atto,
You have hit on the central point that I think has eluded the prior conversation. Implicit in Brec's argument that shorts are more risky is that a larger investment is likely to make a greater move in absolute terms than a small investment, because moves tend to be bounded by percentages rather than absolutes. Indicators like Bollinger Bands reflect empirical evidence of this fact. One look at a chart of any market index, or any fixed interest investment over time reveals the exponential growth curve all investors know and love. Exponential growth happens because gains (and losses) tend to be in proportion to the current value of the investment, not governed by absolutes.
Long vs short is not really an issue once the difference in value of the equity has been created. Brec's argument could be equally applied to an $8,000 long position and a $12,000 long position in the same stock. The larger position clearly puts more capital at risk (and also increases the potential reward). It's just that being on the losing side of a short position leaves you with more capital exposed than being on the losing side of a long position, and that certainly raises the stakes for any future gains or losses.
OZ is right that in absolute terms a loss is a loss, whether you are on the long side or the short, but his analysis does not incorporate the increased potential of the larger valued position to make a larger absolute move that is fundamental to Brec's hypothesis. You have identified that and used it to show the increased potential for added loss, but that larger potential move can work for you as well against you. Extending your argument, look at the potential gain when comparing the $12,000 short to the $8,000 long that resulted from the initial 20% loss. If the short now moves 20% in your favor, the value of the stock drops to $9,600 and you are in the money by $400, while a 20% gain on the $8,000 long raises the value to $9,600 and you are still down $400. So yes, Brec is right that the risk is greater, but as is usually the case greater risk is accompanied by greater potential gain. The risk/potential reward ratio is not really different in the two cases, but at some point the amount of risk, rather than the ratio, must set a limit on one's quest for gain.
Dan |
