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#21
11-20-2007, 03:26 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] It's unfortunate that certain posters display their arrogance in answering a question that's been put forth honestly with the intent of gaining some knowledge. Actually it's really not poor reasoning per se IMO. For some reason many people think they always know what the price of a stock should be. Of course they probably wouldn't be trying to impress us with their knowledge if that was actually the case. There are many reasons to short a stock and of course one reason is that you believe it's over valued for whatever reason. Doesn't have to be a short term trade either. [/ QUOTE ] Ok, I can certainly see how some instances would be +EV to go short on a stock, and even remain short for a long period of time (so long as the company remained overvalued). What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position. In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better. When you short, it's as if you're the one taking out a loan, but now you're paying the high-interest (market return) that the loaner only recieves because of the risk he takes on. And yet, you take on this same risk. To me that doesn't make sense. 
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#22
11-20-2007, 03:42 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position. In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better. When you short, it's as if you're the one taking out a loan, but now you're paying the high-interest (market return) that the loaner only recieves because of the risk he takes on. And yet, you take on this same risk. To me that doesn't make sense. [/ QUOTE ] Of course not. Shorting a stock randomly is idiotic. This is like saying "moving all-in with 52o doesn't make sense to me." Of course it doesn't make sense as something you would do randomly. But it can be a winning play if the context is right. Just like shorting can be a winning play if the context is right. eastbay
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#23
11-20-2007, 03:44 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position. [/ QUOTE ] Ok. [ QUOTE ] In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better. [/ QUOTE ] Pretty much. [ QUOTE ] When you short, it's as if you're the one taking out a loan, [/ QUOTE ] Sort of... you borrowed a stock from someone and sold it at the current market price and you are to return that stock at some point in the future by buying it back (hopefully at a lower price than you initally sold it). [ QUOTE ] but now you're paying the high-interest (market return) [/ QUOTE ] I sure hope you don't expect to do this; the point of selling short is because you think the return on this stock will be negative.
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#24
11-20-2007, 05:25 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).
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#25
11-20-2007, 07:02 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days). [/ QUOTE ] do you think that at any point in time it is +EV to fundamentally be short a broad based stock index? if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky? and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index? there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic. Barron
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#26
11-20-2007, 07:07 PM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days). [/ QUOTE ] do you think that at any point in time it is +EV to fundamentally be short a broad based stock index? if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky? and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index? there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic. Barron [/ QUOTE ] I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses!
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#27
11-21-2007, 01:12 AM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days). [/ QUOTE ] do you think that at any point in time it is +EV to fundamentally be short a broad based stock index? if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky? and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index? there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic. Barron [/ QUOTE ] I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses! [/ QUOTE ] thats a nice try but the shops i'm talking about have been in existance since the time of the S&Ls. and they've survived all these market environments. being short can be + EV just like being underweight the index can. and that is my next example. is it ever +EV to be less than 100% allocated to an index that you are managing? i think that is very well documented and sniper linked a paper which very good signals were generated from looking at the allocations of the best managers...and the changes in allocations. one criteria for "best manager" was previous high alpha generation. when those with high alpha generation changed their allocation and eliminated a stock that action was taken as a sell signal. that proved in backtests to be robust "+EV" but as you can see, the logical leap from being "less than fully allocated" to "being short" is both direct and clear. if it is ever +EV to sacrifice the risk premium by being underweight when youi can't go short (which is the reason many managers engage in that type of activity) then it can be even better to be actually short. when you are udnerweight, you are betting that the stock will underperform. when you have 0 weight, you are essenciallyb etting the stock will decline. if those bets are + EV, as they have proved to be for the high alpha generation managers, then clearly being short is even more + EV. Barron
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#28
11-21-2007, 01:29 AM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] [ QUOTE ] I would stay very far away from these investments. First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV. [/ QUOTE ] this is very poor reasoning. [/ QUOTE ] I know his reasoning can't be correct, but I don't see why. Can you explain further? [/ QUOTE ] If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days). [/ QUOTE ] do you think that at any point in time it is +EV to fundamentally be short a broad based stock index? if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky? and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index? there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic. Barron [/ QUOTE ] I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses! [/ QUOTE ] thats a nice try but the shops i'm talking about have been in existance since the time of the S&Ls. and they've survived all these market environments. being short can be + EV just like being underweight the index can. and that is my next example. is it ever +EV to be less than 100% allocated to an index that you are managing? i think that is very well documented and sniper linked a paper which very good signals were generated from looking at the allocations of the best managers...and the changes in allocations. one criteria for "best manager" was previous high alpha generation. when those with high alpha generation changed their allocation and eliminated a stock that action was taken as a sell signal. that proved in backtests to be robust "+EV" but as you can see, the logical leap from being "less than fully allocated" to "being short" is both direct and clear. if it is ever +EV to sacrifice the risk premium by being underweight when youi can't go short (which is the reason many managers engage in that type of activity) then it can be even better to be actually short. when you are udnerweight, you are betting that the stock will underperform. when you have 0 weight, you are essenciallyb etting the stock will decline. if those bets are + EV, as they have proved to be for the high alpha generation managers, then clearly being short is even more + EV. Barron [/ QUOTE ] I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal!
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#29
11-21-2007, 02:15 AM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal! [/ QUOTE ] I know this is hard for you to imagine, but there are people in this world that actually know how to read a financial statement and evaluate stocks. Some of them even make money shorting stocks. Ever hear of James Chanos? Or Manuel Asensio?
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#30
11-21-2007, 03:03 AM
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Re: Ultrashort ETF: Good if Feeling Bearish?
[ QUOTE ]
[ QUOTE ] I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal! [/ QUOTE ] I know this is hard for you to imagine, but there are people in this world that actually know how to read a financial statement and evaluate stocks. Some of them even make money shorting stocks. Ever hear of James Chanos? Or Manuel Asensio? [/ QUOTE ] You think Jim Chanos got Enron right by scouring finnacial statements? Ha, good one. Sometimes inside sources are better than financial statements. Ever heard of Raymond Dirks? I believe you can make money shorting stocks, I don't believe it would have been plus EV to be net short stocks over the past 20 years. Although Chanos has had many succesful short sale calls over the past 20 years he was not 100% short, nor would he have beaten the market if he were. I worked at the same firm as Chanos in the 80's and followed some of his short sale ideas in the 80's through a short sale newsletter written by a guy named Murphy I think, he also wrote a tech letter. Chanos is brilliant, no doubt, he has his sources though, like all good short sellers!
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