I always try to post a "How-To" on Sundays, as the slower pace of the weekend allows for some quiet contemplation. Given the significance of the start of holiday shopping, I almost skipped it — until I read Hedge fund manager Doug Kass good advice on what to do when you are short in the face of a robust rally:
"(With the possible exception of being a New York Jets football fan this season), few experiences are more painful than being short in a near parabolic rise in the equity market (like we have witnessed recently).
It is easy to rationalize either side of the market. It is harder to implement a strategy that reduces the overall impact of being wrong and attempts to take emotion out of the investment equation.
What follows are some lessons I have learned when I have been short in a rapidly rising equity market, as has been the case over the last few weeks:
1. Avoid averaging up on your shorts.
2. Buy some out-of-the-money calls to protect from further gains to the upside.
3. Cover shorts down to levels that you can sleep with — even reduce the number of your shorts in your portfolio by making some sacrifical covers.
4. If you have the charter, consider pairing some shorts with longs in the same industry or sector that are statistically cheaper than your short.
5. Go through the exercise of reviewing each and every short anew, and be objective in the process.
6. Work out, take a walk, or do some lifting. It will be refreshing, invigorating and will get your mind off the pressures associated with recent trading mistakes.
7. Finally, go back and reread some of the classic books on investing like Reminiscences of a Stock Operator.
That said, I don’t think the short side will be a long-term lease in the House of Pain. Not by any stretch of the imagination.
Good advice from a pro . . .
On Being Short in a Rising Equity Market
Street Insight, 11/23/2005 3:36 PM EST
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