You must be an independent thinker
Posted By admin on September 7, 2009
With optimism as the prevailing attitude, it is heretical to insist stock prices will decline, and sacrilegious to make money from declining stock prices. Shorts are vilified by the financial services industry and in the financial press. Mutual fund managers often declare their abhorrence of shorting stocks, lest any potential investor think them a traitor. Television interviewers hark on the shorts’ mistakes, and often give them unfair coverage, if any. Intimidated by social pressure, few investors dare go short.
You must be an independent thinker capable of acting in spite of social ostracism if you wish to short stocks. Some will brand you a rebel. Few investors will be comfortable going short. Switching to real estate or oil and gas partnerships may be easier. Rather than being vilified by the equity culture, you will be ignored.
Even investors with the self-esteem to go short may not have the required emotional fortitude. The loss potential of going short is unlimited. Say you buy 1,000 shares of a stock at $10. Your potential loss, should it go bankrupt, is $10,000. On the other hand, sell 1,000 shares short at $10, the potential loss is unlimited. If the stock moves up to $20 and you cover, you lose $10,000. At $30, you lose $20,000. At $110, you lose $100,000 on a $10,000 investment. The seeming unlimited potential gain of stocks works against you. Anyone with difficulty admitting mistakes, taking losses, and moving on will be miserable shorting stock. If you are the type that holds on to losing positions waiting in pain to get out if you ever break even, you will be even more unhappy with shorts. Though stockbrokers are often blamed and sued in shorting cases, invariably the investor’s lack of self-knowledge was the real culprit.
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