Hug A Bear If You Want To Make Money

It was a tough call to make. A very tough call.

It seemed that the last-remaining mosquito that took up residence in my apartment had finally surfaced. It landed on my friend’s forehead. It was also within convenient striking distance of a rolled up newspaper that I just happened to have in my hand.

It would have been dead easy to eliminate the determined pest. But I, prudently, chose not to.

Instead, I wafted more citronella scent around the room, which has proven to be highly effective in deterring mosquitoes in the past. I felt that friendship-preservation was more important than mosquito-eradication.

The role of shorters

Mosquitoes can be the bane of our lives here in Singapore. So too, it seems, can traders that short the market. But without giving too much credibility to the blood-sucking insects (by that I mean mosquitoes), they actually do serve a purpose. They are part of the delicate ecosystem that we live in.

Shorters or short-sellers are part of the financial environment too. They are traders who sell shares that they don’t already own. They do this by borrowing shares in a company that they believe could be overvalued. They then sell those shares in the market.

But as with all goods on loan, the borrowed stock has to be returned to the lender at some later date, with interest. So shorters will hope that they are correct in predicting that their chosen victim is overvalued.

Unlimited losses

They also hope that they will be able to buy back the shares at a more favourable price later on, before they have to return the stock to their lenders.

But to do that they need to, firstly, be sure that they are right with their valuation. They also have to be certain that the market will, collectively, agree with them that they are right.

It is a risky strategy with gains that are limited. However, losses can be almost infinite.

The subtlety of investing

Many investors tend to take a dim view of traders who either short or sell their stock.

But it is important to remember that it doesn’t mean we are wrong just because the price of our stock goes down. Nor are we right simply because the price of our stock goes up. Investing is more subtle than that.

Peter Lynch once pointed out: “People invariably feel better after the market gains 600 points and stocks are overvalued and worse after it drops 600 points and bargains abound.

To be successful in investing, we need to develop a methodical approach that enables us to block out the opinions of others and, more importantly, repress our own distress signals.

In the end, it is neither the stock market nor even the companies that determine our fate. Instead, it is us, and how we react to events.

The secret to making money

If we are unable to convince ourselves when we are down, to be a buyer, and toss out the idea that when we are down to be a seller, then we will never make money from investing.

Bear in mind that for every buyer there has to be a seller. And for every seller there has to be a buyer. At the point of exchange, both sides get what they want.

The seller gets cash in exchange for his stock. The buyer, on the other hand, gets something that he wants too – he gets stock in exchange for his cash.

As long-term buyers of stocks, we ideally want to buy them as cheaply as possible. So go out and hug a shorter and cuddle a bear. They are doing you a favour. Mosquitoes, on the other hand, are more than capable of looking after themselves.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.