No stock picks today – nothing worth buying. I am looking to reduce my equity holdings to 30% over the next few days, assuming the Shiller PE continues to increase – and exceeds 27.5 times earnings (can’t believe we are here again – people will never learn). Anyway, I am happy to continue taking profits – I have already met my goals for 2016!
I am often asked – if I am so bearish, why don’t I short the market?
The answer is easy – there are substantial risks when you short a stock or market. If you simply buy a stock you have an unlimited upside – profits are as much as the equity increases in value. And the loss is limited – if the company goes bankrupt, you will lose as much as you invested, but no more.
But shorting stocks has unlimited downside. If you guess wrong when shorting a stock and the equity’s value actually increases, you will have to buy back the shares at a higher price than when they were borrowed in order to return them to the lender. And there’s no cap on how high a stock can go.
There are also costs that aren’t there for equity buyers. If you short a stock, you will have to pay interest on his borrowed shares. Additionally, shorting a stock that pays a dividend requires paying that yield to the lender.
There’s little room for error in short term trades – trust me, Long-term strategies are safer.
Need and example:
Another reason not to short – do you really want to always be hoping for a market crash? Not a fun way to live your life. I don’t think long term returns will be very good from this valuation level – but short term, anything can and will happen.
So how do we deal with an equity bubble? I suggest you review my rebalancing portfolio rules – to better understand my process. I am old and have capital – so the conservative percentages I use might not work for you – but trust me, the overall process works – and also lets you sleep at night.
It’s Friday, markets are at all time highs – time to dance:
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