Those who want to know about the difference between both strategies may feel free to read this article as a new insight.
How does shorting strategy works?
Since 2000, due to the bubble burst of technology stocks, this strategy is very popular. In simple words, it is an expectation that the price of a stock will drop in near future. Such investors sell their stocks by borrowing from brokers today and then buy back that stock when the price falls. The difference between selling and buying price is known as their profit.
How does the value investing technique works?
The core task of this method is to calculate the intrinsic value of stocks and picking up stocks that are trading at a lower price than their intrinsic value. Buying stocks at a lower value than their intrinsic value will allow an investor to keep that stock unless the price goes high in the future. They will sell the stocks at a higher price and the difference between buying price and the selling price will become their profit.
In the end, the calculation methods for both these strategies are same because it clearly describes what stocks are undervalued or overvalued.
If you read the books of the father of value investment technique “Benjamin Graham”, you will realize there is very little information about shorting. Moreover, Warren Buffet did not prefer shorting strategy. A question arises from here, why both these greatest investors of history did not use this technique?
Well, the shorting technique requires a higher degree of diversification. An extremely diversified portfolio of a number of stocks is known as mutual funds. Numerous value investors invest in the concentrated stock portfolio with the adequate diversification. Benjamin Graham preached the adequate diversification of ten to thirty stocks and not excessive diversification. Furthermore, Warren Buffet is also famous for investing in twenty to thirty stocks’ portfolio in the early years of his hedge funds of the Berkshire Hathaway.
Even more, when he was managing his own hedge funds alone, Charles T. Munger a great billionaire value investor, also known as the second man of Berkshire Hathaway is famous to make a more concentrated bet as compared to Warren Buffet before joining Berkshire Hathaway.
In the end, investors have two choices to avoid wipe out with the short strategy.
They should have a more diversified portfolio, consist of a mutual fund-like portfolio with hundreds or thousands of stocks. Or, they will engage in the short term market or trading timing so that they can short.
Both these above-mentioned choices are not at all attractive for a successful value investor. Concentrated bet without the excessive diversification, first of all, is a key reason for high performance. Containing on hundreds or thousands of stocks, a portfolio with the short strategy will be mundane just like a typical mutual fund portfolio when it comes to performance. Secondly, the value investment technique is purely price oriented, which itself is at odds with short-term trading or any market timing strategy.
You are advised to take a good investment courses to understand more investment concepts in a better way.