Mark Cuban has an interesting post on shorting stocks, entitled I feel so dirty….Naked Shorts.
While most of Mark’s post targets SEC rules regarding stock loan regulation and its related market impact, I am not going to argue with him about shorting as he is right on target (most of the time). I short stocks as well – in fact I short more stock than I buy. Reason being something similar to what Mark says about bias.
Analysts heavily weight recommendations towards the long side. I think the balance of positive to negative recommendations is something like 15:1, but don’t quote me on it (just correct me – I’ll learn something new).
Everyone looks at bears as pessimists. I look at them as opportunists. If everyone is consistently long biased (and they are, right up until a crash), then the general market trend should be up. Now if a stock starts skidding, it is bucking the market forces. All the long bias isn’t helping, and that means it is in trouble.
I short stocks AFTER they have started their downward moves. What I do as far as the size of the position, setting stops, etc. is beyond the scope of this post, but let’s just say I am careful.
But then again, I am not a billionaire, so if anything here falls contrary to what Mark has said in his post, take his advice.