Shorting Lousy Stocks = Lousy Returns?
This research note was originally published by the CFA Institute’s EI blog.
SUMMARY
INTRODUCTION
Playing the stock market should be easy. When the economy is booming, buy equities. When it’s deteriorating, short them.?
Stock selection shouldn’t take much effort either — we just need to apply the metrics from the factor investing literature. In bull markets that might mean focusing on cheap, low-risk, outperforming, small, or high-quality stocks, and in bear markets, the inverse.
Of course, in practice, equity investing is neither easy nor effortless.
First, not even economists can really pinpoint when an economy goes from boom to bust. Economic data isn’t released in real time and is often revised. It may take quarters if not years to determine precisely when the tide turned. Second, in the recent, long-running bull market, buying stocks with high factor loadings has not been a winning formula. For example, the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) — the largest?multi-factor product, with almost $11 billion in assets under management (AUM) — has underperformed the S&P 500 by 10% since its launch in September 2015 (read?Multi-Factor Smart Beta ETFs).
But what about shorting stocks? How has that worked as a strategy? Let’s explore.
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