Short Selling and The Value Investor: My Recipe

One of the benefits of incorporating technical and fundamental analysis while value investing is that you begin to respect the trend. Over the past few decades, I have learned from experience that fighting Trends is extremely difficult. When buying a value stock, I wait for signs of a technical change of trend and improving fundamentals that usually appear in the financial statement ratios.

If and when we enter a bear Market, I plan to sell short many stocks. I have a unique approach to Short Selling that combines both fundamental and technical analysis.

The key point for selling short is to short weak stocks, not strong stocks. Most investors look at stocks making 52-week highs for short candidates. That’s a recipe for disaster. Typically, strong stocks get stronger and weak stocks get weaker.

You want to wait for a stock to confirm that its uptrend has broken before shorting. Remember you can only make 100% when shorting, so it does not matter if you short a stock from 20 to 5 or 40 to 10, it’s the same 75%.

When shorting I like to combine a technical trend change with a leveraged balance sheet and deteriorating working capital turnover. This is a great recipe for short sales.

I have not started to sell short yet but many of the signals that I’m looking for are slowly starting to appear technically. Members of turnaround Stock Investing will get the benefits from my years of investing in past bear markets. If you’re interested in great turnaround stocks and short sale candidates over the next year consider becoming a member of turnaround stock investing.