Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Number One Reason You Should Learn How to Short Stocks

InvestorEducation / Learning to Invest Jul 24, 2010 - 03:07 PM GMT

By: Justice_Litle

InvestorEducation

Best Financial Markets Analysis ArticleThere are many good reasons to learn how to go short. One of the best ones is maintaining objectivity.

The vast majority of investors will never short a stock (or an index, a commodity or a currency for that matter). A modest contingent will experiment with options and inverse ETFs. But very few will ever take the time and effort to truly explore the “dark side” of financial markets.


That’s a shame, because the dark side has much to recommend it. Not from a perma-bear standpoint, mind you, but an opportunistic one.

From your humble editor’s point of view, the best stance is a flexible stance. Or perhaps think of it like tennis. The ability to go long is like having a good forehand; the ability to go short is like having a good backhand. Can you imagine a tennis player with no backhand? He would be vulnerable in half the positions on the court.

Having the ability to go long or short expands your horizons greatly. It increases the number of opportunities you can take advantage of, which in turn increases your odds of long-run success.

Comparing the Risks

“But shorting [stocks] can be incredibly tough,” some will argue. As if long-side investing is all that much different?

“When you go short your potential risk is unlimited,” the conventional wisdom warns. What an asinine statement! (Technically true, but still asinine. Technically the sun might not come up tomorrow.)

Imagine that XYZ is a dog of a stock with poor earnings quality, a richly valued multiple, a bearish chart, and heavy insider selling – in other words, an ideal short candidate. Is it likely to imagine a stock like this tripling in less than a week? In this age of accounting shenanigans, a sudden drop to zero seems far more probable. Yet nobody goes around saying, “Long-side investing is dangerous because the stock could be a zero.”

And who are these hypothetical people trading without risk points? If I go short at $50 with a risk point at $55 in case I’m wrong, why would it matter if the stock goes to $200? I cut my losses back at $55, remember?

Short-side players are usually very diligent in their use of risk points: “If the position goes against me by X, I am out.” Long side investors, ironically, are much more willing to ride a stock into the dirt.

Yet the short side is consistently portrayed as more risky? Ironic, that.

If I Had a Hammer

There are times when making money on the bearish side of the market is like shooting fish in a barrel. At other times, one will hardly wish to be short stocks at all.

It’s just the same as the long side: Sometimes the money comes flying in through the window. Other times the window is nailed shut. A key task, then, is getting a handle on what type of market environment one is in.

The trouble with only going long is encapsulated in that old saying: “To a man with a hammer, everything looks like a nail.” If bullishness is the auto-default option, then everything looks like a reason to buy.

Learning to go short adds another tool to the toolbox. That doesn’t mean one has to be bearish all the time. It merely enables the option of taking a proactive bearish stance when market conditions call for it.

Maintaining Objectivity

And so now we get round to the top reason for learning how to go short: It helps you maintain objectivity. If you can go both ways with ease, you will be less susceptible to unchecked emotions, confirmation bias or wishful thinking.

A low-to-no-growth economic environment – one that will likely be with us for years – means increased volatility as the average investor struggles. It also means stock valuations can be compressed for months, quarters, or even years at a time.

The way to deal with this is by assessing general conditions. When price to earnings multiples are expanding like an accordion – thus creating visible strength that shows up on the charts – it makes sense to participate in the bullish upside of the market. But when P/E multiples are contracting as investor capital flees – again showing up via bearish primary trends – it make mores sense to “go with the flow,” focusing on potential short candidates setting up for decline.

Publisher's Note: If you want to learn more investment strategies like this, be sure to join us at the Taipan Publishing Group Global Opportunities Summit. Justice will be joining a distinguished team of global financial experts, including all of the Taipan editors and analysts, to show you how you can arm yourself with today’s most sophisticated wealth-protecting and wealth-building “weapons.” You’ll find out how to emerge victorious… instead of becoming the next casualty. And you’ll have a great time doing it.

The summit is September 23-25 at the luxurious Venetian hotel on the Las Vegas Strip, and we're extending a special invitation just to you. But please hurry. Space is extremely limited... and spots are already filling up fast. Learn all the details here.

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source : http://www.taipanpublishinggroup.com/tpg/taipan-daily/taipan-daily-072310.html

By Justice Litle
http://www.taipanpublishinggroup.com/

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.

Copyright © 2010, Taipan Publishing Group

Justice_Litle Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Alan
26 Jul 10, 09:27
Article Update- Taipan Daily

http://www.taipanpublishinggroup.com/tpg/taipan-daily/taipan-daily-072310.html

Also, some of our editors have new roles. Please ensure that the editor’s bio is updated. For your convenience we’ve included the updated bio: Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Bios for additional editors can be found on the Taipan Publishing Group Web site: http://www.taipanpublishinggroup.com/editorial.html

Please let us know when these changes and updates have been made. As always, we welcome article submissions, and encourage you to submit articles to us.

Please contact my supervisor, Missi Carmen, at mcarmen@taipangroup.com or myself if you have any questions.

Sincerely,

Alan Tsao | E-Commerce Coordinator

Taipan Publishing Group LLC | Agora Inc.

www.taipanpublishinggroup.com

p. 410-864-0804

e. editor@taipanpublishinggroup.com

Follow us on Twitter @Taipan_Trader


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules