Is it wise to pick stocks just to short them? There are quite some experts out there doing nothing but that. It is probably much easier to be right with betting on worsening business conditions. Many death candidates have been investment zombies for years. For shorting experts, sort of negative investors, often a glance into the books is enough to be reasonable sure.
But there is a minor problem. The maximal gain is limited to hundred percent, while the maximal loss is infinite. The lower a stock tumbled, the greater is its theoretical potential to crush the shorter. Of course, we are ironic here. This is the major problem of shorting stocks and it is huge with penny stocks. For penny stocks the real chance is the large asymmetry of maximal gain and maximal loss. With shorting a penny stock you have turned this positive potential into a negative one.
Have a look at the chart above. This is Penson Worldwide (PNSN), a recursive joke in this article, because it is the clearing house of about 1 million security accounts. Customers of brokers like MB Trading, Zecco and others just got transferred to the newly formed Apex Clearing. Penson looks like diving into the toilet, but perhaps it becomes a penny stock pick worth a long trade.
At least these accounts seem to have survived the troubles of its clearing house. Customers of MF Global had not that much luck.
Here is another chart of a financial company, namely Bankamerica (BAC). It was a nice short, and you could have made almost 100% with it, but the recovery would have awarded the brave investor with a five-bagger.
Seen from the outside, both companies have or had problems. Important here is, that only in hindsight it becomes clear, whose problems were solvable. Investors often think they had known it before. At least it sounds like that. You will only read that someone predicted what has happened. No one likes to admit that they got it all wrong and so everybody says that everything was clear.
The truth is far from that. If prices go down, almost all traders and investors believe that this is a fair gauge for the future prospects. In other words, they don’t believe in a turnaround. The proof is simply the falling price.
And the conclusion is…
If the future is unknown, it is better to bet on the theoretical potential. So, if you prefer to live a long investor’s live, be a long investor and not a short one.
There are two methods to make money in the stock market:
One is real trading at the high, which is what we aim for.
The other one is to find fallen angels. Don’t trade them. You have to invest in them.
How to do it? Accept that investing is gambling. Even the best informed decision will yield a hit-rate just above fifty percent. It pays off for investors to concentrate on stocks with huge recovering potential instead of overanalyzing the fundamentals.
Select a trustful source for digging up such chances and then inhale your new mantra…
An investment is a bet.