InvestorQ : What are the situations when I can use the short selling formula effectively?
Abhisha Yadav made post

What are the situations when I can use the short selling formula effectively?

Abhisha Yadav answered.
3 years ago

Unlike what a lot traders and investors believe, short selling is not about shooting from the hip. Short selling requires patience and perseverance and an ability to fight scepticism. Paulson who made the big short on sub-prime in 2007 had to hold on to shorts for close to 2 years. When Jim Chanos started shorting Enron, nobody accepted a short on a blue-chip company. Even when David Einhorn came out with his famous short trade on Lehmann, the entire investment community was against him. The moral of the story is that it requires much more patience, conviction and ability to fight scepticism as compared to a long position. A short sale too has to be researched thoroughly like any investment decision. A short selling decision is also a search for value, albeit in a different direction.

Short selling can be a great idea when the tide turns in a stock. Look at the case in 2008. Every real estate stock corrected between 85% and 95% over the next 2 years. Technology in 2000 also corrected close to 90% from its peaks. Even blue chip capital goods stocks and PSU bank in India corrected 60-70% since the peak of 2010. The beauty of the short side is that once the trend is apparent, then sell on rises almost becomes a sure shot trade. Of course, you cannot forget the checks and balances that are required to make the short sale really effective.