Thursday, April 21, 2011

Portfolio - Introducing......The Short Game!

As a golfer with a rather “volatile” long game, I know that a good short game can save a person a lot of strokes. Similarly, in today's volatile markets, its seems evident that a good short game can save a person lots of money.

Like many investors, the vast majority of my early experience had been on the long side of investing. In the past, I like many people, would have my eyes glaze over, my mind go blank, and my hands start to sweat in fear if anyone even mentioned the word “short”. Over the past several years, I have spent a lot of time studying how the big boys in the financial service industry make their trading profits. I've come to believe a lot of their success comes from how they manage their risks via risk using short strategies. I hope CCI can help readers develop a similar perspective.

Over the past few years, I have continually expanded the use of the short game in my portfolio. It did help reduce, but certainly did not eliminate, my losses in the last trough. Through this experience, I have developed a few theories and opinions (shocking I know) about how to implement the short game in investing. From my perspective, there are several aspects to a good short game, but all of them are related to reducing the risk of the overall portfolio. It starts with relatively traditional risk management techniques such as how often and aggressively a portfolio is re-balanced, the use of options, etc. It extends to more aggressive approaches of shorting stocks, pairs trading, and even the use of the controversial double/triple short etfs.

Over time, my plans are to have CCI have a specific section and focus on The Short Game. One component The Short Game is to have a small portfolio of short stock positions. The common sense reason for this simplistic short portfolio is that out of the thousands of stocks and etfs in the market it seems like there has to be at least a few that are overvalued.

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The first edition of The Short Game focuses on a short position in (CRM)

This high flying stock is one of the most shorted in the market. That means many people have already shorted and lost. The article below discusses why I think now is the time to short the stock.

The portfolio is short one lot of the stock at $140.38, and the trade will be tracked on this site.

Additionally, it is important to point out that this trade really does not stand alone. Readers of this blog know that the portfolio is overweight stocks like Intel, IBM, and Oracle. There are lots of reasons I like those stocks, but one of them is their role in cloud computing, They are the cloud. Conversely, while CRM is often referred to as a cloud computing play, it is really just an application floating in the cloud. In my perfect world, Intel, IBM and Oracle will be up while CRM will be down ( careful attention......short game...IBM up, CRM down...get However, it is possible that may not be the case. For example a market correction, tech sector stall, or bursting of the cloud bubble (get could bring all these stock down. In that case, it is my belief that CRM will fall more than the mainline players. Of course, the worse case scenario is CRM decides to go parabolic, while the mainline players fall. That would be bad, but I think/hope the chances of that are small.

In summary, now is the time to short CRM in general, but it also should be viewed as a “pairs trade” with the other pieces of the portfolio.

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