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By: Anthony Green
Before going further, let me give a definition of short selling because its vital to what follows. Short selling is the opposite of normal (long) stock positions. If you buy a stock hoping it will go up, you are long of the stock. But if you think the stock will go down, you can sell it first, and buy it anytime you please. This short selling is a simple borrowing-of-stock process that is handled by your broker with no need for you to understand how. Now, let me clear the air on another common fallacy that some people hold with regard to bears. Some think being a bear and/or selling short is in some way unpatriotic or negative. They believe that to invest your money in the industry of your country and lose it is more patriotic than to sell those industries short by selling their stock short or simply selling out completely because you feel we have entered a bear market. Many TV market commentators, in the aftermath of the September 11, 2001 terrorist attack, urged investors to hold on to their stocks regardless of what the markets would do. At the beginning of G.W. Bushs presidency, when he suggested that there were signs of weakness in the US economy, there was a cry of outrage from those who accused him of talking down the stock market and the economy as if the health of our entire capitalist system is so fragile that it can be talked into changing directions. Even advisors claiming to help you recession proof your portfolio cite people like Warren Buffet who made his fortune by buying and holding, regardless of short- and medium-term fluctuations. Most advise all nonprofessional investors to do the same, unless they are getting near retirement age, when switching into bonds might be safer. What these advisors fail to mention is that it is only since 1982 that buying and holding has paid off over the longer term. But Joseph Kennedy, father of JFK, for example, made his familys fortune by short selling in the bear market that began in 1929. And many lesser known tycoons of the roaring twenties simply sold all their stocks and took a multi-year vacation, beginning around 1928. Nor did any of these men do the country or the stock market any harm. They stayed solvent and provided the capital for the next economic upturn. If anyone is still not convinced, the facts are these: (1) If there was anything unethical, immoral, illegal, or un-American about it, the Securities and Exchange Commission wouldnt allow it. (2) The country cannot benefit from having all its investing citizens lose money. Therefore, if some are able to make money in a declining market, this is all to the good. A free society needs solvent citizens, in order to remain free. One might also say its a patriotic duty to stay solvent. And, if short selling does that in a bear market, it can hardly be evil. You cant help your family, country, or self if you lose your money. (3) Stock prices are merely peoples opinions of their value. And, since stocks once sold by the company are no longer the property of the company, the shorting of those shares is not shorting the company but rather shorting the opinion of the company as held by other investors or traders. Microsoft doesnt get your money if you buy its shares, neither does it lose money if you sell its shares short and they drop in price and you make a profit thereby. You merely won a bet with a fellow investor. He thought they would go up. You thought not. You won. (4) The short seller contributes mightily to the creation of more orderly and stabilized security markets through the demand for and the supply of securities he creates. In bull markets and bear, he is selling short, and he is eventually covering (i.e., buying), which demand puts a cushion under market declines. Without the short seller, our markets would be bottomless those times when panic prevails and bulls rush for the exits while the short seller is calmly buying stock to cover his shorts and taking a profit.
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