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Short selling is not for every individual investor. It requires a surer command of company financials than most people are willing to develop. And, since many short sellers got killed in 1991-93, even more caution is warranted. The people who do profit from collapse, often profit handsomely. Short sellers of Crazy Eddie bought for $2 and sold for $40 in less than a year. Like long investors, they buy low and sell high. Unlike long investors, they sell first, then buy.
That said, the discipline of the short seller is one anybody can use. There just haven't been too many books devoted solely to this subject. Katherine Staley is filling the void quite well. She is an experienced short seller, knows how to do and teach financial statement analysis, and according to the jacket copy, she "lectures on the absence of economic reality in publicly reported earnings announcements."
The author's definition of selling short is "selling a security that the seller does not own but promises to deliver by borrowing it from someone else, in order to profit from the subsequent price drop." Market makers and block traders sell short to create supply. Institutions and individuals sell short to speculate on price declines. Others sell short to hedge an industry outlook or to protect profits on a stock that's already owned and appreciated. Many reasons exist to sell short. Staley describes very clearly how short selling fits into the economic and financial picture, who does it, who can benefit from it, and what the risks are. As she points out, "if a stock moves against the position holder, the effect on a portfolio and net worth can be devastating." She also points out that successful short selling gives the investor a game to play in any economic environment.
Anyone needing a one-volume current reference on short selling strategies can stop their search with The Art of Short Selling.
Reviewed by Michael Pellecchia.