Short selling in the stock market

[findleowong]

Hi Dennis,

Just finish up reading your book. From your past experience investing in the stock market, seems like you always ‘long’ the stocks. Have you ever ‘short’ it?

Especially from the recent bear market, it’s a good chance to ‘short’ it.

If you happen have not done it, any particular for not doing it?

Thanks

[Dennis Ng]

Hi Dennis,

Just finish up reading your book. From your past experience investing in the stock market, seems like you always ‘long’ the stocks. Have you ever ‘short’ it?

Especially from the recent bear market, it’s a good chance to ‘short’ it.

If you happen have not done it, any particular for not doing it?

Thanks

it is easy to say short the market. Not easy to do (psychologically).

One thing I noted is that Warren Buffett grew his wealth and became the Richest Investor in the Whole World without shorting markets.

So did you yourself short the market? How is your investment results so far?

So far, I either Long (buy) or Sell away stocks and keep in Cash or move to other assets. I just looked back and back in year 2007 after I sold off most of my stocks, I had less than S$100,000 in Stocks, from total of S$1 million investible funds. The fact that I sold off my stocks helped me avoided the market crash that followed.

Of course, it is easy to say I would have made more money if I had short sell. However, my Number 1 Question is What if I'm wrong, will I be financially ok? Recently I found out from Jacelyn Tay herself that she became a bankrupt becos she short sold stocks on one afternoon and the price shot up instead. So that single decision on that fateful afternoon caused her to lose all her money and became bankrupt, when she turned out to be wrong.

Now my investible funds has grown to S$1.4 million, and my stock portfolio is about S$0.5+ million.

[findleowong]

It’s true that Warren Buffett grew his wealth without shorting the markets.

Hence, I’m thinking in the bear market, it makes more sense to short the market. The chances of success will be higher.

Thanks for sharing your personal experience & stock portfolio & I believe this will certainly educate the rest the true scenario happening in the stock market.

I think most people never know how Jacelyn Tay became bankrupt. It will be a good learning experience for us.

[Dennis Ng]

It’s true that Warren Buffett grew his wealth without shorting the markets.

Hence, I’m thinking in the bear market, it makes more sense to short the market. The chances of success will be higher.

Thanks for sharing your personal experience & stock portfolio & I believe this will certainly educate the rest the true scenario happening in the stock market.

I think most people never know how Jacelyn Tay became bankrupt. It will be a good learning experience for us.

yup, I only know the actual reason for Jacelyn's bankruptcy from her sharing at the Mind Your Money Seminar organised by MAS on 28 Nov 2009. She and I were invited Guest Speakers at the event.

The next round of market cycle I might try some short selling, after it is clear the overall market trend has changed....of course, I would still be careful becos my No. 1 question is What if I'm wrong, will I be financially ok?"

For me, personally my stock investing experience thus far is:

1. 1993 to 1998 - "Gambling", buy on Rumours and tips. Made money when market up, gave back all my gains, plus lost 50% when market turned.

2. 1999 to 2001 - avoided Tech stocks/funds due to earlier experience, but failed to sell most of my stocks....learned the importance of Opportunity Fund from 1998's experience, good thing is I did not invest all my money, started building Opportunity fund as market went higher and higher.

3. 2002 - learned my lesson from 1998 that worst time is Good time to invest. Bought too soon in year 2002, thought what can be worst than 911 incident and invested all my Opportunity fund. Market went down further and only bottomed in Mar 2003.

4. 2003 to 2007 - rode the Bull market in stock market and made over 200% returns.

5. 2007 - managed to sell most of my stocks (finally learned my lesson), avoided the Stock market crash, sent out many warnings that stock market going to Crash (becos of my earlier experience of 1997 and year 2000's market crash.

6. 2008 - bought too early again, started buying big from Oct 2008 onwards, market went further down and only bottomed in March 2009.

7. 2009 - continued to selectively buy stocks and increased allocation to stocks from less than S$100,000 in 2008 to about S$380,000....market value of stocks ended 40% up at end year 2009, at over S$530,000.

9. Jan 2010 - warned that STI already up over 100%, risk of investing have increased, not decreased...upside for STI limited in year 2010; urge investors to selectively look for "laggards" and undervalued stocks, if they want to invest in year 2010.

[wemakebread]

Personally I am not inclined towards shorting stocks.
This was influenced by one of my sifu.

He shared that fundamentally, stocks represent the health & growth potential of a listed company. To short the stocks means that you hope that this company will become worse, despite the efforts of the stakeholders.

But for traders of financial instruments, especially those who are inclined towards technical analysis (as opposed to fundamental analysis), to long or short is merely an objective decision derived from the analysis. However, it is highly advisable to put a stop loss.

However the above is more about trading, rather than investing.


I don't know whether I am correct to say that investors always look for things of value (eg. stocks, property, wine, gold) and therefore would not adopt shorting as part of the wealth growing strategy.

