Short selling can be quite lucrative for investors, but it has an undeserved reputation as a "slimy" practice, columnist Gene Epstein wrote in the latest issue of Barron's.
In the cover article, entitled "Shorts Story," Epstein wrote that short sellers have been getting a lot of abuse for an investment strategy that actually makes a lot of sense.
"Short sellers are the perennial un-Americans. Vampires intent on driving down the prices of shares, destroying companies, and greedily sucking the blood out of innocent investors," he wrote.
But there is actually nothing unfair about shorting stocks, Epstein wrote. Nor is there anything devious. He compares the practice to betting that one professional football team will lose its next game.
"Over the past decade, investors who shorted some stocks probably would have done much better than the vast majority of individuals, who only go long — buying shares in the hope of eventually selling them at a higher price," he wrote.
Epstein wrote that shorts "reverse the process" and borrow stocks, and then sell them, hoping their prices will drop. That would enable them to replace the shares for less than what they paid for them.
"Done intelligently, shorting can be enormously lucrative," he wrote.
As evidence, he cites the strategy of a firm called Short Alert, a North Carolina-based research firm that produces reports on stocks it recommends shorting. The company has been producing the reports since 1988.
"In the 10 1/2 years ended June 30 of this year, about 75 percent of the 86 recommendations it made would have turned a profit even if they were judged based on conservative criteria," Epstein wrote.
Barron's found that Short Alert produced annual returns averaging 18.3 percent based on a shorting strategy.
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