Read on Twitter
1. Today, For no particular reason, I feel like doing a tweet storm about short-selling. Good thing I am the only one doing that.
2. I try not to criticize any strategic approach ex-ante. It’s pointless to say things like “technicals don’t matter” or “fundamentals don’t matter.” Different people are cut out for different strategies. What matters is what make money for YOU.
3. There are reasons, however, why in my 23 years + in financial markets as a professional I have never shorted a single stock or a single stock index with investors money.
4. I have added a caveat about investors’ money, because I bought puts on personal account on a couple of occasion ( with very mediocre success). Puts are a separate cans of worms because there are so many ways to right and still lose money.
5. In my book I have discussed how I avoid swimming against the tide. Hence, I virtually never trade short-term against my long-term view. And since stock markets generally go up, this precludes me from shorting stock indices.
6. One time when I was still in a bank, I told a senior manager that I think as a market maker it’s much easier to make money when your asset class is trending up. He labeled me as a “bull market trader” and didn’t want much to do with me from that point on.
7. I was correct though. Both empirically and theoretically. The risk profile of being long an asset is different from being short an asset.
8. Since most trades are in the black at some point, it’s important to define clearly what constitutes a winning trade. If you short a stock at $100 and hold the short while it goes above $200 it is hard to call this trade successful even if eventually it goes to 0.
9. Hence, shorting a stock is not a valid strategy FOR ME as it ties up too much capital. Is there no way to express negative views on stocks?
10. I have by now navigated several bear market without taking short positions - there are ways to do it.
11. My main point is that as equities are an integral default portion of any portfolio and they trend up, being flat is a sufficiently strong expression of a negative outlook.
12. And if you disdain is directed at a specific stock - you can just exclude form your portfolio. No one prohibits you from holding S&P 500 minus stocks you hate.
