Monday, 22 August 2011

Short-sellers – keep them close to us!

In a market correction or crash, one of the favorite boogie-man to blame is the short- seller… Even governments blame them and try to change the rules as we go along. That’s lame.

If short-selling is “bad”, then ban it altogether! Not when it suits the governments or regulators.

Keep your friends near, but keep your enemies closer!

In a trade, there is a buy and there is a sell. Both are same sides of the same coin. Long only decision making can be limiting in the sense it creates a bias in our perception and analysis – the glass is always half-full.

If we pause for a moment and ask ourselves – the stock I am thinking of buying, is it a great candidate for short sellers? Perhaps the glass is more half-empty!?

For e.g., would you want buy at a technical price resistance level that short-sellers are establishing their new positions? Or would you wait till the price breaks through this resistance and buy into the momentum? Short-sellers covering their shorts (wrong bets) are now providing the wind behind our sails. How is that for support?

Or if you are more a bottom fisher, would you feel more secured that you are buying at a price no short-sellers would dare to establish a new short position? In fact, short-sellers taking profits on their short trades are good buying indicators!

I use short-sellers as the canary in the coal mine.

As I am at the bottom of the information hierarchy, if I find my canary is dead (price hit my 10% cut-loss point), I don’t ask questions. I just get out of the mine!

In my view, short-sellers are doing the “job” of the regulators. Just take the recent China stock fraud cases uncovered by the short-sellers in US – muddy waters and co…  

That means if I have stuck with my cut-loss plan, the max loss for me is 10%. Who likes to take a loss? But look at it this way. Would you prefer to have no “price destruction” and out-of-the-blue, the S-chip that you owned is suspended by SGX for accounting irregularities? Then months later the S-chip is de-listed with 100% loss?

If it’s a mental block to “respect” the role short-sellers play, I have one tip:

See them as fellow vested shareholders who are dumping their shares.
(Does it really matter they are selling shares they don’t own?)

To quote one Createwealth8888 saying that I like a lot: our car’s GPS signal turn left, we turn left. But when the same GPS signal we turn right, we question the GPS…



  1. not only they blame the short seller of stocks, they blame the exchange speculators and anybody who can make money except themselves.

  2. Hi SMOL,

    I agree...why do people blame short sellers? There is an inherent bias on the market to be on the upside but not on the downside. People don't like it when the market tanks but do not mind when the market exhibits exuberance on the upside. If you want to ban short sellers, then people who are late on the market should be banned from buying in as well!

    Full of rubbish actually.

  3. wow mr. perfectionist haha, well said.

    i only have 2 short position, covered half, its enough for me, i'm going in to buy all these cheap stocks that i once own!!

  4. 1) Wow! LP!!!

    Such passion! That's why I like reading your posts. You are REAL :)

    2) Coconut,

    I appreciate and understand what you meant when you say not to mix investing with trading.

    As I am a middle-path follower, I realise that most "investors" (incliuding me!) are weak at the "selling" part. Not knowing how and when to take profits (my first blow-up).

    It's only after I borrowed trading techniques (including shorts) to my "investing" that I begin to have real money in my pocket ;)

    Your short trades speak for itself. Taking some money off the table is prudent. Now how many "investors" took some money off before August?

    You are right! It's not OK to mix investing and trading MINDSET. But techniques and methods are the same - there is a BUY, and there is a SELL.

    And you need both to fly!

    OK, unless you are a very highly educated "helicopter"! LOL!

    I only a small sparrow. And I need both my wings.

  5. ok, sparrow it is, as an investor, why do you want to take profit?

    there are many ways one can "short". you can short the index futures, you can borrow stocks to short, you can even borrow from your own stocks porfolio to short. but make very sure you have to return back to your portfolio be it profit or loss.

    if you want to mix trading with investing (like me), you have to be very clear of their distinction. for trading you have to cut losses and take profit but investing you don't, you only diversify.

  6. Coconut,

    I practice the trade around a core investment position technique:

    1) Price looks toppish. Sell 1/3 position. Price goes up, I happy -my 2/3 vested position makes more money.

    2) Price goes down, my 1/3 sale now allows me to buy back on the dip.

    3) I am never completely caught 100% cash or 100% fully invested.

    4) And if Armageddon comes, I sell everything! I call it a covered-short. This way, I will REMEMBER to buy-back the same stocks I've sold when its safe to get out of the bunkers.

    Buy/sell - I treat it as moving from Yang to Ying and back. Always shades of grey; never black or white.


  7. ok ok haha. sound like trading to me, or in between trading and investing (neither here nor there).

    who am i to comment? if its works, go for it!

    p.s. bought quite a lot of stocks this morning and sold some in the afternoon, being out of work for a month already haha


Related Posts Plugin for WordPress, Blogger...