With a number of Dell shorts on this thread (although they've been quiet the last couple days) I thought the recent Motley Fool article on shorts would be interesting. Here are selections, the full article is at
fool.com
There is also a bull/bear debate on Dell at 208.206.41.244
How do you know
when you've found a stock worth shorting, and even then, how is shorting a
stock superior to investing in a world-leading company for the long haul? It's
very difficult for a short to beat out a long-term investment in a leading
company. Very difficult. The most that you can gain on a short is 100% of the
value initially shorted -- and that's only if the company goes bankrupt.
Now, The Motley Fool Investment Guide states that shorts are fun. Or can
be fun. It also states that they're only for advanced investors who understand
the risks, because shorts can be the most painful experience of your investment
life. The risk in shorting is limitless. A stock can rise forever. Literally. You
might short hoping to gain 30%, but you face endless risk in the process. The
risk-to-reward ratio is horrible, and vowing to cover your short at a certain
loss-level doesn't make the risk-to-reward ratio any better. It only aims to
"end" the risk by surrendering to it. Meanwhile, Dell has risen 200% this year.
No short has outperformed Dell. Mathematically no short has ever
outperformed any stock that has gained more than 100%. No short ever will.
There are many concrete reasons to consider shorts unFoolish. But for me,
investing for decades with the hopes of compounding returns, already I know
that I'd rather buy Microsoft, Dell or Intel than try to short something for a
slight profit, while facing endless risk.
...
it's much easier to
measure and recognize great business models, and the risks involved, than it is
to recognize a very poor business model and all the risks involved, because
there are so many risks that a poor model will improve -- and improve
through ways that you don't understand and couldn't have foreseen.
....
the other argument for
shorting, which is: "It's a good company, but I think the stock is overvalued, so
I'm shorting it." Well, good Fool, how overvalued might it be? And are you
sure? Good companies often execute better than expected, continually, and
often sooner than expected, too. Shorting great companies, such as
Coca-Cola, is like finding the most successful person in town and then
following him or her around for the rest of your life, waiting for their downfall.
It's a waste of time. You stand to gain much more by befriending them.
I haven't shorted anything since 1996, and over the past several months I've
developed the belief that, rather than short something -- taking the time to learn
a bad business model and what makes a bad business, and then shorting it for
whatever gains possible, but always under 100% -- I'd rather take the time to
learn about good business models, and what makes good business, and then
invest in those companies and let the investment ride for years to come.
What has shorting stocks done for the Fool? Since the portfolio launched, the
Fool has shorted Bed Bath and Beyond, Paychex, Quarterdeck and Trump
Hotels. On the three closed positions the Fool made about $454.00. Not
enough to influence the portfolio's overall return. Add the Trump short, on
which the Fool is currently down $2450, and overall the Fool has lost $2000
while shorting $27,000 worth of stock since inception.
Since that time -- August of 1994 -- Intel has gained 486%, and Microsoft
380%. Coca-Cola, 213%. All recognizable winners. Were the shorts that the
Fool chose such recognizable losers? The best short gained the Fool a little
over 20%. |
