Making the case for short selling
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Is short selling bad?
The very idea of short selling can enrage some investors. Why make a bet that a stock will go down when the goal of investing is to expand your capital?
But Vad Yazvinski, aka The Amateur in the current round of Strategy Lab, offered an impassioned defense of short selling this week. Not only that, he gave readers a primer on how to sell stocks short with the least risk to one's cash, if not one's sleep.
Yazvinski's timing was opportune. The market has been rocky, to say the least. As of Thursday's close, the Dow Jones Industrial Average ($INDU) was up 0.6% since this Lab round began Jan. 28. It had been up as much as 4.4%, after Day 5 of the round. The Standard & Poor's 500 Index ($INX) is up 0.9%, but the Nasdaq Composite Index ($COMPX) and the Russell 2000 Index ($RUT.X) are down about 1%.
In the meantime, bond insurance company MBIA (MBI, news, msgs) has asked Congress to ban the "unscrupulous and dangerous market manipulation of short sellers." With Thursday's close, MBIA's shares are down 83% since January 2007, as investors have realized that a strategy to move into guaranteeing mortgage-related securities was disastrously wrong.
The idea that short selling is unscrupulous and dangerous struck Yazvinski as hogwash. He wrote, "Do MBI's top managers seriously think the company's stock price has declined because of short sellers, rather than because of the fundamental issues with its business model?"
In fact, he wrote, short selling is necessary for markets to run properly because "it not only helps to keep markets from being irrational for prolonged periods of time, but also makes sure that incompetent managements' messes do not go unpunished for too long."
In short selling, an investor borrows company shares, usually from a broker, and then sells them. If the stock drops, the investor profits by buying back the shares at the lower price and returning them to the original owner.More from MSN Money
Yazvinski: 5 rules for selling short
Reese: Some stocks Buffett would like
Kam: 3 ways to improve your 401(k)
Wright: Try your luck with these 13 stocks
Carpenter: A drug stock worth a look
Walberg: Bet on consumer-oriented stocks
It's done all the time. In a market like this one, short sellers have set off small, intense rallies by buying back shares, forcing prices higher.
Yazvinski regards short selling as risk mitigation, a way of protecting his portfolio against when the market falls back. He thinks every active investor ought to know how it works and how it can work best.
He has five factors that make a stock a good candidate, starting with: A high price alone is not a reason to short a stock. Yazvinski said the company needs to carry a fair amount of debt and see profits getting squeezed from deteriorating prospects, and he likes stocks that already have attracted a number of short sellers. And he won't short a stock in an industry such as biotechnology, where to buy or sell intelligently needs a lot of sophisticated insight.
Two of Yazvinski's short positions, Saul Centers (BFS, news, msgs) and BankUnited Finance (BKUNA, news, msgs), are among his best trades so far this round.
How to protect yourself in a tough market
Portfolio protection has been a theme among the players in our little game this week. All-Star Team investor Ken Kam raised it twice this week. On Wednesday, he took up three related questions: How should one protect core mutual fund positions? Should one buy beaten-down financial stocks? Should one simply get out of stocks? His answer on the first was to suggest that if your core funds are falling less than the market overall -- i.e., the S&P 500 -- the manager is doing a good job.
He was not wild about buying many financial stocks. "Many banks are still sorting out the extent of the damage, and there is a chance that the problem will expand beyond subprime mortgages to other types of loans that were securitized in the same way as subprime mortgages," Kam wrote.
And he didn't think one should abandon stocks. "Sure, we have problems in the financial and housing sectors," he wrote, "but we are working through them, and the interest-rate cuts that are already in place have planted the seeds for a strong recovery later this year."
On Thursday, he dealt with a different question: How to get employers to improve the roster of mutual fund choices in 401(k) plans. A problem with many 401(k) plans, Kam wrote, is that a number of funds have bought their way onto the list. And they may not be particularly good funds.
How can you get around the problem? Do the research and identify funds with better long-term records. Then ask your employer expand his or her offerings. If that doesn't work, see whether the plan can establish a self-directed window so you can expand your choices. If that doesn't work and you change jobs, move your 401(k) money to an individual retirement plan that gives you more choices -- and better choices.
Stocks Warren Buffett would like
Meanwhile, Guru Investor John Reese came up with a list of stocks that the Oracle of Omaha might like in this environment.
Broadly, he wrote, "Buffett generally likes large, conservatively financed companies that have a long history of strong business performance -- and which are selling at a discount."
Reese's list included insurance company Brown & Brown (BRO, news, msgs), recreational vehicle manufacturer Thor Industries (THO, news, msgs), Johnson & Johnson (JNJ, news, msgs), Bed Bath & Beyond (BBBY, news, msgs) and PepsiCo (PEP, news, msgs) -- even though Buffett has a big stake in Coca-Cola (KO, news, msgs).
