Brian Annis: ‘There’s at least one more hazard of shorting stocks that you didn’t mention: your position can be called in at any time because the real owner of the shares has sold them. Worst case, this will happen on a huge rally.’
☞ True! Ordinarily, when the faceless person who’s loaned the stock sells it, your broker just arranges to borrow it from someone else. You don’t even know it happened. But sometimes that’s not possible and you are forced to buy the now-even-more-preposterously overvalued stock to cover your short position.
Jack Ratcliff: ‘And when managers of an overpriced stock use that overpriced stock to purchase other companies, anyone short the stock being acquired is in for really BIG trouble. In late August, 1998, when Clarify (a smallish software company) was in the $8 range, my friend asked about shorting the stock but did not do so because I mentioned the possibility that someone might buy them out. Sure enough, Clarify began a steady climb to an incredible $150! Only AFTER it had soared to the sky, did we learn that it was being acquired by Nortel (as I recall). His contemplated 1000-share short sale, if left uncovered, would have cost him an eventual $142,000. Not that I am so smart, but I did learn that in order to make a small fortune by shorting stocks, you need to start with a large one.’