Why shorting is not Foolish - an opinion.Much has been said on the topic of shorting by Fools and wise wo/men. So here's some more to reflect upon. The Foolish credo is "To Educate, Enrich and Amuse". Let's take these admirable goals one by one and see how they apply to shorting stock. In the Rule Maker style we will award 3 points to each category…..To Educate:Shorting stock means you borrow stock you don't own and sell it, in the hope that it goes down, so you can buy it back later at a reduced price. Your profit/loss is the difference between your selling income and your buying cost.Why short a stock ? Obviously the company is in deep trouble. How do you know ? Perhaps the business they are in has no future (according to your research), or they are left in the dust by competitors. Their balance sheet is mired in debt with little free cash flow, and their revenue, margins and net income is dwindling. All good reasons to believe the share price will sink along with it. While learning from your own mistakes and failures is the best education, it is perhaps even more Foolish to learn from someone else's ! Of course, what you never know is the potential bomb shell around the corner - the company is doing so badly that it is bought out by a large company that sees some possibilities and is willing to inject much needed cash. And then there is always the possibility that the company announces it is starting a dot com venture and the stock skyrockets. Still, I think the Education of a Short in the Rule Breaker port is worth 3 points.To Enrich :The best that can happen is that the company goes bankrupt and the stock goes to zero. 100% of your money is profit. The worst that can happen is the company is bought out or tries the dot com ploy. Your potential losses are….. unlimited. So no matter how long you wait (after all, Fools are in it for the long term) - your profit can never exceed the initial amount of money from the sale, whilst putting your entire life's savings at risk. Unless you bail out at a certain point. But that's called…. Market timing ? Not Foolish ! Compare this with a long stock - if it goes belly up, you lose your initial investment, but your profit outlook is unlimited. Sounds good to me. The point being then that a short by its nature cannot really be a long term prospect - it provides diminishing returns while it falls, and can be catastrophic if it rises. With this risk/profit outlook, I would award 0 points to Enrichment.To Amuse :Oh look - the share price tumbled another 3 points today. Ha ha ! Management is desperately looking for ways out of the quagmire. Ho Ho ! Ah - they announced layoffs today to try to cut costs. Hee hee ! And while you are laughing all the way to the bank, 100 people go home to tell their families they have lost their jobs. While I see the educational value of a badly managed company, I don't find someone else's pain particularly funny. Especially the hard working staff who have little control over management decisions. We are not amused - no Sir ! 0 points. The Foolish Spirit of optimism, good cheer and humor.A new category which I will slip in - one that I enjoy so much at Fooldom, since it pervades the whole culture on the daily write ups and the boards. When shorting a stock - the opposite happens. I admit I have myself shorted stock before (I didn't inhale, honest ; ) . And found my emotions split into two. When the market went up and stocks rose in general with the tide, I found myself cheering my longs and mourning my shorts. And vice versa. Now I do believe in unemotional investing - it's essential to be able to hold for the long term. But still - we are but human, and a little smile may appear now and then when the Nasdaq powers on to another record high….. So you find yourself in a continual conflict (albeit slight, trying to appear bravely above the fray). The worst thing about this is that you are actually hoping for your stock to decline - meaning you are sending negative 'thought waves' or energy towards the company and its people - since their suffering means money in the bank to you. When thousands of Fools do the same, it has an affect - ask Richard Gere…….Is this Foolish ? Does this bring happiness ? How much better then, to cheer on a great company (AOL, CSCO etc.) to even greater things, to watch its employees reap the riches and rewards while your own small shareholding is rising gently (or powering relentlessly) to the sky ! Full of optimism, celebrating wit and repartee, adding your own ideas and inventiveness to the MF message boards to contribute in a small way to the overall success. Now that's Foolish !I would never have contemplated going on the RB company board to discuss my fervent hopes of the next Big Mistake The Donald was going to make !So my score for the Foolish Spirit in shorting stocks : 0 points.To recap the score : To Educate : 3/3 pointsTo Enrich: 0/3 pointsTo Amuse: 0/3 pointsFoolish spirit: 0/3 points.Total : 3 / 12 points. Conclusion : Shorting ? It just ain't Foolish.KWB.
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