Shorting Bear's Rebuttal
by Bill Barker ([email protected])

I think that Louis and I agree on much of what we're supposedly debating here: that shorting can be effectively used for companies on their way to zero, and that there is (in Louis's words) "no reason ever to short a great company... no matter how richly valued it may appear."

I also would like to give full credit to Louis for making the point that a polite shorting bear is a true asset to the stock boards around Fooldom. The boards here are certainly at their best when there is a healthy debate regarding the ultimate issue of the direction of a stock's price in the long, short and intermediate term. I couldn't agree more that an informed and mature short-seller ought to be welcomed by all. I hope to always see bears who put their money where their mouths are join in and add to mature discussions in a way that sharpens both sides' knowledge of a company. While that kind of dialogue is still not seen as much here as it could be, it is in far more plentiful supply locally than in any other forum with which I am aware. Without the existence and practice of short selling, some of the best debates, and therefore some of the best avenues for learning, would simply not be here at all.

So we really don't disagree on too much, but let me just take one example from Louis's fine argument as an illustration of just how dangerous shorting is. Louis writes, "These dynamics can sometimes promote bubbles, as shorts are forced to "cover" their position in a stock like K-tel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> that has a small float."

See, that's the danger with shorting -- there's so much more that comes into play than just recognizing that a company really doesn't deserve to be at the price it's going for. The timing has to be on your side as well, and I continue to think that a proper investment strategy should always be seeking to limit the role that short-term timing has on results. Like so many other people, I'd rather be lucky than good -- but when you short a stock you have to be both lucky and good. You have to be correct on your analysis, and you have to hope that luck is on your side and that some weird little irrelevant item -- like market hysteria -- doesn't jump up and bite you while you're waiting for the "inevitable" collapse of the stock. K-tel becomes the perfect example of a stock that was priced without any relation to value, and then kept going up just to spite the short-sellers anyway.

Since the exposure on the upside (meaning, the downside) is unlimited, shorting can be a pretty tough game to play (certainly too tough for beginning investors), and the price for being unlucky is simply out of all proportion to the reward for being lucky. Investors, rather than traders, are better off spending their time looking for the best companies, rather than the worst.

To read more about shorting stocks, see Step 11 of the "Thirteen Steps to Investing Foolishly."

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