I have essentially been sitting tight on my positions (with the exception of being stopped out of my high momo shorts earlier this year) for the better part of a year. If I had held my high momo shorts I would have made a killing (30%-40% returns). I don't feel bad about that because you have to enact a limit loss discipline in the short realm. Fortunately, I didn't panic when the market took its little dive in February. The main reason was that I didn't think my holdings warranted being sold. I put a long mega-cap tech position on last year based on what I considered to be a significant undervaluation for the space (relative to the high growth momos and the rest of the market). That thesis has played out over the period and I expect it to continue to play out (which is likely to provide an upward bias to the indices). In fact, many of those names (INTC, QCOM, MSFT, ORCL, GOOG, AAPL, EMC, CSCO) still look very attractive on a valuation & yield basis relative to alternative investments. I have price targets set for each name and will begin reducing my exposure as those targets get hit. INTC = $36-$38, QCOM = $90-$100, MSFT = $45-$48, ORCL = $48-$52, GOOG = $620-$650, AAPL = $120-$130, EMC = $34-$36, CSCO = $34-$36. I also have a kind of net-net barbell on with KLIC, QLGC, GENC, TST & WSTL. I'm eyeing RELL but expect to pick it up when the market pulls back. I have a stodgy contrarian core with BP, RDSA, CHL, SYT, BEN and JPM, and two contrarian plays in BBRY and SGI and a speculator in ARO.
I think patience is the most important part of investing. At least it is for me. I feel that it is my weakness - my achilles heel. I cannot count the number of times I was in the right position, but failed to hold, either through lack of conviction or pulling the trigger too quick or reacting to macro events. With the market continuing to march higher, I am feeling pressure to take profits and put some money in the bank, even as my thesis hasn't played out. And when those names reach their target levels there is a good chance I'll re-evaluate and decide they are still the best option from a value, yield and alternative valuation perspective. In which case, I may trade around those positions. Right now, I am hitting my one year holding period and so the temptation to lock in long term gains is definitely there.
Showing posts with label short selling. Show all posts
Showing posts with label short selling. Show all posts
Saturday, July 12, 2014
Thursday, May 15, 2014
Take The Money and Run - Close out CRAY Short
I didn't issue a report or anything like that because there are only two people (three actually) who have seen my Cray report (and I doubt they even read it).
But just for the record, I looked to close the position at $25.50.
Time will tell how propitious that was, but I figured I'd take the money and run.
The report came out when the stock was trading around $35, but I would have looked to short it when it was trading above $40 on the gap from its 4Q earnings.
Timing is incredibly hard in the research game because it takes time to build the case and construct the report.
But just for the record, I looked to close the position at $25.50.
Time will tell how propitious that was, but I figured I'd take the money and run.
The report came out when the stock was trading around $35, but I would have looked to short it when it was trading above $40 on the gap from its 4Q earnings.
Timing is incredibly hard in the research game because it takes time to build the case and construct the report.
Wednesday, May 7, 2014
The Art of Short Selling - Short Sellers
Robert Wilson (profiled by John Train in The Money Masters) is the acknowledged grandfather of the short selling hedge fund managers.
Julian Robertson used a fundamental approach based on prodigious research and a long term horizon. Valuation bets on price alone make bad short sales. There must be either a fundamental change in the outlook or a major misconception by the stock buying public.
Alex Porter (Porter, Felleman) - the trick is to be short the stocks you can stay short without pain or expense. He likes shorts where mgmt doesn't own much stock, management is not realistic or forthright, and where the company has a fatal balance sheet flaw.
Joe DiMenna (Zweig Funds) - Short frauds, earnings disappointments, hyped stocks, industry themes where macro forces are negative and deteriorating balance sheets. Try to determine a catalyst. Don't short stocks with strong relative strength and earnings momentum.
Short sellers tend to be odd people. Most are ambitious, driven, antisocial and singleminded. They are contrarian by nature and like to win against the odds. They often have a chip on their shoulder.
