- A discussion of my short-lived short position in Herbalife.
- This was an experiment as a trader.
- It won't be repeated.
On Thursday, as the market was falling off a cliff, I shorted a stock. In 14 years in the market, I had never held a short position. This day, all the stars had aligned - the right stock, a market that was heading lower quickly, and the thought process that said, "Try it. Just this one time."
On Friday morning I closed the position, ending about 20 hours of an experiment that will never be repeated. Why? It surely wasn't because I lost money and was licking my wounds. Including commissions, I was only down about $21. It was because I had entered the world of the short term trader, and found the experience to be as bad as I had always known it would be.
Several times over the last few weeks, I read articles on Seeking Alpha stating the bearish case on Herbalife (NYSE:HLF). I had known the company was bad news since my otherwise cool guitar teacher had tried to recruit me as a teenager in the early 80s. With the sudden finger pointing by Bill Ackman and the commentators on SA, I thought we might finally see the government step in and shut them down. We may still, although my money won't be involved.
Before earnings, the stock was trading at $66. Part of me really wanted to short it. When the earnings came out, the stock dropped to $59. The next day it went down further, and the next day even further than that. "If I shorted stocks, I would definitely do it," I kept saying to myself. Finally the market took its big move down. I convinced myself that I should at least short a stock somewhere during my life, and this was the perfect opportunity to do it.
Excitedly I entered the trade. I felt adrenaline rushing. The order came up on the screen. I could still stop. All I had to do was not hit "Confirm". I pressed it anyway. Suddenly it was there on my home page, a short position, negative shares held in my account. A few seconds later, I hit refresh and the stock had gone lower by a few cents - not enough to cover the commission, but moving in the right direction.
For the remainder of the trading day, I kept going back to the page. Sometimes the stock would drop a few pennies, getting me closer to break even, and sometimes it would go up.
Finally the market closed. It was ridiculous how I felt, excitement mixed with nervousness, kind of like a first date or a trip to Vegas. This was nothing like the long side of my portfolio, where I check my stock prices with only passing interest. After an hour, "Fast Money" came on, followed by Cramer. Instead of changing the channel, or half listening with a good amount of disdain, I found myself hanging on every word. "They all seem to think the market will continue much lower!"
For 14 years, I had told myself that short term market movements were entirely unpredictable and largely irrelevant. Today was different. Everything I have always viewed with intense negativity, like technical analysis, was now important. If we could just get below that 50 day moving average, we could be off to the races!
But how would I know when to cover? If I followed the thesis that the company was somehow breaking the law, I should hold on all the way to zero. This could be a very long way off, and shorts are supposed to be trades. I could wait for it to go down maybe a couple points, hoping to make a few bucks that could be used on my next buy. Excitement and insecurity combined perfectly.
This is where the fun began to end. I knew the jobs number would be the deciding factor in where the markets would move this day. The problem is that I live on the West Coast, and that number would be coming in very early. Should I get up at 5 am to be ready for it? OK, no, I won't go that crazy. I would get up at a normal hour and treat this like any other market day...yeah right.
I did manage to sleep in past 5:00, but not for much longer. I was lying in bed, worrying about my trade. Was I making a huge gain? Did the market react positively, leaving me in a short squeeze? I tried to sleep, but couldn't succeed.
Finally I got up and went to the computer. 200k+ jobs created, but less than estimates. Unemployment at 6.2%. Market down a bit, but not crashing. And then....HLF up slightly. Oh no!!! Do I hold on and wait for it to come back down so I can break even? I could try that, but what if it goes up, causing my minor loss to become a major one?
In all my years in the market, I have always been able to exclude emotion. I have been through two crashes without a problem. As a Graham and Dodd, long term buyer of businesses, I have never felt a twinge of excitement or despair on trades much larger than this. I hit "buy to cover" and it was over.
Instantly I felt normal again. The loss I incurred was less than a dinner in a cheap restaurant, but the lessons will remain with me forever: No investment can ever be good if it has more emotional value than financial. The stock exchange is not a casino. And most importantly, a disciplined approach must be exactly that - disciplined.
Author's Note - No technical analysts were injured in the writing of this article.
Additional disclosure: Closed short position on 8/1/14