Explanation: Being a bear while everyone else is bullish is one of the most challenging propositions in investing. For instance, ‘Short selling is an incredibly lonely proposition,’ billionaire hedge fund manager Bill Ackman says. Yet, it can pay off big time if you get your TIMING right. However, since most people, even professional investors are terrified of shorting, I will introduce a quick series about short selling, proper risk management when short selling and the best way to maximize returns. This was to be a part of my never finished book (no time to finish it)…….
Buy Low, Sell High, Go Short & Cover Investment Strategy Summary
Know Exactly Where You Are At All Times.
Whether you are investing in individual stocks or the overall stock market, you must have a clear understanding of exactly where you are in the cyclical composition of the underlying financial instrument. Luckily, you only have a few options
- Market Bottom:
Cover your short positions and prepare to go long. Identify substantially undervalued securities.
- Bull Market:
Buy and hold substantially undervalued securities. Continue to add to your positions and/or buy newly discovered undervalued securities throughout the duration of a bull market.
- Market Top:
Liquidate all of your long positions and prepare to go short. Identify good shorting opportunities. They can either be stocks you were long or stocks that are expected to decline at X multiple to the market.
- Bear Market:
Take short positions in the overall stock market or individual stocks once a bear move is confirmed. Continue to add to your short positions for the duration of the move. Cover once the bottom is reached.
Then simply rinse and repeat. The rules above, of course, can be applied to all time frames and to all financial instruments. For as long as you know exactly where in the cycle you are. The primary benefits are as follows.
Risk Reduction:
- Through the purchase of undervalued securities.
- Through knowing where in the cycle you are.
- Though having the ability to be on both sides of the trade at appropriate times.
Maximizing Profits:
- Through having the ability to profit from both sides of the move. Long and short.
- Through purchasing undervalued securities with significant upside potential or shorting overvalued securities with a lot downside.
- Through compressing anticipated gains into the shortest time frame possible.
