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The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017

Social Security
Issue #450, December 26, 2016

My Outlook for 2017: Part II of II
Issue #449, December 19, 2016

My Outlook for 2017: The Market
Issue #448, December 12, 2016

Medicine in 20 Years
Issue #447, December 05, 2016

Higher Interest Rates
Issue #446, November 28, 2016

Trump and the Markets: The Bad and Ugly
Issue #445A, November 23, 2016

Trump and the Markets: The Good
Issue #445, November 21, 2016

Negative Trends: The Suits aren’t Makin’ Steel
Issue #444, November 16, 2016

The New DOJ Fiduciary Rule
Issue #443, November 07, 2016

Barron’s Conference, Part IV of IV
Issue #442, October 31, 2016

Barron’s Conference, Part III of IV
Issue #Interim Bulletin #441A, October 26, 2016

Barron’s Conference, Part II of IV
Issue #441, October 24, 2016

Barron’s Conference, Part I of IV
Issue #440, October 20, 2016

This Newsletter
Issue #439A, October 12, 2016

Memoirs of US Grant: Vol II
Issue #439, October 10, 2016

More Points on Collecting, Investing and the Economy
Issue #Interim Bulletin #438A, October 05, 2016

Personal Memoirs of US Grant
Issue #438, October 03, 2016

Ideas for a High School Part-Time Job
Issue #Interim Bulletin #437A, September 29, 2016

Collecting, Investing, and the Economy
Issue #437, September 26, 2016

Free College
Issue #436A, September 22, 2016

A Military Commitment to Pay for Med School
Issue #436, September 19, 2016

When a CD isn’t a CD
Issue #435, September 12, 2016

I Made a Mistake
Issue #Interim Bulletin #434A, September 07, 2016

What is Your Spare Time Worth?
Issue #434, September 05, 2016

Credit Cards and Bonus/Loyalty Points
Issue #433, August 29, 2016

The Write-off of Student Loans
Issue #Interim Bulletin #432A, August 25, 2016

412 Retirement Plans
Issue #432, August 22, 2016

Join the Club
Issue #Interim Bulletin #431A, August 18, 2016

The Case for Precious Metals and Hard Assets
Issue #431, August 15, 2016

When the US went off the Silver Standard
Issue #430, August 08, 2016

Why NOT to Open a Restaurant
Issue #429, August 01, 2016

Some Tips on Life Insurance
Issue #428, July 25, 2016

More Observations on Negative Interest Rates
Issue #427, July 18, 2016

Issue #426, July 11, 2016

Is a PhD Worth It? Part II of II
Issue #425, July 04, 2016

Is a PhD Worth It? Part I of II
Issue #424, June 27, 2016

Avoid Part-time real Estate Agents
Issue #423, June 20, 2016

Issue #422, June 13, 2016

The Problem with Auction Reserves
Issue #421, June 06, 2016

Make Full Use of Your Capital Investments
Issue #420, May 30, 2016

The Fed’s Announcement
Issue #419, May 23, 2016

Quit While You’re Ahead: A True Story
Issue #418, May 16, 2016

The Precious Metals
Issue #417, May 09, 2016

Negative Secular Trends: Part Ii of II
Issue #416, May 02, 2016

Negative Secular Trends: Part I of II
Issue #415, April 25, 2016

Not Winning is not the same as not Losing
Issue #414, April 19, 2016

Behavioral Economics: Part II: Weaknesses
Issue #413, April 11, 2016

Behavioral Economics: Part I: Valid Points
Issue #412, April 04, 2016

The Most Important Books I’ve Read
Issue #411, March 28, 2016

Secret to Success: Take Risks and do Things Differently
Issue #410, March 21, 2016

The Over-Priced Food Presentation Hustle
Issue #409, March 14, 2016


By Robert M. Doroghazi, M.D., F.A.C.C.

