There is a lot of opportunity coming on the downside of things. If I’m right, there’s fortunes to be made when it hits. Learn how to short. Learn to use put options. Markets go up, but they come down faster. If you catch it right, you’ll be richly rewarded.
In over 25 years of personal investing, the single best year we’ve ever had was by being short the market during the 2008 – 09 “crash”. We had been preaching for quite some time that the wheels were going to fall off the market, and the real kicker to me was one day watching that carnival barker Jim Cramer screaming in November of 2007. He was saying something to the tune of “yeah I know the market looks extended, but this isn’t over by a long shot and I’m telling you to buy buy buy!”
I looked at my charts. I looked at the disconnects. I decided that night that it was time to start scaling into shorts and puts. Knowing that it was the crashing housing market that was pressuring the banks so badly, we got especially aggressive there. We used a vehicle symbol FAZ, which is a 3X inverse ETF of the financial sector. If the financials were going to get blown up, we figured that would be the best return.
But we didn’t stop there. Although I said we were “short” that time period, short actually encompasses a lot of options for investors now adays. In other words you can buy put options which rise if the underlying asset falls. You can buy the inverse ETF’s, where you’re actually buying ‘long” as the ETF will go up if the underlying assets it tracks go down. You can sell call options. You can just sell short the shares.
We had also bought put options against the SPY and the DIA. The SPY is the proxy for the S&P 500, the DIA’s are the proxy trading stock for the DOW. While there were some other things we did during the year of 08 – 09, such as sell short the IWM ( the ETF for the Russell 2000) and sell short the semi conductors via the SMH, we also bought long in gold, silver and some mining stocks.
You all know what happened. After years of getting stretched like a rubber band, the band snapped and it was crisis time. When Bear Sterns and Lehman were having their “oh no!” moments, the financials as a whole started to fall like a rock. Pretty soon we were up and up big. While we aren’t clever enough to catch the exact top or bottom of anything, we generally do a fine job of taking our slice out of the middle. Well, our slice was big and fat that year.
I bring all this up, because it is going to happen again. Depending on whom you listen to, the next crash will either be “pretty bad” or full blown epic in nature. Our stock market has been prodded, poked, pulled and pushed through various stimulations, manipulations, fraud, accounting gimmicks, printed money, QE’s and you name it. The reason is simple. The world is insolvent. They either have to confess to that, or continue the illusion of growth. They opt for kicking the can, coming up with newfangled programs like negative interest rates, Central banks buying stocks, and more “QE”.
But if you ask Bernie Madoff, he’ll tell you that even the best run ponzi’s are still schemes. In the long run they have to fail. Well our global ponzi is now getting pretty long in the tooth. As much as this entire system is built upon using equities as collateral for ever more derivatives, the bottom line is that the system is busted. Yes they want to keep stock markets up at any cost. Why? Because central bankers know that if they can just keep Joey Sixpack feeling that his silly 401K is doing okay, Joey won’t come looking for the bankers with a rope in his hand looking for an oak tree branch to hang them from. They know that if they can just keep stocks “up” Wall Street will devise new ways to create debt from them.
So the bankers job – one; is to do any and everything known to man and ape, to keep the market up. It gives Wall Street the “always rising” equity as collateral to create more debt instruments, and it keeps Joey from sharpening his pitch fork. The question however is one of time. The system should have imploded in 2008 and they just barely saved it. Now heading into 2016… maybe they’ve exhausted all their avenues? Short of driving rates ever lower into negative territory, unless they do the helicopter drop, what do they have left? Not too much. They’ve levitated the market for years on gimmicks. One day it won’t work.
I tend to think we’re getting closer and closer to the day of reckoning. If we get a pull down like we had in 2000 – 02, or 08 – 09 we’ll surely want to be participating in that pull down. So the question is…how? There are many options available, so let me lay out a few of the common ways.
