Money Angles

By Andrew Tobias

With the U.S. economy shaky and the Japanese stock market down 25% in three months, this may be the time to sell short. There are two reasons to short stocks right now (and one not to):

1) If the stocks you pick go down, you make money. Short a stock at 40 that drops to 30, and you've made ten bucks. It may be too late to short United Airlines, which dropped from 294 to 140 before news of the latest buyout plan (you'd have made $15,400 shorting 100 shares), but with the Dow Jones industrial average only 4% below its Jan. 2 all-time high, there's still plenty of room for stocks to fall.

2) Your broker will love you for it. He'll get to charge a commission when you initiate the short (selling shares of a stock you don't yet own) and another when you "cover" (buying them back), just as he would if you bought and sold a stock normally. But your broker's real thrill will be the interest he earns on the proceeds of your sale. Because even though you didn't own the shares you sold (your broker borrowed them for you from another customer), you really did sell them, and your broker really did receive cash. By rights, you should earn interest on that cash. But unless you're a very big, insistent customer, you won't. Your broker keeps it. Wall Street makes hundreds of millions of dollars this way each year.

The reason not to sell short:

You'll lose money. Well, conceivably you won't; you may just lose sleep. But probably. To begin with, there are the aforementioned commissions. On top of that, if the stock pays a dividend, you don't get it -- you pay it. (With short sales, everything works in reverse.) Mainly, though, if the stock you've shorted goes up instead of down, you lose a dollar for every point it climbs.

You may think it's easy to pick stocks that will go down. It certainly seems easy enough when you're not trying. But it's actually even harder than picking stocks that will go up. Over time, more stocks rise than fall.

Granted, in a bear market almost all stocks fall. But how sure are you we're in for a bear market? Or that a good deal of the damage hasn't already been done? (The Dow is near its all-time high, but many lesser stocks are off 20% or more.) "Our Fund Timing Index has risen to its highest and most bullish level in history," reported a recent issue of Norman Fosback's Mutual Fund Forecaster, which looks for a 32% rise in the market over the next twelve months. Sure, Wall Street seems gloomy these days, says Fosback, but that's the time to buy.

If you do find a stock you're certain is overpriced -- like the Germany Fund not long ago, selling for twice the value of its assets -- often you won't be able to short it after all, because your broker can't find anyone to lend the shares. Or if he can, you get caught in a "short squeeze," in which the stock gets bid up to even more absurd levels by short sellers forced to buy back and return borrowed shares.

Far better, if you're convinced the market's headed down, to buy puts (at least with puts, your loss is limited to the size of your bet) or leave all this to the managers of your mutual fund. Some funds, like Fidelity Magellan, feel obligated to remain nearly fully invested at all times. But others, like Mutual Shares, may go heavily into cash, or, like the closed-end Zweig Fund, short stocks themselves.