Why You Should Never Short Stocks

If you want to be a winning trader,  you should never short-sell stocks EVER!  I know it seems shorting is very lucrative as stocks go up at a slow pace, but it takes a split second to plunge; that is why shorting is an art and timing is everything (unfortunately timing often is random).

People tend to short stocks for the reasons listed below:

1.  You think the stock is overvalued. 
2.  You think the stock went up too fast.
3.  A famous short-seller put out a short-seller report (i.e. the stock is fraudulent)

There are several approaches to shorting, one is doing the fundamental "short", where the trader in question has spreadsheets and their model shows the stock is severely overvalued based on earnings, growth, debts, etc. 

Another approach is to short based on technical analysis, where your technical analysis has determined the stock is in a downtrend. 

There are issues with both approaches, the first is the Market no longer runs on P/E ratios. Ever since the technology renaissance started by companies like Apple, Tesla, Google, Facebook, stocks trade on hype. They no longer follow the old-school fundamental models. Just look at what GameStop, AMC is trading at right now, or Bitcoin.

The second approach based on Technical Analysis, I'm sorry to say this but your technical analysis isn't that accurate.  There are just too many people using it, making it less reliable, and leaving you vulnerable to margin calls, or severe losses with put options. Although, if you had to short a stock for whatever the reasons, the route to go would be via put options, at least limit your potential losses. Shorting a stock directly can open you to infinite losses!

For those following the short reason of #3, where a famous short-seller puts out a famous report (like Citron Research), they often make a ton of money on the initial scare. If you look at the majority of their track record you will often see it's awful! Their short thesis revolving around being overvalued should usually be ignored. However, a short-seller can really nail it with stocks entangled in fraud and that’s when you should move out of the way (i.e. Luckin Coffee got exposed and went to 0).

Currently, as this article is written GameStop ($GME) and $AMC are putting off a crazy short squeeze that is never-ending! Do not short! The market isn't rational; it does what it wants. Sometimes you get so caught up in the emotions of trading that you forget that no matter how right you think you are and no matter how over-valued you think the stock is, the market is boss. Remember that!

Epic examples of "easy" short trades in recent years have ruined trading careers and forced early retirement for many of those who continue to remain short Tesla ($TSLA) and GameStop ($GME). I remember back in the day when Amazon was trading around $180, Seeking Alpha published articles daily on why it should be shorted. Currently, as this article was written, it is trading at $3500! 

Often it is just best to avoid shorting all together, if you trade/invest in large-cap stocks, you will make money as the Market in the long term always goes up (despite 2000/2008/2020 Market crashes).

As a reminder the chart below is the S&P 500 for the last 20 years, does this look like a chart you wanna short? Especially in the last ten years. Where now the market is driven by the Federal Reserve printing infinite money.

You may be right about a stock being overvalued, but you don't have the resources to efficiently short and become profitable over the long term. Maybe you get one or two lucky trades and that will give you false hope. In conclusion, NEVER SHORT, and if you must do it via put options.

Check out my other article on Why Stock Options Are Bad if you are interested in preserving your capital!