I'm not sure I remember exactly how I felt in February, but like
most investors I was interested in what the New Year would bring.
I suppose there's a certain amount of optimism that goes with that.
The S&P 500 had just finished two pretty good years, with total
returns of 15.1% in 2010 and 26.5% in 2009. My guess is I was
trying to find which companies would be the biggest winners in
another "up" year.
And buy them.
But that strategy is, at best, half-baked. It only represents half
the action going on in the
at any given time. Of all the investors trading stocks exactly 50%
are buying -- and 50% are selling.
I can hear what you're thinking. Something along the lines of,
"Well, duh." But does your portfolio strategy reflect the seemingly
self-evident point that at any point in time, half the players in
the market are betting against a stock?
My guess is no. My guess is you have a portfolio full of stuff
Too bad. If all you did was buy and not sell, then you invariably
missed out on a winner I picked in February.
is a dog of a company. It has one product, a smartphone app for
doctors and medical professionals. Everyone in the industry signs
up for the free version, but few upgrade to the very pricey paid
version. I wrote in February that the company would continue to
bleed paid users until it was sold off piecemeal or went the way of
Pets.com. When I penned those words, Epocrates was at $21.80 a
share. It was nearly a $500 million company.
are just north of $8. The market cap has fallen to $195 million. So
if you bought at $8 and sold at $21.80, you'd have captured a
beautiful 162.7% gain.
Most investors would say that's impossible. They'd say the market
doesn't work like that. But it does.
Right now at your brokerage, there are a jillion shares of a stock
no one is using. They just sit there. And assets in piles always
drive brokers nuts. So they came up with a nifty idea: The
When I think Epocrates is about to plummet, I tell my broker I want
to short the stock. He lends me 1,000 shares. They are worth, at
the time of this trade, $21.80.
Quiz: What do I owe my broker?
Well, the natural reaction is to take the 1,000 shares times the
$21.80 price and decide that I owe my broker $21,800.
That's incorrect, though. I can only give back what I have
borrowed, and I didn't borrow a dime. I borrowed 1,000 shares. Then
I sold them. I have $21,800, -- the proceeds of the sale. But I
only owe my broker the shares.
When shares of Epocrates -- which I need to buy back at some point
to return to the brokerage -- hit $8.30, I decide to get out. So I
sell the shares for that price, which deducts $8,300 from my
trading account. Of the cash from the original sale, the balance is
$13,500. The brokerage is, of course, going to deduct some fees for
this -- and I had to have some cash on the table in a
to be allowed a short sale -- but this trade nevertheless returned
a triple-digit gain.
I've seen every market model and read every investment theory known
to man or God, and I can tell you this. Only one paradigm governs
the trading of equities, and that is the "greater fool" theory. I
buy shares of
at $10 and ride them to $400. Then I sell them to another (greater)
fool, who thinks he can make an additional gain on them. Good luck
Or, to put it another way, at any given time in the market, half of
the market is trying to get out of positions where they see no
additional upside. They're looking to sell to any dimwit who will
pay in cash. As the investment sage Gordon Gekko said, "A fool and
his money were lucky to get together in the first place." This
seems especially true in a tough year like this.
As 2011 ends with a whimper (and the promise of a presidential
election next year), the inescapable truth is that you can't afford
to have only one part available in the great Wall Street passion
play. You can't afford to be cast as the fool in every trade. Yes,
I know there are thousands, millions, even billions of trades where
the trader was able to fulfill the basic reason d'etre of every
investor: Buy low and sell high.
There's nothing wrong with that -- when it works. But why limit
yourself? Why not put yourself in a position to benefit from both
sides of the market? When you see a company like Epocrates, which
has what looks like an inevitable future of falling revenue and red
ink, then why not find a way to
from it? Well, the simple answer is you don't have to. Your broker,
who is here to help, has already done it for you. All you need to
do is sign the forms to authorize short sales.
Buy low, sell high. It is a universal, unmitigated truth that is
the only way to make money in the market. But there's no rule that
says you have to do it in that order. Short sales sell high and buy
low. And as anyone who heeded my
on Epocrates can tell you, a short sale sometimes isn't just the
best choice, it's the only choice.
Risks to Consider:
Nothing comes without risk, and in this case, short sales can
carry a lot of it. When you buy, it's always healthy to keep in
mind that any stock can go to zero. But when you short a stock, the
exact opposite can happen, too.
Action to Take-->
Talk to your broker today about how to execute short sales. And, if
you want, start with Epocrates. It still has a long way to
Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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