Selling Short: Part II of II

Issue #401, January 18, 2016

    Selling short requires a much different temperament and mind-set compared to going long. The time frame is also different. Long investments are typically held for months, or more commonly, years. Because things go down 5 times faster than they go up, a short is a trade to be held days or weeks or a few months. Take your 10 or 20% and get out.
    Only sophisticated investors who know a great deal about the company should consider shorting individual stocks. Rather, I’m going to discuss the best way to short the major averages, namely the S&P 500.
    There are inverse, and even double inverse, mutual funds. Because they can be traded only at the end of the day, they are no longer a viable option and are to be avoided for selling short.
    Options offer the greatest leverage to profit from a drop in the market. You can either buy put options on the S&P 500 or long options on the VIX, the Volatility Index, which goes up when investors are fearful the markets will fall. I would only consider options if you are a sophisticated investor who knows the nuances of trading options.
    I believe that ETFs are an efficient vehicle to establish a short position. I have found double inverse ETFs to be most useful, namely SDS, which moves twice the inverse of the S&P 500, and QID, which moves twice the inverse of the NASDAQ 100. I would avoid 1) triple inverse (and long) ETFs (they are just too volatile), 2) single inverse ETFs, because they provide no leverage, and 3) thinly traded ETFs (because of the wide bid to ask spread, and the poor liquidity).
    Margin is not allowed in a retirement account: in my opinion, a wise rule. Inverse ETFs allow you to hold short positions in a retirement account without being on margin.
    ETFs are also an efficient way to sell short in a non-retirement account. Rather than short the S&P 500 by selling the SPY, which puts you on margin and puts you on the hook for the dividend, just buy the SDS. 
    In my opinion, futures are the most efficient way to hold a short position on the S&P 500. But first, the caveats. When you sign the futures brokerage agreement, it notes that a majority of investors, like 70%+, lose money trading futures. This is because 1) futures are a zero sum game, there are an equal amount of long and short positions. When you trade futures, it’s wise to presume a professional is on the other side of your trade. 2) Futures allow considerable leverage, up to 10 to 1 or higher. When a position leveraged 5 to 1 goes for you, its heaven, like getting pocket Aces in Texas Hold’Em. But when it goes against you, it gets real ugly really fast. But if you trade unleveraged, it’s no different than any other position. Ex: an S&P 500 mini future represent 50X the S&P 500. If the S&P is 2,000, one mini future represent $100,000 worth of the S&P 500. If you trade just one mini future and have $100K in your account, you are unleveraged.
    The big advantage of futures as compared to ETFs to short the S&P 500 is that they trade electronically 24 hours a day, from Sunday evening when the markets open in Asia, until Friday afternoon when the markets close here. Ex: say the S&P 500 closes at 1900 on Tuesday. The Shanghai tanks overnight, and the futures drop 30 points, so you cover your position at a nice profit. But the Plunge Protection Team (see below) comes to the rescue, and by the time our market opens on Wednesday, the S&P 500 is back to 1900. Your ETF missed all of the action.
    One more point: put in the order to cover your short position as soon as it is established. Because things can cave in then bounce over the course of hours or sometimes even minutes, you could easily miss your price. Secondly, when things get really hairy, which is why you have the short in the first place, you may not be able to reach your broker, or maybe even access your account. 
    To summarize:
    1) Short selling is a standard tool all investors should understand. It allows you to preserve capital, or even make money, while others are losing.
    2) It takes a different personality and mindset than the traditional buy and hold.
    3) Short selling requires day to day monitoring of your position.
    4) A short position is a trade, not an investment, to be held for only hours, days or maybe weeks. Take your 10 or 20% and get out.       
    The bear market has started:
    1) don’t be a hero: buy and hold is a myth.
    2) Sell into any bounce.
    3) Don’t buy the dips, or you will get crushed.
    If you didn’t understand last week’s description of how the brokerage borrows shares from others’ accounts and deposits them in your account so they can be sold short, let’s make it easy. You put in an order to sell 1,000 shares of GE short at 30. It gets done. When you buy them back to cover your short, the brokerage removes the shares from your account, and you are left with a profit or loss. It really is that simple. 
    The first week of January was a tough one for the market, with the DJIA down more than 1,000 points. Last week, Monday started well, with the Dow opening up more than 100 points. The market began to fade, then accelerated to the downside, and by 1230 (Central) was down about 115 points. At that instant, Federal Reserve Board Governor Lacker issued a statement that he didn’t think the Fed would raise rates in January. The market immediately reversed to end +52 points for the day.
    RMD comment: Would the government try to manipulate the markets? Does a wild bear…? Cousin Tony calls this the PPT, the Plunge Protection Team. The Chinese have been trying to do this, but don’t seem very adept.
    Every winter I make kolbasz, Hungarian pork sausage. The price of the ground pork was $4.49 per pound (plus sales tax). Considering the cost of the casings (about $15 to make 50 lbs. of sausage), the seasonings, and the wood to smoke the sausage, my all-in costs were about $6 per pound.
    RMD comment: The price of oil and most commodities is soft, but this was by far the most it ever cost me to make sausage.
    About 20 years ago “Yo’ Mama” jokes were popular. “Yo’ Mama’s so short that…”, or “Yo’ Mama’s so stupid that…”. My favorite “Yo’ Mama’s so ugly that the last time she went to the top of the Empire State Building, she was attacked by planes. 
    I received an ad from a regional furniture company that recently moved to town. “Your bank can’t do this…No money down…No interest charges for the next SIX Years (until 2022, emphasis in the original).
    RMD comment: This is not a comment on the company, they’re just trying to make a buck. It’s a comment on our culture and our society. If you can’t pay cash for your furniture, for a bed or a sofa, you can’t afford it. Consider: $3K of bedroom furniture: $50 per month for 5 years. Auto loans for the first time have passed $1T and are often 5 or 6 years.
    Our society’s infatuation with debt reminds me of 2 of my favorite sayings:
A nickel down, a nickel a month
A dollar now, the rest when you catch me.
    In high school I worked 35 hours a week at Graham’s Book Store in Granite City, IL. The more I think about it, Mr. Graham was a spectacular businessman. Graham’s was open 365 days a year, while the bank hours were still 10 AM – 3 PM. In about 1960, the Post Office moved away from across the street to elsewhere in town. From that time on, Mr. Graham carried stamps and sold them at face value, just to get people in the store.
    Only one time do I remember Mr. Graham being direct with a customer. We had a TV tube tester. A man bought a tube, but apparently it wasn’t the problem, so he was back an hour later. He exchanged it for another tube. He was then back an hour later, and exchanged it for another tube. Mr. Graham did it, but said there would be no more exchanges. The man wasn’t back: either that tube was it, or he didn’t have the nerve.
    We also sold plastic models and the glue, which in the pre-marijuana days was sniffed for a high. Mr. Graham would never sell more than 1 tube at a time to anyone of the age who might do that. On a Sunday about 10 minutes before closing, a kid in my high school class that we thought was a “hood” came in with a guy I didn’t know. “I want 6 tubes of glue and a paper bag”. I’m not sure, but I think he was killed in Viet Nam.
    I highly recommend Dead Wake: The Last Crossing of the Lusitania. Erik Lawson, author of The Devil in the White City, knows how to tell a story.

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