Tom's market comments 8/19/04

[Pete1]

Tom,

Thanks for the lesson and explanation regarding "selling short". Since I don't buy individual stocks or day trade, never really understood what this meant. Very interesting. Selling short truly does sound like gambling. Place your bet and hope that the stock goes down or lose your house if the market goes up. What a dangerous game.

[Rolo]

Not really, but, of course, it depends on how you play it (but that is true in trading anything).

Buying long is buying a stock with the anticipation of its going up in value.

Selling short is selling a stock with the anticipation of its going down in value.

In either case, with either trade, ONE of the two parties is WRONG. Both trades are fundamentally the same, only our view is askew.

Who has been wrong more often then right these past six months? Those buying long.


I do not have a lot of short-selling experience. However, I have sold my long positions when something went wrong with the stock and the price reversed quickly. It dawned on me, finally one day, "Duh! If I am selling this stock because I see it decreasing in value in the imminent future and do not want it, then why not sell short and profit from it, too?"

I did that with RHAT and TASR. I wish I'd thought of it sooner, I would have done it with APPX and SCSS. See those charts to see what I mean. A stock will fall more quickly than it will rise, so the profit opportunities are much more favourable.

RHAT: P/E at 360, "She's gonna blow!" Sell. Wait. SEC get curious, accounting questions raised. Stock drops. Sell short. Accounting statements for last 3 years changed. Close short position. Stock stabilises.

TASR: Pinhead journalists ignorantly blame TASR weapon for prison injuries. Close long, sell short. Stock drops 15% in one day, more following two days. Close short position when sell-off slows. CEO refutes journalists (which was a good read, a bit entertaining). Look for buying opportunity a la Warren Buffett.

It's like seeing a boxer get knocked square in the face with a killer punch and being able to instantly bet against him. Selling short can be a sure-thing. The bonus? haha, you don't even need cash to do it!

[Pete1]

The implication is that ifthe investorsells short or buys long, somehow,he/she knows the direction that the individual security is headed on a daily basis. Ifsuch winning trades wereachievable over the long-term, nobodywouldown mutual funds, bonds, cash - just buy stocks and sell short/buy long. Do you have enough confidence in your ability to see into the futureto first, pick thewinning stocksand second, sell short/buy long?If so, abandon your otherholdings and become a day trader of individual stocks.Not :). Don't give up your day job :D

[Pete1]

Also, Rolo, on another post you indicated your butt had been handed to you and you were only holding equity in TSP. If it is so simple and is not dangerous, whassup?

[tsptalk]

One of the dangers of short selling as opposed to buying is that you can lose 100% of your money a lot easier. If you try to short a stock at $20 that seems too high, you would lose all your money if it shot up to $40. Where as the only way to can lose 100% of you money when you buy a stock is if they go out of business.

I have been caught in that situation before back in 1999 and 2000.Some of those internet and B2B stocks had nosebleed PE's and theyjust kept going up, up, up. You can lose a ton shorting them at the wrong time. As Rolo said, they eventually do come back to earth. You just hope you haven't gone broke before then. ;)

[Rolo]

Pete1 wrote:

Also, Rolo, on another post you indicated your butt had been handed to you and you were only holding equity in TSP. If it is so simple and is not dangerous, whassup?

Hey! Waitaminute...I'm the "everything is black-and-white" Borderline here!

I never said it was simple nor "dangerous", I just said that it is not inherently the gamble many make it out to be.

Of course, "gambling" is decided by the trader, regardless of the transaction.

Regarding my losses: I made some dumb moves and "corrected" them by compounding them. All of those moves were long, BTW, and half of them were with mutual funds. My short-sells cushioned the blow a little.

It is OK, though, I am a lot wiser for it, psychotic episodes and all.

[Pete1]

Rolo, you're a smart guy. Sorry if I misintrepreted your earlier post and have a nice weekend :^