Trillions of dollars of "wealth" evaporate in one weekend...

[lawyerdad]

Originally Posted by Godspeed

Can someone explain the difference between "being long" and "being short". i haven't heard this terminology.
Essentially, if you're short you're betting that either an individual security, a sector, or the entire market will go down. There are certain technical issues that have to do with "borrowing" the stock, but that's the general idea. "Being long" generally means you own the stock (or index, or whatever) and are hoping its price will go up.

Originally Posted by iammatt

I think the difficulty of being a short seller is one of the most misunderstood things in investing. At least when you are long, if you are right you will eventually win. Being short requires not only being right, but being right at the right time. Being on the wrong side of a stron rally in an individual stock can decimate you as your liability is limitless.
Not that I'm recommending this, but if you go short by buying puts at least your risk is finite.

 

[itsstillmatt]

Originally Posted by lawyerdad

Not that I'm recommending this, but if you go short by buying puts at least your risk is finite.

True, but you still have the timing issue as puts expire and, typically, the need to use a bit of leverage.

 

[Godspeed]

Originally Posted by iammatt

When you are long, you buy shares in a stock. When you are short, you borrow shares and sell them with the intent of purchasing them back at a lower price at a later date. You also pay interest on the stock loan and are responsible for any dividends during the time you are short the stock.

For example, if you think stock XXX, currently trading at 50 will go down, you sell short 1000 shares, pocket the 50k and hope to buy it back lower. If the stock goes to 25, you make a return of 25k on your short sale. If it goes to 100, you are forced to buy it back for 100k and you lose 50k.

Most smart short sellers use many different methods of shorting including options and other derivatives.

ah, that makes sense. i'm strictly a buy and hold index fund guy, so i don't get too concerned about this kind of action

 

[Piobaire]

Originally Posted by Godspeed

ah, that makes sense. i'm strictly a buy and hold index fund guy, so i don't get too concerned about this kind of action

Well even then, you coud still get in on the action with volatility. Sell covered calls...if anyone will buy them right now.

 

[lawyerdad]

Originally Posted by iammatt

True, but you still have the timing issue as puts expire and, typically, the need to use a bit of leverage.

Absolutely. As I said, it's not a trading strategy I'm recommending to anyone.

 

[Mark from Plano]

Originally Posted by Godspeed

ah, that makes sense. i'm strictly a buy and hold index fund guy, so i don't get too concerned about this kind of action

Then for purposes of this conversation you are always a "long" unless you've sold out of all of your positions and only hold cash.

 

[Cantabrigian]

Originally Posted by Connemara

If you aren't short, you're fucked.

We can thank the near criminally negligent Alan Greenspan for this, and the greedy I-banks/rating agencies that continued to package pure garbage and claim it had a sterling AAA rating. Bullshit.

You realize that you can legitimately get a AAA rating on a properly structured bond backed by poor quality underlyings, right?

 

[imageWIS]

Originally Posted by Cantabrigian

You realize that you can legitimately get a AAA rating on a properly structured bond backed by poor quality underlyings, right?

Indeed, Conne how else do you think sub-prime mortgages got repackaged into 'sterling' investments?

Jon.

 

[Karo]

Dang it, just missed a very nice opportunity yesterday with the hk market

 

[eg1]

Time horizon has an awful lot to do with whether you should be relatively long or neutral. Short is for "playas" only.

 

[crease]

Originally Posted by iammatt

I think the difficulty of being a short seller is one of the most misunderstood things in investing. At least when you are long, if you are right you will eventually win. Being short requires not only being right, but being right at the right time. Being on the wrong side of a stron rally in an individual stock can decimate you as your liability is limitless.

I agree. I also don't like the inherent idea behind shorting -- you're essentially hoping a company gets crapped on so that you can make a few bucks.

Maybe it's just me, but I get excited when the companies that I invest in actually grow.

But to each their own.

 

[Connemara]

Originally Posted by Cantabrigian

You realize that you can legitimately get a AAA rating on a properly structured bond backed by poor quality underlyings, right?

Originally Posted by imageWIS

Indeed, Conne how else do you think sub-prime mortgages got repackaged into 'sterling' investments? Jon.
Yeah, I'm well aware of this. The issue is that the Fed and the government (even the insurance companies themselves, who should have acted more ethically) turned a blind eye to years of the insurers putting their stamp on pure garbage. A lot of these simply did not deserve a AAA rating.

 

[Cantabrigian]

Originally Posted by Connemara

Yeah, I'm well aware of this. The issue is that the Fed and the government (even the insurance companies themselves, who should have acted more ethically) turned a blind eye to years of the insurers putting their stamp on pure garbage. A lot of these simply did not deserve a AAA rating.

So the monoline insurance cos (who, by the way, have a lot of skin in the game) acted less than ethically by insuring these things?

What makes you think that these bonds shouldn't be rated AAA? AFAIK credit ratings deal only with probability of repayment / default not with liquidity.

 

[LesterSnodgrass]

Doesn't "subprime" mean anything to anyone? Duh!!

Trust the methods employed by the Warren Buffets and Peter Lynches (Fidelity Magellan guy) of the world. If it appeals to your commen sense, buy and hold.

Unless of course you have oodles of money, and then its just like Vegas, baby -- let it ride!!

 

[Cantabrigian]

Originally Posted by LesterSnodgrass

Doesn't "subprime" mean anything to anyone? Duh!!

Trust the methods employed by the Warren Buffets and Peter Lynches (Fidelity Magellan guy) of the world. If it appeals to your commen sense, buy and hold.

Unless of course you have oodles of money, and then its just like Vegas, baby -- let it ride!!

Though he's best known for his buy and hold exploits and calling derivatives financial weapons of mass destruction, Buffet has been known to get involved in other markets - most publically being short the US dollar a couple years back.

And when he announced that he would be giving away most of his Berkshire holdings, he mentioned that he wasn't exactly going to starve since he had personally made a number of investments that didn't fit with Berkshire's implied mandate - among those were some fixed income relative value trades.

It's not inherently a bad idea to buy risky debt - it's just a bad idea to buy it at too high a price. But you can say that about anything.