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The Big Opportunity to Short the Stock Market

“Shorting the market can make you a lot of money” a friend once told me.

My friend might be drawing his conclusions from the movie, The Big Short. The 2015 film is based on a book of the same title that detailed how a group of investors foresaw the collapse of the U.S. housing bubble in 2007. The housing crisis was a major cause of the US banking emergency which eventually morphed into the now well-known global financial crisis.

In the movie, one of the main protagonists is Dr Michael Burry.

From mid-2005 to 2008, Dr Burry shorted the market before the housing crisis unfolded – hence, the movie title The Big Short – and thus, benefitted from the collapse. His hedge fund reportedly netted a cool US$700 million as a result of his short position.

The Big Long

Based on the movie, it is not hard to see why my friend would think that shorting the market can lead to a big windfall. But there’s a sharp irony to the story of the Big Short. In an interview, Dr Burry explained:

“Ironically, I’m in this book ‘The Big Short,’ but I’m not a big short. I don’t go out looking for good shorts. I’m spending my time looking for good longs.”

From where I stand, the maximum gain from shorting a stock is 100%. When you go long, it is possible to gain multiples beyond 100%. That simple math, in my opinion, is why Dr Burry is looking for good longs (stocks to hold for the long term) rather than to go short.

This is Dr Burry’s view even though he is perhaps now most well-known for shorting the market.

Closer to home, the market-mimicking SPDR STI ETF (SGX: ES3) has produced total returns of around 6.7% per year from its inception in 11 April 2002 to the end of November this year. And, this has happened despite the market crashing hard during the global financial crisis.

At its current growth rate, the SPDR STI ETF will double every 10.7 years or so.

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