Friday, February 20, 2009

Confessions of a short seller (and a question "What were you thinking?")

Originally published as a blog post on Motley Fool CAPS on Oct 21, 2008...

Woo hoo! Mr Paulson, here I am! You banned me for a little while. That hurt. But I weighed my options and decided to stay put. The arrogance of Dick Fuld, the indiscretion of Washington Mutual, and funny people from Iceland nearly made me a gazillionaire. Now I have questions for you and everyone reading this.

Why is it that in winter of 2006 when everyone knew the housing was overleveraged and overpriced that many of you stayed long on financials? But now that the financial stocks are 50% cheaper you are now saying “don’t miss the bottom”. What are you thinking? That is the logic of a lemming. Before you put another dollar in the market, what were you thinking then? What emotion are you listening to now?

Why is it that Bill Nygren made Washington Mutual one of his top five holdings for the next 10 years? Did you “Buy and Hold”? What were you think then? What are you crying about now?

Forget about “in the long run the stock market goes up” stuff because in the long run we are all dead. The fact of the matter is that there was a huge credit bubble supporting growth and it was unsustainable. What is needed is a return to the basic math of investing. Stop thinking about buying low and selling high. Things do not have to go in a specific order. Just think of the more basic concept of receiving more than you invest.

As short seller I long ago realized that markets are like roller coasters driven by fear and greed. They take a slow, deliberate rise toward the peak. But once past the peak, the market drops so fast you will quickly find out what you had for lunch. Moreover, the amount of money made (or lost) in the market is directly propotional to the amount of movement in the stock. The market has never gained 45% in one year, but it definitely has lost it in one year.

The Motley Fool gets you started with Foolish investing based on sound principles. But in IMHO, it is just as intelligent to benefit from the collapse of a house of cards as much as the rise of a dynasty. Is it more dignified to benefit the implosion of Crocs jazzy plastic shoe trend, or the conquest of the Chinese retail market by Wal Mart? Both are successful investing techniques. You can’t have everyone on one side of a trade like you can’t have everyone trying to buy low and sell high.

The best investors I have seen on Motley Fool CAPS or anywhere else focus on a market they know and understand when to buy and sell (and not necessarily in that order). Buffet sold his stake in GEICO once before buying it back later, a synthetic short. Buffett knows insurance, and that is where he plays. So, before you buy another share of Bank of America, please beware I am on the other side of it and realize I will sell you as many as you want because there are so many of you to feed.

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