| I've noted from reading investment blogs and Yahoo | | | | no longer exist, you'd probably have forgotten all |
| Message board posts that there seems to be a | | | | about the other losers by now and be living on an |
| great deal of interest in short selling. Maybe it is the | | | | island somewhere. What if you'd thought Bill Gates |
| general mood about the economy. Maybe some folks | | | | was full of hype, however, and shorted Microsoft? |
| first tried short selling during the big slide in 2008 and | | | | Even though the other five also went to zero, your |
| found that they could do no wrong. (It is said that | | | | Microsoft position would have grown to gargantuan |
| every buyer is a genius in a Bull Market. In a Bear | | | | size. You would have needed to work five jobs just |
| Market, every short seller is a genius.) Maybe there | | | | to keep funneling enough cash into your account to |
| have always been a lot of people dabbling in short | | | | avoid a margin call. There is no such thing as a limit to |
| selling and the blogs and message boards have just | | | | your losses when you sell short. |
| created better venues for them to advertise their | | | | Given these traits, it is important to consider risk and |
| adventures. | | | | reward when contemplating a short sale. While that |
| What has disturbed me, however, is some of the | | | | stock that has fallen into the penny range from the |
| types of short positions that people are taking. While | | | | teens may be likely to disappear completely, with |
| at first blush short selling seems no different from | | | | 10,000 shares you might only make $5000 when it |
| going long, there are some important differences that | | | | does so. If you are wrong and a venture firm |
| must be understood. | | | | decides to buy the company and offers $3.00 per |
| First of all in buying long, time is on your side. | | | | share, you stand to lose $25,000. If the stock |
| Because the general direction of stocks is up | | | | recovers and goes into the teens, you could lose |
| (because the economy is always growing), one can | | | | hundreds of thousands of dollars. The potential |
| usually just wait out bad spells in the economy. If | | | | reward is not worth the risk taken. |
| your stocks are all falling, the best thing to do is to | | | | So, before taking a short position, consider the |
| just stop looking at them for a while. Usually you'll be | | | | potential reward (how much can you make if the |
| happier the next time you look (and not just because | | | | stock drops by 50%, and how likely is that to |
| they've done a reverse 10 for 1 split). This is doubly | | | | happen) and the risk (how likely is it for this stock to |
| true if you select stocks that have good long-term | | | | move upwards, and how much could it move if it |
| growth characteristics such as steady earnings | | | | does so). Look for stocks that are already so |
| growth. In short selling, time is against you. If you are | | | | overvalued that it is very unlikely that they could go |
| wrong about a stock, because the markets tend to | | | | much higher. Find stocks with lots of cheerleaders |
| go up, your loses will normally continue to grow the | | | | and high PE ratios. If everyone likes the stock, they |
| longer you wait to close the position. | | | | have already bought in and it will be difficult for them |
| The second difference is that when you buy a dud, | | | | to push the price higher. It also helps if the market in |
| the size of the position becomes smaller relative to | | | | general is nearing a peak, since when the whole |
| the size of your overall portfolio. If you'd bought | | | | market is falling every stock is a dog. |
| Microsoft in the early 80's and five other stocks that | | | | |