I was listening to a financial guru/talking head of one of the local radio money shows recently. He was pontificating about the opportunities that were being presented in the stock market if only you knew where to look. What caught my attention, however, was his pronouncement about the problem with recent IPO offerings, most notably Ally (formerly the bankrupt GMAC). He kept warning people away from this stock which put him in my camp. However, when a caller asked him if they should short the stock he immediately went to my “Are you kidding me?” list.
It wasn’t whether or not to short Ally that was in question. My angst came when he boldly stated that shorting should be left to the professionals and not attempted by the average investor.
He cited a few statistics that taken at face value makes some sense but when viewed in the light of day becomes as idiotic as his premise.
“Since 1929 to 2012 the S & P has been up 9% annually so shorters are betting against the odds and history”. Taking an 84 year span is an awfully long buy and hold time period. I seem to recall the ’29, ’87, ’99 and 2008 crashes as possible interrupters in his sea of tranquility.
“Going long you can only lose 100% of your investment but make many times more. Going short you can only make 100% of your investment and lose many times more”. This statement eliminates such devices as stop losses, both long and short, and the development of inverse ETFs which minimized risk and maximized profits for the short position.
“You can be right about the company but sometimes the stock continues to rise, meaning a short position will lose”. How many times have you thought you were right about a company, and went long, and the stock continued to go down? It happens both ways.
Disregarding dividends and certain hedge strategies, like call writing, money can be made or lost when a stock goes up and down. Going long or going short gives you the best opportunity of maximizing profit potential regardless of market or stock direction.
Shorting is not for everyone. Suitability, goals and risk tolerance all should be considered.
But to say shorting is not for anyone (save the professionals), which many believe, simply staggers my imagination.
It would be like going into a fight with one hand tied behind your back. The outcome would be fairly predictable.
Along with his 40-years of dedication in the financial services industry, Bill is the President and CEO of GPSforLife, has recently authored a highly successful book entitled 44th: A Presidential Conspiracy, publishes his dynamic monthly financial newsletter MacroProfit, and faithfully continues his third decade on the radio with It’s All About Money, which can be heard weekdays on Money Radio in Phoenix and in podcast form on his website (and on smartphone apps) published at billtatro.com weekdays at 5pm Eastern. Bill can be reached via email at firstname.lastname@example.org and on Twitter @tatroshow.