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Stocks  | January 27, 2020

If anyone was wondering what the all-time worst stock recommendation was, this would certainly promote a lot of discussion, at least up until now. People need to wonder no more.

We definitely need to pay attention to where we enter a trade, and trade here just means entering a position of any expected duration. Our first act when looking to enter a position is the need to focus on whether or not the time is right for the play. It doesn’t matter that investors don’t really do much of this and are actually ignorant to this principle, it suffices that they should be doing this whether they actually do or not.

If you are looking to buy a certain stock, and it is trending down right now, meaning that it is more likely to go down some more before it goes up, why would you want to enter now? You might tell yourself that it will go up at some point down the road and that this timing doesn’t matter, but that’s an ignorant view really, as popular as it is. This is like wanting to make a bet on a bad poker hand instead of waiting for a better one that actually has the odds in your favor, and thinking this won’t matter to your overall results.

At some point, the time where you are betting with the odds instead of against them will arrive, and perhaps it reversed on the very day you entered, and you might feel like you deserve a pat on the back for being lucky this time, just like you might get happy winning with a bad poker hand. However, this is all about probability, and we should never be bucking the odds because this means that we will get the short end of the stick here on balance.

Let’s say you are thinking about buying Apple. You are convinced that this is a good long-term play, but that alone isn’t enough, you also need to ask yourself whether this would be a good time to enter. Perhaps it is in a down trend, perhaps we are back to mid-October of 2018 and Apple just broke through support, at a time where the market was also decidedly negative, as it was back then.

$216 might seem like a nice price if you believed it would go to $300 and beyond, and let’s say that you have a genie in a bottle that told you that this was going to happen in January of 2020 and you knew for certain he was right. Should you buy it here? Not so fast.

It turns out that you should have been shorting it here instead if anything, and this was a very good looking short here indeed, and a terrible place to enter this stock on the long side. You’re an investor though, and investors really don’t short stocks, because you can’t just hold short positions long-term and that’s the horizon that you want to confine yourself to.

Regardless, this stock here was decidedly bearish in the short-term, and while investors cannot be expected to time their entries with the precision required of traders, they still need to be avoiding the big mistakes and always look to enter a long position during an uptrend.

Those who were in this position back then and showed restraint by at least not buying were well rewarded, as Apple spent the whole quarter in decline and went all the way down to $142 before it started to rebound along with the market in the new year. Apple had a fabulous year in 2019, which is continuing into 2020, and did just break $300 like our genie told us it would. By waiting, we now own a lot more Apple stock since we bought it at so much more of a bargain.

We’re using this example for two reasons, to show you how important the proper entry can be as well as showing you a case where it did make a lot of sense to short this mighty stock. We’ve also picked a very easy one for you, as tensions were high at this point, a couple of weeks into this decline, and this was a point where shorting Apple wasn’t just reasonable, it was such a clear play that anyone could have traded it profitably.

Does it make sense to short it in January 2020 though? Let’s say we ask our genie, and he tells us that Apple is going to go down in price from here significantly at some point. He says that we will end up in a recession that puts the hurt on Apple and every other stock out there at some point over the next few years. Should we now short it?

Our genie doesn’t know anything about managing stocks though, and both doesn’t know when this will happen or even why we should care. Someone needs to worry about these things though, and the task always falls on us.

The Trend Matters a Lot, Especially When Looking to Short

Apple is decidedly bullish right now, which means that it is more likely to go up than go down, even though these things are subject to change. We have to act in accordance with what is going on now because this is going to affect our positions, and shorting into a strong uptrend is even worse than trying to do what they call trying to catch a falling knife by buying into a strong down trend.

Buying Apple in October 2018 would have been an example of making this mistake on the long side, but given that stocks tend to go up a lot more than they go down, the risk is higher and we do need to be more careful with shorting. This is especially the case when we’re looking to buck the overall market trend as we would clearly be doing now.

We at the very least need to see enough of a reversal to want to do it, with the scenario actually starting to play out, and if we instead just want to make a guess and the guess goes against both the market and the way that the stock is performing, this is simply crazy. When you try this with one of the strongest stocks in the market, this makes the idea even crazier.

We weren’t the only ones that were shocked to read that portfolio manager Rupal Bhansali of Ariel Investments recently called out Apple as one of her two top shorts right now, as the disbelief in even the headlines was palatable, but we’re pretty sure these folks don’t realize just how bad of a call this is. We do not want you to be among them.

It isn’t made clear whether Bhansali is putting her own money where her mouth is, as she hasn’t shared whether she has gone short Apple, but she is clearly telling us to do it. We’re also not sure when she came to this decision, other than the view was published about a week ago, when Apple closed at $315.24.

If you ask someone what the worst stock pick that they ever have seen would be, all sorts of candidates would emerge, although people tend to look at these past the post to decide, where we really need to be looking at what information was to be had at the time and base our evaluation solely upon that to be fair and accurate.

We can say with considerable confidence that this is the worst stock recommendation ever. Of all the stocks that may be candidates for a short, Apple might even be last on the list, even more so than Tesla. Tesla is running much hotter than Apple is right now but is much less stable and could turn on a dime anytime and see a big selloff, while Apple’s bull run is much more stable, perhaps as stable as they come when all things are considered.

Apple was the one of the two stocks that that we liked the most overall going into 2020, along with AMD. Predicting ahead over a full year isn’t something that anyone should ever be trading on though, and this was more for the purposes of setting the stage rather than telling people they should hang on to this all year regardless, but its promise for 2020 was right up there with anything.

