Good advice, Paul Senior, on short selling. What many people fail to realize is that potential losses from short selling can be infinite (which is why put options or the sale of covered call options may make a lot more sense). But your comments made me recall a broker friend of mine, who at one time had a short position in his personal account in six figures. As the market went up, his short position got so untenable that the company management ordered him to cover, or else. So he did, ending up selling most of the stocks he had patiently accumulated over a 20-year period with the company. He got so upset over this, he had to take a vacation, and, financed mainly by his wife, the two went on a photo safari in Kenya.
When they returned from vacation in late October, 1987, the market had plummeted. The broker was easily able to cover his remaining short positions with the cash accumulated from the forced sales earlier that month. Upon settling the account, he then retired a rich man. If you can predict another October, 1987, I heartily recommend that you short some of your more vulnerable stocks. If not, then forget it! But also consider that there are more than a few poorly managed companies out there, whose share prices simply are not justifiable by even the most optimistic sales/earnings projections, at a time when the overall market is at an historically high level. Look particularly at some of the new IPO's which purportedly have some "unique" market niche on the Internet. Anything with a dot com in its name is becoming fair game if it isn't earning anything.
The thing that usually wrecks an investor who shorts stocks is the management of the company. A well managed company, even if its stock looks overpriced by all conventional measures, will more often than not find a way to deal with its problems. A poorly managed company will more often than not fail. So management quality is the key factor, and the one most often ignored, whether by those going long or short. Art |
