Stop Shorting

Well I think it's apt for me to start my first blog post with an update of what I have been doing with my portfolio. I thought I was obliged to shed some light on how my portfolio works on kaching, espeacially when a good 122 people are following me.

Firstly, I've been busy closing my short positions. It was rewarding in the past year or so to be shorting almost any stock at all (except maybe Volksvagen), especially for financials. I made most of my gains in the past 6 months shorting the main protagonists in this crisis: Lehman Brothers, Bank of America, Fannie and Freddie and many others that made me a ton of obscene returns. But I've never particularly liked shorting stocks.

We all know that if you buy a stock at say $15, and it goes bankrupt, your loss is 100%, $15. But everyone needs to know, and be VERY AWARE of the fact that if you short a stock, your total loss exposure is much more than 100%, in fact, technically, your loss could be infinite should the stock reach sky high valuations.

So unless you are dead sure that US corporations are on the verge of total annihilation, I think it's time to cover your shorts. Don't run the risk of losing more than your initial capital.

My belief today is that yes, the US is in deep trouble, and the world is at a turning point today. Government actions today will largely determine what kind of recession will we go through. But it is no longer a sure bet that every company's stock will continue to decline, even if the economy deterioates further.

Everyone knows that stock markets undergo corrections once in a while. It is part of the process that makes it a more efficient valuation system. But sometimes, due to circumstances, the market gets either too euphoric like the tech bubble in 01, or too downcast.

In fact, it is now my belief that dear Mr Market is now over pessimistic, as the headline news get more and more terrible by the day.

Just look at how, day by day, the players have withdrawn from the market. As the market plunged to its low in Oct 08, most retail investors would have taken all their money off the desk after being burnt repeatedly. Subsequently, even the institutional investors started to withdraw. And then, even hedge funds begun to face massive redemptions. And of course, there was Bernie Madoff.

If we just stop and ponder, we would realise that many market players have chosen to withdraw their positions not because they think that valuations are still too high, but because of external pressures like the fear of the unknown, redemption calls, and a total loss of confidence in the market. And day by day as more capital gets withdrawn from the market, the stock prices declines even further due to selling pressure. This fear then feeds on itself, and wreaks further havoc onto the market.

Fears regarding the viability of some of the best run public companies in the world makes no sense. These businesses will definitely face earning pressures as the economy worsen. But years from now, these firms will survive. For certain stocks of companies to be trading below their liquidation value is laughable, but it is also a chance for investors to pile in on these bargains.