Short and Wrong; Leaving Room for Mistakes

| About: ProShares UltraShort (SDS)

Roger Nusbaum submits: This week was very dull for the stock market and very spicy for this blog. August was clearly a good month for stocks, which I did not expect would be the case. It is worthwhile to revisit the position I put on in the ProShares UltraShort S&P500 (NYSEARCA:SDS): I bought on July 14 at around $74 per share. It closed Friday at $66.76. Since July 14 the S&P 500 is up 6%. Interesting that SDS is down 9.7%, which is not horrible in that I expected tracking errors when I bought it.

When I put the position on I wrote that if I was wrong (which for now has been the case) and the market went up, that SDS would become less and less of a drag. I bought it to about 4% of the portfolio; today it is down to 3.2% of the portfolio. No doubt it has been a drag on returns, but I was clear that for the time being I would be OK with capturing a only a portion of any upside—which I have done.

I think this is a good example of how we can not be right all the time, and the way in which we implement changes will determine the consequences of being wrong. Of course for all anyone knows September could be dreadful and then I seem smart—which isn't the right way to look at it.

SDS 2-month Daily Chart