Saturday, December 15, 2007

Short-selling Part 1 5 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Long-time readers of my blog would know that I have so far been quite resistant to trying to profit from short-selling. But not for moral reasons, for really there is nothing immoral about taking the view that markets will go down and hence backing up that view by selling first before buying up (covering) later. What is immoral is the additional measures the unscrupulous short-seller takes to back up his position by manipulating the market, such as spreading untrue negative rumours (there was a recent case).

I am starting this series of writeups on short-selling for several reasons: firstly, due to increasing possibility of a US recession and contagion to worldwide markets triggering a likely interest in profiting from falling markets (there was already a writeup on shorting in this week's The Edge); secondly, as a learning journey for myself as I develop the material for the writeups and further understand the short-selling process through my articulations; thirdly, for fellow investors/traders to contribute their past short-selling experiences, if any. So please, feel free to give comments or correct me, for I am fresh to short-selling too.

Previously my impression of short-selling was based on pieces of information culled from various market players and from what I had read. More recently, I have spent the last two weeks or so conducting a survey of various shorting instruments available in Singapore's market and will be writing my thoughts on them in subsequent parts. Mainly, I'll be writing about CFDs and SBL accounts, and exploring their characteristics and more personally, my own grouses with them (think this part will be more helpful).

What kind of stocks to short? Perhaps a list of characteristics, culled from this book I have read recently, might be more useful than my personal views, since I haven't shorted (intentionally) before:

1. Emotional rise not founded on reality
2. Rise on increased volume (because people will take profits on the way down)
3. Seems to have stopped rising
4. Has broken down from top area of distribution (characterised by high volume)
5. Has not yet declined >10-15% from secondary peak
6. Very high PE
7. Not thinly-capitalised, not illiquid
8. High downside volatility in past chart action
9. In industries on the downgrade
10. Completed very bearish chart pattern eg. double-top, head-and-shoulders
11. Popular/widely-traded

(extracted from "Bear Market Investing Strategies" by Harry Schultz)

You will notice that a lot of the recommendations are technicals-based. This is probably in recognition of the fact that the horizon of short-sellers is typically short-term. Markets fall much faster than they rise; fear evokes stronger emotions than greed. At the same time, the long-term trend of human development, and hence markets, is upwards. It is probably fatal to sell-and-hold (ie. reverse Warren Buffett).

At the same time, short-sellers, at least in the US, are known to do better research than their long-only opposites. It is probably the siege mentality at work; one needs to be sure, especially when they have the brokerages (typically the bull promoters) lined up against them, and when losses could potentially be unlimited (prices charge to the sky and the short-sellers still need to cover). This is another reason why I'm exploring short-selling; it pays to be in tune with all the bulls and bears and their tools of the trade so that one will not be overly-biased psychologically on the long side.




Blogger Derek said...

Hi DanielXX,

Nice write-up. I will probably never do short selling but understanding how it is done will aid in my own investing journey. Will be waiting for subsequent write-ups.


12/16/2007 5:43 AM  
Blogger sm@ll.fry said...

Hi DanielXX,

In respond to your call and share my experience, I've never short-sell before. In fact I've never taken a short term approach towards any instruments in hope of generating quick profits.

My principle is that I do not gamble. And to me, taking positions in hope of somethings favorable happening without any element of absolute certainty is gambling!

Just my point of view ;=)

Happy holidays!

12/20/2007 7:26 PM  
Blogger DanielXX said...

Hello derek & fishman,
I am still quite resistant to short-selling too. The costs are still rather high and unless I'm pretty sure there is plenty of meat I'd rather stay in cash than go aggressive short. It's always useful to have the facility at your disposal though.

12/23/2007 8:04 PM  
Anonymous Anonymous said...

Im keen in learning how to short US Index as well. So far have philips account only. But havent used before, not sure if I have to put up any margin first or have multi-currency account.

1/05/2008 7:40 AM  
Anonymous Penny Stock Newsletter said...

The thing about short selling is your loses are unlimited if a stock moves sharply higher after you short it.

11/24/2012 7:45 PM  

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