The Art of Short Selling - Book Review

Kathyrn F. Stanley’s “The Art of Short Selling” is considered one of the most important finance books of all time.

Short selling is a niche within niches. It is a high stake game with high rewards, but not everyone can play it well. One of the most famous examples of short selling was by George Soros who shorted the sterling, betting that it would fall. His prediction was bang on and he gained a billion in a day. The result of this short sell was that The Bank of England had to devalue the currency and take it out from the European Exchange Rate Mechanism.

Short selling is not for the faint-hearted or the uninformed. The author deconstructs the art of short selling in her book systematically.

Part one in the book is titled Facts and Practitioners. This section deals with who sells short, opportunities to sell short, analytical techniques, mechanics and risks, hedge funds and investment advisors.

In part two the book discusses cases and examples of high-multiple growth stocks. Some of the case studies are Snapples Beverage Corporation, Cabbage Patch Dolls, Texas air, among others.

History and General lessons comprises part three of the book. Shortcomings, regulations, controversies and a pessimist’s guide to financial statements among other topics.

The author when introducing her book says,

“This is a book about the people who profit from collapse and who specialize in detecting disasters and about the methods those people use to track the demise of companies, like equity seismographers watching for the first tremors of an earthquake.

Short sellers unearth facts from financial statements and from observation to ascertain that a stock is overpriced. They act with conventional wisdom – they buy low and sell high, but they sell before they buy.

…Short selling is perceived by professionals, as well as by casual investors as risky and speculative. A frequent criticism of short selling as an investment alternative states that stocks can only go to zero on the way down, but to infinity on the way up. Short sellers respond that they have seen a lot more stocks at zero than infinity. Because they take greater risks than other investors, short sellers must be confident that their conclusions are correct, and they must have strong evidence to support cases for price declines. Because reverses are terrifying and sudden, the burden of evidence rests on a solid, careful analysis completed before the stock is shorted.

Short sellers are usually hard-working, creative people who enjoy going against the grain and competing with the mind of Wall Street (represented by the price of stocks). They enjoy solving puzzles that other people find frustrating, confusing and unsolvable.”

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