Amazing analysis once again by investor Dan Carroll. I read every word this guy has to say.
Check out this excerpt...but honestly definitely read the rest on vestopia.com
"Anytime market sell-off occurs or we enter into a bear market, Wall Street and the press become enamored with short-sellers. Short-sellers, of course, do well in down markets. Generally, my opinion stands as follows:
1. If you are convinced the market is going down, then shorting indexes is a good way to make money (assuming you are right).
2. If you are worried about the market going down, but have no conviction, then I suggest money market funds instead of stocks.
3. If you have conviction about specific stocks going down, then shorting is a good way to leverage that conviction - assuming you can manage the risks.
The first lesson of short-selling, however, is don't do it just because it would have been a good idea over the past three months.
There are four key differences between short selling and buying long (other than the obvious directionality):
1. Dividends - you buy long, you get a dividend. You sell short, you must pay the dividend.
2. Margin requirements - if you sell short and the stock goes up, you may be required to put more cash up as margin, or cover. Volatility, therefore, is a key risk to manage.
3. Short squeeze - if a stock is heavily shorted, and the stock starts to move up, short sellers may all be forced to cover at once, spiking the price. Margin requirements then become a problem.
4. Stocks, on average and over time, go up. The expected rate of return is 8%-10% annually (+/-35% in any given year). Therefore any shorting strategy needs to exceed that rate of return to be additive."
