I'm going to share a secret with you. It's called Passive Shorting™ **. I have a confession to make. I made some big investment mistakes in the now distant past by not understanding this secret. Yes, I've lived through what many of you have also experienced - riding a stock down into oblivion while "trusting." I'm sure you don't want to repeat that either.
So what did I learn that has not only protected my assets but allowed them to grow? It's what I call Passive Shorting™. This technique is secret to many because it is NOT something that Wall Street wants you to know about. Why? Because if you use it, there will be periods, potentially long periods of time, when your assets are OUT of the markets, fully protected from steep declines, such as the one we went through in 2008 to 2009. Those companies make less money on you when you are protecting your assets by holding them for certain periods in cash. I will lay out the benefits and the risks and then you'll need to make your own decision as to whether you implement it and to what extent. Read it several times and sit with it before you act on this. Consult with an advisor if you need to, especially if you feel emotional about my advice or about implementing it. See my section on Fear and Greed as well before you act. The link is below.
So what is Passive Shorting™? And why coin a new term for it? Because it will help you see the value of it and remember to apply it if you decide it can help you.
You see, what the Wall Street Pros know that some of you reading this may not know, is that money management is the key to investing and market timing and trading success. If you know how to cut your losses by Passive Shorting™, you will do far better than the average investor who cannot emotionally do this.
This concept is very simple. Most investors are brainwashed by Wall Street to do only "Buy and Hold Investing," because the fee structures of mutual funds are set up for them to make more when clients are holding non-cash investments. The truth is that you can do far better by stepping out of the way with at least part of your assets when the market is still "high."
When you are told to "Buy low and sell high," that is fine, but you need to know how to do that. And the part they leave out is that you cannot just SELL HIGH. You must also learn how to RE-BUY LOW! As often as possible, when we see a major correction developing, we "Sell High and "Re-buy low," and we keep the difference. Sounds easy, but why don't more people do it? Because they are actually told to "Buy and Keep On Buying and Keep on Holding." The term "Buy and Hold Investing" should be outlawed by the government as a form of temporary insanity. Why would you buy and hold Citibank from 50 dollars to 1 dollar? How many advisors go to sleep on their clients' assets while they reassure them to "Buy and Hold" or even worse advise them to "Buy on the Dip" when assets are deteriorating rapidly?
The key to making bigger returns in the market is to be willing to sell AS LONG AS you are willing to re-buy. The mistake that many investors make is that they go into fear having sold and do not re-buy when the markets are moving up.
But first you have to sell "high." So where do you sell? You first must decide how much you are willing to lose before you sell. How much of your gains are you going to give up before exiting? That is called a trailing stop loss. The use of trailing stop losses is described here:
So the first step in Passive Shorting™ is that you decide what your stop loss will be. What is your get out point? You decide that in advance. Why? Because if you wait until the stock or index is down 15%, you will start to wonder if you should actually sell it. Then it goes down another 10% and then you REALLY wonder whether you should sell it, because AFTER ALL it's down big and SHOULD not go down more. This is how our minds play with us and cause us to lose money.
If we get a SELL signal on the market you are invested in before your trailing stop loss is triggered, you simply exit earlier if you choose and wait for the next signal to rebuy. Remember not to leave orders in the market when setting trailing stop loss points, because investors lost a bundle doing that in the "Flash Crash on May 6, 2010. Have a mental stop and pull the trigger near the close for the day or on the next opening if needed. Sometimes intraday signals can be misleading to the overall market direction, so many advisors recommend using closing or near closing prices for non-traders.
Be smart. Set up a plan in advance and execute it unemotionally. Get your spouse/partner to sign off on the plan if that helps you. If you have the feeling of "I really want to use stop losses, but boy, then I'll have to tell him/her that I just lost 20% in that stock he said he/she was nervous about..." You get the picture. Been there? Done that? I have. But not for many years. I'm done with that losing strategy. You can be done with it too.
In fact, when you take a loss of whatever it may be 10% or 20%, pat yourself on the back. Yes. I mean it. It sounds ridiculous, but it's a great thing to do. Write an email to yourself about the investment, so you have a record and so you positively reinforce yourself. Great traders and investors do that. They never beat themselves up. They admit their errors, as Warren Buffett did with his fiasco with purchasing ConocoPhillips at all time highs in oil prices. He WAS honest. He told his investors it was stupid and he moved on. Act like a great investor, and you'll be a great investor.
And congratulate yourself when you have a winning investment or trade and then move on. If you stay stuck in pride about "how much I made 4 years ago by nailing the market timing on XYZ," you may fail to move on to make even more on your next trade or investment. You've heard people say things like "My son, he was the valedictorian of his high school." You look over and the "kid" is 45 years old and his Dad is 85. Move on and look for further great or even greater results. That goes too with "getting out at the top." If you were smart enough to "get out at the top," you had better get ready for "re-buying as the market moves up from the bottom!"
So let's continue and make sure we cover getting back in. We're not going to be happy with just getting out using market timing if we cannot learn to re-buy in a smart way.
