The next recession is inevitable, if what I read is to be believed. Whether it happens tomorrow, or in 10 years, it's coming. Why shouldn't I short many stocks, and hold on to them for whatever amount of time is necessary to make the trades profitable?

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    In addition to Bob's great answer you have a problem with your premise: You assume that the drop in value during the next recession will be greater than the stocks current value. Its possible they will drop, but not below where they are today. In fact, some stocks even gained value in 2008. – David Grinberg Jul 16 '18 at 6:19
  • If the S&P500 closes above 2802 that will be confirmation that the uptrend has recommenced, I wouldn't be shorting anything right now as it looks like more upward movement to continue, for now anyway. – Victor Jul 16 '18 at 10:35
  • Around 2000 or so, the Wall Street Journal ran a story called "Blindfolded Monkey Beats Humans With Stock Picks." If one was short in 2008 and picked the few stocks that were up that year, one needs to hire the monkey (wink). – Bob Baerker Jul 16 '18 at 14:40

The margin requirement under Regulation T for shorting stock is 50% of the value of the shares. The minimum margin maintenance requirement is 125% of the current market value of the short sale. Some brokers have higher requirements.

Yes, the next recession is inevitable but when it occurs can make or break your proposed strategy. The more the share price of your short positions rise, the larger the margin requirement will become. If the stocks keep rising, at some point you will have get a margin call and you will have to add more cash to your account. As John Maynard Keynes once said, "The market can remain irrational longer than you can remain solvent."

A secondary problem is that there is a borrow cost paid to the lender of the shares. Liquid large caps stocks can have a borrow rate of as low as .25% per year but more volatile stocks which are more likely to drop more and faster have larger borrow rates. The really crazy stuff can have borrow rates over 100% per year.

If the inevitable recession occurs in 10 years then "Houston, we have a problem!"

Save the shorting for when the recession begins. The bear markets of 2000 and 2008 took 18 months to unfold. React, don't predict.

  • In the film The Big Short, you can see this when Michael Burry's investors are getting furious at him for losing so much money while he holds onto this short position (which eventually pays off - but could easily have made him bankrupt if it had taken a year longer to burst!) – LangeHaare Jul 16 '18 at 8:21
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    @LangeHaare - That's not exactly correct. Michael Burry purchased Credit Default Swaps which can be likened to a long term Put on corporate bonds, in this case, CDOs. So while technically it was a bet that benefited to the downside, it had limited risk and the most that Burry could have lost would have been the cost of the swaps. With a true short position, the loss is theoretically unlimited though that never occurs because the margin maintenance requirement will kick in and the broker will liquidate the position. – Bob Baerker Jul 16 '18 at 12:13
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    @BobBaerker But the monthly premiums he had to pay could have burnt through his cash and other assets, right? – ToniAz Jul 16 '18 at 12:31
  • Hi Toni. As I said, the position had limited risk and the most that Burry could have lost would have been the cost of the swaps. If all of his AUM was used up in the purchase of the swaps then yes, he could have burnt through his cash and other assets. FWIW, "The Big Short" movie was a dumbed down farcical version of the book. You can't really get very technical with the generral pop. If you want some good insight into Burry et. al. as well as a better understanding of those circumstances, read the book. – Bob Baerker Jul 16 '18 at 12:46

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