Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• Short sellers are bearish investors who can provide a valuable service highlighting corporate weaknesses, like Enron’s. Once, they were shadowy figures who did not advertise themselves. Now they are prominent fixtures on the financial scene whose ideas often deserve a hearing.
• To short a stock, you borrow it and immediately sell it, betting that the price will go down. If that happens as you predict, you buy it back at the lower price (known as covering), return the stock to its owner, and profit from the difference. This is very risky, since sometimes the stock keeps rising. Regular investors may not want to take the chance of shorting, yet paying attention to their targets may be useful as a list to avoid.
• Not every heavily shorted stock is a lemon. Netflix has long been a short sellers’ target, but kept churning out good performance through 2010. Despite its lofty valuation, Netflix defied the shorts’ pessimism.
• Professional shorts obey a few rules to protect themselves. If a shorted stock rises 25 percent over the price at which it was borrowed, they bail, taking their lumps rather than waiting for further deterioration of their position. They avoid small stocks with market values below $1 billion. When covering needs to occur, these stocks may be harder to find than larger ones.
• Are shorts market manipulators? An academic study concludes they don’t tend to act before the market does, a finding that weakens the charges against them. If a lot of funny business were going ...