The Feshbachs looked for terminal shorts: (1) stock price overvalued at least by 2x's reasonable valuation, (2) A fundamental problem at the company, (3) A weak financial condition, (4) Weak or crooked management. They perceived themselves as hype detectors. To sell short you have to be certain that you see an important factor that other people do not see. You look for something that is obviously misperceived, obviously important, and obviously detrimental. The most important charater trait of a short seller is the ability to remain analytical when other people panic.
For McBear management is rarely the target, unless there is fraud. It is generally Wall St that has engineered the ascent of the stock.
Chanos' specialty is solving complex financial puzzles. He likes to short stocks with secular problems where he can make a "reasonably strong argument, based on the valuaton of the business, that the equity value of the enterprise is $0." Chanos does not visit companies. Likes to focus on return on invested capital as a key financial indicator. When the accounting gets murky people tend to shy away from rigorous analysis and rely on management and just take earnings per share at face value. Therein lies the opportunity.
Julian Robertson used a fundamental approach based on prodigious research and a long term horizon. Valuation bets on price alone make bad short sales. There must be either a fundamental change in the outlook or a major misconception by the stock buying public.
Alex Porter (Porter, Felleman) - the trick is to be short the stocks you can stay short without pain or expense. He likes shorts where mgmt doesn't own much stock, management is not realistic or forthright, and where the company has a fatal balance sheet flaw.
Joe DiMenna (Zweig Funds) - Short frauds, earnings disappointments, hyped stocks, industry themes where macro forces are negative and deteriorating balance sheets. Try to determine a catalyst. Don't short stocks with strong relative strength and earnings momentum.
Short sellers tend to be odd people. Most are ambitious, driven, antisocial and singleminded. They are contrarian by nature and like to win against the odds. They often have a chip on their shoulder.
The Feshbachs looked for terminal shorts: (1) stock price overvalued at least by 2x's reasonable valuation, (2) A fundamental problem at the company, (3) A weak financial condition, (4) Weak or crooked management. They perceived themselves as hype detectors. To sell short you have to be certain that you see an important factor that other people do not see. You look for something that is obviously misperceived, obviously important, and obviously detrimental. The most important charater trait of a short seller is the ability to remain analytical when other people panic.
For McBear management is rarely the target, unless there is fraud. It is generally Wall St that has engineered the ascent of the stock.
Chanos' specialty is solving complex financial puzzles. He likes to short stocks with secular problems where he can make a "reasonably strong argument, based on the valuaton of the business, that the equity value of the enterprise is $0." Chanos does not visit companies. Likes to focus on return on invested capital as a key financial indicator. When the accounting gets murky people tend to shy away from rigorous analysis and rely on management and just take earnings per share at face value. Therein lies the opportunity.
Tuesday, March 25, 2014
The Art of Short Selling - Wealth With Risk
Short sellers unearth facts from financial statements and from observation to ascertain that a stock is overpriced. Short sellers are information-based traders. Before 1983, no solely short funds existed. Stocks can only go to zero on the way down, but can go to infinity on the way up (reply: I've seen a lot more stocks go to zero than to infinity). Short sellers take greater risk than other investors - they must have strong evidence to support cases for price declines. Becauses reverses are sudden and terrifying, the burden of evidence rests on a solid, careful analysis completed before the stock is shorted.
Short selling is a niche. It is very small relative to the stock market as a whole. The long bias of and in the market creates exploitable inefficiencies for shorters, ie. there are more overpriced stocks than underpriced stocks (Asquith and Meulbroek). Negative earnings surprises affect stock prices to a greater degree than positive earnings surprises, and that effect persists over time. The common wisdom that there is no such thing as one bad quarter has a statistical basis. Stocks become torpedo candidates when very high expectations give way to earnings disappointments.
Short sale candidates cluster in three broad categories:
The trail signs to look for:
Accounting-based analysis is not difficult to do, but it takes time, patience and a suspension of belief.
The lack of attention by other professional investors to financial details provides the inefficiency in information dissemination that is so central to the short sellers art.
