Is short selling bad for your psyche? by Laurent Bernut
Answer by Laurent Bernut:
“Lo que no mata engorda”, what does not kill you makes you fat., a respected short-seller, sums it well.
You are probably alluding to the good and evil battle between the righteous short seller who perceives wrong, the arrogant and corrupt management who falsify their financial statements and price that stubbornly goes up until the final collapse.
Fairness will kill You
Fairness is one of the very few built-in traits in humans. Numerous studies have been conducted on fairness in toddlers. It appears that our sense of fairness predates our language. Even children who turned out to exhibit clinical psychopathic tendencies, dysfunctional amygdala, react to fairness.
So, as short sellers, every now and then, we are tempted to right the wrongs. We engage in a duel with companies and the multitude who buy into the frenzy. One sane mind against a raging mob is still an unfair fight.
A simple advice is to wait until the mob has changed side and starts liquidating its position. You will be vindicated.
Short selling: the spinal tap of investing
In spinal tap, they can turn the volume at 11. On the short side, stress volume is always at 11, even when it works in your favor. In that sense, short selling is corrosive for your psyche until You learn to manage stress.
It takes time to get there but here are a few techniques that will help You:
- Plan your exits: the short side is a bumpy ride. I used to maintain between 40 to 60 shorts at all time. That’s a lot of bumps. It all changed when i set up hard exit rules. Having hard rules for exit is a tenfold reduction in stress. All my Long Only colleagues were glued to the newsfeed to guess what to do next. Meanwhile, as nothing flared up, i was left watchingon Youtube
- partial exit: take risk off the table as a short squeeze starts. No-one knows how far price will retrace and gains evaporate, so reduce size
- stop loss: never enter a short w/o a stop loss. Never override stop loss. No exception
- reversal: there are quite a few false positives. Sometimes, shorts turn into Longs before they trigger a stop loss. Do not ignore what the market is telling you. Market is right, or it can afford to stay wrong, you can’t
- Quantify your risk: risk is not a story in the US, China or wherever. Risk is a budget: how much you can afford to lose and keep trading. Accept you could lose that much because:
- This is called pre-mortem. It actually releases endorphine and facilitate recovery. The quicker you can put a bad trade behind you, the quicker you can focus on the next one
- More often than not, you will lose. Quantification helps you get better at money management
- Practice mindfulness: every other spiritual guru talks about mindfulness. In its simplest form, it is the ability to observe what is happening without being sucked into the emotional roller coaster
- Welcome to the dark side: the short side will test the darkest corners of your psyche. It will go and elicit fears so deep you did not know you had them. Great, fear dissolves when exposed. I used to journal fears and work through them using Byron Katie’s The Work. Van Tharp recycled this in his fantastic “trading beyond the matrix”. Fear elicitation is a great tool to help you work through your subconscious phobias.
Viktor Frankl, who happened to have survived Auschwitz and Birkenau, said between stimuli and response there is something called freedom. You have the choice of how you will respond. So, fear happens, losses mount. How you choose to deal with them is your path to emotional freedom