Rejoice, Fools!
Christmas is done, the New Year is in sight and the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) is flying higher yet again. Up 20 points in early morning trade.
Source: Google Finance
I couldn't be happier.
The good news is, I think 2015 will be another great year for Aussie share market investors. If they play their cards right.
Whilst I'm not prepared to say the S&P/ASX 200's 1.18% return (excluding dividends) in 2014 is great. I think it's pretty good given what we've been through…
For example the iron ore price is down to just $US66 per tonne, from over $US135 per tonne last year.
Oil prices are also way down. With Brent crude only $US59 per barrel, from around $US110 per barrel in July.
Thermal coal is down.
Consumer confidence, down.
The list goes on…
Indeed I've had some losers of my own…
Gas stocks Senex Energy Ltd (ASX: SXY) and Liquefied Natural Gas Limited (ASX: LNG) have fallen 42% and 39% in the past three months.
But it's not just resources.
Another past holding which sucked the life out of my returns was speculative teleport and satellite operator Newsat Limited (ASX: NWT). Whilst I could've been too early on my decision to sell out, if it rebounds, I'll live with it.
But my warrants in iron ore giant Rio Tinto Limited (ASX: RIO) were probably my worst investment decision in 2014.
I'll admit, leveraged positions work really well when things go right, but when they go wrong, well… you know what happens…
Still, in 2014, my portfolio's weathered the economic storm quite nicely.
Since this time a year ago, my overall return is in the double digits – 13.22% to be exact.
It's not anything to write home about, but in 2014, I did have my fair share of doozies. So I'm happy.
Especially when I consider I've could've just piled all my cash into term deposits and, if I was lucky, got a 4% interest rate.
By all accounts 2015 looks to be more of the same. Low interest rates, struggling retail trade, low consumer confidence, rising unemployment and a lower Aussie dollar.
For long-term investors – i.e. those who are optimistic about the future – this might spell trouble for some of your holdings in the near future. But for short sellers – those profit from falling prices – it can create opportunities.
Indeed whilst I was enjoying my second round of Christmas turkey at the weekend, folks at the Australian Financial Review were busy reporting, "Short sellers coming out the shadows."
Now if this enigmatic financial gobbledygook sounds like something from the 1996 sci-fi masterpiece Mars Attacks!, don't worry, you're not alone.
Short-selling is the act of taking shares from your broker, selling them at a high price, then buying back in a lower price and pocketing the difference.
Sounds simple, right?
It is simple, but it's definitely not easy. Well, at least to do it successfully.
However due to the required knowledge to do it successfully, coupled with the risk, watching short sellers' movements can reveal some interesting trends…
For example Myer Holdings Limited (ASX: MYR) and Fortescue Metals Group Limited (ASX: FMG) were two very popular stocks to be short sold in 2014. Both are down, 48% and 55% respectively, since the beginning of the year.
But the retailer and iron ore miner have more than downwards share prices in common.
Both companies are at a critical juncture in their respective industries, neither have sustainable competitive advantages and, I think, both of them cannot be considered best in class.
Meaning, if I was to pick an Australian retailer and iron ore miner to invest in, it would not be those two.
According the AFR, for investors looking ahead, who are game enough to try their hand at short-selling, there's two things to look for: deteriorating business quality and valuation.
Finding overvalued stocks in a structurally challenged industry is probably a good place to start. For example, the media sector could provide opportunities.
Whilst it's definitely not something on my bucket list, if you are prepared to short sell, proceed with caution…
Even the best short-sellers in world like Bill Ackman, Carl Icahn and David Einhorn get it wrong occasionally. But they have teams of analysts at their disposal.
Remember, when something appears too good to be true, it generally is.
And the more complicated an investment thesis becomes, the more uneasy you'll grow in times of heightened uncertainty.
Keeping within your circle of competence, whilst also trying to expand it slightly, is vital to long-term investing success.
Sticking to what's knowable and important is essential.
For me, that means finding great businesses trading at good prices and holding on.
So whilst 2015 may present short-selling opportunities for some investors, who hope share prices will fall down in the tough economy, instead I'll stick to buying great dividend-paying shares on the ASX.
It's a Foolish investment strategy which has served me well over the years, and one which I believe will continue to do so well into the future.
