Post of the Day
September 24, 1999
Mechanical Investing Folder
Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light.
It sounds to me like you have the perfect plan--if you're planning on spending would-be retirement years waiting on tables.
First the good news: The beauty of the American stock market is liquidity. Basically any trade within the reach of the individual investor can and will be executed within seconds. Don't sweat it. The system is designed to make sure you can do stuff like this easily.
This is the way shorting works in a nutshell (and this is the bad news): You borrow shares from your broker, sell them, and then when the stock goes down you (hopefully) buy them back and return the shares to your broker, keeping the difference for yourself. However, if the price goes up, you still have to return the shares and you can lose more than your original investment!
|"Other than a burp or two, I'm still waiting for the damn correction."|
Right after I bought my first mutual fund, I read an article by Jane Bryant Quinn about what a great investment mutual funds were, but (she said) the market was on top bubble and definitely wait for a correction before buying in. Boy, did I feel sick to my stomach. The Dow was at 3200. A while later, I sold a car and put the money into the same fund. Sure enough, literally the next day Andrew Tobias was telling me the market is overvalued. Wait for the correction, he said, then buy stocks at a bargain. Boy, did I feel dumb. The Dow was at 3600. That fund made me a nice penny over the 7 or 8 years I owned it. Other than a burp or two, I'm still waiting for the damn correction. Most of that original investment (not a whole lot) became the down payment of my house. The rest (more than I started with) I cashed in this year to start mechanical investing and basically doubled what the fund would have done to date. If I listened to the experts at the time I'd still be in cash and wouldn't have the house or the portfolio. These are people who get paid to write this stuff, mind you.
|"if we are on top of a bubble, I'll bet my last dollar and my first born child that Milton Freidman doesn't know when it will burst."|
Bully for me, but my point is this: There is not a person on planet Earth who knows what the stock market will do tomorrow, next week, or next month. We very well could be on top of a bubble. The Dow could easily drop 1,000 points or more between now and next Friday. But if we are on top of a bubble, I'll bet my last dollar and my first born child that Milton Freidman doesn't know when it will burst. I'll make another bet: The next 1,000 point move of the Dow could be either up or down, but the next 5,000 point move will be up. In other words, I'll bet that the Dow will reach 15,300 at some point, but we will never see 5,300 again.
To summarize: If your analysis tells you a particular stock will fall in price, short it and hope your analysis is correct. If you have information no other human being on the face of the earth has, then go ahead and short QQQ.
Another thing: If you would have shorted QQQ last month, you'd be buying it back at 10% higher even with today's drop. So time your bubble bursting carefully, if your intuition is off even a week or two it could cost you plenty.