If the market goes up, the good stocks should rise more than bad, so gains on the good stocks should exceed losses on the short sales. If the market falls, the bad stocks should fall more than the good, so gains on the short sales should exceed losses. But profitable short selling requires superhuman timing, and the inevitable mistakes can be super expensive.
In 1999 and 2000, a number of hedge funds collapsed because they shorted Internet stocks that went on to soar. The hedge-fund managers were “early rather than wrong”, as the saying goes, but they still lost huge sums. After all, short selling turns the traditional market odds upside down. When you buy, your profit potential is unlimited and the most you can lose is 100%. When you sell short, the most you can make is 100%, but your potential for loss is unlimited.
Fund companies are still eager to launch hedge funds, especially now that new rules make it easier to sell them to the public. Hedge funds, long associated in the public’s mind with reclusive offshore millionaires, are a prestige item. In addition, they’re hugely profitable for the sponsors, due to incentive fees-investors pay extra if the fund performs well. Brokers are also happy to sell the funds and earn commissions. In addition, hedge funds trade heavily, and they usually trade through brokerage firms that sell their fund to investors. It’s a common investment situation.
The fund makes money; the broker makes money; sometimes even the client makes money. Of course, some investors lose heavily, due to the fees and risks. But, as they say in the investment business, “two out of three ain’t bad”.
Our advice: stay out. Rather than invest in hedge funds, we think you should build a portfolio of high-quality, mostly dividend-paying stocks and follow our TSI Network three-part Successful Investor strategy:
Most investors who successfully build wealth over the long term follow certain investing practices. Find out what they are in our FREE investing guide, The 10 Best Practices of Successful Investors.
Here’s the text of the most-recent letter I sent to our Portfolio Management clients in late July:
“Often, one or more big or key idea(s) provide the stock market with its main direction.
Many investors instinctively try to spot these big ideas. Most instead… Read More
Dear Inner Circle Member,
One of our three key rules for stock market success is to downplay or avoid stocks that are in the broker/media limelight. The problem with stocks in the limelight is that investors tend to build up excessive expectations for them. When stocks… Read More
A: The Direxion iBillionaire Index ETF, $27.51, symbol IBLN on New York (Units outstanding: 1.4 million; Market cap: $38.5 million; www.direxioninvestments.com), is designed to profit from copying the moves of billionaire investors such as Warren Buffett, Carl Icahn, Daniel Loeb, Bill Ackman and David Tepper.
The… Read More
Pat McKeough recently replied to an Inner Circle member looking for an opinion on Imvescor Restaurant Group Inc. The company’s focus on its menu and customer service has boosted sales for its restaurants as well as its earnings.
Q: Hello Pat: What would be your opinion… Read More
A: Imvescor Restaurant Group Inc., $3.23, symbol IRG on Toronto (Shares outstanding: 56.7 million; Market cap: $184.2 million; www.imvescor.ca), operates 223 restaurants (218 franchised and five company-owned) under the Pizza Delight, Trattoria di Mikes, Scores, and Baton Rouge brands. They are mainly in Atlantic Canada.
The… Read More
TD BANK $58.18 (Toronto symbol TD; Shares outstanding: 1.9 billion; Market cap: $108.4 billion; TSINetwork Rating: Above Average; Dividend yield: 3.8%; www.td.com) has acquired Albert Fried & Co., a small brokerage firm based in New York City. The bank has yet to reveal the purchase… Read More
AGRIUM INC., $118.45, Toronto symbol AGU, and POTASH CORP. OF SASKATCHEWAN, $21.11, Toronto symbol POT, both fell on the news that they plan to merge operations. The deal will be an all-stock transaction.
Agrium gets most of its revenue and earnings from selling seeds, fertilizers and… Read More
A: The Dynamic Global Growth Opportunities Fund, the Picton Mahoney Long Short Equity Fund and the Sprott Hedge fund take both long and short positions in securities, as do most hedge funds.
Those two activities differ widely. When you buy high-quality stocks… Read More
Hedge fund investing may sound good on paper but in actuality, it requires superhuman timing, and the inevitable mistakes can be super expensive.
Hedge fund investing aims to buy good stocks and sell bad stocks “short” (that means borrowing bad stocks, selling them, and… Read More
25 investment terms every investor should know—from Aggressive Investing to Warren Buffett
If you’re an investor, you may not know all of the investment terms you come across. Here’s a breakdown of some of the most common ones.
Aggressive Investing
Aggressive investing is a style… Read More
Learn everything you need to know in 'The Canadian Guide on How to Invest in Stocks Successfully' FREE Special Report from The Successful Investor.
How to Invest In Stocks Guide: Find 10 factors that make your investments safer and stronger.
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