Just Call me Shorty Shorterson... or "Shorty" for Short

A stock trading strategy that I have been interested in for some time is short positions.  To short a stock means that you "sell" a position now, with the intention of "buying" it back later, at a lower price.  I think the whole thing is quite bizarre, really, but since it exists and is available, who am I to question the practice?  Obviously, you do this when you think the stock will move down in price.

Some reasons for my interest include:
- Fear is stronger than greed.  What this means for the stock market is that, in a nutshell, when a stock is rising in price, it rises relatively slowly, and when it drops in price, it drops relatively quickly (because people panic when they see their profits disappearing, and they sell out quickly).  The generally agreed upon "normal" breakdown is that stocks trend upwards 2/3 of the time, and trend downwards 1/3 of the time.  Put another way, if you successfully short stocks, you can make the same amount of money, but in half the time.
- I have noticed that once a stock starts to crater, it craters pretty consistently (there’s the fear thing) until it finally stops and reverses... unlike up-trends which can be much more sloppy and hard to read.  When you see a down-trend on a stock, you can be pretty confident it will continue for a while (note that it has to be a "trend" - one or two daily bars don’t make a trend!).  This is more likely true for stocks for weaker companies and/or companies which do not pay dividends... the strong, dividend payers tend to stay stronger.
- At times when the market is weak, the chances to make money the "normal" way (by holding long positions), are slim to none.

Of course, shorting a stock can be risky; a stock can rise in price infinitely, meaning that your potential losses are infinite if you don’t manage your trades closely (the most you can lose on a long position is the amount you initially put in).  Many traders (and all investors) stand by during the down-trends, or hold onto their long positions for when they will recover after the down-trend.  I don’t want to stand by and wait, and the "hang on and wait for recovery" strategy makes my blood turn to ice when I watch my positions shrink and shrink and shrink.

As I am trying to train myself to be a successful stock market trader (mostly "position trader", occasionally "swing trader"), short positions sound very appealing to me.  In December 2012, when I plotted out my "training plan" for 2013/2014, I set myself a goal of dipping my toes into a short position by March of 2013.  As I’m such a keener, though, I opened my first short position on January 31, 2013, with Kinross Gold (K). The stock moved sideways, and I got nervous, and I closed the position on February 8th.  Although I didn’t make (or lose) any money on the trade, I was thrilled.  I had successfully gotten in and out of a short position, which actually wasn’t that easy since my broker, Questrade, often doesn’t have enough of particular stocks at hand to short (ie. when I try to open short positions, the orders often get refused because there’s no ‘inventory’ from which to short).

The best time to short stocks is when the stock MARKET is in a down-trend... not just the individual stock.  People stampede for the door, and lots of stocks crater at the same time, regardless of how strong they "should" be if the market were a place of reason.  I piddled around with some short positions, but around late March is when things started to get interesting.  The TSX (where most of the stocks I watch live) had done a beautiful up-trend from mid-November until late January when it started softening... moving sideways... sometimes down, sometimes up.  I thought perhaps a top was forming, and a down-trend was coming.  Seasonally, we often get a down-trend in the stock market around April or May, so the timing seemed about right as well.  I started paying a lot more attention and looking for signs and confirmations of a down-trend in the market.

A safer way to "short" the market, and the only way possible from within an RRSP or TFSA account, is to buy long positions in "Inverse" ETFs ("inverse" meaning that the ETF itself shorts the market, but you, yourself, are holding a long position in that ETF).  Opening a position in one of those ETFs means you think the stocks they include will go DOWN - as those stocks go down, the ETF itself goes UP.

So, as I was watching the market for a confirmation of a down-trend, I was also scouting for stocks to short (in my Margin account), and Inverse ETFs to purchase (in my RRSP account).

On March 25th, the TSX took a fairly big drop down, and by March 28th, the 10, 20, and 30-day Moving Averages crossed over from an "up-trend" configuration to a "down-trend" configuration.  I took that as my cue to jump in (although, I was well aware that it could easily be a correction, and the market which had been so strong for so many months previously could just reverse again and happily resume its up-trend).

Today, as I write this, I am having my first-ever WOO-FREAKIN-HOO day with the stock market.  Since March 28th, the market has taken a couple more serious drops down.  My short positions gapped down, and my Inverse ETFs, largely, gapped way up.  I set tight stop-loss orders on the ones that gapped significantly so that I didn’t lose my profits if/when those stocks (and ETFs) pulled back (maybe even closing their gaps).

