Advice on Short-Selling, Volatility

Editor's note: Here, Scott Rothbort replies to questions he has received from readers.

J.R.: Where can I learn about short selling?

Rothbort: There is no one book or class that I can recommend that solely focuses on short selling. However, I have written several articles that cover the topic:

"How Short Selling Works"

"Three Strategies Every Short Seller Must Know"

"Three Risks Every Short Seller Must Know"

"Five Arbitrage Techniques Every Investor Needs to Know"

"How To Outperform the Market and Manage Risk With ETFs"

You can also refer to TheStreet.com's updated Short Selling section.

A.G.: What is your most recent list of worst-managed companies?

Rothbort: For the past two years on RealMoney, I have published a list of the worst-managed companies in the U.S. I find that these companies tend to perform poorly and may even wind up in bankruptcy . Here is the 2007 list -- by sector:

Technology: Palm (PALM Quote) -- The consumer smartphone market was Palm's to lose. Just like the Mets in September 2007, Palm has failed to deliver even a small victory.

Palm had Research In Motion (RIMM Quote) by the throat when RIM was paralyzed by the NTP litigation. Instead, Palm blew a product introduction in Europe. The Foleo product introduced to much fanfare in May was scraped in September. Next, along comes Apple (AAPL Quote) with the iPhone and now Palm is "taking on water" really fast.

The funny thing is that Palm makes a great smartphone for consumers. I was very happy with my Treo 650 and I recently upgraded it to the Treo 750 with the Microsoft (MSFT Quote) operating system.

Retail: Circuit City (CC Quote) -- While Best Buy (BBY Quote) has broken the mold and finally built a successful electronic retailer, Circuit City is trying to best emulate The Wiz (which was last owned by Cablevision (CVC Quote) before it closed for good) or Crazy Eddie (without the fraud). Circuit City seems to be the takeover-rumor-of-the-week -- every week (see "Blockbuster Goes After Circuit City").

The problem with Circuit City is that unlike Home Depot (HD Quote) and Lowe's (LOW Quote), or Target (TGT Quote) and Wal-Mart (WMT Quote), there does not seem to be room for both Best Buy and Circuit City to co-exist. In this sector, Best Buy is the innovator and Circuit City is the imitator.

Cable and Telecommunications: Charter Communications (CHTR Quote) -- As cable television, Internet, VOIP and the whole "triple play" telecom package grows in popularity, Charter has managed to deliver its own triple play of operating losses, excess leverage and cash flow burn to its shareholders. As hard as it is to say, even Charter can make Cablevision look good.

Entertainment: Six Flags (SIX Quote) -- Six Flags is trying to make its parks more socially conscious and in doing so it has become less investor friendly. This company is also adept at operating consistently at a loss and burning cash. Six Flags relies on coupons and discounting to attract traffic. That is never a recipe for success. With debt piled on top of debt Six Flags' destiny may be in bankruptcy court.

Financial Services: Washington Mutual (WM Quote) -- Every Washington Mutual customer and former employee that I speak with does not hold the company in high regard. Neither do investors, since the five-year price return for the stock is just about zero. A track record of bad acquisitions might be the explanation.

Even Citigroup (C Quote), which was management-challenged with Chuck Prince at the helm had some positive stock price returns.