The goal is to identify the tragic flaw in a business long before the company's demise (the death rattle of a company in decline). The art of short selling trains analysts to avoid torpedo stocks or to profit from them.
The main weakness of short sellers is the inability/difficulty in judging the timing of collapse. Short sellers are consistently years too early when they sell stocks. Short sellers fear most a sustained rally in a stock.
How to make money in short selling and how not to lose money by selling are different sides of the same coin.
Short selling is a game of wits with the odds in favor of the analysts who do hard work and think for themselves, who turn jaundiced eyes on what passes for Wall St wisdom.
Short selling is a niche. It is very small relative to the stock market as a whole. The long bias of and in the market creates exploitable inefficiencies for shorters, ie. there are more overpriced stocks than underpriced stocks (Asquith and Meulbroek). Negative earnings surprises affect stock prices to a greater degree than positive earnings surprises, and that effect persists over time. The common wisdom that there is no such thing as one bad quarter has a statistical basis. Stocks become torpedo candidates when very high expectations give way to earnings disappointments.
Short sale candidates cluster in three broad categories:
- Companies in which management lies to investors and obscures events that affect earnings.
- Companies that have tremendously inflated stock prices - speculative bubble.
- Companies that will be affected in a significant way by changing external events.
The trail signs to look for:
- Accounting gimmickry: clues that the financial statements
- Insider sleaze: inurement, insider sellling.
- Fad or bubble stock pricing: large price rise over short period.
- A gluttonous corporate appetite for cash.
- Overvalued assets or an ugly balance sheet.
Accounting-based analysis is not difficult to do, but it takes time, patience and a suspension of belief.
The lack of attention by other professional investors to financial details provides the inefficiency in information dissemination that is so central to the short sellers art.
The goal is to identify the tragic flaw in a business long before the company's demise (the death rattle of a company in decline). The art of short selling trains analysts to avoid torpedo stocks or to profit from them.
The main weakness of short sellers is the inability/difficulty in judging the timing of collapse. Short sellers are consistently years too early when they sell stocks. Short sellers fear most a sustained rally in a stock.
How to make money in short selling and how not to lose money by selling are different sides of the same coin.
Short selling is a game of wits with the odds in favor of the analysts who do hard work and think for themselves, who turn jaundiced eyes on what passes for Wall St wisdom.
The Art of Short Selling - Preface
The analytical methods of great short sellers are characterized by prodigious analysis attentive to (1) the quality of earnings, (2) quality of assets, (3) and, quality of management.
You are looking for a bad business run by incompetent managers.
The years 1991 to 1993 decimated the population of short sellers. Those years saw the ascendancy of mutual funds, of momentum investing, and of the short squeeze.
(sounds eerily like 2012-2014 with ETFs, momentum investing, and short squeezes)
The simplest techniques work year in and year out - rising inventories, and insider selling.
You are looking for a bad business run by incompetent managers.
The years 1991 to 1993 decimated the population of short sellers. Those years saw the ascendancy of mutual funds, of momentum investing, and of the short squeeze.
(sounds eerily like 2012-2014 with ETFs, momentum investing, and short squeezes)
The simplest techniques work year in and year out - rising inventories, and insider selling.
Bernard Baruch on Bears
Bears can make money only if the bulls push up stocks to where they are overpriced and unsound.
Bulls always have been more popular than bears in this country because optimism is so strong a part of our heritage. Still, over-optimism is capably of doing more damage than pessimism since caution tends to be thrown aside.
To enjoy the advantages of a free market, one must have both buyers and sellers, both bulls and bears. A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster.
Quote at the beginning of "The Art of Short Selling."
Bulls always have been more popular than bears in this country because optimism is so strong a part of our heritage. Still, over-optimism is capably of doing more damage than pessimism since caution tends to be thrown aside.
To enjoy the advantages of a free market, one must have both buyers and sellers, both bulls and bears. A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster.
Quote at the beginning of "The Art of Short Selling."
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