Shorting Using Mutual Funds

Our dear forum hosts decided to close the mutual fund board, even though it had more posts and was more active than some truly irrelevant ones they decided to keep open. So I’m going to post my comments here.

Back in the day, when many of us gray beards were starting to invest, mutual funds were a Really Big Thing (RBT). You’d go the Money Shows, and most of the seminars and talks were about how to use them, own them, or trade them. These days, open-end mutual funds are pretty passé --and closed-end funds maybe even more so.-- for having been displaced by exchange-traded funds and notes (ETFs and ETNs). But there’s fun in being “retro”, and open-end funds and their single, end-of-day pricing (EOD) offers some advantages, especially for West coasters. Instead of having to get up at the crack of dawn and live on New York time to stay with markets, one can having a leisurely morning and still get one’s trades done. As long as orders are submitted ten minutes before close of the regular session, they will execute that same day.

On the 19th, five market days ago, I used a mutual fund to go short emerging markets. Logging into my account just now, I see that I’m being marked to market as being up 16.61% on the position. Do the math. That’s a gain of just over 3% per day, which is serious money, given that “the market” is selling down each day by nearly that much.

Are mutual funds investments, or are they trading vehicles? The obvious answer is “Yes”. They can be both, depending --as always-- on one’s means, needs, and goals. If you’re going to trade 'em, you need to avoid the ones that impose short-term trading fees and/or high initial purchase amounts. Fortunately, through Schwab, there are 136 of them that impose no ST fees and can be bought for as little as $100 bucks. Even better, they cover all the major asset classes, as well as offer some inverses. So, if you want to short the $US dollar or oil or real estate, or the SP500 or the DJIA or the NAZ 100, you can do so with a mouse click.

As for shorting oil or or the $US right now, I’d say DON’T. You’re going to lose that bet. But rising interest-rates --as well as general stupidity on the part of the Fed/Treasury cartel-- is wrecking havoc with equity prices, never mind the vicious, fact-free policies of the Marxists who’ve seized control of our government. The net result is the phony, inflated, bull market is dying, and it’s become time to get short. Using mutual funds is a low-cost, low-effort way to dip one’s toe into the shorting game provided --of course-- you know how to build and use price charts.

That’s the rub. You’re going to get killed if you’re not a pretty decent technical analyst. Fortunately, there are plenty of books on the subject, any of which can be useful. But the easiest way to learn to chart stocks and funds is to chart stocks and funds, hundreds of them. Forget the fancy patterns like ‘Head and Shoulders’ or ‘Tea Cup and Handle’. Just focus on whether prices seem to be making higher highs, or lower lows, or going sideways (which happens a lot). If the trend is ‘Up’, you 'Buy. If the trend is ‘Down’, you ‘Sell’ (Or you go short if you have access to inverses.)

The keys to not losing money are simple:

#1, Don’t try to see in a price chart something that isn’t there. Explanation: The sort of faith-based investing that the TMF reps advocate --and their talk about “having conviction”-- is total bullsh*t. If the evidence isn’t in the tape that prices might go up, the higher probability is they won’t, and “investing” is nothing but a game of making bets on the direction of prices.

#2, Never, ever over-bet your hand or your account. Yeah, when a trade goes well, there always comes the regret of not having bet bigger. But that’s a sure way to blow up an account. Until you’ve done hundreds of trades, don’t even think about trying to scale up. Keep your bets small. Keep them equally sized. The goal in the beginning isn’t making a lot of money, but learning how to not make bad choices and decisions.

#3, “Hope isn’t an Investing Plan.” When prices move against you, have the humility to admit you are wrong and get out of the trade while your loss is still small and your emotions haven’t yet become crippled.

#4, Finally, always remember this. This investing/trading stuff is just a game. Family and friends come first. Community and church (or temple or synagogue) second. Markets are a distant third, and there’s always a bull market somewhere, or at least an opportunity everyone else seems to be ignoring. So, chart your own path, and ignore what everyone else seems to be chasing, because you’re late to their game, and you’ll probably do better --and have more fun – if you find your own.