Shorting Stocks

Usually shorting stocks (selling a stock and hopefully buying later at a lower price for a profit) is not something you would hear a value investor talk about. But, since you can apply value investing principles to determine if a stock is undervalued, you can theoretically use the same principles to determine if a stock is grossly overvalued.

However, shorting stocks is far more dangerous and far less profitable than simply just buying a stock because generally stocks tend to go up (U.S. stocks have had a historical 7% inflation adjusted return) Also, the maximum you can lose buying a stock is 100%. But, in shorting stocks, your loss is infinite. Even, if you are correct in analyzing that a stock is overvalued, it might take time before the market realizes this. And you could be broke by that time.

Because of these dangers, you shouldn’t short stocks. If you do decide to short, you should do it with a very small percentage of your overall portfolio. In my next blog, I’ll examine what you need to understand about a stock before you short. Also, I’ll give you some examples from stocks I’ve shorted and try to come up with a stock that could be a short in today’s market.