How to Be a Short-Term Bear and a Long-Term Bull and Make Money
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It’s a way someone can acknowledge that you’re right about something without just coming out and saying the words — while also slyly hinting they don’t really agree with you.
Kind of like a verbal version of the “side eye.”
But in investing, I don’t mind it.
In fact, it’s useful and even a potentially very profitable way to think about investing and trading opportunities.
If one person says a certain company is a good long-term investment while another says they see a short-term bearish trade to make, both of those viewpoints could be true.
If one person sees a company to avoid with a 10-foot pole for the long term but another sees a short-term bullish trade to make, both of those viewpoints could be true.
I could tell each of those individuals, “You’re not wrong.”
Considering what appear to be conflicting views is difficult because it’s human nature to want to have 100% certainty. It makes decision-making easier — either the company is great or it’s lousy.
Either you buy the stock and set up additional bullish trades, or you avoid the stock and set up bearish trades.
F. Scott Fitzgerald wrote, “The test of first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” I would take that a step further for investors.
First-rate investing intelligence is the ability to hold two opposing ideas in mind, retain the ability to function, AND profit.
Because if you’re limiting yourself to just one extreme in your thinking, you’re limiting how much money you can make in the stock market.
In particular, with companies set to release a new round of earnings, the ability to profit is even more pronounced.
Companies you may normally avoid could have great earnings that offer a short-term profit opportunity (“get in, get out, get paid”-style), while companies you strongly believe in may have a weak quarter that you can still make money from by setting up a bearish trade.
It’s why some professional traders have labeled this upcoming earnings season as the 40 most important days of the investing year.
Adding More Moneymaking Opportunities to Your RadarA great example of everything I just talked about is Restoration Hardware (RH), which is considered the “upscale of the upscale” in home furnishings.
With more people stuck at home and wanting to upgrade their living spaces at the start of the pandemic, RH stock took off like a rocket ship, as you can see in the chart below:
But the stock price has been more than cut in half since then.
Heading into earnings, LikeFolio co-founder Landon Swan warned that LikeFolio’s data showed that RH would most likely not have a positive earnings surprise that would send the stock higher.
Specifically, he shared how Purchase Intent mentions — customers talking about buying or intending to buy a product or service — have been choppy for RH since the early stages of the pandemic.
He said RH could offer an attractive entry point someday, but he wasn’t a buyer before earnings.
Landon’s assessment proved correct, as RH reported a decline in profits and sales and the stock price has been bouncing around mostly down from where it was before earnings.
That’s just one example of a company having two realities.
Could RH have been a good candidate for a bearish investing strategy ahead of earnings?
Could RH also be a value play at some point once it reaches a certain price?
Chewy Inc. (CHWY) is another company that exhibits these two realities.
Landon says that consumer happiness levels are high and in a long-term uptrend.
This is an indication that Chewy can keep its current customers and their reoccurring revenue through subscriptions.
But he says that in the short term, things could be a little bit “iffy.”
There are fewer people talking about purchasing or wanting to purchase something from Chewy:
Landon acknowledged both the value and limitations of investing in Chewy, saying, “If you’re an investor, yes, you want that cash-cow company that never loses a customer. But you really want growth.”
Could Chewy be a company worth owning over the long haul because it knows how to keep its customers happy?
Could it be a company that faces issues in the coming quarters because it isn’t gaining new customers?
And are there ways to set up trades and investment strategies to profit from both scenarios?
Bottom line: It may be easier to think about investing in extremes — only viewing a company with a purely bullish or purely bearish lens — but you can find multiple ways to profit if you view things from both a short-term and a long-term perspective, especially during earnings season.