Is it possible to make money on both sides of the market?
Is short-selling a viable strategy?
It is not very hard to convince people that it is impossible to reliably time the markets. Unfortunately though, when the same idea gets repackaged and sold as “swing trading” or “make money on both sides of the market,” people fail to see through it.
Stock trading on the short term is a zero-sum game. When you win, someone else must lose. But the stock movements are random. If they are any real patterns such as correlations or arbitrage, computers already take advantage of those and leave no share of the pie for the common retail trader. These patterns cease to exist almost as soon as they are discovered and exploited.
In the long run however, the stock market is not a zero-sum game. If you zoom out far enough, you will see that the SPX500 seems to move only in one direction, and everyone who stays invested grows. The dips are brief and far in between. To beat the market by betting against it, you’d have to time the dips and use heavy leverage. The upside of shorting is limited, but the downside is unlimited!
The easiest way to make money is to buy and hold SPX500. In doing so, you are betting that our economies will continue to grow. This is a safe bet, unless you are one of those who believe there is going to be a catastrophic failure of our economic system.
Don’t get me wrong, I don’t think the economic system is infallible. History repeats itself over and over again. We are not immune from wars, as we’ve become very well aware in the recent years. There is much talk about changing world order too. I read about it with as much curiosity and intrigue as everyone else, but I am not yet at the point where I would bet on this happening in the coming months. When it does happen, I am sure no one will be prepared for it. In the meanwhile, you should let your money grow by investing on the market, not against it.
That said, there is also a case to be made about betting too much on the market. While it is very hard to time the market accurately, you shouldn’t ignore obvious signs of trouble. I’ve made the case for not short-selling, but now I am making the case for reducing your exposure when the risk becomes high.
As an active investor, you cannot remain completely dispassionate. It is your job to analyze the macro- and micro-economic conditions and express your opinion.
Based on your analysis, if you anticipate periods of high volatility or risk, instead of betting against the market, you should reduce your exposure and wait for the right time to buy the dip. If you time it just right, you will fall slower than the rest of the market during the dip and rise much faster than the market during recovery. But even if you time it incorrectly, you will still continue to grow with the market, albeit a bit slower, however you will still grow faster when you buy the dip eventually.
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