Crime, as one of the gangsters in The Asphalt Jungle says, is only a left-handed form of human endeavor. Similarly, short-selling -- or placing a bet that a stock is going to decline -- is a left-handed form of investing. While reviled by many on Wall Street, shorting is no crime, and it has paid quite nicely over the past three years.In retrospect, March 2000 was a great time to short the market, but trying to time the market, up or down, isn't easy. Nonetheless, a lot of individual investors who have learned rather painfully that stocks don't always go up are mulling short-selling stocks.
|The Big Three |
eBay, Yahoo! and Amazon have been among the strongest stocks of the past year
Because the market isn't nearly as frothy as it was a few years ago, much of the focus has swirled around the Internet's Big Three: eBay ( EBAY), Yahoo! ( YHOO) and Amazon ( AMZN). Since Oct. 7, eBay has soared 98%, Yahoo! has catapulted 232% and Amazon has climbed 114%. The latter two sport triple-digit price-to-earnings multiples, and eBay's current P/E of 95 isn't far behind. It's not hard to see why would-be short-sellers are drawn to these phoenixlike shares, hoping they once again crash and burn. But short-selling carries additional risks for individual investors -- and it can be a costly endeavor. Even if an in-depth analysis into these three stocks leads you to conclude that they are overvalued, the rest of the market might not come around to your way of thinking for a while. As economist John Maynard Keynes said, the markets can remain irrational longer than you can remain solvent. Also, when you go long a stock, the most you can lose is 100% if it goes to zero. Your potential losses on a short sale are limitless. For today's column, we'll run down the basics on how to short-sell a stock, and whether it's right for average investors.