Bruce Pile

A Short Comment on Shorting

Running a short portfolio is hobbled by some simple facts of math. For one thing, when you put a position at risk, you have to take a quick loss if you are wrong in the short term; and the short term movement even in a bear market is largely random noise with little predictability - close to a 50/50 chance of having the stock move against you right off the bat. So even if you are right about the longer term direction, you will be taking quick losses nearly half the time or be risking the bigger losses. And of the positions that go your way, you have another math fact working against you. If you put say $20,000 at risk and the stock tanks nicely from $20 to $10, you will be buying 1000 shares at $10 and creating a profit of $10,000. So on your $20,000 you make $10,000 - a 50% profit. But for the same % price move long, this would have been a 100% profit with the stock moving from $10 to $20. So even on your home runs, you are having your shorting profits cut in half versus a long portfolio. Then there is the real world matter of taxes. Most bear markets don't last much more than a year, and much of your short portfolio will be holds of less than a year. If your long holds are mainly more than a year, you will have the long-term tax rate of 15% versus the short-term rate of 30% or more cutting in half again your hard won shorting campaign profits compared to buy and hold long! So after all the added stress and worry of shorting, you are actually keeping just a sliver of what the same price movements would be handing you in long positions. No wonder there are so few rich shorters.

If there are no good bull markets to take advantage of, shorting may be better than cash if done well (and O' Neal shows you how to do it well in his books). But right now, there are some strong bull markets that probably have better net profit odds than shorting. The long-term debasing of the dollar provides good buy and hold opportunity in precious metals. And the agri crops bull market is driven by long-term supply and demand plus the currency issues. These will only be aided by a bear market.