Say you have your stop in place and you get out and it so happens that you got out "early" during a major decline. Picture yourself back in 2008 when the market started selling off in the late summer and when that continued in a punishing way into early October. What if you had used this method of Passive Shorting™ back then and cut your losses at the beginning of the decline? It would have looked like the diagram below.
So there is another step to market timing as the graphic above shows. You must have a way to get back in. You get in using signals similar to those published in our newsletter after every market day.
And what would have happened in the above example of Passive Shorting™? You would have GAINED the amount of money represented by your exit point minus your re-entry point ON THE WAY BACK UP. This is how successful market timing works. That whole dotted gap between "exit" and "re-enter" is a HUGE AMOUNT OF MONEY YOU WOULD HAVE MADE on the way back up. The amount you would have ADDED to your net worth is equal to the price of the asset when you exited the investment at the "exit" point by "Passive Shorting™" minus the price when you got back in times the number of shares or to keep it simple:
Yes, it's that simple. Now you can protect your capital as well as any big investment pro out there. You just need to know what they know. So now as far as Passive Shorting™ goes, you are "in the know." I also would like you to read Part 2 of this, but I'll get to that a bit later.
Why not short the market too and not just sell and then re-buy? I don't recommend it, because I know that 99% of those reading this will never short a stock. I've noticed that most investors just don't feel comfortable with this. This is a way to be "short" your normal investment in an index and not have the greater risks of shorting.
If you are a trader and you know what you are doing, of course, you could SELL using Passive Shorting™ so to speak and then SHORT the market as well. But most of the investors who read this will never do that, which is why the concept of Passive Shorting™ is useful. It could lead to enough confidence to allow you to actually be outright short the market in the future.
There are just a few more points I need to share with you about Passive Shorting™, so I'd like to ask you for a small favor and that is to subscribe to my free "Tips" E-Newsletter below, so I can continue to offer you strategies like these and other insights Otherwise I'm concerned that I will not have a way of getting back to you when I have my next insight. And right now, I need to share with you the risk involved when you sell too late during a decline when you are "passively short" the market. If you are enthusiastic about learning about investing, you know exactly what I'm talking about. It's nice to have input that offers a fresh perspective on investing or trading, especially when it's both intellectually challenging and it makes you money.
The first report I'll send to you is about the risk of getting out late in a move down. It's important. I think it's time you at least considered something new rather than to continue to "Buy and Hold," if that has been your pattern in the past. It's time to be done with that failed model in my personal opinion. I know reasonable people can disagree, but the evidence speaks for itself. If you know 100% of what there is to know about a company you can buy and hold. Warren Buffett has access to that kind of information but 99.9% of investors do not.
The reason people hold when they should sell is often fear. Freezing in the headlights is bad for deer and it's not great for you either. You have the ability to reason, so freezing in fear is something that you can get past. Believe me. And go to my Fear and Greed page if it's an issue for you. Fear is a killer of capital and of opportunity.
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NOTE: Sorry, but subscription to the free newsletter is now closed. I may reopen it at a later date, so keep following the weekly "Market Timing Brief" posts on the "Market Timing Blog" for updates (see blue navigation bar to left near top).
(NOT currently available) If you would like to see "Part 2" now at no charge, please subscribe to my free "Tips" newsletter below. Your email address will be kept 100% private. The newsletter is free and you can cancel at any time for any reason. These "Tips" are concepts and insights that can enhance what you are already doing.
You will receive both access to the special PDF report entitled: “Passive Shorting™ Part Two: Managing The Risk of Getting out Late" as well as password access to private expanded Intraday Market Comments published on this website.
If you have not yet read about our method of market timing, it's a very interesting strategy that you'll need to know about to apply the concept of the Passive Short™.
Note: You must decide if Passive Shorting™ is for you. You must have the will to get back into the market when it starts to move up and be able to reverse that decision if needed. I'll explain more about that in the free report. You can subscribe above to receive that report at no charge as well as access to my private Intraday Market Comments password.
**By the way, the term "passive shorting" has been used by others in a completely different context as in placing an offer to short vs. shorting at the bid. One other way it has been used is to say "staying short" for long periods of time and not actively trading those positions. But the term has not been used often.
This is an entirely new use of the two words, and I believe could be a useful one for investors who have never been willing to outright short the markets or individual stocks. The point of this completely new use of the term is educational. First, in my view you should learn to do Passive Shorting™ and then you can graduate to shorting itself.
This term captures the concept that if your normal percentage of stocks in your portfolio is 60%, then you could use Passive Shorting ™ to go down to say a 30% or less stock allotment during a major downturn in the markets - and collect money on the way back up after re-entering as described above.
People who are "short a stock or index" make money as it goes DOWN, not as the stock or index recovers. They have to "cover" their shares near the low to make money and if they want to enjoy the gains of the next Bull move, they then have to buy and initiate "long positions." In "Passive Shorting™" you make your extra money after you have re-bought the shares or mutual funds you sold near a HIGH and the market goes back UP from your "re-buying point" near the next LOW. The diagram above makes this clear.
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