Many of my positions have been closed out today on my protective stops, as follows:
- Osisko Mining Corporation (OSK): Short position opened on April 4th at $5.52.  Increased on April 11th at $5.54.  Closed today at $4.04 for a profit of approximately 26%.
- Silver Standard Resources (SSO): Short position opened on April 4th at $9.50.  Increased on April 5th at $9.82.  Closed today at $7.88 for a profit of approximately 18%.
- HGD (Inverse ETF on Gold stocks): Position opened on April 3rd at $16.00.  Closed today at $21.83 for a profit of approximately 35%.
- HZD (Inverse ETF on Silver stocks): Position opened on April 5th at $5.74.  Increased on April 11th at $5.52.  Closed today at $7.41 for a profit of approximately 31%.
- HBD (Inverse ETF on Gold Bullion): Position opened April 3rd at $14.04.  Closed today at $17.88 for a profit of approximately 25%.

At this time, I still think the TSX, and the precious metals, will keep moving downward, at least for a short time (although I agree, and heed, those who say gold is about to bottom and reverse).  Once the dust has settled, I will look to possibly re-open some positions (hopefully after a pull-back)... assuming the trend continues.

Through my learning process of the past several months, I have had some great mentors and teachers who all have different approaches and perspectives of their own.  As one of them might say (you know who you are), "good luck to me!"

Poseidon Adventure

The Poseidon Adventure was a 1972 movie about an old luxury liner ship on her final voyage that was overturned by a tsunami.  The bulk of the film was about the plights of the passengers and crew members trapped in the upside-down ship.

My Poseidon Adventure, thankfully didn’t involve any tsunamis or people trapped in upside-down ships, but it has most certainly been an “adventure”.

I read about a company called Poseidon Concepts (PSN) in early November 2012.  It was highly recommended by a well-respected analyst.  It is a Calgary-based company which provides fluid-handling services to the oil and gas industry.

I looked at the stock and did some fundamental analysis on it.  It all looked really great, based on the information available to me at the time.  The technical indicators at the time were saying it was a bad time to buy into the stock, but I wasn’t using much in the way of technical analysis then.

On November 9th, I opened a position of 100 shares for $13.37/ea (approximately $1000).   Here lies mistake number 1.  I wish I’d known more about technical analysis at the time and stayed out of this stock, which is what the technical indicators were saying to do.

Mistake number 2 was in not paying attention to when the company would be releasing quarterly results.  Big moves often come with the release of financial results (and other news)… in between times people are buying stock based on old information and speculations about how the company may be doing.  When the financial results are published, then you have your proof… good or bad.

A few short days later, on November 14th, the company released their Third Quarter Results (after markets closed for the day) and on November 15th the price gapped down, opening at $5.79.  Less than half of what it had closed at on the 14th ($13.22).  I had already realized that Poseidon was about to have some new competition which would make things tougher for them, a rumor about a tank leak in NYC, and the third quarter results weren’t rosy, but I didn’t think they weren’t earth-shatteringly horrible either.  But... well... what do I know about understanding dry financial reports... not much.

I looked at www.stockchase.com and www.stocktwits.com to see if anyone was saying anything useful about what was happening.  On Stock Chase, a few analysts had posted about the company in November… “Past Top Pick” (Nov 1), “Past Top Pick” (Nov 8), “Buy” (Nov 9), “Don’t Buy” (Nov 13) with concerns about competition.  Stock Twits had a little more to offer.  The rumor of the leak had been out before and was denied by management.  The third quarter numbers “are horrific”.  Price drop “seems like a bit of an over reaction”.    “Talk about overcorrection.  Even if they slashed their dividend by ½ (they won’t), this is still a tremendous deal”. 

I wasn’t sure what to do as I watched my $13.00 stock drop down to less than $5.00 in ONE DAY, but I did feel panicked about it.  I had been improving my strategy for stock selection and things were going much better than they had been and this development was going to set back a whole pile of progress!

Then, the price started moving back up.  It inched up and up… and I thought, ok, here’s the end of the overcorrection.  People are coming back in.  This is an opportunity for me to buy more of the stock, bring my average price down, and recoup my losses as the price continues to move back up.

This was mistake number 3.  I got caught up in my own panic about the situation and I didn’t think about what was likely to happen over the next while as people dumped out of the stock… the repercussions were not over and were not going to be over for a while.  It was really naïve of me to think that the stock could gap down that much and then just merrily climb its way back up to where the analyst was now saying it would end up… at around $8.00.  Other people, with panics of their own, were dealing with the situation as well.

Using my iPhone, I tried to place an order for another hundred stocks at about $6.00/each.  The app on my iPhone chose that very day to malfunction, though, and here comes mistake number 4.  As the app refused to process my order, the price of the stock continued to inch up and inch up, and I got caught up in a new panic all my own as the “opportunity” to buy in at $6.00 danced away from me due to a technology malfunction.

I tried, repeatedly, to get the iPhone app to process my order, and was finally successful when the stock hit $6.16.  I had had to press the button several times on the iPhone to get it to “take”.  Thankfully, I only had about $1500 cash in my trading account at the time because… as would happen during a mistake made in panic… the app actually DID process my order every single time I pressed the button.

I got a confirmation that I increased my position by 100 at $6.16.  Then, I got another confirmation that I increased my position by 100 at $6.16.  Then, thankfully, my account ran out of cash and I got “order refused” messages for the remaining panic orders.

I was now holding 300 shares of Poseidon with an average price of $8.62.

Poseidon hit a high of $6.50 on November 15th, but then drifted down… and down.  On November 28th, it sunk to a new low of 4.06 and from there continued to drift down… and down.  On November 29th, Poseidon announced that they intended to vigorously defend the class action lawsuit.  Hmmmmm… what was that about?  I looked it up and there’s a class action lawsuit brought against them by investors for allegedly hiding their bad financial situation.  Anyone who held the stock prior to November 14th was eligible for damages if the lawsuit against them was successful.

The stock continued its slow drift down and closed at $3.31 on December 24th.  I held onto the stock.  Perhaps I would get some money from the lawsuit, or perhaps the stock would finally bottom out and eventually climb back up.  Would this turn out to be mistake #5?  It was quite possible, but considering I spent over $2500 on something that was not even worth $1000 at this point, I figured I would wait it out and hope for a recovery.

Today, December 27th, the stock gapped down again on open ($1.93) and has hit a low, so far, of $1.27.  You see, they released some news today that they’ve suspended future dividends and have formed a special committee to review and address various A/R issues.  Three of their board members have resigned.

I am still holding this stock.  Will that turn out to be mistake #6? Time will tell.  But considering I spent $2586 on something that is now worth $429, I have very little to gain by exiting at this point.

Technical Knockout

In spring of 2012, based on all my fundamental analysis, I selected some healthy, dividend-paying companies and REITs and sat back to watch my money grow.  And lo, it worked!  For about one month.  Then, the prices of my well-selected stocks began to drift down.  I watched as my paper profits dwindled and then my paper losses began mountain as the prices drifted down... and down... and down.  At first, I thought, well, it's not really what's happening to my oh-so-healthy stocks, it's just that the stock market itself is having a few down days.  It will recover, and so will my stock prices.

But of course, that's not what happened.  What actually had happened was that I experienced (without knowing what it was) my first trend reversal.  One of the things I had looked at before I purchased a stock was the direction of the price movement.  All of the stocks I'd chosen had prices that were neatly trending upward.  REITs, especially, were “unstoppable” at that time.  That was a much better sign than the downward drift of my earlier, poor decisions. Stock prices never (or rarely) go consistently up and up and up every day... they "correct", and sometimes go slightly down before continuing their upward trend, so I wasn’t concerned when it happened.  

In the summer of 2012, when my stocks had some down days, I knew that the stock market as a whole was also having some down days so I failed to take notice of what was really happening.  Many of my stocks were actually experiencing a trend reversal, in which the upward trend switches to a downward trend (or vice versa).  Because they all had some "up" days (stocks "correct" on their way down as well as on their way up), I didn't notice the trend, and frankly, didn't know what to look for.  I stood by the decisions I'd made on what stocks to invest in and held on. And watched, dejectedly, as my nice plump stocks drifted down... and down... and down.

But how did I go SO wrong on that?  Of course I realized (after the fact) that although my stocks were trending upward when I bought them, I needed to watch out for them to top out and reverse direction.   How could I be so foolish and naive?

Clearly, the trend was not my friend.  The trend and I were just barely acquaintances, and I’m pretty sure the trend thought I was an arrogant newb who thought she knew all she needed, and everything was going to be easy.  That is really not a good way to befriend the trend.

The flip side of fundamental analysis is known as technical analysis and it involves identifying price trends and being sure to use the trend to your advantage. Buying low, and selling high, as it were.  I had been aware of technical analysis from reading the Dummies books, and I had glommed on to some of the concepts, especially moving averages, so I knew to look for stock prices trending upward.  I had made some great choices of companies and REITs, and bought when they were trending upward, but I'd failed to notice when their prices topped out and reversed into a downward “bearish” price trend.  

Realizing that because my chosen stocks were healthy, I had a better chance of winning the trend back as my friend, and in the meantime I was enjoying a healthy yield from each of my stocks, this time I held on to them.  I watched them drift down... and down... and down... but by late 2012 they have reversed again and are mostly trending upward.  I still have some paper losses on them, but the paper losses are dwindling as the stock prices trend upward, and I'm hopeful that they'll recover at least to the level where I bought them.

I am now intently studying technical analysis.  I don’t want the trend to just be my friend… I want the trend to be my BEST friend.  When the trend has a bad day at work, or the trend’s mom gets sick, I want to be the one that the trend calls for support.  I am starting by actually paying attention to the trend instead of ignoring what it is trying to tell me.  I’ll watch what the trend is doing on the S&P TSX index, as well as on my individual stocks.  I just need to learn to speak the trend’s language a little better than I do now.  I am fairly comfortable with moving averages, but I have a long way to go… I’m delving into the voodoo-land of Bollinger Bands and indicators such as MACD, Relative Strength, and On Balance Volume. 

My friend, Meghan, recently asked me if the reason I’ve become so interested in the stock market is because I had some early, addictive successes.  I hadn’t thought of it in those terms before, but as soon as she asked me that, I realized that no… quite the opposite.  I have become so interested in the stock market because of my early FAILURES and wanting… needing… to figure out what I had done wrong.  I enjoy mental challenges, and I prefer things that take some time and effort to figure out (thus the 21-year career in IT).  The stock market is huge and complicated and price movements are chaos-driven, but there are those who say you can use that chaos to your financial advantage, and I really want to figure out how to do that.  I’m hoping that this was my last “KO”, and the main thing I’m concerned about is that I may learn the technical indicators very well but still miss a big “crash” when it happens.  I’ve read that if people had paid proper attention to the technicals, they would have pulled out of the market before the big crash related to the dot-com bubble. 

Hark… is that some ominous cliff-hanger music I hear?

Fundamental Knockout

In early 2012 I had this stock market thing all figured out and I knew that I wanted to invest in dividend paying common shares.  It saved me from having to do the intense due diligence that Brent performed when assessing a preferred share, but still gave me a decent dividend yield.  I did some searches on the internet for good dividend paying stocks and found several pages which included lists of the "best" dividend paying stocks... "best" meaning that they had a good track record for paying dividends.

This was great!  All I had to do was pick from the lists of dividend "aristocrats" and I was golden.  I picked the ones with the highest returns (yield) and bought a bunch, including Atlantic Power Corporation (ATP), AGF Management (AGF.B) and Bonavista Energy (BNP).

After purchasing my shares in said aristocrats, I sat back to watch my money grow, and instead, watched the value of each of the stocks drift down... and down... and down.  The problem was, I hadn't considered the "fundamental" advice for picking dividend stocks, which is oh-so-clearly plastered all over the internet, as well as in all of the stock market "Dummies" books I've subsequently read.  The main caution being that one must consider the financial fundamentals of the company before investing - often a high yield is a sign that a company is in SOME KIND OF TROUBLE and one should be wary of investing in it.

I had bought ATP stocks on February 6th at a price of $14.92, AGF.B on February 10th at a price of $16.00 and BNP on March 16th at a price of $19.96.  The prices have drifted steadily down until today they are sitting at $10.86, $9.50 and $14.56, respectively.  That is a loss of $275 (27%), $400 (40%), and $275 (27%) per $1000 invested, respectively.  It would take an awful lot of dividend payments to make THAT back.  I could have held onto the stocks and waited and hoped that someday the price would come back up, but because these companies were in some kind of trouble, fundamentally speaking, holding onto them would likely have compounded my error.  The prices could take a very long time to return to the level where I bought them... or they may NEVER recover to that level.  I bailed out of each of them long before they drifted down to their current levels.

But how did I go SO wrong on that?  Of course I realized (after the fact) that there was more to the decision than just blindly picking the highest yield stocks and expecting everything to be golden.  How could I be so foolish and naive?

I dug into learning about the "fundamentals".  What characteristics should a company have in order to be considered a solid investment? How do I find out if a company exhibits those characteristics?

