Dana Galante: Against The Current

Dana Galante realized an average annual compounded return of 15%. This may not sound impressive until one gets to know that Galante is a pure short seller. She achieved her 15% return during a period when the index rose by an annual average of 32%.

Although Galante is a pure short seller, her ideas also hold good for the long-only investors. Her methods provide useful guidance on which stock to liquidate or avoid.

The combination of factors she follows is a very high P/E ratio, a catalyst that will keep the stock exposed in the near term, and a reversed uptrend. All three of these conditions must be met. Investors might consider reviewing their portfolios from time to time and replacing stocks that meet all of the three conditions with other stocks. By doing so, investors can reduce portfolio risk.

In addition to this, Galante also explains several red flags that attract her attention to consider stocks for shorting. Investors can think of liquidating their position if any of these conditions hold. These red flags include:

• high receivables
• change in accountants
• high turnover of chief financial officers
• blaming short-sellers for a stock's decline
• a company changing its core business to take advantage of a prevailing trend

She also evaluates some stocks that break below their fifty-day moving average.

Further, she explains her risk-controlling strategies. If she loses 20% on a single stock, she covers one-third of her position. The maximum allocation given to a single stock is 3% of the portfolio. If due to a price rise, a stock covers a larger percentage of the portfolio, she rebalances it. She believes in controlling risk through diversification. Hence, she has 50-60 stocks in her portfolio from across different sectors.