Where we stand
We may have brought Reese up last among our correspondents today, but he is the leader so far in this Lab round with a 2.8% return. His winners so far: Chico's FAS (CHS, news, msgs), up 14.1%, and footwear manufacturer Steven Madden (SHOO, news, msgs), up 13.7%.
Kam is second, up 1.1%, thanks to a 9.6% gain in Novo-Nordisk (NVO, news, msgs).
Yazvinski's shorts of BankUnited Finance and Levitt (LEV, news, msgs) have produced gains of 16.9% and 15.3%, respectively. His best long position in a portfolio that's up 1% is Joy Global (JOYG, news, msgs), a big manufacturer of farm and construction equipment, up 13%.
Yazvinski is followed by High IQ investor Kelley Wright, up 0.9%. Wright's top position is signage company LSI Industries (LYTS, news, msgs), up nearly 6.4%.
CAPS Commando Russell Carpenter is up 0.4%. Like Kam, his big winner so far is in energy: oil and gas equipment maker Lufkin Industries (LUFK, news, msgs), up 9.1%
Dog Pound trader Robert Walberg is down 0.7%. A 5.8% gain in casino operator Las Vegas Sands (LVS, news, msgs) and a 13.1% gain in children's apparel retailer Bebe Stores (BEBE, news, msgs) have been offset by a 10.4% loss in Google (GOOG, news, msgs).
Strategy Lab Open Week 3: Stock market whiplash
Of course, the pros are only one part of the game. Jamie Dlugosch, the executive editor of InvestorPlaceBlogs and the Strategy Lab Open Web site, offers this update from our reader competition:
Pretty much the only thing you can count on in the stock market these days is volatility. Through it all, our Strategy Lab Open stock pickers are proving you can make money in any market. Check out the stocks they are buying, selling and making money on this week:
Potash of Saskatchewan (POT, news, msgs) continued its climb up our top five most widely held list this week, moving into the fourth spot. We also welcomed newcomer General Electric (GE, news, msgs) to No. 5, knocking off ExxonMobil (XOM, news, msgs).
The rest of the top five (in order) are Apple (AAPL, news, msgs), Google (GOOG, news, msgs) and Microsoft (MSFT, news, msgs). Potash also jumped up two slots on the list of most profitable stocks in the competition and now has the top spot.
Monsanto (MON, news, msgs) and DryShips (DRYS, news, msgs) continued making people money, joined by Schlumberger (SLB, news, msgs) and Companhia Vale do Rio Doce (RIO, news, msgs).
What our stock pickers are buying this week
The most bought stocks this week were the UltraShort FTSE/Xinhua China 25 Proshares (FXP, news, msgs), an inverse exchange-traded fund; Pfizer (PFE, news, msgs); StreetTracks Gold Shares (GLD, news, msgs), GE and Apple.
Just as money continued to move in to UltraShort FTSE/Xinhua China 25 Proshares this week, it also continued to move out of iShares FTSE/Xinhua China 25 Index (FXI, news, msgs), an ETF that moves with the FTSE rather than in the opposite direction.
Rebecca Witwer of the blog Liquid Gold shows us why she believes in gold now and her strategy for making money through ETFs and mining stocks in the post "Shine On Gold, Shine On." She's buying stocks like Newmont Mining (NEM, news, msgs) and Goldcorp (GG, news, msgs).
Doug Kerr of Five Percent weighs in with his reasons for why UltraShort ETFs are the smart way to go for the next two weeks, particularly for real estate, financial stocks, China, emerging markets and technology. Read all about it in "A fool and his money."
Richard Nahlen of Unique Constraint got walloped on Crocs (CROX, news, msgs), but he still believes in the stock. Find out why in "CROX -- always a bridesmaid." Want a second opinion on Crocs? Try InvestorPlace's own John Lansing, who back up Nahlen with five reasons to buy the stock now -- and gives you his buy under price.
For those going mad because of the market's uncertainty, Keith Barton of Complete Stock Idjit, wants you to know, "It's a Dramamine market, and queasy is normal." He explains how he's employing a couple of different strategies to cope. He also seems to be in agreement with both Rebecca and Doug, as he bought Thompson Creek Metals (TC, news, msgs) and UltraShort Real Estate ProShares (SRS, news, msgs) this week.
We know it is a tough time to be picking stocks. Heck, it is a tough time to be an investor!
But, as the Strategy Lab Open leader board shows, plenty of stock pickers are finding ways to make money in the stock market right now, and you can, too. Stick with us, and we'll bring you the best ideas the community has to offer each week here in the Investor Post. And stop on by InvestorPlaceBlogs.com in between issues to see our most up to the minute blog posts and stock discussions.
Just getting started with your portfolio? Check out our Coach's Corner and Here's How sections for guides to help you get going with your portfolio at Marketocracy and to writing in your blog at InvestorPlaceBlogs.com. E-mail us with questions at service@investorplaceblogs.com.
By Charley Blaine, MSN Money |
