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Shorting seriously out of favor


Valuebo

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Funny how history rhymes...

 

http://www.ft.com/cms/s/0/b5445190-069c-11e4-8c0e-00144feab7de.html

http://finance.yahoo.com/blogs/talking-numbers/even-hedge-funds-have-stopped-betting-against-this-rally-212933500.html

 

 

Anyone else highly short versus his longs? I have been for a couple of months now both through general shorting and options. Must admit that it is harder to go against the crowd on the short side than on the long side.

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Short selling is at a low, share repurchases and M&A are at a high, reddit's investing subforum predicts stocks will go up forever... Something somewhere will crap the bed soon, it appears. I sure hope so, I want to load up on some cheap stuff. There's almost nothing that feels like a screaming buy.

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Not to mention that most new ideas on this forum nowadays start with "I found this company but don't have time/don't know the business, what do you guys think?". Not that I am a big contributor of new ideas but it shows the lack of lots of attractive ideas. I see myself opportunistically buying and selling some main holdings to lock in some return, other than there isn't all that much to do.

 

 

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Not to mention that most new ideas on this forum nowadays start with "I found this company but don't have time/don't know the business, what do you guys think?". Not that I am a big contributor of new ideas but it shows the lack of lots of attractive ideas. I see myself opportunistically buying and selling some main holdings to lock in some return, other than there isn't all that much to do.

 

What about Russian stocks? or Greek stocks?

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I still hold my puts since the start of june, beta adjusted i am flat (but long volatility and value). I was net short at the start of june, but that was crazy and something i will not do again, i paid the price for that during june.

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Not to mention that most new ideas on this forum nowadays start with "I found this company but don't have time/don't know the business, what do you guys think?". Not that I am a big contributor of new ideas but it shows the lack of lots of attractive ideas. I see myself opportunistically buying and selling some main holdings to lock in some return, other than there isn't all that much to do.

 

What about Russian stocks? or Greek stocks?

 

I own a good chunck of Intralot. Took a while but the recent price drop got me in. :) Don't own anything European otherwise but run a very concentrated portfolio. My full portfolio is GNCMA (biggest position), AIQ (trade this one a lot but hold a main position), Intralot, IBM leaps, CRM short and short options and WDAY short (also trade around them). That's it.

I am looking to add the JPM warrants but hope to pick them up at $15-16 some day. At that point I think it could return 100% in 2 years or 200% in 4 years. I like that the warrants adjust and it will be hard to lose money on them over 4 years, a good leveraged bet.

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Not to mention that most new ideas on this forum nowadays start with "I found this company but don't have time/don't know the business, what do you guys think?". Not that I am a big contributor of new ideas but it shows the lack of lots of attractive ideas. I see myself opportunistically buying and selling some main holdings to lock in some return, other than there isn't all that much to do.

 

What about Russian stocks? or Greek stocks?

 

Korean stocks keep popping up too

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Just to invert a bit on the starting point that shorting is out of favor right now;

 

What's the right level of shorting anyway? Is it possible that the 2000s have accustomed us to a certain level because we had two huge crises? What was the right level in the 1990s? 1980s? 1970s? 1960s? 1950s? etc.

 

I don't have an answer, but I think it's an interesting question. Maybe too many investors are still fighting the last war and are expecting a repeat of 2008-2009 any day now?

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Liberty, what would make you start feeling more concerned about the market?

 

Who says I'm not concerned?

 

But I'd certainly be more concerned if people hadn't been predicting a crash for years now. I just realize that I have no ability to time the market - what if I had decided last year that things were too pricey and went to the sidelines and missed 2013? that's an opportunity cost just as bad as not foreseeing a drop - so I don't try, and that goes for either up or down.

 

And I don't think that much about the market in general when making investment decisions, because I don't buy indexes. As long as I find businesses that I like and that are selling at prices I think are fair, I don't feel I have to wait for the next correction to buy because what if we get a 10% correction after another 30% run up? I bet a lot of people in late 2012 though they should just wait for a big drop before buying something...

 

I wonder if people would be as worried if we weren't in "all time high" territory. I think it's a normal thing in a world where the population and economy are growing and there's inflation to eventually start hitting all-time highs and keep hitting new all time highs for a long time (ie. look at most of the past century). There will be corrections, and recessions, but who knows when? Tomorrow? In a year? We hit a plateau for a while? Doesn't mean the landscape will be like in the 2000s, that's just the recency effect. It could be worse, or it could be much better... No idea. People will always point out the long list of reasons why everything's about to go to hell, but that list has always been there (as Buffett says, look at what the world went through in the 20th century and look at how the stock market did -- now look at what above average capital allocators did over long periods of the same).

 

As long as the people I invest in are really talented at creating value in all kinds of conditions, I think in the long term I'll do all right.

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with 45k stocks out there, and so many blogs and websites writing up in detail about what they think are bargains, how on earth can you not be 100% invested at all times? I am having problems choosing which stocks I wanna buy to maximize my returns. I don't get how people cannot find good idea's. there are probably hundreds of very mispriced stocks at all times even at tops of the market overall. Law of numbers?

They just get harder to find. BUT if you find them, it is more likely they return quicker to fair value in a bull market. So your harder work does get rewarded quicker when times are tougher. something could have 150% upside in a bear market, and it could take 3 years to pay off, but in a bull market it might happen in a year. And then you can try and find the next one that is cheap.

 

Fwiw I think we will see a major tech boom in the next 30-40 years making life cheaper and better. There are people saying that the next 20-40 years will make the last 100 look like nothing. So I am cautiously optimistic.

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And who says that cheap things can`t get a lot cheaper?

I was burned in the past over summer, so my natural instinct tells me to protect myself during that time. It may be irrational or not, but we are living in times where QE is the only reason that markets go up or down. And QE ends this october (cool timing!) and its power is probably already fading.

 

Perhaps i am wrong, but who cares as long as i don`t damage my account? When i miss a big upmove that is ok, as long as i don`t lose money. Think about rule #1.

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yeah i just sold my house to my neighbor for the summer, just in case.  ::) it makes a lot of sense to own something you consider worth owning and then speculate on the price.

 

Don't you insure your house against heavy damage?

 

And now imagine that 80% of all storms happen in the summer and the insurance for that time is a lot cheaper than for the whole year wouldn't you do that kind of deal?

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"Being short and seeing a promoter take a stock up is very irritating. It’s not worth it to have so much irritation in your life."

-- Charlie Munger

 

With quotes you can easily prove your point yet they can be countered by another quote just as easily:

 

"Good things take time and effort. Nothing good in life is effortless." etc

 

It's not Munger's style to short, which is fine. That doesn't mean you definitely shouldn't do it. What is very irritating for one person might be manageable for another.

 

 

Just to invert a bit on the starting point that shorting is out of favor right now;

 

What's the right level of shorting anyway? Is it possible that the 2000s have accustomed us to a certain level because we had two huge crises? What was the right level in the 1990s? 1980s? 1970s? 1960s? 1950s? etc.

 

I don't have an answer, but I think it's an interesting question. Maybe too many investors are still fighting the last war and are expecting a repeat of 2008-2009 any day now?

 

I guess it would be hard to pinpoint the level of general shorting that would be right for the market. Meaning the point at which the market shows a healthy scepticism and does indeed climb a wall of worry. All the articles tell us is that negativism has rarely been so low in recent times, despite valuations being higher than average. It's simply another good sentiment meter.

 

I don't get your last assumption. If anything, the numbers show that most investors simply aren't worried about a repeat (or a simple correction for that matter). As for myself, I personally wouldn't own leaps and three debt leveraged companies if I was fighting the last war. :)

 

with 45k stocks out there, and so many blogs and websites writing up in detail about what they think are bargains, how on earth can you not be 100% invested at all times? I am having problems choosing which stocks I wanna buy to maximize my returns. I don't get how people cannot find good idea's. there are probably hundreds of very mispriced stocks at all times even at tops of the market overall. Law of numbers?

 

You are partly right but it is not that simply.

 

I have to be able to buy them for one. For example, I can't buy the Korean ideas Packer blesses us with, even if I wanted to pay a 1.5% commission with a minimum of 100€/trade. It can't be done.

I also require an upside of at least 60-100% unless I can get a safer security leveraged through leaps.

Good management, decent business, at least a decent understanding of the sector and business, ...

I am also trying very hard to simply avoid (possible) traps like SHLD, EBIX, ... I'm not smart enough to know where they will end up. If there is any doubt, I'll look elsewhere.

 

How many remain?

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With quotes you can easily prove your point yet they can be countered by another quote just as easily:

 

"Good things take time and effort. Nothing good in life is effortless." etc

 

It's not Munger's style to short, which is fine. That doesn't mean you definitely shouldn't do it. What is very irritating for one person might be manageable for another.

