Common sense says that the way to make money on Wall Street is to buy low and sell high. Common sense says that if you hold on to your investments for a long time, you will avoid fluctuations of the market. Common sense says that sound investment strategy will ensure that your investments increase in value over the long haul.
Common sense once dictated that the world was flat.
Common sense is usually wrong.
The real way to making money on Wall Street is to borrow high and buy low. It’s called selling short. Instead of waiting five years to turn a 12% average profit, you can wait two months–or even two weeks. If you are a really sharp cat, make your money in two days.
Selling short is turning a profit on market disaster. Here is how it is done:
I decide that Company A (NASDAQ: COMA) is about to take a massive dive from its current price of $100 per share. COMA is an Internet company that specializes in providing relatives of accident victims with live updates on their investments via cellular telecommunications. Clearly, this company has no future. They issued their eighth straight quarter loss. Everyone holding this stock is an idiot in my opinion.
I call my broker to sell COMA short. To execute this investment maneuver, my broker loans me 100 shares of COMA. Immediately, I sell COMA at its market value of $100. Now I have $10,000 in my account. My only obligation is to give my broker back his 100 shares.
Three weeks pass. COMA gets a visit from the Grim Reaper. The value of the stock collapses to $10. I figure it would be a good time to give my broker his shares back. I buy 100 shares at $10 per share for $1000.
The broker gets his shares back plus three weeks interest. My account is now valued at approximately $8900 cash. Not a bad gamble.
Gambling is exactly the name of the Wall Street game. Investments are illusions. Investments as defined by Wall Street are a relinquishment of control of your money. Without honest people to put up their hard-earned cash, investment houses can’t play their high-stakes games of crashing the market.
This isn’t in any investment house brochure but you can rest assured that every investment house allows short selling. They try to demand a history of your “investing” experience but with the right amount of cash, investment houses would happily let your children and pets engage in short selling.
An economy that serves society would bar short selling of securities. If you own shares of a corporation that has made bad decisions and builds itself on a faulty position, you absolutely have a right to exit your position by taking your profits where they stand or simply cutting losses. That’s an ownership decision; a company decision. On the other hand, to get involved in a company because of what they do not do correctly in hopes of banking on their market collapse has serious ethical problems.
It erodes the responsibility of company ownership that stock implies. Instead of being a company with people and children behind it, stock becomes photons on a computer screen with a value on it. Stock ownership becomes little more than a video game. Stock ownership becomes something worse than a casino chip.
People that enter short positions will destabilize the positions of everyone who entered long positions–the overwhelming majority of owners. What was once a collective investment in the well being of a company becomes a bet where everything will be lost should an investor be on the wrong side of the parimutuel crowd.
Selling short should be outlawed. If short selling ever reaches public debate, it should–at the very least–be explained to every potential investor who wants to put money in the market. Unfortunately, short selling thrives on mass ignorance and the deceit of the few. If any investor were required to fully understated short selling and it’s impact on market fluctuation, they might just put their money somewhere else. Mattresses hold cash exceptionally well.
There are more enjoyable ways of losing your money and standing an equally good chance of making some. It’s called gambling.
