Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Investors Turning Wall Street's “Darkest Art” Into Your Gain

InvestorEducation / Stock Index Trading Mar 21, 2009 - 03:07 AM GMT

By: Q1_Publishing

InvestorEducation

Best Financial Markets Analysis ArticleIt's one of the oldest tricks in the bag and it has a terrible reputation. But the sooner you learn how to use it, the sooner you'll be able to sleep soundly at night.

Bloomberg recently called it “ One of [Wall Street's] darkest arts.


Time says, “ It's a trick that has been hastening market crashes for at least 400 years .”

New York State's Attorney General Andrew Cuomo likens this strategy to “ looting after a hurricane.

Worst of all, it's always the first “fall guy” for politicians and media (check out the recent “expose” from the Daily Show as the perfect example) when times get tough.

It has been called evil, un-American, and destructive. Despite it all, it's one of the most profitable things you can do and one of the best ways to keep yourself protected in a bear market.

Before we go any further, I ask you to hear me out completely. Read this entirely until the end. And if you still disagree that's fine.

I'm about to ask you to think about something 99% of investors refuse to. I want you to put aside the old rules which have held up over the past 27-year bull market. Forget about the elegant and simple “buy low, sell high” rationale for the moment.

I want to talk about short selling.

Sell High and Buy Low

That's right. The maniacal, the unpopular, and little understood practice of short selling a stock.

In essence, it's a very simple practice. You borrow the shares from your broker. You sell them into the market. Then buy them back (the lower the price, the better) and return them to who you borrowed them from.

Sounds, pretty simple right? Well, it is if you do it in very liquid stocks, but most investors refuse to.

The reason most average investors don't do it is because of the simple math of investing. If you buy a stock, it technically has an unlimited upside. In theory, a stock's price can go up forever. When you sell short, you're maximum gain is 100%.

This couldn't be more wrong. From what I've learned from watching average investors, they will sell very quickly and won't hold out long enough for that “infinite” rise in value. And they probably won't even be holding on for the big gains in the long run. So that rationale doesn't really fit in most cases against short selling.

In the end, short selling successfully is based on the exact same rule of investing successfully, buy low and sell high. When you're selling a stock short, you just do it in reverse. You sell high first. Then you buy the share back at a low price.

At the risk of oversimplifying short selling, if done properly with reasonable stops and limit orders, it is just as safe as investing – if not safer. And it's a heck of a lot safer in bear markets (like what we're still in now).

Short-Selling is Not Bad

The “math” isn't the only thing holding most people back from short selling. It's also one of the worst marketed strategies for investing successfully.

We've all seen one of those infomercials on TV with some guy in a sports car who got rich thanks to some magic trading system and leveraged stock options trading. There are also those ads on the Internet that promise instant fortunes through currency trading. And there are plenty of others including “free money” and “checks from the government” and…well, anything that will get someone to bite.

All of those ads are painstakingly constructed by marketers trying to get a few people to do two things – to believe and to open their wallets. As I'm sure many buyers eventually realized, it really isn't as easy as it seems.

Also, the short-sellers are doing well while most everyone else is losing out big. Think of the ultra-successful short-sellers who uncovered problems at Enron, Worldcom, and Bear Stearns. They made money when other people were losing fortunes.

Naturally, they would be easy targets for the government regulators who failed to uncover the same problems. Also, the same folks who worked at Enron and would gladly collect bonuses, paychecks, and free shares from a company they had front row seats to watch.

Still though, despite all the odds being stacked against you when buying stock or currency options (the declining time values being the big culprit), they are still marketed as a “sure-fire” way to get rich quick.

Meanwhile, very few people try and make short-selling out to be nearly as glamorous even though it's much less risky than most people realize.

We've been over how stocks move a few times before. As the old saying goes, stocks climb up stairs and fall down the elevator. Every decade or so we get a big reminder of this and short-selling is the best way to take advantage of the way stocks naturally move – especially in a bear market.

There is one more very important thing most investors make the first time they “go short.”

“Uninvesting” 101

The mistake is that they look at it as a trade instead of an investment. When most people sell a stock short, they look at it like a trade. They'll go in for the initial ride down, but when it turns against them, they jump out quickly.

I think most of them start thinking of the “unlimited” downside with a short sale on the slightest uptick. It's completely irrational especially if you're using trailing stops or other types of risk reduction strategies. But how many times are most investors rationale?

That's why I encourage investors to look at short selling as “uninvesting.”

As an uninvestor, you don't do anything extraordinarily different from when you buy a stock. You buy (in this case sell short) the same amount as you would normally when you buy a stock. You have the same time frame. You set the same stop points to limit risk if it goes against you. You do everything the same, you're just in position to benefit as the stock goes down.

The reason I bring this up today is because I believe there will be a tremendous opportunity to “uninvest” during this rally. The entire economic landscape is changing and the market has yet to anticipate all of them.

At the Prosperity Dispatch , we've talked about how many industries will get hit hard from new policies and regulations (i.e. payday loans, insurance, healthcare, etc.) and how the banking industry will be much more fragmented (“too big to fail” size will probably be outlawed by the time this is all said and done). On top of that we'll have all kinds of tax code changes which will further impact a lot of industries for good and bad (i.e. solar vs. coal).

Like it or not, we are facing a period of great change and the best thing to do is take advantage of that change. The willingness, knowledge, and ability to “uninvest” will be an invaluable tool to capitalize on that change.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

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


Post Comment

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

6 Critical Money Making Rules