I read some Dummies books.  I pored over companies' financial statements as posted on TMX, becoming very familiar with the kinds of information that one can glean from the Balance Sheet, the Income Statement and the Cash Flow Statement.  I learned about certain ratios that one can calculate using the numbers from the financial statements to help sniff out potential issues that may not be immediately apparent from studying the financial statements.  Wow, this was some dry stuff, but I guess this is around the time that a spark of genuine interest was born in my brain because I kept at it... quite obsessively.  I created spreadsheets.  I gleaned and calculated.  I chose better companies to invest in based on all that gleaning and calculating.

Then I discovered that Morningstar.ca lets you set up custom portfolio views which will give you the fundamental analysis without really having to do all that gleaning and calculating manually.  Woo-hoo!  I was really on fire then... with my knowledge of the fundamentals and Morningstar's handy views, I could easily distinguish between healthy companies and sickly ones.

I also discovered the lovely REIT thingies which were a vehicle to invest in real estate without buying the real estate... and enjoy a healthy yield while you're at it.  I discovered that some of the fundamental criteria used for assessing an REIT are different from the criteria used in assessing companies, and I made sure to find out how to assess the fundamentals of an REIT.

I found some healthy, dividend-paying companies and some REITs.  I chose the ones with the higher (relatively speaking) yields and bought a bunch.  Now all I had to do was sit back and watch my money grow!

Unfortunately (and slightly more surprisingly), that is truly NOT what happened next.  Re-cue the ominous cliff-hanger music....

What Kind of Stocks You Got There, Brent?

In late 2011, I had to figure out what to do with regards to preparing for my retirement.  I’d given up on mutual funds many years earlier and had been plowing all of my extra money into paying off my condo.  In fall of 2011 (freedom 45, baby!), I achieved that and had to figure out what to do next, with the obvious goal of preparing for retirement.

Handicapped by a deep, deep lack of interest in finances and economics, though, my options were limited.  My partner, Brent, has been investing in the stock market for a long time, so I decided I would give that a try. 

Being an essentially lazy person (ok, maybe not “lazy” exactly… but certainly a fan of taking shortcuts when I can), I decided to employ one of my favorite techniques, known as the “Eddie’s Camera” technique.  In the early 2000s, I knew a guy named Eddie, and Eddie was a very thorough and meticulous researcher when he was considering making a purchase.  One time, Eddie was researching digital cameras with the intention of buying one.  He researched and compared and fretted for what seemed like an excessive number of weeks before finally deciding on a camera and making his purchase.  He was very pleased with his camera.  I was also looking to buy a new digital camera.  I did some great research and got a camera that I was very pleased with.  My 30-second research consisted of “What kind of camera you got there, Eddie?”.  It was foolproof!

So, intending to apply the “Eddie’s Camera” technique to entering the stock market, I slyly asked “What kind of stocks you got there, Brent?”.  Brent is a very thorough and meticulous researcher of stocks.  What followed was about a month of mind-numbing instruction on preferred shares, reading prospectuses, and calculating the potential return from a preferred share based on issue date, current price, and declared redemption date.  Well THAT didn’t work.  More to the point, exactly what stocks do you invest in Brent?  Well, Brent being Brent (gotta love him), he didn’t want to just tell me some stocks… he was concerned that he’d make a bad recommendation and I would get burned.  I tried to convince him that I would take full responsibility for my decisions but he wasn’t having any of it.  He insisted that I should learn some stuff and make my own decisions.  Insert long-suffering sigh here.

I started trying to assess some preferred shares, reading prospectuses, and calculating the potential return from a preferred share based on issue date, current price, and declared redemption date.  I wanted to poke my brain out with a stick.  I made a spreadsheet that I could plug some key numbers into and it would do some of the calculating for me.  That helped a little.  I found some preferred shares that generally seemed to fit Brent’s analysis, but trying to glean the key numbers out of the prospectuses was truly painful and, to quote Austin Powers, “just wasn’t my bag, baby”. 

I turned my attention to dividend-paying common shares instead.  They’re a little riskier than preferred shares, but a whole lot simpler to “read”.  The yield is just posted right out there for everyone to see.  No mind-numbing prospectuses or calculating.  By doing some internet searches I managed to identify a number of dividend paying stocks which were hailed by the experts.  I chose the ones with the highest yields and bought a bunch.  How easy is that!?  All I had to do now was sit back and watch my money start to grow. 

Unfortunately (but not surprisingly), that is truly NOT what happened next... insert ominous cliff-hanger music here...