The easiest way to make a small fortune in the share market?
Start off with a large fortune and make it into a small one.
That’s been the case for billionaire hedge fund boss David Einhorn.
I’ve seen this story so many times before.
Hedge fund managers taking client’s money and then going off to the market to trade their opinions.
Einhorn is only the latest in a long line. The story’s the same. It’s only the faces that change.
Einhorn’s fund, Greenlight Capital, was reported to be worth $12 billion in 2014.
Now it’s worth about $5.5 billion.
Shrunk by more than half.
Greenlight Fund is Down…
Since the end of 2014, the Greenlight fund is down a whopping 25%. Investors are heading for the exits pulling out billions.
It really is a coup. Quite a feat, to lose so much money in a roaring bull market.
One fund investor mentions a talk where Einhorn said he’d been shorting stocks like Netflix and Amazon.
Let’s bring up their charts:
[Click to enlarge]
Going short on stocks like this is the wrong thing to do.
This is where having some basic chart knowledge can be really helpful.
From a charting point of view, there is no reason to go short.
Going short on these stocks is just crazy.
No wonder investors are voting with their feet, leaving the fund on masse.
There’s a particular mindset going on here.
It goes something like, ‘the share price is high, it can’t go higher’.
But any stock which continues to grow revenues, will go higher.
Shorting stocks like this is not the way to make fast money in the market.
In fact, it’s the way to lose money. And fast.
So what can we learn from the David Einhorn story?
What lessons can we take away for our own trading?
Well first off, it’s okay to have opinions, but just don’t try and impose them on the market.
Opinions are the last thing you want to bring to the market. The market doesn’t care who you are, what you think or how much you believe in a stock.
It will do what it does.
Just move in the same direction of the market; swim with the current or trade the trend. Whatever way you want to describe it.
It’s not so much that the market is smarter than you.
It’s just that it knows more than you. It knows the potential contract that could re-rate a company. It knows the developments taking place within a company which might bear fruit in the months ahead.
If you want go short, find stocks breaking monthly lows from years past. That way you’re at least trading with the trend. Profits are made far quicker that way.
Trading is hard enough already, why make it more difficult than it need be by trading against the trend.
The trend on Netflix and Amazon has been strongly up.
Swimming Against the Current
Your swimming against the current trying to go short on stocks like these.
The other lesson that comes to mind, is never try to justify holding a losing position.
Cut your losses quickly.
Learn to take a small loss early.
It sounds simple.
But most traders have found out the hard way how difficult it is to master this one simple rule.
Many bring their egos to the market and that usually doesn’t end well.
The thinking goes something like, ‘I’ll eventually be proved right. The market will eventually catch up and come around to my view’.
That mindset is financial suicide. As Einhorn and his hapless Greenlight investors have found out.
Set your ego aside, take the loss quickly and protect capital.
Never hold on to your losing positions.
Losses are more quickly recovered by finding the next move with the trend. Not by holding onto stocks that don’t go your way.
Chartist, Phil Anderson’s Time Trader