 

Yeah! Definitely! So… let’s just say shorting isn’t my style either! ;)

 

Btw, quotes imo are “condensed and clear lessons”… there is nothing wrong with quoting… it is just the validity of the message that must be assessed each time.

Or let's put it this way: there is nothing wrong with quoting... the only problem is when stupid things get quoted! ;D ;D

 

Gio

 

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Theory: Shorting is helpful to protect against corrections

 

Practice: Few people are able to generate alpha through shorting

 

So... how many people on this thread have been able to say that their short book has been a net positive for them over the long-term?

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I think you need to be good at technical analysis as well to really get an edge. So now you have to do 2 things really really well to not even make that high returns as they are pretty capped.

 

All the extra time spent on crap like studying head and shoulders patterns and really making sure your not missing something fundamentally could be spent finding another cheap idea with a lot more then 50-90% upside.

 

Biggest reason i went into valueinvesting is because 'heads you break even, tails you win'. Or sometimes even 'heads you win some tails you win more'.

 

With shorting it is 'heads you lose a shitload , tails you win a little and get an ulcer'.

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Liberty, what would make you start feeling more concerned about the market?

 

Who says I'm not concerned?

 

But I'd certainly be more concerned if people hadn't been predicting a crash for years now. I just realize that I have no ability to time the market - what if I had decided last year that things were too pricey and went to the sidelines and missed 2013? that's an opportunity cost just as bad as not foreseeing a drop - so I don't try, and that goes for either up or down.

 

And I don't think that much about the market in general when making investment decisions, because I don't buy indexes. As long as I find businesses that I like and that are selling at prices I think are fair, I don't feel I have to wait for the next correction to buy because what if we get a 10% correction after another 30% run up? I bet a lot of people in late 2012 though they should just wait for a big drop before buying something...

 

I wonder if people would be as worried if we weren't in "all time high" territory. I think it's a normal thing in a world where the population and economy are growing and there's inflation to eventually start hitting all-time highs and keep hitting new all time highs for a long time (ie. look at most of the past century). There will be corrections, and recessions, but who knows when? Tomorrow? In a year? We hit a plateau for a while? Doesn't mean the landscape will be like in the 2000s, that's just the recency effect. It could be worse, or it could be much better... No idea. People will always point out the long list of reasons why everything's about to go to hell, but that list has always been there (as Buffett says, look at what the world went through in the 20th century and look at how the stock market did -- now look at what above average capital allocators did over long periods of the same).

 

As long as the people I invest in are really talented at creating value in all kinds of conditions, I think in the long term I'll do all right.

 

"Crazy" people were talking about how a crash was coming for the housing market years before 2007, too. Just because things take longer than people assume, doesn't mean they're wrong.

 

I'll agree with you that timing is incredibly, incredibly difficult. Personally, I find it odd (indeed, too good to be true) that we had a ton of excess with the tech bubble and housing bubble and markets didn't pay much at all for it. We shall see what happens, I suppose.

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There is a difference between shorting and protecting your portfolio against market moves.

 

Shorting is something where you need a trading style, you can`t let something like CYNK run against you and not cut your losses. That won`t work and can ruin you in days. I would nobody advise to do that without a lot of trading experience.

 

Protection via puts is on a totally different side, you have limited losses and huge possible wins just like buying stocks. That is more like buying insurance. And the good thing about that is that it is cheapest when nobody wants it, but that is most often the time when you need it. Think about the other side of that trade. The one who sold me the puts is running on a very thin line, i would never do that with such low premiums and that huge amount of risk. And when the puts are worthless in the end, i won`t regret buying it because i was protected when i felt i needed it. (You won`t regret buying fire insurance for your house even when it didn`t burn down, do you?)

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Think about the other side of that trade. The one who sold me the puts is running on a very thin line, i would never do that with such low premiums and that huge amount of risk.

 

The guy who sold you the puts could very well be sitting on a large concentrated position that he wants to hold onto for tax purposes only, but would otherwise like to diversify his downside risk.

 

So he purchases at-the-money puts to diversify his downside risk, and he write puts on a diversified group of names that he does not otherwise have a position in.  The premiums collected from the naked puts he writes are used to fund the puts he purchases as insurance.

 

So he he moves his previously concentrated risk into a basket of other names.

 

Don't assume he is running on a very thin line.  It may be completely the opposite -- he was on a thin line before with his concentration, and now he is being very conservative.

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