David Capablanca is a short-only bias trader, which means he bets against companies with weak fundamentals, expecting their share prices to drop. He does this by borrowing shares to sell them and then buying them back later at a lower price to pocket the difference.
It’s a more aggressive approach than many investors employ, because being a short seller is infinitely more risky than buying shares. If you buy a stock, the most you can lose is what you paid for it. But when you short, the potential loss is unlimited because there’s no guarantee a stock’s price will fall; it could instead rally to extreme highs.
Regardless, Capablanca has always preferred the short side of a trade because he enjoys the process of finding weaknesses and holes in a business — especially those that are short on cash.
He compares the process to being a chess player: You have to plan all your moves in advance and know how you’d react to different outcomes. To get there, he has implemented a multi-layer assessment that includes reviewing a company’s fundamentals, technical analysis of the stock’s chart patterns, headline news, and a preparedness to remain hyper-aware once in the trade.
Over the years, he developed a nine-part checklist that he uses to determine if a trade makes for a good short. These variables include low institutional ownership, low cash reserves, and market caps smaller than $250 million, among other characteristics that could signal a vulnerable stock. Through this, he has maintained a win ratio of more than 90%, according to records of his brokerage accounts previously viewed by Business Insider.
And while he loves the thrill of short selling, he knows it’s a high-risk, high-reward proposition. Capablanca, now 40, is also thinking about his long-term financial future, and more reliably stable sources of income. Since he isn’t an employee, he doesn’t have a 401(k) or employer-sponsored retirement plan. Therefore, the onus is on him to set money aside. His strategy thus far has been to intentionally allocate 2% to 5% of his trading gains on a monthly or quarterly basis toward long-term, more stable investments that he doesn’t need to check on continually.
2 popular ETFs, and 2 big tech stocks
Investing in exchange-traded funds has been his main choice for locking in profits and allowing his gains to continue growing in a safer way.
Of the four long-term investments Capablanca regularly adds to, two of them are among the world’s most popular ETFs. They provide broad exposure to major stock indexes, which gives him peace of mind.
“When I go long, I don’t want to worry about anything,” Capablanca said. “I just want to put money in once a month [or] every couple of months.”
His main go-to fund is SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 Index. He refers to this investment as “making a bet on America” by gaining exposure to the country’s top companies across various sectors.
“We have blue chip companies that are beautiful and are innovators for the whole world,” Capablanca said.
Invesco QQQ ETF (QQQ), is a more tech-focused fund that tracks the Nasdaq 100 Index, a basket of 100 of the largest companies traded on the Nasdaq stock exchange, not including financials. He chose this one because many of the companies he short sells are on the Nasdaq, so exposure to the top names is a type of hedge against his active bets.
Beyond the major ETFs, Capablanca allocates a smaller percentage of his portfolio to individual stocks, two of which he likes the most. Since he shorts companies with minimal cash flow and reserves, and low institutional ownership, he looks for the inverse when he wants to be long a stock.
The first is Apple (AAPL), a nearly $3 trillion company with tens of billions of dollars of cash on hand. It has been consistently growing its revenue since 2010 while maintaining a healthy debt-to-equity ratio, Capablanca said.
In the long term, he believes there’s no ceiling on the company’s potential, especially because of the complementary products it offers tied to its hardware, which creates a whole ecosystem, such as the apps available on iPhone. And if flying cars ever become a thing, he believes it would be an Apple car.
Uber (UBER) is another stock he really likes, although he allocates less toward it because it’s a newer company. Capablanca’s conviction comes from its very high institutional ownership at 83%, which means large funds own and believe in the company. He noted that despite being founded in 2009, it became profitable by 2022 and maintains a low debt level relative to its market cap. Further, the company’s free cash flow has more than doubled over the past year, he added.
“Uber is a little bit more riskier than Apple because they’re in the car industry,” Capablanca said. “The car industry can have some problems. However, I travel a lot. I just came back from Argentina. I was in the Galapagos Islands. I was in Columbia. And I’m going to Italy to see sites tomorrow. But everywhere I go, there’s Uber. I go to India, they got rickshaws with Uber.”
He only allocates about 1% on a discretionary basis to Uber because any shift in regulations could impact its business model, he noted.