Elise O’Connell is a Vice President and Senior Trader at Granahan Investment Management. Elise became a member of GIM in 2018 with 22 years of collateral trading experience over, and an emphasis in trading SMID-cap and small securities. Prior to joining GIM, Elise was a Director of Business Operations at Vivox in Boston.

The problem for me was that I had fashioned no idea what was happening (whether or not it proceeded to go up or down) or what the outcome was. It really is completely unlike an extended position where you have some notion of why a position is increasing or falling. The marketplace increases over time so you are actually fighting against time. As Li Lu highlights also, short selling sort of messes up your brain and is very distracting.

If you are gambling against anything–in my case I had been betting against the market so that it was even worse–it just clouds your long positions and any positive thoughts you might have. For instance, it’s easy to second-guess any bullish thought if you too have any kind of brief position. Finally, short selling is very costly for small traders (whether you are borrowing stocks, using inverse ETFs, or buying/writing put/call options).

I never actually short sold straight because whenever I inquired, the costs seemed really high. It appeared like it wasn’t for small investors. It sort of reminded me of bonds, where I’m quoted really high costs (bid-ask spread for instance) and feel that bonds aren’t cost-effective for small investors. G&D: Can you talk about your investment process?

LL: Ideas come to me from all sources, principally from reading and speaking. I don’t discriminate how they come, so long as they are good ideas. G&D: Are the individuals who you speak to fellow investors or are they people like customers, suppliers, and management? LL: All of them. I don’t speak to as many traders – very few.

I am more interested in talking to folks who are actually operating businesses and entrepreneurs or CEOs or simply good businessmen. I read all the major newspaper magazines and annual reviews of the best companies. I get a whole great deal of ideas out of those too. One interesting thing is that Li Lu says he doesn’t rely on investors for ideas.

Instead, he gets ideas from management, mass media, etc. That is sort of opposite of several others I’ve read who ignore management and instead rely on other traders. I believe this depends upon your investment style as well as your personality and thought processes. You begin by keeping cash, and that is clearly a pretty good opportunity cost, since it doesn’t go down. So any time you find an investment, it has to be an improvement on an overall risk-adjusted basis.

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You may find some very interesting things, and today you’ve got a basket of a few interesting securities plus cash. That is a pretty good opportunity cost, and the next time another security is added by you, it make the stock portfolio better than the prevailing one better. You just improve your opportunity cost constantly. Sounds obvious but I have a sense many don’t think concerning this much.

I see a lot of people just adding money to whatever position or selling something because it has gone up, and seemingly going after even worse ideas then. I believe people often set off on tangents and weaken their portfolio. For small investors, it’s probably better to follow some rigid approach that forces you to think about whether you are actually improving your opportunity cost. G&D: How to you get more comfortable with the risk/ praise of a high tech company like BYD that is undergoing pretty rapid technological change? Do you think you have a good sense of what BYD will look like 10 years from now?

LL: Most businesses are subject to change if you stay with them long enough. There’s not a one business that I know of that will never change. Every company in today’s age somehow is a technology company, but the technology might not be on the cutting edge, and might not play an important role in the success or failure of the overall business. So culture really plays an important role in those faster-changing environments, enabling certain companies to surge ahead of everyone else always. Many value investors mistakenly believe it is high-tech (or similar) companies that change rapidly but as Li Lu alludes to, every industry can change almost.