So what is short? Short is really simple. You "call" your broker ( you press a button) and tell him you want to short XYZ. If the brokerage house has enough XYZ laying around in their accounts they literally lend it to you. You borrow their shares and sell them into the market and receive the proceeds into your account. So if you shorted 100 shares of XYZ at 10 bucks a share, you instantly have 1,000 dollars deposited in your account. Now suppose you are right and XYZ crashed down to 5 bucks over the next two months. You think that's the bottom, so you "cover" your short. You do that by hitting the "cover" button or what ever your platform has. That just means you will be "buying back" the stock you sold so you can give it back to your broker. Remember, you borrowed it. But here's the key... you sold at 10 bucks and took in a grand. Now you buy back those 100 shares at 5 bucks each, and that costs you 500 bucks. You took in 1000, you laid out 500. The remaining 500 is your profit.
So to make it really really simple, where you don't even have to think about it, just remember...when you go short, if the stock drops, you cover and make money. If the stock RISES, you're losing money and you'll need to cover at some point to prevent big losses. It's really that simple. When you go short however, if you've got the direction wrong, the pain will be immediate and it can get pretty big. The scare tactic that the street uses to scare away short sellers is that your losses can be "unlimited". Well, that's a bit much. What they're saying is this... if you go LONG a stock, say XYZ at 10 bucks and you're wrong, the CEO is having sex with monkeys, the accountant fudged all the numbers and they go completely belly up...your risks is 10 bucks. You can't lose any more than that. But if you short XYZ at 10 bucks and they go on and cure cancer, solve the mystery of the missing dryer sock and the stock goes to 25000 per share and still rising.... you're out a lot of money. Infinite? Nah. But a bunch.
Sometimes a better way to deal with the risk of being short is the ETF's. With inverse ETF’s you can only lose the share price of the ETF. For instance consider SH. This is the “inverse” ETF for the S&P 500. If the S&P were to fall, SH will rise. But if the S&P kept rising, the MOST you could lose is about 21 bucks. (the price of SH on Monday) Or the DOG for example. That's the inverse ETF for the DOW. It’s at about 22.75. If the DOW went up and up and up for ever, the most you could possibly lose is 22.75.
But the other way to limit your risk is with put options. With a put option, you know your entire possible risk before you place the trade. Remember, just like an inverse ETF, a put will gain in value IF the stock goes lower. If the stock rises, you'll be losing money. But you can only lose your "bet". So if the option you want cost you say 11 dollars per share, that's all you could lose even if you're dead wrong.
What puts do is give you a bit of flexibility concerning time and price. The big downside to options is that they have a time limit. Yes you get to pick that limit, but you pay for it. For instance if you buy an option that expires in 2017 it will cost you more than one that expires in a month. But it also allows for your idea to "develop".
I wanted to pen this article because so many people have the idea that going short is hard, it’s terribly risky and it isn’t for the average mom and pop investor. Well that’s a load of horse hockey. Wall Street doesn’t like folks playing in their sandbox is the reason for all the horror stories about taking the down side of things. They would like to be the only people playing the downside of the market, that way they have more lemmings to fleece when they do their rug pulls. Just use common sense folks. Let me explain….
If you were to buy the ABC Company because you like their products and they seem to have rising sales, but instead of going up, it went down, what would you do? You’d cut your losses by taking a small hit instead of a big one. If you bought ABC at 100 per share, and it rolled right over on you, would you wait until it’s down to 70 to sell? Not at all, you’d cut your loss quickly at 95ish and try and figure out why it didn’t do what you thought it would. It’s the same with being on the short side. If you sell 100 shares of ABC short at 100 bucks per share thinking it’s going to 80, and a week later it’s at 106 and still climbing, obviously your timing or your reason for the short was wrong. You stop yourself out of the trade.
I think there’s a lot of opportunity coming on the downside of things folks. If I’m right, there’s fortunes to be made when it hits. Learn how to short. Explore the inverse ETF’s like DOG, SH, RWM, PSQ. Learn to use put options. Markets go up, but they come down faster. If you catch it right, you’ll be richly rewarded. I think we’re getting close to one of those times. Good luck.