Sunday, May 31, 2009

Making money the hard way & losing money the easy way

What do you think is the toughest way to make money in the market? I would say without a doubt it is shorting. Even in a bear market it's very tough to make money by shorting. The reason; timing is critical when shorting. Not to mention the mathematics are working against you as the most one can make with a short is 100%.

Very very few people ever make long term lasting gains by shorting stocks. The ones that do, don't do it by reading charts and trying to time the ups and downs in the market.

Successful short sellers decipher financials. They investigate companies and discover which ones are sick. John Paulson didn't get rich on the short side because he timed the bear market. No, he got rich because he did his homework and decided the real estate bull was a sham. He got rich because he figured out the CDS market would eventually come crashing down. He didn't even time the short sell correctly (he was almost a year too early). But he did hold on till the fundamentals rewarded his position.

I have to wonder how many bears had actually made any significant money during this bear market until the crash last Sept. I dare say the number is probably quite small.

Then we got the crash and a select few bears managed to catch that crash and get rich.

I remember several bears posting at the time bragging about their prowess. I also remember these same bears adamantly defending their heavy short positions as the market proceeded to rally into the Jan. top. I haven't heard from them since.

I've watched for 2 months now as another guru who thought he had the market figured out has squandered most if not all those big gains from last fall by maintaining a bearish position during the second most powerful bear market rally in history.

Folks whenever you start thinking you have the market "wired" I suggest you immediately sell all your positions and go on a 6 month vacation.

Now on the flip side what do you think is the easiest way to lose money?

Let's say you want to deliberately lose money. As long as one isn't trading options or using heavy leverage it's not all that easy to lose money. The reason is; if one went about trying to lose money they would trade exactly opposite of what they thought was going to happen.

However as we all know by now (but are probably still unable to implement) the market almost always does the opposite of what we think it should do. The hardest trade is usually the right trade. So if we were to try and lose money by trading against what we think should happen we would probably end up even or even making money.

I dare say the easiest way for a novice investor to make money is to probably do the exact opposite of what they think they should do. Since novice investors have a win rate of probably about 30%, trading opposite of what they expect to happen would probably mean they would get rich.

Back to losing money. So let's say you want to try to successfully lose money what would be the best way to do it? What would give one the highest odds of actually shrinking ones account?

Without a doubt it would be to short a bull market. So when I see someone say they are short gold or miners I have to wonder if they are deliberately trying to shrink their account.