My @Quora comment on an answer to What does it mean to short the volatility index? :
My @Quora comment on an answer to What does it mean to short the volatility index? :
The 30s’ are usually remembered as the “Great Depression era”. Yet, from 1932 to 1937, despite abject poverty on main street, what was left of Wall Street enjoyed an exceptionally resilient bull market. The government had found a new tool called pump priming, inspired from an economist (only they can get away with such awful track records on the markets) named John Maynard Keynes. The government loved it and they feel asleep on the button. Sounds familiar ?
We have enjoyed a synchronous long smooth bull market. It has been good to all participants. Yet, no bull market has ever boosted anyone’s IQ. If anything, this Fed sponsored bull market has made participants fat and complacent: low interest rates pick up the tab anyway. Now, that the Fed has decided to tighten the purse, things may get a bit more turbulent out there.
Short-selling is the most underrated skill on the markets. It is neither a nefarious conspiracy nor an anti-patriotic gesture. It is a rare, versatile and immensely valuable craft that will ensure your survival in the most turbulent times. Markets have dropped by 50% twice in the last decade. If You would like to retire on returns rather than stories, then this is something worth learning.
“Too many people look at “what is” from a position of “what should be”, Bruce Lee, Chinese philosopher
These days, everybody seems to have an opinion on short-selling. Short sellers seem to proliferate faster than syphilis on a ship. I cannot but feel humbled in such illustrious company. I have been in the alternative space for 15 years (hedge funds and large institutions). For the past 8 years, I was a dedicated short-seller with Fidelity Japan.
My mandate was to underperform the inverse of the longest bear market in modern history: Japan equities. Every day, I woke up -100% net short, having to do worse than the worst market on earth, good morning. These days, it feels somewhat refreshing to be around -50% net short.
While every other freshly minted guru has some elaborate speech about how short selling should be done, I have earned my short selling-skills the hard way and I have the scars to prove it. It is all lovely and cosy but the only tiny difference is that in the real world You can’t hit the reset button after Game Over. So, Come with me if You want to live
There are three obvious reasons:
“In theory, theory and practice are the same. In practice, they are not”, Yogi Berra, American Philosopher
Market participants approach short selling the same way they approach long buying. They do their analysis, watch some of it being validated and then happily conclude it is just the inverse of going long. That all works well until it is time to put theory into practice.
A couple of short-squeezes that would turn Barry White‘s rich baritone into Barry Gibb‘s high falsetto, a couple of quarters of humbling losses down the road, and they conclude that short-selling is dangerous. What they do not realise is that on the short-side, the market does not cooperate, stock picking is just not good enough. Market participants fail to understand the dynamics and the mechanics of short selling.
On the long side, picking stocks is sufficient. The market does all the heavy lifting thereafter. Stocks grow bigger, everything works in tandem: they contribute more both in terms of alpha and exposures. Losers shrink and hurt less.
On the short side, the market works against You. Winning big literally means watching your portfolio shrink like a magic skin: You have smaller victories when successful and bigger problems when unsuccessful.
Picking stocks is just the start. The real work of extracting alpha comes after that. This is hard, frustrating work, when it works at all. This is why people keep looking for structural shorts all the time, something they can sell short and throw away the key. Structural shorts are like market gurus, they are everywhere. Profitable structural shorts are more like market wizards, good luck finding one. They are so rare they make Big Foot look like a frequent guest on the Saturday Night Live show. Welcome to the mechanics of short selling: scarce poor quality borrow leading to short squeezes, prohibitive interest fees and dividends payable.
Martial arts are a good analogy for the markets. If Long only was a fighting sport, it would be English boxing, Queensburry rules. If Short selling was a sport, it would be MMA, Vale Tudo. Floyd Mayweather is the undefeated champion of the world. He is a solid contender for the title of the best boxer of all times. Yet, should he face Conor McGregor in the octagon, MMA style, he would be dismantled, dismembered and disfigured long before the first round bell has a chance to save him.
On the Long side, all You have to do is pick stocks and the market does the rest of the work for You.
On the short side, not only do You have to do that, but You will have to master those skills:
The good news is that short-selling is a skill. It can be acquired, perfected and expanded. It is also a versatile and valuable one. Remember this: with this skill, You can go Long without breaking a sweat, but can Long-Only do your job with the same ease
Short selling is a high pressure sport. Those who have only gone Long will suddenly be confronted with unfamiliar levels of stress. Volatility, uncertainty, fear, stress, pressure constrict the thinking brain (prefrontal cortex). Whatever mental bandwidth is left will be thankful for clear, unambiguous and simple instructions. So, do not be fooled by the apparent simplicity zen appearance of the charts. It took years to mature and thousands of lines of code to come to this level of clarity. In time, I hope You will learn to appreciate the gift of simplicity.
The above chart is designed to be intuitive.
Charts have all the essential information You need to know to go on your journey: bullish/bearish underlying trend and exit roadmaps. It is kept simple by design. For example, position sizes have been removed in this version. They are calculated separately in the alert table. It all comes down to essentialist philosophy: focus on the essential few and let go of the trivial many. With this tool, You have a sustainable fighting chance against the markets.
The above chart translates into real trading: multiple entries and exits. Green column is entry. Salmon is partial exit and grey is final exit. As soon as a position is entered, the first order of business is to take some money off the table so as to reduce risk.
Above is JNK, the ETF for high-yield bonds. When the first trade was taken, the chrematocoulrophony (chremato: money, phone: voice, coulro: clown) or consensus on The Street was talking about “Buy the dips”, “value hunting”. These days, everyone talks about the implosion of the high yield space. Bottom line, the hardest trades often offer the best rewards. Stick to your system.
The table contains the same information as charts, only in a more compact numerical form.
Types of Alert:
That’s it, everyone is set. Happy trading. Two things, I trade the same signals that are shared on the website. Call it front-running or camaraderie. Rather than 5 pages of lawyerly bizantyne disclaimer, one sentence suffices: You are responsible for your own choices.
“The time to repair the roof is when the sun is shining”, JFK, modern mystery
Short-selling is a habit. It takes time, mistakes, patience to unlearn bad habits and form new beneficial neural pathways. The best time to do so is when urgency forces focus, but not critical enough to be a question of life and death.
The Fed has ended its life-support, which means more turbulence ahead. This is a good time to learn how to ride volatility with serene equanimity.
Our sincere apologies for the long silence. We were immersed in a fascinating auto-trade project. It has been a wonderful watchmaking experience. “If investment is a process, then automation is a logical conclusion”. We will come back with solid content soon.
Thought of the day: “Sometimes by kising a battle, You find a new way to win the war”, Donald Trump, Happy Birthday
Thought of the day: “Decisions are made by those who show up”, Aaron Sorkin, Happy Birthday
Thought of the day: “A victory without danger, is a triumph without glory”, Pierre Corneille, Happy Birthday
Thought of the day: “Make bold choices and make mistakes. It’s all those things that add up to the person you become”, Angelina Jolie, Happy Birthday
Thought of the day: “Follow your own inner moonlight, do not hide the madness”, Allen Ginsberg, Happy Birthday
Thought of the day: “The task of the leader is to get his people from where they are to where they have not been”, Henry Kissinger, Happy Birthday
Thought of the day: “In theory, there is no difference between theory and practice. In practice, there is”, Yogi Berra, baseball philosopher, Happy Birthday