Dear reader,

With all the volatility currently in the market you have to wonder if your normal “buy-and-hold” strategy really is the best way to make money in this climate. After all, since markets are relatively range-bound right now, very few shares (especially blue-chip giants) are makng any headway.

Surely there’s a way to exploit these relatively predictable moves, right?

The good news is, there is: It’s called “short selling” and it’s one of the best tools investors have at their disposal when markets are trading sideways. 

Today, I’ve asked South African Investor Pillar One Adviser, Dr. Steve Sjuggerud, to look at short selling stocks, what it means, how to make money from it, as well as share his tips and strategies for getting your timing spot on.

So what are you waiting for…

It’s time to change your strategy!

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The ins and outs of selling short…

“Short selling stocks is painful, difficult and not particularly lucrative…” that’s the line market commentators like the Wall Street Journal have been spinning for years. So why would anyone even consider doing it?

What a dirty trick! So what we can extract from this is that shorting selling stocks is difficult, hard to make money on and onerous. No wonder not many people are doing it.

But a-ha! Not many people are doing it… Hmm… That gets me interested…

I contacted a short selling aficionado I know who has made an extraordinary amount of money on his short stock picks so far this year. (I can’t reveal his name, as short sellers don’t like the companies they’re shorting to know who they are.)

He currently thinks the market is actually set for one last gasp higher right now, but also thinks it’ll be an ideal time to begin short selling stocks very soon.

So let’s now take a look at short selling stocks, what it means and how to make money from it…

A quick guide to short selling and how to profit from a fall in the market

“Selling short” is how you profit from a fall in the market or in a stock. In a typical stock trade, you want to buy low and sell high, of course. When it comes to short selling stocks, it’s the same thing, done in the opposite order you actually sell high first and hope to buy low later, to close out your trade.

Some of the most successful folks in the history of Wall Street have been short sellers… Guys like Jesse Livermore and Daniel Drew.

So who’s a famous stock short selling guru today? You probably can’t name one. And it makes sense: Short sellers make money when stocks fall, and stocks have basically gone up since 1982 (with the exception of a brutal 2000-2002). So we’re looking at over two decades of swimming against the tide.

The 1982-2000 bull market in stocks was the longest, greatest bull market in the history of stocks. Even the best short sellers were clobbered. Today’s best-known short selling expert, Jim Chanos, recently told the Wall Street Journal: “You lose money pretty much all the time, and when you make it, you make it in outsized amounts.”

But stocks can’t go up forever. And whether you want to believe it or not, it would naturally follow, that after the longest bull market of all time, we could well enter the longest bear market of all time. And who can make money in that environment? Someone adept at short selling stocks… That’s who.

When to start short selling stocks: The strategy

The pro I talked to today has a relatively simple strategy for short selling stocks. He does the same thing I do when I’m looking for something to buy… Only the opposite.

When I’m looking to invest, I want to buy an asset that is…

*** An extraordinary value
*** Hated
*** Has just begun its uptrend

To do the opposite – to sell short – the pro I talked to is looking for a stock that is:

*** Exceptionally overvalued
*** Loved
*** Has just begun its downtrend

When I pressed him for a tip, the pro actually said the entire market meets these criteria right now. Stocks are overpriced and in a downtrend. He’s expecting a quick rally, to get people to “love” stocks again… And then it sounds like he’ll go aggressive with short selling his stocks in a few weeks time.

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Just because a two-decade long bull market came to an end, doesn’t mean you can’t make money on the market

Stocks are expensive right now, and the downtrend seems to be getting underway once again. We’re coming off a full two-decade bull market, which has knocked out most short sellers. Now may be the time to get into it, as we may be on the brink of a major bear market… And folks who do their homework can make some money selling short.

There is very little competition on the short side (as the long bull market forced traders trying to specialise in shorting to throw in the towel)… So good homework on the short side could potentially be really profitable in the coming years. It’s definitely worth learning more about right now… Or you could be really smart and follow the advice of a true trading genius, Nic Best. In the past few weeks, Nic’s made a small group of traders gains of 30.77%, 33% and even 50% by going long and short on the market.

Good investing,

Karin Iten and Steve Sjuggerud
For Money Morning

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