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Thursday, May 26, 2005

Shorts are hero's

Ever since the dot com crash of 2000 there has been a big fascination with shorting. If you shorted the S&P at the peak and covered in 2002, you would have made 50% or 25% a year, and creamed the index... On paper. In reality interest rates were high, so the interest paid on the borrowed shares would have trimmed your profits by 10%+.

The case against shorting is that it is unamerican. That's non-sense, there is nothing more patriotic then realizing a company has a problem and selling ahead of the real sellers so you can create liquidity at the bottom. Studies have shown that shorted stocks outperform stocks not shorted. In that case why are there so few short sellers? Perhaps the chart below can explain.


Since inception in 1994 the short hedge fund index returned -19.27% or -1.87% per yr

The S&P returned 204% or 10.31% per yr during the same period.

The reason there are so few short sellers, is they went out of business.

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