It always amazes me that so many active investors who pick individual
stocks, rather than buy funds or get passive market exposure through
index funds and ETF's, are unwilling to express their bearish views
through short selling. Instead, they sell outright, or buy puts, or
hedge with some other passive device to lower their market exposure.
If
you have the guts to buy a stock, presumably you've decided that the
stock is at least relatively cheaper than its competitors, or stocks in
general. Whatever the insight to that decision should be "reverse
engineered" allowing stocks to be identified as unattractive, and thus
likely to underperform your picks. There has to be an applicable
symmetry to your investment process, otherwise you are deluding
yourself that you can pick "winners", if you can't pick relative
"losers" as well.
So, to hedge market, sector or industry
exposure, look at your current positions. What competitors did you pass
up to buy, and why? If they didn't look so attractive then, and if
they've lagged since you've had your competing position, then maybe you
just proved that you had relative valuation insight as well as
absolute. Consider expanding your investment insights to selling short
stocks that don't meet your investment criteria - if you want to lower
your market exposure. If you're purely bullish, stand pat, or consider
higher beta stocks that you like to get that extra oomph.
The
purest expression of stock selection skill is to both buy and short
stocks that you believe are mis-priced, and earn a spread between the
longs and shorts, independent of the market's direction. Give it some
thought. You can see how I'm doing with my long/short portfolio on
Vestopia.com.
