[metafunctor]

How does holding money have an "unlimited loss potential"? You just buy back at whatever value the stock is at the time.

I would argue that money is a neutral position (adjusting for inflation which is nowadays quite low). After all, we buy stuff with money, not stock.

Now, selling short, that has an unlimited loss potential, but it's very very different from a cash position.

[jmvoodoo]

It's unlimited opportunity loss. If you sell at say $100 and it goes to $1000 while you're in cash, you "lost" $900 vs your original position. However if you hold at $100 and buy a put for $2 that hedges you, you can still participate in the upside while limiting your downside. Also, downside risk has been historically undervalued (this may be changing though) which is why tail risk funds exist.

[leetcrew]

everything has an unlimited opportunity loss though. if I put all my money in SPY, I'm forgoing the "opportunity" to buy a bunch of OTM gamestop calls at the perfect time and 10x my net worth.

[metafunctor]

Yeah, well, pfft. Not being on the market is an opportunity loss, sure. But it's not "unlimited".

[yreg]

The strategy forces you to time the market. You might get unlucky by holding cash during a market rally, then buy back for a dump.

An investor who sells when they think the market is going to go downhill, with the intention to buy back later is not acting as an investor but as a trader.

That's why hedging with options is less risky (and less profitable in the best case).

edit: My use of word 'unlimited' applies if you want to keep the same stake at the companies. In money terms you cannot lose more than the value of your holdings.

[metafunctor]

Yep, then I agree. I'm not advocating for trying to time the market, or holding cash instead of being on the market.

But selling your position simply does NOT mean you take on "unlimited loss potential". It's simply being outside of the market, which means you're missing out on gains. It's not like selling stock is suddenly the same as shorting the same stock. I think the terminology here is clear-cut and well established.

[caffeine]

I get what you're saying and I think your terminology makes sense.

But the way to understand this is to reframe your view of "money" from being some special, neutral thing to just being another asset.

At any given moment, you could own $1000, or some gold, or some bitcoin, or whatever else. There is nothing special about the fact that it's $ you're holding rather than DOGE or SPY.

So imagine a 2-asset world, that has SPY and $ in it. You are holding $1000 right now, and the market goes from 1 SPY = $1 to 1 SPY = $1000. That is a loss. Denominated in SPY, you just lost 999 SPY.

[mattmaroon]

It’s unlimited because in the time he is holding cash there’s no limit to the amount the stock market could increase. If he sells a stock for $10, and then it goes from $10 to $10,000 he’ll only be able to buy back 1/1,000th of what he had. He lost $9,990.

It’s the same as writing call options. There’s defined upside and unlimited downside.

[gowld]

By that theory everything has unlimited loss potential.

"Loss potential" (downside risk) in finance refers to money you lose, not money you could have made by doing something else.

https://www.investopedia.com/terms/d/downsiderisk.asp

[mattmaroon]

Yeah I was just explaining what I was pretty sure he meant.

[clipradiowallet]

> How does holding money have an "unlimited loss potential"? You just buy back at whatever value the stock is at the time.

It does not have unlimited loss potential, I'm not sure why the poster said it did. It's the opposite - holding has unlimited upside potential(however slim).

[xwdv]

People don’t realize you have unlimited loss potential on every stock you are not holding right now, and that’s why cash is not a great position. When you sell and wait for a dip, you are basically in a short position except you’re not borrowing stock.