Takeaway of the art of short selling from Empire financial research
First, due to I spent few days to finish this report, the following points are what I still remember and feel it worth to share. These ideas are quite basic but important. The examples he used are quite interesting as well, you’d better read it on your own. The link is enclosed at the end of article.
- Only short stocks that have possibility or you have strong confidence to go to zero, but before it go bankrupt, you’d better cover your short position, the most successful short (Lehman Brothers) the author did still haven’t got the chance to cover it lol.
- Don’t short stocks have loyal/sticky customers or holders, like TSLA… “A corollary to this is that if you are short a stock because you think it’s going
to zero, and the facts change, removing the possibility of a zero, then you must cover and move on. This is exactly what happened when Tesla reported a profitable third quarter on 2019” - Timing is important, you may think it right, but you should pick the right timing to let your investment thesis plays out, or it’s just dead money.
- If fundamentals goes the totally wrong way as you think, cover ASAP.
- You’d better know those smart and well-known investors engaged in the names you short and know his thesis. And you must have better understanding to the co. than anyone else in the market.
- If short exposure over 50% of your portfolio, match you long and short position. E.g. when you short pretty volatile stock, you should long volatile stock or heavily shorting stocks. vice versa.
One thing I disagree with the author is that he said if you want to hedge your long position, it’s better to short stock rather than buy Put, due to Put have higher probability to go to zero, and he don’t want to use this kind of method to mitigate risk if you know it end up will no value. And I don’t get it…
By the way, strong recommend you guys to read “Reminiscences of a stock operator” ("股票作手回憶錄"), talking about Jesse Livermore go bankrupt eight times and came back stronger each time. I will summarize it if I got time. Believe me, if you are new to the stock market, his story will blow your mind.
The art of the short selling — Empire financial research
