The Art Of Short Selling
When searching for reasons to invest your money in stocks, the 2 basic methods you have at your disposal are to dig for the good news or scour for the bad news. A lot of good news with little bad news may raise your level of interest. Similarly, a lot of bad news with little good news may lower your enthusiasm. When there’s a mix of good news and bad news, it often feels too much like a coin flip. But let’s get back to the company stock that has so much bad news going on, could you make a wise investment decision by shorting it?
Short selling has often been considered a dark art; not for the faint of heart. That’s almost a ringing endorsement for a contrarian like me! To sharpen my short selling skills, I browsed a few online book reviews on the subject for a possible reading candidate. The reviews of Kathryn Staley’s “The Art Of Short Selling” particularly grabbed my attention.
This isn’t a book review as I haven’t read the book. But it’s been on my wish list for quite a while. I will be buying it this week and thought I’d just share why I thought this would be a good read for me. And just perhaps, this could be the start of the Investorial book club? If you become interested after reading this book reviews “summary”, let me know! Or drop a comment! I’d encourage you to buy and read it too, and maybe we can get a discussion started!
What This Book Is Not!
Despite its title, the reviewers agree that this is NOT a book about short selling techniques. It’s not a “how-to” book, but rather a book intent on describing the “art” - the reason to short in the first place. The book begins by heavily emphasizing the psychological aspect of short selling and the psychology of the markets. This approach appeals to me, because techniques mean little if you don’t have the proper mindset to fully utilize them. It’s important to understand myself, and helps control my temperment towards investment decisions.
This book is also NOT a book about technical analysis. Kathryn reads balance sheets and company reports for fun and she is known for her innovative ways to dissect 10Ks and financial statements. The chapters I’m looking forward to reading will emphasize numerous fundamental analysis; such as tracking inventory and receivables, as well as the tricks companies play to make revenues and earnings appear better than they are. It almost could be a perfect fundamental analysis manual disguised as a short selling book. The difference being that the perspective of a short seller can be very different from a Wall Street analyst. Both work with the same numbers, but short sellers take a jaundiced view of the growth and patterns that emerge.
Case Studies
The Art Of Short Selling contains many thorough examinations of historical case studies. Anecdotes and successful short stories are highlighted throughout the book. I often find such analysis helpful for formulating my own investment thesis. Besides the quantitative analysis, Kathryn also examines the qualitative traits of bad companies and what makes them prime candidates to be shorted.
Kathryn also covers the psychology of the short-seller and breaks down why some shorters are successful while others struggle. She attacks the myth that a stock should be shorted simply because it appears overvalued. Kathryn points out that a catalyst is often needed to encourage massive selling, and that may not happen for a very very long time. Here are where the case studies can tremendously aid your education.
Good For The Long-Term Investor Too!
Learning how the shorts find bad stocks can give long-term investor the edge needed to avoid bad investment choices. Fundamentals will eventually drive market action. Even though the market may stubbornly ignore negative fundamentals for significantly extended periods of time, long-term investors can remove these riskier stocks in their watch list. Why take the chance that the market will realize their folly one day?
Reader Caveats
More than a few reviewers have commented that some basics in corporate finance and financial statements will help the enjoyment of the book. For those who find this aspect a hassle, this may not be the reading material for you. I’m looking to improve my financial statement analysis so having an experienced mentor in Kathryn Staley will help.
Will You Join Me?
I’m not Mark Cuban, and I don’t have investigative journalists working for me. But I know short-selling will be a welcome addition to my investing skills. I will be writing update posts as I progress through my reading. I’m almost certain that some of my blog posts will be inspired by the material within. Hopefully, you’ll want to read alongside and join in the discussion of what you’re looking forward to learning, what you’ve learnt and how you’ve applied it!
