I failed to beat the market in 2014 because I bet heavily on new-economy stocks and shorted old-economy stocks as a hedge that year. That’s the only year that my portfolio underperformed the benchmark in the last 10 years or so.
New-economy stocks suffered a heavy sell-off in March 2014 as market focus switched to old-economy plays. I was forced to close my positions, and it took almost six months to make up for the huge losses.
The US market sort of repeated the pattern of early 2014 last Friday. But it occurred with far less dramatic decline.
With the bitter lesson still deeply in mind, I’ve cut back my short-selling considerably in recent years.
Short sellers are typically under great pressure, and they would usually close positions with small margins. In fact, it’s no longer that realistic to hope investors will panic and dump shares at dirt-cheap levels.
On the other hand, the penalty for short-sellers when they make mistakes can be grave.
I believe minimizing or even staying away from short-selling completely is quite helpful to the overall return.
My defense strategy is simple: just reduce the holdings of new-economy stocks to a comfortable level.
I think the market correction should be limited this time. Valuations of new-economy stocks have become elevated compared with a couple of years before.
However, the role of new technologies in the economy has become so pronounced, and internet firms have more solid results.
The market decline this time has been triggered by unwinding positions of derivatives and elimination of swinging investors. I believe the long-term trend remains unchanged.
Investors might always feel like they are skating on thin ice if they don’t have a strong belief in these new-economy stocks. These stocks have high valuations and accumulated significant gains. A deep correction appears to be imminent.
Another way to handle such fear is to diversify. For example, I hold a lot of REITs as a hedge. I would sell some internet stocks and switch into REITS from time to time to lock in the profit.
My strategy may not be perfect, but I would rather give up some potential upside in order to buy insurance and have peace of mind. Pushing the limit too far could be dangerous.
This article appeared in the Hong Kong Economic Journal on June 13
Translation by Julie Zhu
[Chinese version 中文版]
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