Weak Longs
Candlefocus EditorWhen enough individual traders capitulate, the weak longs become trapped and this inevitably puts up the buy orders. When exchange traded funds (ETFs) track these stocks, it can amplify the effect of the weak longs and even lead to quicker reversal of the price.
The term weak longs was popularized by hedge fund manager and investor David Einhorn in his book, Fooling Some of the People All of the Time. In the book, Einhorn argued that individual traders tend to be overly impatient and often tend to sell during a period of bearishness, ignoring the fact that a stock may be undervalued at that point. Drawing upon his extensive research of corporate reporting, Einhorn posited that by waiting out bearish periods, many stocks eventually recover and investors who held on to their stocks could benefit immensely.
Another way to take advantage of weak longs is to practice contrarian investing — that is, investing in an asset when it is undervalued even though the majority of traders are selling, in the hope that the stock will recover and the price will eventually increase. Many market watchers also point to the concept of mean reversion — which holds that markets tend to revert back to their long-term averages after a period being out of balance. Therefore, contrarian investors can benefit from this long-term trend when it comes to fundamental stock analysis.
The key takeaway about weak longs is that individual investors who actively manage their own portfolios can benefit from this phenomenon. By recognizing when the majority of traders have given up on a particular stock and taking advantage of contrarian investing opportunities, investors can gain an edge over the market and potentially reap larger returns in the long run.