A Trip To The Science Fair…
March 12, 2010
An Ode To The PIPE
March 12, 2010

A Short Story

Look in the Forbes 400 list. Who’s there? Entrepreneurs who built something impressive, and the kids of those visionaries. Successful investors. The occasional Royal. Not surprisingly, there are no short sellers on the list. Short selling is dangerous to your portfolio and I no longer partake.

A quick history will suffice. For a decade, on average I doubled my money each year investing in small companies that I believed in. I would then proceed to lose a third (or more) of that gain shorting companies that were obviously worthless. I tried every method possible. I shorted individual shares. I shorted indexes. I bought puts. I sold calls. It’s hopeless. Frauds go up until people realize it’s a fraud. The CEO can continue to lie. He can say anything. People believe him and the shares go higher. While I lost millions, these CEOs were cashing out and laughing all the way to the bank.

Of course, if you’re patient, eventually you will usually get it right. There are two problems with this. Firstly, a stock can go from 10 dollar to 100 dollars before going to zero. As it goes up, it gets to be a bigger and bigger piece of your portfolio. Your losses are theoretically infinite. As it goes up, your broker can give you a margin call. Your broker can force you to sell your great little companies at stupid prices because some fraud keeps going higher.

Even worse, the most you can make is 100% if some stock goes to zero. If it takes a few years to die, your return is mediocre at best and awful when compared to the 5 in 5 gains you can achieve in smaller companies. This means you’ve tied up a lot of capital to make a small gain. What’s the point? The way to make real money is to buy a few really great companies and hold on to them. Shorting is not part of that process.

After having lost tens of millions shorting companies like Lehman, Bear Stearns, Countrywide, Fannie Mae, damn near every financial in 2007, steel companies, niche consumer technology companies, innumerable frauds and all the homebuilders, I’ve given up. Over the last decade, I’ve been right 95% of the time on my shorts. They were almost all lemons. Some were outright frauds. Yet, I only made money on very few of these. Most of the time, I lost considerable sums of money and gave up. Usually, I was just too early. Things don’t matter, until they do. As the shares went higher, I had to face real decisions. Either I had to cover and take my loss, or I had to sell one of my favorite little companies to cover the losses. What an awful decision to be forced to make. I like to be a patient investor who thinks things through before making a decision. Nothing is more frustrating than having a stock go higher and force you make a bad decision on the spot. Forget it. NEVER AGAIN! I do not short stocks any longer. Neither should you.

Categories: Investment Strategy
Positions Mentioned: none

To receive email updates on new posts, use the subscribe feature (on the right column of each page of the website.)