Wednesday, July 9, 2014

The Brave Are Short

Just a small tribute to one of my favourite characters on the series. No pun intended.

It takes guts to go short in a raging bull market, like the one that we have been through.

Based on just statistics and fundamentals, I have been bearish the US stock market since Q3 last year.

Yes, I have been shorting in and out since then.
Yes, I have loss money going short.

Going short is never an easy decision and it is really hard to be profitable doing it. But when it works out, oh boy does it work out.

Perhaps it is the potent mix of seasonality, statistics and fundamentals that I am once again translating my convictions into market actions, or maybe it is just the recent 3 day "correction"

The S&P has only pulled back 1% in the past 3 days. It is no where near being a "correction" yet. The last correction was back in Oct 2011. We have now gone more than 1000 days without a correction. If that isn't scary to you, I don't know what is.

Peter Lynch famously mused that the stock market makes a correction every 2 years and has a bear market every 4 years, and just based on simple statistics like that, you would know when to buy and when to sell.

I think far too many people are obsessed with the short-term, being a time period of between 1-3 years. We all know that the shorter time frame we are looking at, the less accurate are all the factor variables and also the predicted outcome. It has been shown that using a longer time frame and selecting appropriate factor variables can produce a more reliable predicted outcome.

I just watched an hour long presentation by Meb Faber about a talk he gave at Google which is a super quick summary of his book, which is not only backed by large amounts of data and literature, but also by simple common sense. All the greats in investing like Peter Lynch, Jim Rogers and John Templeton all had the same approach, buy low and sell high.

Do remember that cash is also a position. You don't have to be long or short in this market. You can just realize that things look a bit lofty and decide to take a step back. That is what I am mostly doing, except for a token amount betting on the short side.

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