Do you have any thoughts on the subject of short selling?
I need more time to study it and more experience. However, to pick a short, I think you need to flip all these
characteristics we were talking about. Instead of a good growth record, you should look for a poor five-year growth
record and quarterly earnings that are decelerating. The stock should be losing relative strength, breaking uptrends,
and starting to hit new lows.
Do you think that short selling may be a critical element for superior performance if we go into a
long bear market?
Yes, I think it would help. But, Bill O'Neil will tell you that shorting is about three times as hard as buying
stocks. Bill says he has made substantial money in only two of the past nine bear markets. He thinks the best thing
you can do in a bear market is just sit it out.
How do you recognize a bear market before it's too late?
By how well my individual stocks are doing. If, during the bull phase, the leaders start losing, it indicates that
a bear market is developing. If I have five or six stocks in a row that get stopped out, a caution flag goes up.
What else do you look for to signal a bear market?
Divergence between the Dow and the daily
advance/decline line
[a graph of the cumulative net difference
between the number of New York Stock Exchange stocks advancing each day versus the number declining]. The
advance/decline tends to top out a few months before the Dow does.
Did that happen in 1987?
The advance/decline topped out during the first quarter of 1987, well before the stock market peak in August.
Were you looking for a top because of that?
Not at that point, because a lot of the individual stocks were still doing very well. The big clue that the market
was really topping was after the Dow came off its high at 2,746, there was a very feeble, low-volume rally, and then
the market got hit for another 90-point loss. At that juncture, I decided it was time to move out of the market.
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