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Home  > Money >  Investing

Sometimes I Eat the Bear
by John M. Grund

If you were to go out and ask five people, each knowledgeable about the markets, what they thought of short selling, perhaps four of them would respond with some variation of "Well, it's a legitimate strategy."

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Uh-huh. Apparently a legitimate strategy most investors are ready to damn with the faintest of praise. Would you invest in a company someone had to defend as "legitimate"?

To sell short, a trader borrows shares of a stock and sells them, hoping that the price later falls so he or she can buy back the shares at a lower price, return them, and pocket the difference.

More new investors are tempted to short now that stocks are down, according to James Armstrong, president of money management firm Henry Armstrong Associates.

"Not long ago, a client asked me, 'Shouldn't I be in a hedge fund [which can engage in short sales] now that stocks are down?' I laughed and said the time to go into a hedge fund was a year ago," recalls Armstrong. "You want to short stocks when the market is high, not when we're in a severe bear market like we are now."

And you may not want to short even then, he warns.

"The deck is stacked against you," he says. The potential profits from shorting are, for most people, outweighed by restrictions and quirks that make shorting a particularly dangerous game. Indeed, short trading has become so unappealing that it has made up only 1.3 percent of New York Stock Exchange trading in recent years.

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