Short Selling, Some Basics

Here are the basics of my short selling. This very simple system has served me well since I started rolling out of longs and into shorts back in late 2010.
For this to work, it is necessary to shake off some natural biases.
1.) Stocks are not like projectiles that get shot out of a cannon. They don’t necessarily reach a maximum altitude and then drop.
2.) There is no floor a stock in a downtrend will ever hit and cause it to bounce or reverse its trend.
Newton’s laws don’t apply to the stock market.
Stocks like AAPL are always a bad bet to short. If there is as expected huge bear market in the offing, AAPL might very well drop 50% but chances are that it will be among the last stocks to get hit. If the downturn doesn’t come, you are cooked shorting strong stocks. No stock has gone as high as it can possibly go.

Stocks like MDIC look like they have gone down as far as it is possible to go, but the opposite is actually true. Stocks in these kinds of downtrends frequently don’t recover at all. When a severe downtrend starts, the rate of decline in the “super weak stock” category is likely to increase. If the bear market doesn’t materialize as expected the dogs are likely to keep going down anyway.

How many stocks should be shorted? Always more than one and hopefully no less than five. Any time a stock breaks its long term downtrend line, cover it and rotate the money into something weaker. I look at diversification differently than most others. I diversify to make certain I participate in a move rather than to limit risk.

In the current stock market setting, very few investors trade in individual stocks. Exchange traded funds and derivatives have replaced stocks as the trading vehicle of choice. The investor who does trade stocks is at a distinct because he outside of the majority and can game what others are doing. When all of the world’s financial markets have cleared, I will reverse and start going long. Right now there are no asset classes that are not totally vulnurable to collapse, including gold. I well selected portfolio of short positions makes sense. This is the opposite of owning assets.

(Visited 29 times, 1 visits today)
0 0 votes
Article Rating

About Fantasy Free Economics

James Quillian independent scholar,free market economist,and teacher of natural law. Who is James Quillian? Certainly I am nobody special, Just a tireless academic and deep thinker. Besides that, I have broken the code with respect to economics and political science. Credentials? Nothing you would be impressed with. I am not a household name. It is hard to become famous writing that virtually no one in the country is genuinely not in touch with reality. But, if I did not do that, there would be no point in my broking the broken the code. If you read the blog, it is easy to see that there are just a few charts, no math and no quantitative analysis. That is not by accident. Given what I know, those items are completely useless. I do turn out to be highly adept at applying natural law. Natural law has predominance over any principles the social science comes up. By virtue of understanding natural law, I can debunk, in just a few sentences , any theory that calls for intervention by a government. My taking the time to understand the ins and outs of Keynes General Theory is about like expecting a chemistry student to completely grasp all that the alchemists of the middle ages thought they understood in efforts to turn base metals into goal. Keynesian theory clearly calls for complete objectivity. Government can only make political decisions. Keynesian techniques call for economic decisions. So, why go any further with that? Fantasy Free Economics is in a sense a lot like technical analysis. Technical analysis began with the premise that it was impossible to gain enough information studying fundamentals to gain a trading advantage. Study the behavior of investors instead. Unlike technical analysis, I don't use technical charts. What I understand are the incentives of different people and entities active in the economics arena. For example, there is no such thing as an incentive to serve with life in the aggregate. In the aggregate, only self interest applies. It is routinely assumed otherwise. That is highly unappealing. But, I am sorry. That is the way it is. I can accept that because I am genuinely in touch with reality. Step one in using Fantasy Free Economics is for me to understand just how little I really know. A highly credentialed economist may know 100 times what I do based on the standard dogma. Compare the knowledge each of us has compared to all there is to know and we both look like we know nothing at all. There is always more than we don't know than what we do know. I am humble enough to present myself on that basis. Why? That is the way it is. I am not bad at math. I have taught math. What I understand is when to use it and when to rely on something else. Math is useless in natural law so I don't use it. While others look at numbers, I am busy understanding the forces in nature that makes their numbers what they are. That gives me a clear advantage.
This entry was posted in Daily Comments and tagged , . Bookmark the permalink.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

0 Comments
Inline Feedbacks
View all comments