We at least recommended a stop though, and one that serves to keep risk more than acceptable, as we certainly do not want to be participating in anyone’s demise.

To see one of our top picks, which continues to perform well, be called out as a top short simply startled us. We could understand this if the skies were starting to cloud over, but to do this without even a hint of this is even beyond the bizarre.

We don’t even have to go into whatever reasons she may have to do this, because it simply goes against reality. This is not a matter of a disagreement about the longer-term prospects of Apple, it is about shorting one of the strongest and most stable stocks in the market right now, during a strong uptrend. Instead of trying to catch a falling knife, we want to fall on the knife, which is even worse.

We need to view this incrementally to discover how bad this really is though. This is clearly not about thinking ahead six months or a year from now and trying to figure where we think that the stock will be and trading that idea. We also need to map the path there and take that well into account as well, in the same way that you both need to keep your eyes on the horizon as well as on the road in front of you when you drive a car.

Even if you think that Apple will fall in value, you still need to account for when this is more likely to happen than not, and that time is certainly not now. There may not even be a situation that is less likely to happen out there than Apple continuing to go up for a while, with the stock doing so well, the company doing so well, and the market doing so well.

What this means is that regardless of any guesses we may want to make longer term, the odds are very much against us in the shorter term, just like the odds of it moving forward are so much in our favor. Of all the bets that we could possibly make in the stock market right now, it would be hard to find a worse one.

It’s Hard to Even Come Up with a Word to Describe How Bad this Call Is

The fact that someone is actually telling us to make this bet is what has this standing out from all the rest, as we would not normally think that someone in a position to recommend stock plays would ever even think of doing such a thing. When you recommend a stock, and people for whatever reason believe you and do it, and things turn out bad, the blood is on your hands as well.

There is therefore a certain level of responsibility that falls upon those of us who do make these recommendations. At the very least, we need to seek to qualify our recommendations, as in here’s what we think will happen if it goes right and here’s what you need to do if it doesn’t. Unqualified picks that leave those without the wherewithal to know how to protect themselves are dangerous, especially with calls to short a stock as strong as Apple is right now.

There’s no standard here and we very often see unqualified recommendations being made by people, although in a lot of cases the person recommending them doesn’t have much of an idea of what they are doing either, and we end up with the blind who are presumed to have sight leading the blind. There may be no better example of this than with this pick of Bhansali’s.

If we tried this a year ago, and weren’t provided any instructions on how to hedge this, we would have already lost all of our investment and then some, with more likely to come. People fear shorting too much, but unqualified short recommendations, especially with stocks with such potential upside and in strong uptrends, is something we need to fear a great deal.

We do not just want to ask where Apple will be in a year from now, we also need to ask where it is headed right now. Apple has, not surprisingly, rose further since this call was made, and even though we’d only be down a few percent so far, right now Apple is decidedly still bullish, and this is not a time that we should either be entering short or holding short if we are of sound mind.

Bhansali tells us she used to work with George Soros, who is no stranger to shorting or even to the outrageous, and this somehow has caused her to believe that she has the skills to do this as well. The facts tell a completely different story though.

It doesn’t even matter why she thinks this, as this is like needing to ask why you should not punch yourself in the face, but she does provide a few reasons that are worth mentioning, for entertainment purposes if nothing else.

She believes that Apple is not actually a tech company but is instead a consumer electronics company, although it’s not mentioned why this should matter and especially why this even contributes to reasons to short it. Ironically, she is right enough to make this even worse, because technology companies tend to produce moves up that are less reliable, and Apple is certainly more solid than most of them.

The other reason is that Apple is facing strong competition with some of the things they are looking to gain a stronger foothold in, and while that may be true, they are doing quite well at this and are expected to going forward as well. This is one of the big reasons other analysts like it so much and can find it in their hearts to still recommend it even though they may be concerned about how far it has come already.

Apple’s business continues to look very strong, not that this matters at all as far as our deciding whether we should short it here or not. We need both the outlook to sour and the stock to sour as well before we should even think of shorting. Neither are happening now.

This really does need to be, first and foremost, about where Apple will be next week and next month though, and this is where this pick so utterly fails to coincide with reality. No one will tell you that the chances of Apple being below where it is now in the short term is high enough to short, but even if they did, we’d still need to see it play out on the chart to even know whether this was a good guess or a bad one.

There may indeed be some real opportunities to do this at some point down the road, but we won’t spot them unless our eyes are open to it. We can make a lot of money from down moves as well, provided that one is likely enough to get the odds in our favor. Doing this when the odds are against us this much is quite another matter though.

It does not even matter if tomorrow Apple starts dropping and this call ends up being very profitable without even going against us any more than the little it has already. This is completely about probability. We need to have the patience to wait for the right conditions to emerge.

If this all causes people to become more open to shorting, and if their interest is piqued enough to want to go out and learn now to do this right, there may actually be a benefit to this massively twisted short call. There are even stocks out there right now that may be worth a look, especially those in distressed sectors with both the stock and the sector moving the way we want.

Maybe it’s not so bad to also be exposed to the worst stock call of all time, if this can teach us that we do not want to be shorting into strength and insist on thinking enough before we act. This pick is truly one for the ages, and it does speak to the need to be careful with whose recommendations we go with and always make sure we think things through before we act.

We do not have to wait to see who is right about how bad this call is. If we do not know already, we have some real work to do in order to escape the clutches of the sort of thinking that could even make such a recommendation possible. We cannot afford to be this careless.

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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