Winning strategies change

Please understand I am not saying futures are a bad investment at all. I also have money in the futures. I am not attacking the players who choose to stick to them, I can understand why. Futures cash out. Right or wrong on a predetermined date you will likely get at least part of your investment back no matter how large a position you take. It's not as easy to get trapped and even if you make a big mistake you know you will eventually have a way out on expiration day. Futures can be one-decision investments, you only have to decide to buy or sell once, and you never really have to think about it again if you don't want to.

This was a game that I played a lot too and one that I largely had for myself for a time until you also started investing heavily in futures. These past couple of months I should have pushed harder into the futures but I was used to being able to let the futures run for a while and get better prices. I guess I got complacent resting on my laurels. I should have realized more quickly that the market was changing again. More and more cash was going into the futures market and I didn't react fast enough. Just_Ben, you've done such a good job touting your success that I believe many other players are also making a similar move into the futures market. I knew I never should have been nice on that whole Manhunt thing, I let loose a monster =).

My word of caution is just a commentary on how the market can change quickly. Fantastic returns on investment will diminish over time as more and more people try to play the same game. There was also a time when I used to have the GLS short market largely to myself and I made large outsized gains there for a while because everyone was still concentrating on the long side. I made good money fast by shorting the right stocks and I quickly used the extra cash gained from a successful short by leveraging it into even more short positions, each time pushing the limits of margin.

However, others soon started to notice what was happening. People began to realize that there was a lot of money to be made by going short and a lot of people started to play the same game. Over time the GLS short market began to get crowded and money wasn't as easy to make anymore. A couple other things like an improved IPO process and a much smaller bid/ask allotment also began to make shorting GLS stocks less profitable and more difficult.

Now everything has turned around completely. Another big reason why shorting GLS stock is more difficult is because anytime a stock falls to a 'fair value' there are now a lot of people buying trying to cover their short positions. Everyone wants their money back or needs it because of margin and now it takes longer and longer for prices to fall. Eventually many people just get so frustrated and they just want out so they also cover even though they may believe a stock is still overvalued which further pushes up the price exacerbating the situation.

It's similar the old prisoner's dilemma game, if all the shorts could just somehow cooperate and not cover it would be a lot better for everyone. The stock would fall farther or would be delisted faster due to inactivity. However each individual is only looking out for their own self interest and cannot trust so many other individuals to also not cover. Rationally, covering their short position appears to be best option to most individuals even at inflated prices. Nobody wants to be the last person holding the bag.

This type of situation is somewhat less likely to happen in the futures market because they cash out regularly, which is why a lot of money is moving over there. However, a different situation may occur where prices in the futures market will rise or fall extremely quickly to a perceived fair value, and your return on investment may get very very slim. Each futures contract then becomes a lot more gamble than investment. This seems to have already happened to a a lot of futures since they are now far more difficult to play than in the past and the prices appear reach a fair price much faster.