Perry Glasser

RAMBO THE CAT SELLS SHORT

In Business, Economics, Economy, EDUCATION, Finance, MILITARY, Personal Finance, Politics, Wall Street on August 13, 2011 at 8:00 am

Dollar$ wants everyone to know that selling something before you own it is a time honored and honest investment strategy which even a Wizard could present blamelessly.

Short-selling does not send markets into tailspins. Banning short-selling, as has recently happened in Italy, France, Belgium and Spain, is a vain attempt by local Weasels to blame local Wizards for the mayhem in their markets.

The theory is that short-sellers will spread false negative rumors and create a wave of selling. Why these same nefarious type cannot spread false positive rumors is left unexplained by Weasels whose grasp of financial matters is about

Weasel IQ Test

the same as a carrot’s.

Who would suggest that world markets are staggering like drunks on Saturday night because the largest economy in the world has mortgaged its future to spend wildly on wars waged against shepherds? We require drone airplanes and assault helicopters to defeat a foe boarding airplanes with box cutters or plastique up their behinds. Why, just last week, the entire Pentagon was hot on the trail of an errant housefly, pursuing the slippery sumbitch relentlessly by deploying 250  Marines howling through the corridors wielding Louisville sluggers.

THE SHORTS

Well, enough politicking. Here the lesson for today.

Say your neighbor on your left is leaving for 10 days and asks you to feed her cat while she is gone. Her cat, Rambo, is picky, and only eats Finicky Cat Food.  The cat devours a full can of this mixture of grain, chicken, and horse each day. You say, “Sure.”

Ten days later your neighbor texts you with news: volcanic activity in Iceland means she will be delayed five days. Wouldn’t you know it? You opened the last can of Finicky that morning. The pantry is bare.

Since you are short of time, you run to your neighbor on the right, another cat lover.  Good news! She has five cans of Finicky to spare! Each is marked $1.29, and when you tell her you are desperately short of cash, since she is a shut-in, she requests that all you need to do is replace the five cans at your leisure.

Five days later, your wandering neighbor descends from the clouds, hugs Rambo, and sees the five empty cans. She immediately gives you $6.45.

You amble over to the Pet Shop. There’s a sale on Finicky!  It is marked down to $.79 per can! Wahoo!  W00t!

You pick up 5 cans at a total cost of $3.95, and then hightail it to your amiable neighbor to return the 5 cans your borrowed.

RAMBO THE CAT

As you amble down the walk, you enjoy the pleasant feel of $2.50 in your pocket.

How DID that happen?

You

  1. BORROWED 5 CANS.
  2. SOLD 5 CANS.
  3. BOUGHT THEM BACK AT A LOWER PRICE.
  4. REPLACED THE BORROWED CANS.

Look at that list again. You sold before you bought.

Instead of cat food, understand that you are trading stock. Your amiable shut-in neighbor is a brokerage house. The Pet Store is the Stock Exchange. Your traveling neighbor is, like you, a stock trader.

There are some other rules about shorting stock—Who gets the dividend on borrowed shares? How long can they be borrowed? What if the owner wants to sell? — but those technicalities are not what’s at issue when Weasels call for a halt to the practice.

CAVEAT: Generally, unsophisticated traders should stay away from this trading practice without thorough knowledge of the rules. Think of it this way: if you go long on a stock, it can rise forever, but if you go short and have guessed wrong, you potential losses are infinite. There is also a limit to your potential profit, the limit being when the stock hits zero.

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  1. […] So when Dollar$ reads that Comcast will pony up $45 billion for the acquisition of about 11 million TW subscribers, dumping 3 million of them to satisfy charges of monopolistic practices, netting about 8 million subscribers, he thinks short this stock! […]

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