October 22, 2021

How to make money in a falling market

5 min read
How to make money in a falling market

Statistics show that most successful traders are typical “bulls”, that is, they prefer to play for a raise. This is especially true of the stock market.

Therefore, both the managers of the largest hedge funds and ordinary players are constantly looking for undervalued stocks, the acquisition of which can bring them huge profits.

But you can earn not only on a growing market, but also on a falling, “bearish” market. This is very colorfully tells the famous film “The Game on the slide” (The Big Short). Colorful, but not always clear to a mass audience.

The script of the film is based on the book of the American writer and financial journalist Michael Lewis, who said that it was not enough to explain complex concepts to the audience, it’s necessary that a person wants to understand them. This, in this case, is about the macroeconomic causes of the mortgage debt crisis in the United States. And despite the fact that Forbes columnist Steve Denning praised the film’s credibility, it (like the book) doesn’t mention the one who actually earned the most from this crisis – billionaire John Paulson.

In addition to Paulson, there are a number of famous “bears”, but for a start, let’s remember where this concept came from – “bears”.

The first explanation that we see most often is that, unlike the bull, which raises the opponent on its horns, the bear hits his paw from top to bottom. However, it is possible that the origin of the term is somewhat different. Thus, the stock historian E. Morgan believes that the beginning of everything was laid in the XVII century, when the first stock exchanges were born in London coffee houses. Even then, some businessmen were selling stocks that they did not even have a trace. That’s about them, and they began to say that they were selling the skin of an unkilled bear. (Today it is correctly called futures and options).

So, how to make money on the sale of the skin, which is not?

“In theory, everything looks quite simple,” explains analyst at NordFX brokerage company John Gordon. – Suppose you think that bear coats will soon go out of fashion. Therefore, you turn to a friend and ask him to loan such a fur coat, promising to return it, say, in six months. Having obtained this piece of clothing, you immediately, while it is still in demand, sell it on the market and earn $ 1,000 from the sale.

Let’s fix this moment: you no longer have a fur coat, but there is $ 1,000 and an obligation to return the fur coat to a friend in 6 months.

In the next six months, animal rights activists won a convincing victory, and wearing fur coats made of natural fur is not only unfashionable, but also indecent. At this point, you are again entering the market, buying a new fur coat for a bargain price of $ 150 and, with words of deep gratitude, return it to your friend. Everything, the transaction is closed, and your net profit from it was 850 dollars. ”

“It is according to this scheme,” continues John Gordon , “Bears” and conduct their operations in modern financial markets. Only instead of hides, they borrow from banks or stock funds and money, and instead of thanking words they return to the lender interest on the amount of the transaction. ”

Probably the most famous “bearish” operation in the Forex market was the collapse of the British pound by George Soros in 1992, when he and his Quantum Fund at the expense of borrowed funds almost immediately threw a huge amount of British pounds onto the market, equivalent to 15 billion dollars.

The catalyst for this operation was the quote of the head of the German Bundesbank, Helmut Schlesinger, paraphrased by the Wall Street Journal and the German newspaper. Their publications stated that even after German interest rates were cut, one or two European currencies could be under pressure.

And that’s it! Say no more! But Soros and the entire financial world have suggested that one of these currencies could be the British pound, which was by that time greatly overvalued. Soros immediately began selling his (or rather borrowed) pounds of sterling. After him, other financiers also rushed to do this, and the Bank of England, trying to keep its exchange rate, was forced to buy this huge money supply.

It was not possible to hold the course, the British surrendered, and because of one harmless one – and, moreover, paraphrased by journalists! – quotes (though not without the help of Soros), the pound fell by 15% relative to the German mark and by 25% to the US dollar. As a result, the $ 15,000,000,000 of the Quantum Foundation turned first into $ 19,000,000,000, and in a few months the figure increased to $ 22 billion!

This operation by Soros fully confirmed the popular proverb among financiers that “money is needed for price increases. Prices may fall under their own weight. ”

Bear traders
Bear traders

By the way, the government headed by Prime Minister John Major was far from the only one who suffered in the UK from the Bears attack. An interesting case is when, back in 1720, the British Parliament itself initiated the game for a fall, adopting the Royal Exchange Act, which caused a sharp drop in the stock prices of many companies. As a result, not only ordinary shareholders lost their funds, but also many entrepreneurs, politicians and even members of the royal family. And the well-known scientist Isaac Newton lost a whole fortune – £ 20,000 (which is about 2.5 million today), after which he sadly said: “I can calculate the movement of the stars, but not the madness of people!”

Returning to the “Bears” of our time, one cannot help but recall the name of Jim Chanos, who, having started his career as a snow cleaner, managed to rise to the position of Vice President of Deutsche Bank, and then founded his own hedge fund Kynikos, which is translated from Greek as “Cynic“.

This “cynical” name is fully consistent with the strategy of Chanos, specializing exclusively in the sale of various assets. The most famous Kynikos acquired after the acclaimed collapse of the company Enron. And in 2014, the Chanos Foundation successfully played on the fall in the prices of oil and precious metals.

Among other well-known players on the slide can be called Jesse Livermore, whose lightning-fast short positions plunged the market into shock, for which he received the nickname “The Great Bear of Wall Street.”

Another super-bear is the head of the hedge fund Centaurus, John Arnold, who received a decrease in gas prices in the summer of 2006 with a profit of 317% and ruined his competitors, the Amaranth fund, which lost about $ 6 billion during the week. .

SumZero financial resource regularly makes its rating of leading players for a fall, from which it can be noted:

– Bertha Ross (Wagamon Advisors), who has conducted, since 2013, three successful deals, the most successful of which was the game to lower Walter Energy shares, which lost 99.52%.

– as well as Ban Exler (Spruce Point Capital Management), the best deal of which was the sale of shares of the James River Coal Company, which brought him a profit of 99.92%.

“As you can see,” concludes J. Gordon from NordFX , “good and even very good money can be earned on the falls. As the Greek billionaire Aristotle Onassis said, to do this, just know something that others do not know … “