And One last word from the Motley Fool, which i thought was a good way to kick this thread off !
We use a simple measurement to determine which stocks to short. It's the Fool Ratio, and
you can read about it elsewhere in our area. We're not going to waste space here
elaborately summarizing the Fool Ratio. Suffice to say that the number shows the ratio
between a stock's price-to-earnings ratio (P/E) and its company's growth rate. The premise
is that a stock becomes fairly and fully valued when its P/E (which is reported daily in many
business sections and financial papers) equals the percent of the company growth rate.
Here's our key to shorting: When a stock's P/E ratio exceeds the company growth rate by
30% or more, consider selling it short. For PEG ratio fans, that would be a PEG of 1.30 or
more.
As you can see, we're not aiming to short every stock that's quadrupled over the past year;
some of those may quadruple again in the next one. But we are shorting some of those
quadruplers -- and triplers, and doublers -- those whose stock has run up 30% or more
beyond what we consider the fair, full value. And as you might expect, the chances of those
highflyers moving up much more when they're already so overvalued is small.
Shorting Stock is one approach that separates the sophisticated investor from the novice.
Believing that selling shares short is difficult and highly dangerous, some people pay oodles
of money to enter "hedge funds," mutual fund partnerships whose managers short stock and
go on margin. Having read this far, you already know most of what these "pros" know, and
can do it yourself.
Finally, remember that when your "Pass Line" friends find out you're shorting stocks, they
may start to regard you as Darth Vader. So wear dark clothes, a low visor, breathe loud,
and milk it.
by David Gardner (MotleyFool)
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