Long-time contributor Whitney Tilson developed a presentation titled "Lessons from a Dozen Years of Short Selling" that he's presented at a handful of investment conferences in New York City. With his permission, we're now publishing it here.

Excerpt from Chapter 11 of " More Mortgage Meltdown ". Shorting looked easy in , but in reality, it's a brutally tough business.

In many ways, it appears to involve nothing more than applying the same analyses one uses when determining whether to buy a stock: Conversely, short sellers look for weak or dishonest management, low or negative growth, margins and returns on capital, high and increasing debt, accounts receivable and inventory, and weak competitive advantages - all at a ridiculously high price.

But shorting is not simply the opposite of long investing. It's much harder and more dangerous for a number of reasons:. For what it's worth, we agree that this is the best environment to find shorts and we are seeing some incredible opportunities. We haven't seen a variance like this between our longs and shorts since early So, while I feel like I'm covered in battle wounds and have blood dripping out of my eye balls at the end of each day, I am confident we will be rewarded for staying the course.

I don't have the antidote to your pain. We've been bludgeoned by this melt-up as well. I've never seen such widespread capitulation among seasoned short sellers. Many are out of business. This stretch is worse than the internet bubble for me. It's constant pain across my entire short book, whereas the internet was isolated to one industry - and then you got relief when the bubble burst. So which feeling am I going to follow?

I don't know, but this I know for sure: Hell no, not a single share! I couldn't bring myself to cover a single share of any stock I was short - they were all "trembling-with-greed" shorts. And that's exactly how I feel today. I look at the stocks I'm short - all of which I think are absurdly overvalued and sure to collapse - and feel intensely that covering them now would be the most boneheaded capitulation trade of all time.

That said, unlike in , I don't have the same foreboding feeling that there's a good chance that the world will fall apart in the next year or two though it's possible , which makes being short that much harder My Largest Short Position: Lumber Liquidators' Stock Has Been Cut in Half Since I Presented it at the Robin Hood Conference in November ' Despite its decline, however, I have recently added materially to my position in Lumber Liquidators, and it is now my largest short position.

After Three Years of Spectacular and Somewhat Inexplicable Increases, the Margins Are Reversing.

I believe that Lumber Liquidators is trafficking in tainted wood to a much greater degree than just hardwoods - and I think I will soon be able to prove this, so stay tuned. This article discusses one or more securities that do not trade on a major U.

Please be aware of the risks associated with these stocks. Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks. Lessons From A Dozen Years Of Short Selling Feb.

Summary Consider the 12 reasons not to short. Then consider 10 reasons to short. I have conflicting thoughts on shorting right now.

It's much harder and more dangerous for a number of reasons: Your upside is capped, and your downside is unlimited - precisely the opposite of long positions. Worse yet, a once-a-century storm - such as the internet bubble - might wipe you out entirely. To prevent such an occurrence, most short sellers use stop loss limits, meaning they will start covering the short if it runs against them a certain amount. This means short sellers not only have to be right about a stock, but also about the timing.

If a stock rises significantly, many short sellers will lock in losses, even if they are later proven correct. In order to short a stock, you first must get the borrow from your broker, who has the power to call in the stock you've borrowed at any time - or worse yet, buy stock to cover for you.

Brokers are most likely to do these things if the stock is rising quickly, and they're probably doing it to other short sellers as well at the same time, so all of this buying pressure can cause a stock to rise even further, triggering even more covering. This vicious cycle is called a "short squeeze", and it isn't pretty - we can show you the scars on our backs. Shorting has gotten much more competitive. There are now a few thousand hedge funds and who knows how many individual investors looking for the same handful of good shorts, in contrast to a few dozen a couple of decades ago.

This results in "crowded" shorts, increasing the odds of a short squeeze. A short squeeze can also be created if the "float" - the number of shares that trade freely - is suddenly reduced. Such a case occurred in October when Porsche OTCPK: VLKAY , unexpectedly disclosed that it had raised its stake in Volkswagen to Three popular hedge fund trades had been to short VW based on weakening car demand, go long Porsche and short out its ownership of VW to "create" only Porsche, or go long VW preferred stock and short the common stock, betting on relative underperformance of the common.

What Is Short Selling: Good Stocks To Short

This was extraordinarily painful for many shorts. The long-term upward trend of the market works against you yes, believe it or not, markets used to go up most of the time. Gains are taxed at the highest short-term rate. It generally requires many more investment decisions, thereby increasing the chances of making a serious mistake.

Disqus - Short Sell Stock Picks

It's a short-term, high-stress, trading-oriented style of investing that requires constant oversight. Mistakes hurt your portfolio more as they compound. If you make a mistake with a long position, it becomes a smaller percentage of your portfolio as it drops.

A mistaken short, however, grows larger as it appreciates.

Difference Between Short Selling And Put Options | Investopedia

If you go public with your short thesis, a company can attack you in many ways: FRFHF , complain to regulators who occasionally investigate MBIA NYSE: MBI , Farmer Mac NYSE: AGM , tap your phone Allied Capital NYSE: Also, expect to get flamed on message boards and in the media. Many people view short selling as evil and un-American.

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