The Bull Hunters Guide

Lately, we’ve been talking a lot about short selling in this blog. In particular, we’ve been talking about the pros and cons of short selling, and last time I mentioned that there was a distinct dark side to the practice that causes many to cringe when they even hear the term. This time, we’re going to talk about exactly that.

Short and Distort

Short selling is a somewhat cryptic process that is rarely understood all that well by the amateur investor. Because of this, it creates a ripe opportunity for unscrupulous traders to take advantage of short selling and twist it into a market-harming “money making machine” that doesn’t respect the true meaning of free commerce and investing.

When this happens, investors resort to using a tactics known as the “short and distort”. The way it works is this. Imagine that you have a bear market. The prices of stocks are almost universally down, and prospects all around aren’t so great. Traders might take this opportunity to buy a bunch of short options in a stock. Of course, that in itself is perfectly normal and ethical. However, what makes the “short and distort” such a terrible practice is that the investors then go on to spread slander and lies about the businesses that they’ve bought shorts in.

Slander Is Believable

Obviously, in a bull market, everyone is already nervous and pessimistic. Slander is thus easily believed, and it’s easy for investors to cripple a company through these means. When that happens, they walk away from the smoking wreckage with a handy profit, purchased at the cost of their integrity as real business people.

Of course short selling has its dark side. So do all forms of investing. It’s the ease with which short selling can be exploited however that makes it a particular target for scepticism.

See you next week for part 8 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Over the last few entries, we’ve taken quite a detailed look at the process of short selling, or selling stocks that you don’t own under the agreement that you’ll actually put up the money to buy them at a future date. In doing so, your hope is that the value of the stock will decrease and that the price you have to pay is less than the money you received by “selling” them.

Short Selling Is Risky

Of course, this is a risky proposition. There’s an awful lot that can go wrong, especially if the value of the stocks that you’ve short sold happen to go up rather than down. Let’s take a look at some of the major risks of short selling.

First of all, there’s the matter of historical precedent. Historically speaking, stocks do tend to go up rather than down. It’s just a general rule of thumb that has applied to the market over the decades. Because the very nature of short selling involves the assumption that a stock will go down, you’re automatically working against historical precedent, so be aware of that.

Secondly, there is no limit to the potential losses when you short sell. Since you lose out on a short sell when the value of the stock increases, it’s entirely possible for that stock to skyrocket without limit. If that happens, you could quickly be ruined. On the other hand, the distance between the price you short sold for and zero is the maximum possible profit that you can gain.

Lastly, short selling automatically involves the practice of trading on margin. This entails the use of borrowed money, which is a risky proposition in and of itself even without the added dangers of short selling stacked on top of it. You might fall prey to sudden margin calls even, which is one of the most disastrous things that can befall a trader. Even if you’re right, it might take quite a while for your stock to decrease in value, and in the meantime, you’ll be sitting on short sold stocks bought on margin that are increasing in interest and ultimately costing you money.

Long story short, if you’re going to short sell, you need to be absolutely aware of all the risks that are involved. Of course, it’s not all about making of losing money. There are a lot of ethical concerns involved in short selling as well, that we’ll take a look at next time out.

See you next week for part 5 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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Last time in this blog, we introduced the concept of short selling, something that we’re going to be discussing over the next few entries. It’s a pretty simple technique that quite a lot of people are involved in, but like any aspect of trading, it involves its own unique set of risks and opportunities. As such, it warrants a closer look than you might have given it in the past.

What Exactly Is Short Selling?

Like we said last time, it’s a way to profit off of a bear market. You invest in a stock, but you profit when the value of the stock decreases rather than increases. Here’s how it works.

When you short sell a stock, you’re essentially selling a stock that you do not own. If that sounds weird to you, well… that’s because it’s a weird situation, and hard for many to understand. When you short sell, your broker is entering an agreement with you that they’re paying you for the selling of a stock today and that you’ll actually buy that stock at a later date, in order to restore balance to the transaction.

One typically engages in short selling when they expect that the value of a stock is about to fall soon. Say that you short sell on a stock that is worth $1000. You do this and the broker gives you that $1000. Then, before the time period expires in which you have to actually buy the stock in question, the stock collapses and is worth only $500. You’ve just made $500 off the decline of a stock!

Of course, there are risks to be had here. For example, if the value of the stock rises, then you’re still obligated to make the purchase. You might well find yourself having to shell out significantly more than you sold for in the first place. Next time, we’re going to take a closer look at what goes on in a short sell transaction.

See you next week for part 3 of Short Selling.

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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The stock market has dropped 2 years worth of gain in the last few months.  One would be tempted to call it a large correction in a Bull Market or the start of a Bear Market.  Either way there are ways to make money in both markets.  I have personally not felt the drop since I’m 100% insured at the level I got in at and have locked away profits along the way.

Trust Me - Said The Smiling Bank Manager

The market has people worried!  It’s dropping and suddenly the “Fed” (Federal Reserve Bank of New York), a non-US Government controlled corporation that makes a living from lending money to it’s biggest customer: The US Government, decides to “issue”  Billions of dollars to “prop” up the economy…  Well, that money never existed in the first place.  Seriously, how is that going to help?  We all know it does, short term, but the long term effect is this:

• 150 Billion Dollars issued to the US economy (or was it 200? Does it really matter?)
• The money isn’t backed by squat! It’s simply issued. It is only regulated.
• Inflation devalues the existing currency in circulation, which will possibly increase interest rates. Oops! Who collects interest rates?
• The US now pays annual interest on that money, presumably from taxes as it surely doesn’t have many other sources of income. But the US Government doesn’t issue money, so how will it ever repay the debt?
• The US National Debt increases (by over 1 Billion Dollars per day). Remember, the money isn’t issued by the government.
• The downward spiral is fueled even more.

Money Is An Illusion

If money can just be issued without any backing (i.e. gold), then what controls the supply and demand?  Who controls whether we have another recession or depression?  Who stands to benefit from a major stock market crash and / or a depression?  Only really the people that issue and charge interest on money.  True value is running out over time, a bit like an option, melting away, like sands through an hour glass.

Are The Bears Here To Stay?

First of all, this doesn’t matter if you are financially educated.  You know what to do, right? I’ve already mentioned how I protect my investments.  There are many things to think about for the future direction of markets. I’ll mention one major one…

The current (42nd) US president has added more national debt to the US than the previous 41 between them.  Last I looked, the deficit was growing by USD700 Billion per year. China and Japan, between them, hold enough US treassury bonds and US cash to crash the US economy back to the stone age.  All military equipment (and the soldiers) around the world would need to be dumped in the sea, WWII style, because there would be no money to ship them home…

Another reason…

US hard assets are being sold off to former enemies (and future wanted enemies), such as Russia, Japan, India and China. Meanwhile US money is largely being invested in soft assets such as technology that ages (and depreciates) very fast, especially during war (or a stock market crash).  Hard assets, such as factories, can still produce product, regardless of the assets value.

Don’t get to carried away when you see the markets take a massive leap upwards next time. It will likely take the opposite direction the next day. Great for options traders! It’s volatile and will move in big jumps, reacting to almost artificial signs. Like the Fed pumping in 150 Billion Dollars of money it doesn’t even have to print. It’s like the Milk Man telling you that you need 4 litres of milk instead of 1 litre that you normally use. Why? No reason… just that you’ll need to pay him more for the extra 3 litres of milk.

Oh dear…

See you in a few days for part 5 of the “Basic Investment Strategies”

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2008

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