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Is Shorting Stocks Foolish?

Have you ever shorted a stock or thought about it? We have. In fact, just yesterday the Rule Breaker portfolio announced that it would short Affymetrix(Nasdaq: AFFX), banking that the biotech tool maker's share price will sink, not zoom.

Now just wait a doggone minute here, some of you exclaim to your pet, partner, or wall. Isn't it risky, downright unfair, or simply not Foolish to buy a stock you think will go down? Aren't investors uniformly anti-Newton?

We think not. Whitney Tilson recently wrote:

Some people view short selling as something akin to flag burning. It's un-[insert your nationality here] to hope that a company stumbles and its stock plunges, right? Rubbish! Just as a healthy legal system needs both defense attorneys and prosecutors, healthy financial markets need people who will look at companies in a skeptical light, given that accountants, Wall Street, and the companies themselves have such strong incentives to spin a positive story. Short-sellers -- and the handful of courageous journalists who cover their pans -- are a blessing to savvy investors, even those who only invest on the long side.

And even though Tilson says he doesn't short because he basically devotes his time to finding long positions, he adds, "By reading and understanding the shorts' arguments, I have avoided or sold stocks that have subsequently declined significantly."

That's the Foolish lesson, folks: Whether you ever short sell a stock or not -- and we think that it's a technique only for advanced investors -- learning the ins and outs can help you become a better investor. Here's are tools to help you learn more:   

FOOL FAQ: What is Shorting a Stock?
This is stop one on the short road. What exactly happens when you short Gardner's Gondolas (Ticker: VENI)? What do short interest, days to cover, and short squeeze mean?

13 Steps to Investing Foolishly: Step 12 -- Advanced Investing
While Foolish investors should steer clear of day trading, technical analysis, options, and other voodoo, advanced investors may find that margin and shorting -- very carefully employed and limited to a small part of one's portfolio -- can be useful tools.

Let's Short Something
Brian Lund (TMF Tardior) gives you an inside look at the Rule Breaker portfolio's shorting strategy. The Rule Breaker team eschews open situations and shorting based on valuation alone, looking for closed situations and a high current assets-to-liabilities ratio. Brian defines each criterion and adds one more that by itself makes this column required reading: To be a good short, a company must have "jumped the shark."  

Is Shorting Stocks Foolish?
Jeff Fischer (TMF Jeff) -- yes, the person who penned Monday's column proposing that the rule Breaker portfolio short Affymetrix -- makes the arguments for why shorting stocks is not Foolish. A classic Motley Fool column.

Dueling Fools: Short-Selling 
Mike Trigg (TMF Tonto) and Rick Aristotle Munarriz (TMF Edible) bare their investing teeth and fight the short battle. Mike believes that even if you never short, you are a better investor if you think about what makes a company a good candidate for short selling. Rick thinks that short selling presents too much risk and will keep most people up at night.   

MicroStrategy Declares War 
Can a company and its investors prevent short selling? Should it try? Paul Larson (TMF Parlay) reviews what happened when one company tried.

Good Time to Short Stocks?
Whitney Tilson defends short sellers and explodes the myths about them, but explains why he isn't one. Among the sound reasons? That shorting takes Tilson's attention away from his primary passion of looking for longs. (See Mike Trigg's Duel argument for what you can learn by studying possible short sales -- even if you never make them.)  

The Short-Seller's Mindset 
Tilson looks at famed short seller Manuel Asensio's new book, Sold Short, and provides a half-humorous list of sure-fire short indicators.

Shorting Stocks Discussion Board
Questions about shorting? Ideas about good (or bad) stocks to short? Here's the forum for you.

Do you have to short only stocks?
Fortunately, no. Robert Brokamp (TMF Bro) provides this list of ideas that may be perfect for shorting.
Randy Newman's "Short People"
Martin Short
The Strawberry Shortcake Theme Song
The Short-Nosed Cattle Louse

And that's the long and short of shorting! (Sorry, we had to say that.) We hope you now have a trusty tool for your investing kit, even if you never use it. 


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