Should you learn about short selling? Most definitively. Short selling and knowing about it are two different matters. So even if you do not wish to engage in the practice (which is understandable given its drawbacks), understanding the approach of a short seller/bear will allow you to develop a well-rounded outlook and skill set as an investor/trader, which can only be a good thing. Here are some reasons why nurturing your inner bear is time well spent.
It will improve your research skills
Given the limited upside and unlimited downside to shorting, those who do it are very thorough with their due diligence. Short sellers spend hours going through filings, news articles and research papers as well as carefully researching the backgrounds of the people involved with publicly listed companies. This is a very time-consuming task, meaning that short sellers have developed techniques and methods that allow them increase the quality of their research while reducing the time spent on it.
It will improve your trading skills
Timing is of utmost importance to the short seller. Short sell too early and he/she will lose money, too late and he/she will miss the bus as due to the uptick rule. As a result, short sellers need to have a solid foundation as far as technical analysis is concerned. Price action, volume fluctuations and key indicators need to be well understood in order to devise successful trading strategies.
It will thicken your skin
Short sellers are not popular; they are contrarians by nature. Expressing negative views about a company will often result fair amount of vitriol from current shareholders, sometimes even the management. This will teach you to deal with detractors and abuse in a calm and restrained manner. Keeping a cool head is important when dealing with the highly volatile and often times emotional world of trading.
It will improve your critical thinking skills
Questioning and assessing the nature and value of information is paramount for well informed decision making. Short sellers are very sceptical by nature. This information must also be deemed varied and balanced. Short sellers are always on the lookout for negative information that counters the dominant bullish narratives. Understanding the short seller’s approach to trading can thus provide an insight into a frame of mind that makes use of a few critical thinking skills.
All in all, little can be lost from learning about something, especially if it can make you money. If you wish to learn about short selling or take it to the next level, please have a look the services offered by the Utopia Capital Research team.