In my senior year of high school, we had a stock trading competition.
We all got paper accounts, with $100K each.
I did some longs in the first week and lost about 20%. People made fun of me.
I told the guy sitting in front of me that I am going to be #1 in the class regardless.
Instead of longs, I just looked at Yahoo’s stock screener and looked at the highest gainers. And I shorted them intraday.
I noticed the stocks were most volatile in the morning. So, if a stock went up 120% and I felt that the news didn’t warrant such a rise, I’d just short it.
Most ended up being biopharm stocks as they’re the most volatile industry.
I made 5-10% per day, and by the end of the 3-week contest, I made more than 100%. In class, the teacher talked about how Berkshire was worth $100K per share. So I just bought 2 shares as a “fuck you” to the whole class, as none of them could afford to.
I won.
This strategy makes sense since the whole goal was to maximize earnings in a short time. Not exactly the best environment for well-researched value investing.
Let me trade on your account, mom#
I asked my mom to trade on her account.
I tried the same strategy and made 3% on the first day.
When she asked me how I did it, I just said I shorted stuff. She revoked my access to her account immediately.
The reason’s simple: shorts have unlimited losses, and my mom didn’t want her son bankrupting him overnight.
Going for broke#
Fast forward 7 years later, I got a full-time job and saved up $10K.
I tried doing the same strategy again and was able to net 20% my first week. I was annoyed as it was only 20% and not 50%, which was my high school record.
The next week, I shorted a tech stock called JRJC and got margin-called as it continued to rise 100% the same day.
I lost everything and my lesson learned was never short a stock again.
The wrong lesson#
Considering the best trade I ever did was from a short, it was the wrong lesson.
The right lesson is using shorts appropriately:
- Set a stop loss so you don’t lose your shirt when you’re wrong
- Short intraday only if you have low conviction, so you don’t get wiped out after hours
- Short hard if you are 100% you are right, with no possibility for failure (e.g. a drug’s molecule cannot possibly work, but the market thinks it can because they aren’t well-informed and they will announce results in a few minutes)
Doing 1+2 is great for lower-conviction, quant-type plays. Your losses are always limited, and you can make a few points much faster than you would on longs. If the magnitude of your rights is more than your wrongs, you should be able to make a killing.
3 can be a great portfolio booster, but you need to be 100% sure you’re right. Not 99%. 100%. These cases are exceptionally rare, so be careful about justifying an 80-90% sure case as 100%. You could bankrupt yourself overnight. But if you’re 100% sure, then it’s free money and you can 2X-3X your entire portfolio overnight depending on your broker’s margin requirements.