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: