you long?

    ReplyDelete
    Replies
    1. CW,

      Answer LP already provided above

      I "long" a short CFD or futures contract, or put option - that's my long when I am short.

      It's as clear as mud,

      LOL!

      You think why LP call it smoke bomb?


      I think we better stop saying long and short....

      Guys sensitive to discussions on long and short, as to girls on big and small...



      Delete
  5. SMOL,
    Aiya! i like to make it as simple as possible lah. i like $$$ as hedge for stocks investment. As favoured by JM.

    A Value Investor's Perspective on Tail Risk ... - Trend Following
    trendfollowing.com/whitepaper/JM_TailRisk_611.pdf‎

    ReplyDelete
    Replies
    1. temperament,

      There you go!

      You have the answer to what you seek - just 25% cash. Simple or what?

      CW call it pillow stock strategy, I say long cash, some say opportunity fund...

      We under-perform those who are 100% vested in a bull market.

      And we definitely under-perform those nimble shortist who are 100% short.

      At my life's stage, I'll let the "benchmarking" to the young and their thirst for glory; I'll settle for a good night's sleep ;)

      Delete

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