Saturday, October 4, 2008 1 comments ++[ CLICK TO COMMENT ]++

Sold: S&P/TSX 60 Bear Plus ETF (TSX: HXD)... Good Newbie Lesson For Me

Finally got rid of the Horizons S&P/TSX 60 Bear Plus ETF (TSX: HXD). This is an ETF that returns 2x inverse of the S&P/TSX 60. I said this was a mistake but fortunately made a small amount of money on it. I came to the conclusion that I'm not cut out for shorting and have been thinking of unloading this at the first opportunity I get (I had opportunities to exit at a break-even price about a year ago and in January, but chose not to.) Although I'm still somewhat bearish on the TSX, I am selling out now since the markets are unpredictable (there is potential for a rally.) The return is poor, underperforms long bonds and is below my 20% ideal target (I never hit the 20%, it's just a target.) I sold with an annual return of around 8% (non-annualized return of around 13%).

This is an example of a mistake that ends up working out, although not to the original expectations. The lesson I learned is that I'm not cut out for shorting. It's hard to rationalize a short position when it goes against you.


This was a position I took when I was more macro-oriented (now, I'm more into value investing although I'm still influenced heavily by macroeconomics and don't consider myself as a value investor.) I took this position as a bearish bet on commodities. I chose the TSX, which is heavily driven by commodities these days (energy and materials accounts for a huge chunk of the index.) My thesis was based on the view that commodities were in a bubble (particularly oil and base metals.) I was expecting oil to drop to around $40 (right now I think a more realistic target is $70.) This wasn't a long-term call but rather an intermdiate one. For all I know, oil may hit $500 in 20 years.

The bearish commodity bet looked like it was turning into a disaster of epic proportions--although it's hard to do worse than Ambac :(--when oil skyrocketed to $140, gold was on fire, and Potash seemed like a dot-com written in history books. However I still felt that commodities were in a mini-bubble, if not an outright long-term bubble. When Potash became one of the largest companies on the TSX, it re-affirmed my view that this is exhibiting signs of a bubble. I mentioned a few months ago how oil prices didn't seem justifiable and Potash seems like it was in a bubble.

The thing that saved me was the fact that the subprime virus infected financial institutions (even the conservatively-run Canadian ones) and the whole market got killed. In fact, practically every single sector and asset type is down this year (except the US$ of course.)

Well, Potash crashed this week, and is off almost 50% within a few months. I felt it was time to exit, even though the TSX can still drop a bit more. Given the likely real losses with Ambac and paper losses in others, I was a bit too scared to hold this. The thing that always worried me was what Marc Faber said a long time ago. He said one of his worst investment mistakes was shorting NASDAQ back in the late 90's. His call was right but it went up much higher than anyone expected. I was worried that I might have made the mistake. The way oil was skyrocketing for no "valid" reason, there was no telling where the peak was.

The lesson I learned is that shorting is not for me, and it is hard to justify a position when it goes against you. This is especially true of taking an inverse position against a broad index. When you are long a stock and say it drops in price or its profits drop, or whatever, then you can always think that through. If the conditions are temporary or if profits are holding up while stock drops, it is easy to justify holding it. For a short position on an index, it's difficult to say something. Ok, so commodity prices look ridiculous but how can one be sure it will decline any time soon? What if the valuation multiple expanded?


Sale Price: $26.96 and $26.61
Total Return: 13.04% (7.91% annualized)

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1 Response to Sold: S&P/TSX 60 Bear Plus ETF (TSX: HXD)... Good Newbie Lesson For Me

synchro
October 6, 2008 at 11:48 PM

I applaud you for realizing your own limitations or weakness. Shorting is by definition trading. And trading by fundamentals alone is a sure way to exhaust your emotional mental capital -- because inevitably you would be in a situation where you'd be staring at the position going against you when you knew, just knew, the price couldn't be moving the way it does.

But it always does.

If you try shorting again, you should have a technical filter, and more importantly, a money management methodology.

You went into trading w/ only one leg (fundemental) of a three-legged stool. You need to bring two more legs to the battle: technical and money moneyment.

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