Instead, it is often traders/speculators who look for opportunities to buy/sell, as long as it is profitable.

[Dennis Ng]

Personally I am not inclined towards shorting stocks.
This was influenced by one of my sifu.

He shared that fundamentally, stocks represent the health & growth potential of a listed company. To short the stocks means that you hope that this company will become worse, despite the efforts of the stakeholders.

But for traders of financial instruments, especially those who are inclined towards technical analysis (as opposed to fundamental analysis), to long or short is merely an objective decision derived from the analysis. However, it is highly advisable to put a stop loss.

However the above is more about trading, rather than investing.


I don't know whether I am correct to say that investors always look for things of value (eg. stocks, property, wine, gold) and therefore would not adopt shorting as part of the wealth growing strategy.

Instead, it is often traders/speculators who look for opportunities to buy/sell, as long as it is profitable.

Hi wemakebread,
now that you said it, this might possibly be one of the sub-conscious reasons why I did not short stocks during the stock market crash.

However, the main reason is still becos of my No. 1 question in investing:"What if I'm wrong, will I be financially ok?" And of course Jacelyn Tay's personal experience also illustrates the dangers of shorting...

[findleowong]

Does it make sense to short stocks due to the certain factors we have to consider especially on the dividend, margin requirements, and short squeeze?

As we know, sell short, we have to pay the dividend.

While selling short & the stock goes up, we are required to put more cash up as margin or cover (Margin requirements)

In terms of short squeeze, if the stock is heavily shorted & the stock starts to move up, short sellers may all be forced to cover at once, spiking the price.

I guess it make more sense to short in the bear market once it’s convinced the market is going down.

[Stradlinz]

Hi all.. This is my view on shorting the markets. I think that short selling is more appropriate for professional traders and not for investors. Technically when u short sell, the max amount u can possibly lose is unlimited (there is no ceiling to how much the stock can go up). So if u're not managing your position on daily basis, it might be quite dangerous. Imagine if u short the market in 2002-03 and due to super bull run the prices went up 200-300%, can u imagine how much losses u will suffer?

So the main difference when long stock is the max loss is it goes to zero and u loses all ur capital. But when u short it's different story, the stock may go up infinitely and ur losses is MORE than ur capital (off cors stock prices do not always go up infinitely, but just illustrating worst case scenario).

If we take into account, Dennis' mentality of investing which is upside potential should be more than downside, then this type of investing/speculating will not appeal to him ( when shorting the max u can gain is only 100% of capital if u do not use leverage) . Still some people make money shorting the markets, but i believe they manage their positions actively on daily basis which are not suitable for busy ppl.

[findleowong]

Indeed, short selling is for the trader basis on short term and not long term.

If we have research, most value investors long than short. However, there are some value investors actually short the stocks either the companies are not doing well or in the bear market.

I really doubt the trader actually short the stocks all the way from the top to the bottom by selling high and buying it back low. Looking at the dividend has to pay& short squeeze, the risk is higher.


We back track the history; the investing process does not include short. Shorting is for traders. To use it efficiently, there’s a requirement to use Technical Analysis in the shorting process.

[tjcher]

Hi,

I realize everyone's sentiment about shorting stocks all relate to the same fear of unlimited losses. However I feel that no matter how many stock's financial statements you analyze, there are bound to be those that tend to be fundamentally weaker and thus more subject to an increase or decrease in stock price depending on the trend of the broader market ( correct me if I'm wrong ); and especially in a bearish market, instead of simply writing that particular company off your radar because of its fundamental weakness maybe we can consider how to make some profit with it.

I am not suggesting short selling; instead buying a long term put option, in which the only risk is that you lose the entire sum which you put into the cost of purchase for that option. And compared to the stock, the option is significantly cheaper. Although I am only familiar with the options market in US, not sure how it works in Sg.

Maybe you can share your thoughts?

[Dennis Ng]

Hi,

I realize everyone's sentiment about shorting stocks all relate to the same fear of unlimited losses. However I feel that no matter how many stock's financial statements you analyze, there are bound to be those that tend to be fundamentally weaker and thus more subject to an increase or decrease in stock price depending on the trend of the broader market ( correct me if I'm wrong ); and especially in a bearish market, instead of simply writing that particular company off your radar because of its fundamental weakness maybe we can consider how to make some profit with it.

I am not suggesting short selling; instead buying a long term put option, in which the only risk is that you lose the entire sum which you put into the cost of purchase for that option. And compared to the stock, the option is significantly cheaper. Although I am only familiar with the options market in US, not sure how it works in Sg.

Maybe you can share your thoughts?

Refer to my previous postings on my views on this topic.

Nope, in Singapore, no option trading of stocks, we have covered warrants and CFD trading though. Options trading is most active in the U.S. market in the whole world.