Why Shorting Stocks Is A Blood Sport

Here we are with weak retail, consumer confidence and Empire State manufacturing data to begin our day.  This type of thing typically puts pressure on commoditized box-making old tech names.  And you’re short Motorola Mobility ($MMI), as hopeless an also-ran in the wireless box-maker space as ever there was.  And please don’t tell me about patents, Nortel had $5 billion worth and still went bankrupt; the truth is that Morotola Mobility had very little reason to live as an ongoing business.

But then you get to work and read that Google ($GOOG) has announced a $12.5 billion buyout for the company, paying a 63% premium.  You are murdered despite all the technical and fundamental reasons that the company should have made for a terrific “investment short” for years to come.

This is just one more example of how difficult shorting individual stocks is.  You can add it to the list below:

Why Shorting Stocks is a Bloodsport

1.  The markets overall have an upward bias over long stretches of time

2.  The “big winner” maths is difficult – a 2 dollar stock going to 10 has quintupled but a 10 dollar stock dropping to two has only gained 80%

3.  Just when things begin to get juicy to the downside, governments tend to intervene with “special assistance”, bailouts and even short-selling bans

4.  Investors are less mad when you’re long and the market is down, they are furious when you’re short and they are missing a rally

5.  The best shorts get crowded in a hurry, preventing the cascading drop that the worst stocks deserve

6.  The borrowing process can be a royal pain, especially when there is an interest rate involved for hard-to-find shares

7.  Shorting investments with dividends or some type of income distribution means dealing with “negative carry”, even John Paulson’s Greatest Trade Ever meant making insurance premium payments on the credit default swap portfolio while waiting to be right.

8.  It is hard to publicly enjoy the victory, you are more likely to be investigated and publicly shamed for a winning short than be congratulated on your research

Most of the shorting I’ve done over the years has been of the hedging-with-inverse-ETFs variety.  For anyone looking to get into the game of outright short-selling, my advice is to go in with eyes wide open, it’s a real bloodsport.

This post previously appeared at the author’s blog, The Reformed Broker.