I sense a disturbance in the force.
Over the past week or so, I have written two columns covering short-selling: one about
short-interest rebates for retail investors and the other about a hedging strategy known as
shorting against the box.
The response has been pretty heavy. Are investors preparing for a major market downturn?
I can't answer that, but I can certainly address some of the responses I've gotten on the topic of shorting.
I still do not understand the idea behind shorting against the box. It seems that if a stock goes up, your short loss minimizes your long gain. If a stock goes down, your long loss minimizes your short gain. Where is the gain here?
That's like asking, "Where is the benefit in having fire insurance?" You just have to ask someone whose Christmas tree went up in flames.
The purpose of shorting a stock you already own is to lock in the gain of a long position. You aren't trying to make money on this trade. In fact, you are capping any gain your might have in your long position in exchange for protecting yourself against a drop.
As an interesting follow to your (informative) article, it might be worth looking into the story of a Walton family member who many years ago shorted a large Wal-Mart (WMT) - Get Report position against the box, only to see it soar.
In the early 1990s, a
National Association of Securities Dealers
arbitration panel ordered
to pay John "Joe" Robson $9.7 million related to a short-against-the-box trade.
In 1990 Robson, nephew of the late Wal-Mart founder
, had deposited more than 400,000 shares of Wal-Mart stock in a PaineWebber brokerage account. His broker recommended that he short an identical number of shares in Wal-Mart. But the stock started to rise, and Robson did not participate in the gain because of his short position. Robson charged that the broker failed to close the short position when instructed. He also contended the trading technique was improperly explained and unsuitable.
Yesterday I spoke briefly with Joe Robson in Tulsa, Okla. He was wary of talking about the case, given that it happened almost a decade ago. But is he still a PaineWebber client? "No. They were happy to see me go, I think."
Regardless of how long ago it happened, this case does, indeed, illustrate the perils of entering this type of trade without fully understanding its limitations.
For more about the tax implications of shorting against the box, be sure to read this Saturday's
Tax Forum. Tracy Byrnes will devote the entire column to this strategy.
Money Back on Your Shorts
After my column on short-interest
rebates, I asked readers to tell me if they ever received any interest that's earned on the proceeds of a short sale. Typically, institutional customers have enough money and clout that they can get short-interest rebates, something that's infinitely more difficult for an individual to finagle.
I did hear from a few readers, but nobody would let me quote them. That's not surprising, given the secretive nature of short-sellers. Nonetheless, from the responses I got, it does seem possible to get a short-interest rebate as an individual. But the more money you have, the greater your advantage in any negotiations. And there were some investors who haven't had any luck, either.
In Praise of a Roman God
I have continually chided
poor quality of its Web site. OK, so it's got that lovely mountainscape on the home page, but the firm continually fails to deliver timely information about its funds. Finally, an investor is coming to the firm's defense.
As a holder of Janus funds, I am quite content with their Web site. Even if I thought that their Web site sucked, what bearing does this have on their funds' performance?
Good point. I'll end my tirade. For now.
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.