Going Long Versus Going Short Stocks

For the last 2 weeks, the stocks selected for this strategy performed quite well. On the average, the shorts continued their relentless slide downwards, and the longs inched higher as well. To be more specific, here is a view of the spreadsheet this week:



The gains so far represent an annualized yield of about 31%. Also, as you can see, some of the shorts have produced exceptionally enormous profits. It seems to me that the short positions are responsible for the bulk of the profits so far, in fact. In the stock market, there is always a lot of potential shorting stocks, and I think it is a shame that most investors only ever go long.

One misconception about short selling is that it is more risky than going long. There is some truth in that, as there technically is no limit to the amount you can lose short selling, but that risk can be taken care of with any sort of risk management system or investor discipline.

In my opinion, short selling is actually less risky than going long. This is because stocks always go down faster than they go up. There are many times during each year where there are small panics, and stocks sell off violently. The same is true in the commodity markets. Gold for example, will sometimes drop $30-40 in a single morning, yet it would never rise by that amount in such a short period of time.

This is a risk of being long in any market, and it is a risk that is difficult to eliminate. Stop loss orders cannot eliminate this risk, as the price can blow through a stop level. Protective puts work, but they cost money, and only have a limited life.

Thankfully, there are an increasing number of short or inverse ETFs being introduced that allow investors to go short different markets without actually literally shorting stocks.

DXD -2x the inverse of the Dow 30
QID - 2x the inverse of the Nasdaq 100
SDS - 2x the inverse of the S&P 500
HXD.to - 2x the inverse of the TSX 60

And, as always, here is this week's trending stock:

Making Money Without Predicting the Markets

For the past week, the stocks that have been selected produced incremental profits again. One stock in particular, SORC, which was shorted on August 3rd, has lost over 50% of its value since that time:


Two posts ago I mentioned a book I was reading called, "The Way of the Turtle". I'd like to touch on another theme presented in that book in this post. The author, Curtis Faith, makes the point that it is not necessary to know what a stock is going to do in the future to make money trading it.

Although Curtis Faith was not able to predict stock market fluctuations, he still made $35 million in profits trading. How did he achieve this? He did so by trading with an edge, by trading with the trend.

With the stocks posted on this blog, I have no idea if they will continue to fall, or continue to rise. All I know is that there is an inherent edge in trading with the trend, and if you trade enough trending stocks, you will come out ahead.

Think about how casinos make money. When a gambler puts a coin into a slot machine, does the casino know if they are going to lose or make money on that coin? They have no idea what is going to happen. But the odds are built in their favour, so that when enough coins are deposited into the slot machine, the casino will come out ahead.

The casino does not feel upset when a large payout is made, since it is simply the cost of doing business. The same applies for trading. Losses are unavoidable, and are merely the cost of doing business, which means that an experienced trader will not get emotional about losses.

Here is this week's trending stock (or ETF):

Trading with the Trend Stock #16

It's been 2 weeks since the last post, so it is definitely time for an update. I'll try to post on this blog every week, but that will not always be possible.

The stocks that this system has generated performed very well during this time. Here is an update on the performance:


It has been 4 months since the first stock in this strategy was selected, and -although getting off to a very poor start- since that time, the average performance has been just over 8%. This strategy is about generating slow and steady wealth, and I feel that is what is beginning to occur now.

An element that I have not mentioned in this blog so far is diversification. Even though a part of me feels that diversification is for wimps, I still think that this strategy can benefit from it. One way that my selection technique diversifies risk is by holding both long and short positions.

This helps reduce risk in that when the markets sells off violently, the type of sell off that affects all stocks, the short positions help mitigate the damage.

In addition, when I select the stocks for this blog, I do now know what product of service the company provides, but I am sure that I am probably getting into companies from many different sectors, which helps to diversify my holdings. I think it would advantageous to spread one's money amongst at least 5 to 10 stocks to help manage risk.

Anyway, here is this week's trending stock: