The Long and Short of It

What generally follows that expression is a succinct synopsis. We’re always trying to be concise; however, distilling complex economic and investment matters usually requires several pages. Case and point, explaining why we are simultaneously long and short will take more than a few paragraphs to properly convey our rationale.

We own stocks (long positions) principally because stock markets rise over time. Populations grow, unit volumes rise, revenues increase, profits expand, underlying valuations track higher—up and to the right—and stock prices follow suit. We look to participate in the upward bias of long-term market trends, selecting individual securities we believe to be higher quality and more undervalued than the averages.

In the short term, market prices can fluctuate considerably from price volatility fueled by market psychology. This is generally driven by market participants reacting to specific events or when recessions occur which periodically interrupt the upward trajectory. Therefore, we short from time to time, particularly when we expect a recession, to hedge against expected declines—to mitigate losses we may incur on our long positions during market downturns.

Because we don’t have a crystal ball, even when our models are suggesting a market setback, we still don’t wish to eliminate our longs since the upward bias of the market is a powerful force—markets rise most of the time, and by healthy compounding amounts. It’s also much simpler to invest from a bottom-up standpoint since there are fewer moving parts to individual companies whereas a top-down stance is subject to all sorts of external influences.

Though, if we foresee a downturn, as we do now, we may raise additional cash and alter the nature of our long positions for additional protection.