Last week capitulation out of my homies short positions marked more than the closure to a nasty financial loss. This long weekend felt like it lasted three months as visions of Hoofy living in a 7000 ft. mansion purchased for $525 /sq.ft., with a no doc. / no money down mortgage danced in my head nearly 24/7. Sleep was basically non-existent. As I write this on Monday night – I repeat, sleep is non-existent – I can’t wait for Tuesday morning’s bell, and yet I have never felt as doubtful of my trading skills.

The homies debacle brought home a lesson I had heard discussed often: shorting is a difficult, dangerous game under the best of circumstances; shorting cult names, where longs and shorts are fighting it out as if it were the final battle between good and evil, is a recipe for disaster.  I knew of the lesson, but I just did not believe it applied to me.

My fundamental take that the housing market is in a full fledged “Mother-of-all-Manias” overshadowed not only basic rules for short selling (and for surviving to tell about it), but basic discipline, and mounting losses. I feel almost embarrassed to list my mistakes because they are so elementary they are inexcusable, and yet I managed to make them all in one single swoop:

Shorting is almost inherently a counter-trend trade because on average, in the long run, stocks rise. “Investment” shorts come around once in a blue moon. What did I do? I hardly even considered that the homies might not be the ultimate “investment” short.

Digging your heels in a short position in the midst of an established bull market (cyclical as it might be) reduces the odds of that trade to pretty miserly levels. What did I do? I explained away the bull market as being a liquidity driven reaction to the first phase of a secular bear market. As if that would have anything to do with getting my ass handed to me in the process.

Don’t short hot names because they are going to burn you. What did I do? I sought out the hottest of them all.

Recap: I shorted the hottest names, in a cult-like battleground group, in the midst of a bull market, and with the dogmatic approach that some of them, if not many, were bound for the big “Doughnut”. Oh, and did I mention that the liquidity driven bull played right into the hands of these names?

And those are just the strategic mistakes.

Tactically, I basically ignored the P/L damage because I was mitigating some of my losses with call hedges and I was going to make back the rest for sure when the shorts would implode; the closest I got to using a stop loss was not to press my short positions more; what was my catalyst for the implosion? Never even contemplated the need for one. As if the froth of a mania is a sufficient catalyst. The faster they ripped the harder I laid them out.

I think you all get the picture and I’ll stop with the gory details before Toddo and the critters pick me up and throw me unceremoniously over the ‘Ville’s walls.

And yet, if there is a commonality among people who dance with the Minx for a living, it is that almost unavoidable right of passage of having “shorts” rip you to shreds. And I don’t mean having a bad day or taking a bad loss. I mean shaking your confidence to the point where all you can think is whether you have a clue. Most of the people who related their experiences to me – and there have been many – told me that I’d know it when it happens.  But I was too freaking stupid, arrogant, whatever you want to call me, to think it could happen to me, and too far in denial to recognize that it was happening to me. Which, by the way, is precisely the way I was told things would go down.

As the saying goes "the greatest trick the devil ever pulled was to convince the world he did not exist".  The same can be said of getting caught on the wrong side of shortselling. 

Fool Me Once: Shame On Me.