Minyan Mailbag: Short Selling
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
Minyan Mark has been a trader on the CBOE for over 25 years and his opinions are trusted and welcome anytime in the city of critters.
It is possible that the combination of computers, the internet, and the rise of the hedge funds have combined to make short-selling a losing strategy even (and perhaps especially) for professional traders. I know that many of you Minyans trade for a living so here are a few rules that may avoid an untimely demise.
ANYTHING THAT IS CLEARLY RIGHT IS WRONG.
Everybody knows the Taser Int'l (TASR) story but it is a classic. Take a small company, a controversial product, a limited market for that product, a self-promoting company and you have the perfect recipe. Everybody knows that the stock is going to single digits but the battlefield is littered with the corpses of short sellers.
Or General Motors (GM). Buy the bonds, short the stock, make money on both sides, retire and see the world on your yacht. Professor Succo pointed out the pitfalls of this trade to me, but ...Note to Self: You are not in college anymore, listen to your professors.
ALL SHORT-SALES MUST BE STAMPED WITH A FRESHNESS DATE
The longer you have a position on, the worse it gets. Even if it is an undiscovered gem with a low short base, eventually someone will mention it on CNBC and it will become CLEARLY RIGHT. By the way, with computers and the internet, there is no such thing as an undiscovered gem.
IF IT IS SO GOOD THAT, WHAT THE HELL I'LL JUST DO A LITTLE, IT'S NOT AND DON'T.
One way to manage short squeeze risk is to put on only a very small position. If you have correctly identified some overpriced stock that deserves to die, then the chances are that you will make money in the end. The problem here is that to short a stock at 17, have it go to 30, and then 300 painful days later cover it at 16 isn't all that satisfying. The beer you drink to celebrate will probably just interact with your antidepressant and cause you even more trouble.
Alas, there is a certain addictive quality to selling stocks short. Just remember, the short side of the market has always contained the seeds of its own destruction, and the flood of "short money" will cause them to sprout. If you actually want to succeed and be happy, short the indexes.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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