Short Selling Isn’t Dead, You’re Just Doing It Wrong

Keynes said it best when he quipped, “the market can stay irrational longer than the investor can stay solvent.”

Short-sellers can’t afford to wait as voters to turn to weighers. There are borrowing costs, dividends (if the company issues them) to cover and a market that’s constantly trying to send stock prices higher. If there is a fundamental catalyst, you better be damn right on the timing!

Trap 3: Shorting The Obvious Over The Boring

Howard Marks, the renowned Oakmark manager, once said, “There are old investors, and there are bold investors, but there are no bold old investors.”

Change a few words, and Marks’ quote strikes at the heart of the short-seller conundrum:

“There are old short-sellers, and there are bold short-sellers, but there are no old bold short-sellers.”

Investors feel the need to take “obvious” shorts like today’s frauds, pumps, and EV SPACs. The problem is everyone else knows they’re frauds, which creates higher short interest and more significant pain during a short squeeze.

To review, the investor’s three common traps when shorting are:

  1. The danger of “infinite losses” keeps investors away
  2. Shorting only on fundamental data
  3. Shorting the obvious frauds, pumps, and zero-revenue SPACs

By just avoiding those three traps, you’re on your way to being a better short-seller than 95% of market participants.

Invert, Always Invert: Three Ways To Enhance Your Short Game

Rule #1: Proper risk management creates asymmetry

Risk management is the lifeblood of a proper short-selling strategy. You should know where you’re exiting before you put on the short trade. Do this by setting physical stop-losses when you enter the sell order.

For example, say you short company $XYZ at $10/share with a stop-loss at $12/share. That $2/share difference is your actual dollar risk.

A golden rule for traders is to risk no more than 1% of your portfolio NAV on any individual short position ($100 on a $10,000 portfolio). Risking 1% allows you to take many shots on goal without depleting your capital.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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