The Motley Fool Discussion Boards

Previous Page

Investing/Strategies / Shorting Stocks


Subject:  Re: LT investors, think before you short Date:  3/17/2001  5:40 PM
Author:  Gator8387 Number:  7752 of 44633

XXLTINVESTOR, I think now is as good a time as any for active investors (those who follow the market reasonably closely, though they may not trade much) to learn to short. I think all active investors should hold some short position, though you are better off if most of your portfolio is long (or cash) at all times.

The warnings I would give are:

(1) Do NOT risk significant money until two years experience;

(2) Do NOT start off with a large position, start with maybe 3% of your portfolio (needless to say, you should have NO margin debt when you do this).

If you have $40,000 in your account with no margin debt, try shorting $600 each of two stocks that you think will fail. Not much money in it, but not much stress either, and a good learning experience. You are taking baby steps.

(3) Do NOT short a stock just because you have lost a lot of money on it, you will get whiplashed.

Personally, I never go long a stock that I would be willing to short, and I never short a stock I would be willing to own. So, for example, since I have held the drug stocks, I will not even think of shorting them.

Why? Because in the back of my mind I consider them good stocks, and will bail out at the worst possible time if I shorted them.

(4) Do NOT have a short-term mentality, stocks do not die overnight. A stock like AMZN may take two years to die.

(5) Do NOT expect to earn 100% returns, or even 20% returns or positive returns, every year. It is much easier to make money going long than short, for the simple reason that the market, over time, goes up, not down. However, sometimes the only way to make money is short. I do both.

(6) DO cut your losses, sometimes you are just plain wrong. However, with very volatile stocks like AMZN or YHOO (I don't short YHOO myself), a 50% or even 100% spike is to be expected along the way.

Expect, at some point in your career, to have one really terrible, horrifying experience shorting, from which you will learn a great deal.

I would urge any active investor to take these steps right now, don't wait until the Nas is at 5000. Will you make money at it?

Not necessarily, but if you follow these rules, you will become a better investor, and have better success with your longs.

You will learn to be a very good researcher (I generally don't use the term DD, as to me DD is something someone pays me to do). You will learn to question your assumptions. You will learn to question the assumptions of others.
Copyright 1996-2020 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us