June 11, 2009

Short vs. Long: Kettle meet Pot

Those who short are no different than longs. In fact shorting is much harder than being long on so many levels. Shorting require more skill, research and discipline than being long. Actually I can argue that dedicated shorts are better investors than longs.

Sometime shorting is lumped incorrectly with trading and speculation. To short stock based on valuation or speculation is to make a bet on market conditions. But proper short is to short fraud, hype and bad management. These things require a lot of fundamental analysis to uncover.

Shorting is no different than going long. You do the research, more of it actually. Uncover unsustainable business models and bad management. Recognize hype from what is logical and sustainable. Once you complete your process, usually longs pull the trigger at this point. However shorts, do that process over and over again until there is no i left undoted. Then you wait and wait until you the perfect time and here is the art of short selling is when to pull the trigger.

A successful short has to master two things, timing and selection, while the long side can live with selection only. A long investment that depreciate in value hurts performance but does not pressure you to sell, as time can make you whole again. However a short does not have that luxury. A short position that moves against you, require more margin and more capital to hold. How long can you continue holding is a function of how much capital can you come up with.

I recommend reading a book about short selling called "The Art of short selling". It is not much about short selling rather than fundamental analysis. You will be surprised how detailed shorts can be be.


the_obtuse_investor said...

Good post.

I agree that shorts must really know what they are doing because they really do risk everything if they are wrong. Not like us long term value investor types.


Sami said...


shorts are vilified too often unjustly.
I would not short as well even if I uncovered fraud and bad management because things can be "irrational more than I can be solvent".

the_obtuse_investor said...

The market can be irrational much longer than we can be solvent.