Selling Stocks Short

trickynick said: "I recently got done with Victor Niederhoffer's book who says that he has seen more money lost by shorting stocks than by any other technique. Personally, I have made money more than I have lost by doing this but I have recently taken another look at the wisdom of what I have been doing. I closed my short position in GOOG (which I have talked about a lot on here) recently, at a very small profit. And the messed up thing is that I still believe GOOG is headed lower. I just decided it was taking too long for anything to happen and there would be time for me to tune in later if I decide to. This realization begs a question...why is it that I am content to be patient with a long position and can even tolerate a substantial loss in the short run but a short position, no matter how convinced I am of its long-run correctness, causes anxiety and an inability to mentally detatch from the market? The first part of the answer is pretty obvious. A long position can lose no more value once it goes down to zero and there is likely to be bolstered by strong levels of support on the way down. On the other hand, the potential for loss in a short position is infinite due to the lack of an upward limit on the price of a stock. Beyond this, however, there is the opportunity cost of what else I could be doing with the resources. If nothing else I lose a divdend and a risk premium when I short. Even though I have made money a few times, it has never been a huge amount and since the additional risk I assume and opportunities I have given up in these positions have resulted in so little benefit (relatively speaking), I am starting to wonder if it is reasonable to say I am taking chances for nothing. Then again, since I really haven't suffered many losses (knock on wood) maybe I shouldn't be whinning so much. Is this just a natural process of investing maturity by which I am discovering my true level of risk tolerance or am I being chicken shit and going soft by causing myself to worry unnecessarily and second guessing technique that has had, at worst, an innocuous effect on my investing? Comments?"

HappyHarry said: "Because there's something inherently creepy about rooting for stocks to go down. And let's face it, with a stock like Google, do you know how easy it is to be caught on the wrong side of the crowd? Shorting means you're going against the crowd, so psychologically its a harder thing to do than go long."

AlfredSokol said: "Don't forget you have to pay interest on margin too."

trickynick said: "[QUOTE=AlfredSokol]Don't forget you have to pay interest on margin too.[/QUOTE] That's right, there is ANOTHER thing I give up! LOL! Commenting on the "creepy" aspect of rooting for a stock to go down, I used to think that way until I realized that capital markets actually NEED there to exist a way to become a seller of securites without having bought because it keeps prices from getting too unrealistic. Think about it. If there were no money to be made in taking something lower then what would be the incentive to do so? And therefore what would keep the capital markets from turning into a gigantic permabubble? Some people say it's "unpatriotic" to bet against the growth of the country but that's a naive argument IMO. I find notions of patriotism with regard to the stock market to be rather GomerPile-ish. I'd rather evaluate the technique based on risks and rewards. Thanks for the comments so far, guys."

AlfredSokol said: "I don't believe its unpatriotic or immoral to short. But you have to be negative. You're always running around talking about pessimistic news, etc. Longs at least get to be excited about the prospects of the companies they invest in."

LanceJ said: "Hi guys. Kudos to everything written and to add another idea. Shorting is betting against the company. In other words, you've got a company, their board, managers, workers, etc... battling against you when you hold your short position. This is troubling because the company and its workers have more incentive than you do in your short. The company and its workers are battling for their survival (most workers live pay check to pay check). The company can do so many things to adapt to a hostile environment. They can expand by buying out another company. They can come out with a new or improved product. They can start a killer marketing campaign with a catchy jingle. They can cut costs by closing certain stores/plants. They can cut costs by laying off workers. They can cut costs by implementing new technology. They can cut costs by lowering wages of upper management. Worse (if you're short), the board can legally manipulate their stock to put you in a short squeeze like announce a dividend, announce a share buyback, announce a forward split, etc... So when shorting a company, you are betting against the natural organisms ability to adapt to a changing environment. This ability to adapt, adaptation, is a primary variable in the formula of life. Life itself is a result of organisms, both large and small, ability to adapt to a changing environment. To short a company is to bet against adaptation itself. So in essence you are betting against humans, against life itself. Take for example the fiasco with the Libertarian party and their buying massive amounts of gold because of an inevitable nuclear war scenario in which the Federal Reserve is wiped out and so he who holds the most gold is king. They actually bet against humans abilities to adapt, through global policy, to the nuclear world. They lost hundreds of millions of dollars as gold plummetted and their bet against humans ability to adapt failed. The party has never recovered from this snafu. It is not wise to bet against humans ability to adapt to a changing environment. We were suppose to be dead from a nuclear war 15 years ago. We were suppose to be dead as God came in the year 2000 as many churches prophesied. We were suppose to be dead as a society and return to the stone ages from the Y2K computer bug when the year rolled over from 1999 to 2000. We were suppose to be dead from the poor and middle class rising up against the rich elite class in 1995 as was predicted by PhD Social Science professors. I could go on and on... the point is that it is not wise to bet against humans ability to adapt to a changing environment. That's not to say one can't make money shorting. I've done it myself on occasion. But rather it's just another line item as to why going LONG and SHORTING are not equally risky. Wow, what a deep soap box rant dude... :cool:"

alhamid said: "if you see enron is going down, its worth shorting a few shares"

thezster said: "(Quote) Hi guys. Kudos to everything written and to add another idea. Shorting is betting against the company. In other words, you've got a company, their board, managers, workers, etc... battling against you when you hold your short position. "Quote" Sorry, I disagree totally......... for what I'm guessing, most of the people in this forum don't buy/sell based on "long term" results. Shorting is betting against other investors. Typically it has little to do with a companies worth, present or future, but rather betting that the market has overreacted to news and/or conditions. I often short companies that I "absolutely, positively" know will continue to rise in price over the long term. However, for example, when building supplier stocks rise dramatically the day a hurricane hits..... it's time to short that puppy."

AlfredSokol said: "All trades really have the element of making bets for both the long term and the short term. But your example of a builder stock rising with a hurricane is an excellent one. If you see an obviously inflated stock, shorting it really says little about what direction you actually think the company is headed in."

thezster said: "I knew it!!! Lowes rose to $68.75+ a day or so ago..... with no apparent reason......... Just to high for the times we live in not to mention a 5 year high.... So, shorted a couple thousand shares........... Good move? You check it out. Yet, in the long run....... that's a great stock to own, even at that inflated price......."

LanceJ said: "[QUOTE=thezster] [QUOTE]Hi guys. Kudos to everything written and to add another idea. Shorting is betting against the company. In other words, you've got a company, their board, managers, workers, etc... battling against you when you hold your short position.[/QUOTE] Sorry, I disagree totally......... [/QUOTE] And if you disagree with that, you will loose quite a bit of $$ if you continue to engage in short selling. The fact that you've made any money at all without understanding this basic fundamental principle tells me that ladyluck has been on your side. This is such a basic premise of short investing 101 that you are disagreeing with, that it's sort of silly and funny. :D In any event, may your lucky streak continue."

thezster said: "I guess "Lady Luck and I must be engaged"... 6 years without a bad year so far.........."

thezster said: "You should note my "caveat" in my first response... "For most of the investors in this forum".... Shorting a healthy stock in response to news/conditions is not betting against mgmt., etc. As I said, it's betting against other investor/conditions for a short period of time. I agree with your basic premise - for the long term investor.... just have a hard time imagining those folks being a part of this forum... and those that are....... should note my "caveat"."