Yes, I also have been doing very well on LEND, NEW, PHM, CFC, etc. So, this year I am doing better on my shorts than on my longs. But instead of blowing my horn on these few winners, I want to be honest and say that the short side is extremely tough, and it is not like it sounds, putting all the portfolio into some short positions and striking it rich.
Here are many aspects in the way of my success.
-Counting my losers. I started shorting mostly after the runup in 2003. Since 2004, the market has gone only up, up, and up, and who would have known that it can go on that long. I had many put options expire, and I even had a few bad picks that went quite against me. I have maybe more winners than losers now, but it is far from a home run.
-Timing. I shorted my first batch of TOL in 2004 in the $20s. Then again at $30, at $40, and at $50. Talk about insane. But with Piggington I knew how ridiculous it all was. Now it looks like I made all money back, with TOL at the initial price. But it was very very hard to hold on.
-Covered early. I occasionally took profits, sometimes I had to because of written puts. So I was out of NEW and LEND at about 2/3 of the way, and didn’t make the last 1/3.
-Getting too big. If I count all the underlying value controlled by options and short positions, I was short more than my net-worth. But options also lower risk and reward a bit, so it was not that extreme. Obviously, I was also long with the amount of my net-worth with other stocks which helped in the up market. But I couldn’t have shorted any more, and feeling maxed out is not a good feeling.
-Margin interest and dividends paid. My broker didn’t offset longs with shorts, and I still had to pay margin interest. Also, some of the loser companies actually paid dividends that I had to pay.
-Shrinking premiums on puts. No matter if time passes or stock prices drop, the premium shrinks in both cases. So it makes way less than a short position for the same dollar drop.
After analyzing all this, I did realize the need to cut down my shorts, and I used written puts for this. I was even lucky, since I often collected extra premium. Or if I covered, I was sometimes able to short again a few dollars higher.
Still, it shows me my limitations even though I often got in at high prices. But when prices drop enough, I am forced to cover. I never want a short going against me again, which it could when stocks are down 80%.
So I am again out of PHM, CFC, TOL, ACF. They might go lower or even bankrupt. But the risk is too high for me to press the last dollar. I rather hope for the opportunity to re-short them 10% higher, which I will if they bounce. I will also short a few more stocks that haven’t dropped but will if they eventually follow housing.
Maybe there are more talented or lucky traders than me, but I found that I cannot gamble but have to go for smaller but sure profits.
I updated a few lines in my shorting primer, which I wrote last year.
