Making Money in Technology
After the Bubble, page 29
Selling Short
Selling short is, of course, a way to make money when markets and stocks are falling. “Borrowed” shares
are sold with the hope of “buying them back” later at a better price.
Selling short is the best way to make money in a falling market. Many private investors hesitate to sell
short because it seems weird, and because it can be dangerous.
Theoretically, there is no limit to how much money you can lose selling short. (If you sell short a stock
at fifty and it goes to a thousand dollars, you are responsible for the entire difference.) For this reason,
it is important to do short trades in a disciplined way, applying actual or mental stop losses. In other
words, you should calculate in advance of placing the trade the maximum amount you are prepared to lose,
and cover the short if it hits that price.
This barticle has already discussed searching out “amazing hulks” and “former glories” as possible short
candidates. One odd fact is that sometimes companies with established metrics make better short candidates
than “story” stocks. Story stock management can keep on singing its song as long as anyone is buying.
But if a stock price is based on given earnings, and given earnings growth, if there is compaction, the
stock will go down.
As this point, it’s my opinion that the prices of some of the electronic component and semiconductor
manufacturers do not fully reflect the extent of the slowdown in their industries. An example is Linear
Technology (NASDAQ: LLTC), which is currently trading at close to $50. Linear Technology is a leading
maker of integrated circuits used in electronics. It is a good, well-run company—but at the current market
price it sports a PE close to 40. If earnings come in below expectation over the next few quarters, the
stock price will go down.
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