The Bull Hunters Guide

Lately, we’ve been talking a lot about short selling in this blog. In particular, we’ve been talking about the pros and cons of short selling, and last time I mentioned that there was a distinct dark side to the practice that causes many to cringe when they even hear the term. This time, we’re going to talk about exactly that.

Short and Distort

Short selling is a somewhat cryptic process that is rarely understood all that well by the amateur investor. Because of this, it creates a ripe opportunity for unscrupulous traders to take advantage of short selling and twist it into a market-harming “money making machine” that doesn’t respect the true meaning of free commerce and investing.

When this happens, investors resort to using a tactics known as the “short and distort”. The way it works is this. Imagine that you have a bear market. The prices of stocks are almost universally down, and prospects all around aren’t so great. Traders might take this opportunity to buy a bunch of short options in a stock. Of course, that in itself is perfectly normal and ethical. However, what makes the “short and distort” such a terrible practice is that the investors then go on to spread slander and lies about the businesses that they’ve bought shorts in.

Slander Is Believable

Obviously, in a bull market, everyone is already nervous and pessimistic. Slander is thus easily believed, and it’s easy for investors to cripple a company through these means. When that happens, they walk away from the smoking wreckage with a handy profit, purchased at the cost of their integrity as real business people.

Of course short selling has its dark side. So do all forms of investing. It’s the ease with which short selling can be exploited however that makes it a particular target for scepticism.

See you next week for part 8 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Hi again. Recently in this blog, we’ve been covering the topic of short selling and all that it implies. We’ve gone over exactly what short selling is, who does it, what they hope to gain by doing so, and perhaps most importantly, what they stand to lose. Yet, apart from all of these concerns, short selling carries its own unique set of questions that don’t tend to come up in other discussions regarding the market.

Questions Of An Ethical Concern

Despite the degree to which short selling has become an accepted and standardized aspect of trading on the free market, it’s no secret that short sellers themselves aren’t really seen in such a positive light. The reason for this is that short selling itself is an inherently pessimistic process. You only stand to make a profit from short selling when the securities that you invest in do poorly.

Of course, if you only take part in short selling, it’s easy to see why others would regard you as someone who is hoping for the worst. Because most people have at least some investments that stand to profit from upwards movements in the market, you become some of their antithesis – when one of you makes a profit, the other one has to suffer. In other words, short sellers often find themselves set apart from the crowd when it comes to investing.

Bringing The Market Down

However, perhaps more importantly than this emotional impression of short selling, is the argument that short selling can actually have a detrimental effect on the overall status of the market. More than just being a practice founded in betting against one’s neighbour, it is often said that short selling actively works to bring down the market as a motivated force in itself. Next time around, we’re going to take a look at these accusations and see just what truth there is to them, if any.

See you next week for part 6 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Last time, we talked about how short selling is a valuable trading technique that can go a long way towards ensuring your long term profitability as a trader. The ability to profit during a bear market is one of the hallmarks of a seasoned trader, and something that can really make the difference between an amateur and someone who knows what they’re doing.

Short Selling Transaction

Let’s take a look at how a short selling transaction might play out, so that we can better understand the situation for ourselves. In doing so, we can come to realize just when employing a short sell transaction might be useful to us, and when it might become a disaster.

Presume that you take a look at the market and come to the conclusion that a certain stock is about to plummet. You can see it on the horizon, but you haven’t heard the rumbling elsewhere yet. It’s something that’s not anticipated, just a hunch that you have.

Let’s say that stock in that company is currently selling at $100. You decide you’re going to capitalize on their failure and short sell a bundle of shares valued at $1000.

Two Possible Outcomes

Flash forward a few months and we can see two possible outcomes. In the first, your predictions proved to be correct, and the value of the stock dropped from $100 to $50. Now, you’re forced to buy back the stock in question that you short sold, but in so doing, you’re only spending $500. That’s $500 profit on your initial investment!

But suppose the opposite had happened? If the value of the stock had instead surprised you and risen to $150, then you’re be forced to pay back $1500, losing a total of $500 on the trade.

Clearly, short selling is something that we have to carefully study if we’re going to be able to do it wisely and profitably. Next time, we’ll take a more in depth look at some of the risks involved in short selling.

See you next week for part 4 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Hello Fellow Bullhunters

I hope you all got to read Seans post yesterday regarding the success of a couple of graduates of the 21st Century Academy homestudy.  I personally know Maria and Pierre and I have to say that they are a great example of what you can achieve when you put yourself into action and go after your dreams.  Congratulations again on your retirement from your day job and now making a living from trading.

I don’t know about you but I am certainly getting more out of The Bull Hunters Guide to the US Stock Market by breaking it down into small chunks and analysing it.  It’s becoming clearer to me each time I write a post and bringing it all together.  Let’s continue…

The Dow financials are cyclicals as well, but they don’t always follow the same cycle as the industrials.  American Express is the most cyclical of this group.  It performs best when the economy is strong and thus consumer spending is strong.

Citigroup and JP Morgan Chase are the most closely related of the stocks in this group as they are both money center banks.  Banks do well when there is a positive disparity between short-term interest rates and long term interest rates, also known as a normal yield curve.  When long-term rates are lower than short-term rates there is an inverted yield curve which is a nightmare for the banks.  The factors influencing the movements of interest rates are beyond the scope of this book but suffice to say that the inverted yield curves are predictors of oncoming recession and therefore money center banks perform best when the economic future looks strong.

American International Group (AIG) is an insurance company.  It benefits from a strong economy because it invests its assets in the financial markets.  But it is the least predictable of the financials because major events like Hurricane Katrina can have a disproportionate impact on insurers.

Market conditions are dependant on many variables so it is wise to determine the value of a stock and then follow your trading system making use of technical analysis to find your entry and exit points.  Remember that a strong economy is when the financials perform the best.  We cannot predict when natural disasters are going to happen or any disaster for that matter that will have an affect on the stock market at any given time.  Writing put options is one way of protecting yourself if you happen to be new to trading and it’s always wise to start with paper trading until you are confident to put your real money into the market.

Yours in prosperity

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions.
Edwin Lefevre’s Reminiscences of a stock operative (1923) offers advice that still applies today.

Hello Fellow Bullhunters

A little about the psychology of trading is our topic for today. What happens when you begin to trade is that it becomes an expression of your own personality. You take it on originally thinking it is all black and white when instead, as you become more involved with the process, you start to form a kind of love affair with the market and find your favorite stocks and treat them as your very own. STOP RIGHT THERE…

In fact, when this happens, your emotions start to come out and rule how you trade. Becoming emotionally intelligent is a very important step to take at the very beginning. You see, good trading is not a question of doing, rather, it is a way of being. To learn more about Emotional Intelligence, go here to explore Jamie McIntyres ebook: What I Didn’t Learn At School But Wish I Had.

When you trade with your emotions you enter into a downward spiral so do not put yourself under too much pressure because you will fail. It’s important to learn to risk because without risk there is no reward. The minute you become risk orientated you are in the right frame of mind for trading the market.

Develop your own style of trading in a way that you stay detached from it. It is a good idea to start with small trades i.e. one contract at a time. See where this takes you and always, always record every step of what you are doing. This will tell the story of your trading personality.

A trading register will have your buy and sell price, the date you entered and exited. Also write down if the dog next door was barking at the time you chose to do that trade. Why you decided to take the trade. The profit/loss you made. Where you set your stop loss at. All these things and more will reveal your trading personality once again so review your register at any time and you will know straight away whether or not you are an emotional trader.

Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines. Do not enter every single trade you see. Do not become a screen watcher and get up to the minute prices of your stock. Set yourself up so that there will be no need for this. You have a life to live… don’t you?

Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb if you are bullish in a trade, or downward spiral if you are bearish in a trade.

I would like to acknowledge Hans Kujat, a fellow 21st Century Academy Graduate who made the suggestion for this weeks topic.

There is plenty to learn about trading and I am here to help you on that journey. For those of you who wanted to leave me a comment last week and couldn”t because of the challenge of a technical hitch with the software, I invite you back now and look forward to hearing from you.

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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