Risky Investment Ideas or “Don’t risk your home equity shorting stocks”

[lindismith]

Chris,
Can you post your email/site address again? I’ve been meaning to ask you some questions about this.

Deadzone, if you have a minute, can you explain how to Short from start to finish? And tell me like I’m 6 years old. Seriously.

Thanks,
Belinda

[Anonymous]

Good points Chris. Most so called financial advisors tend to give ultra conservative advise because they don’t want to be responsible for your potential losses (and maybe get sued). That’s why if you feel strongly about something, you have to take it on yourself. There are very few advisor who will recommend agressive investing such as options trading for example.

If you want to limit your risk, simply limit the amount of your portfolio in risky investments, common sense.

[powayseller]

deadzone and Daniel, can you both please post how you do your shorts and puts, and list your own positions so I can follow them. If they go well, I will definitely consider going to you for advice in the future.

I am a subscriber to Chris Johnston’s bond futures trading service. He is up 33% this year, and has the track record and openness about his track record on his website. I trust him completely, and put 5% of my money into this service. I asked his opinion on shorting homebuilders and lenders, and he advised against it. I am following his advice.

[technovelist]

Probably the overall best way to buy Swiss francs is via a Swiss franc annuity issued by a Swiss life insurance company. I have had good service from the one I deal with, although I haven’t taken any of the money out yet; I’m accumulating the interest for my retirement. The interest rate is fairly low, but better than with other Swiss franc investments. It also has good liquidity and low expenses.

[Daniel]

Powayseller,

I have no short position whatsoever at this point. The reason is that my view on the economy differs markedly from yours. I believe that there is risk of a recession, but won’t be as bad as you predict. My mouth (and a little of my money) is to go overweight on defensive stocks (I see that we both like Berkshire). Things like consumer staples, health care, etc. I figure that I won’t get killed if things get really ugly, and I also have some upside if the market decides to rally.

However, the vast majority of my positions are market neutral, in arbitrage trades. This has been pretty good lately, with all the M&A activity around. But this implies very high turnover, and use of margin strategies to boost returns. You pretty much becone a trader and start running your own little hedge fund if you decide to do this. I don’t really think it’s suitable for everyone.

As for homebuilders, lenders, energy stocks, etc, my policy is not to touch any “hot” stock (neither buy nor short-sell). I simply feel that I lack the necessary expertise to make an informed choice. Whatever I don’t understand, I stay out of.

Finally, in the hope of clearing this up once and for all, I DO NOT ACTUALLY RECOMMEND THOSE 5 IDEAS. Those are appropriate if, and ONLY if, you’re convinced of a big crash (and I’m not).

[Anonymous]

I most certainly am shorting homebuilders, and have lots of puts. Fact is, I believe the housing crash will be monumental and am confident the homebuilders will suffer greatly as a result. People can talk all they want about book values and P/E ratios and value investors purchasing these stocks. They are right to some degree, there will be minor rallys along the way, but the long term future of of the stocks is clearly down. When sales, profits and land values drop so will the intrinsic value of these companies stocks.

To keep things simple, I suggest shorting only the XHB homebuilder ETF, it includes 21 companies so won’t be as volatile as a single stock, but in the long run will go down along with the entire industry. For Puts, any major homebuilder is a candidate. I personnally focus more long term such as Jan 2008 and beyond with options prices in the $2.00 range or less. Some of the good candidates I like are DHI, SPF, TOL, PHM and KBH.

[Steve Beebo]

Wouldn’t the time to have shorted homebuilder stocks been 6 to 12 months ago? Many of these companies have already been hammered pretty good this year, and maybe their stock prices have already been discounted to the point that they may not go much lower. Wall Street is usually way ahead of the current thinking – the builders’ stocks started trending down at the first hint of problems in the market.

[Anonymous]

Sure, it would have been great to short homebuilders 12 months ago. But in my opinion the worst is still yet to come for the homebuiders due to the magnitude of the coming crash. Pull up the charts on the homebuilders and look at where they were in 2000-2001, I use this as a reference (and reminder) of where they may end up. They still have a long way to fall.

[Author]

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