A small-time trader explains why profiting from decline is not necessarily evil -- nor greedy.
I'm a financial speculator. If the situation calls for it, I sell stocks short. At the moment, that makes me an enemy of America.
"Shorts are very evil and greedy people that strive for the destruction of man-kind and its financial systems and markets," read a recent comment on a Wall Street Journal blog. Out in the grammatical world, presidential candidate John McCain charged that "speculators and hedge funds have turned our markets into a casino."
Well, I'm no sociopath, and I don't really consider myself a gambler. But I do actively trade stocks and derivatives, both upward and downward, in the hope of making a profit. Let me explain how this came to be.
A few years ago, I realized that my wages were stagnant. My chosen industry was faltering. To grow my fabled nest egg, I'd made investments using the time-tested "buy and hold" strategy. But halfway through my career, the nest was moldering.
(The success of "buy and hold," it turns out, depends on when you buy and when you cease to hold. Historically, stocks have risen over time. But, as you know if you have keen eyesight: Past performance does not indicate future results. When it comes time to cash in, we're all at the mercy of the moment.)
I knew that no one was going to secure my future for me. I decided to take the bull by the horns. I decided to learn how to trade.
To many people, this idea would not appeal, but it did to me. I was a kid who -- when I wasn't watching the weather -- would switch to the channel with the stock tickers marching across the bottom of the screen. It takes a great deal of self-assurance to admit this to you now.
Clearly, my plan was risky. We heard the stories of day traders putting their life savings on the line from moment to moment during the tech boom. When the bubble burst, the zeitgeist was over.
A few years later, though, some people were still at it. Some were even making a living. Though there's no luckless way to get rich quick, I knew there must be a secret to getting ahead slowly.
And here it is: Risk management.
Sexy, no? No. But it's a key to juicing your returns responsibly. I left most of my long-term investments in place, to do what buying and holding is supposed to do. I kept my cost-averaging contributions active. But I set aside a small portion to trade actively. I kept my day job. I knew wiping out this small account was a real possibility. I planned to be aggressive with care.
About the time I was really getting into this, the market peaked. I realized that to thrive, I'd have to trade in both directions.
So I started selling short, which is to say, I borrowed shares I didn't own and sold them, hoping to buy them back at a lower price and return them to their owner. It's perfectly legal and fairly common, and it takes place in an electronic instant. (To go "long," as opposed to being short, is to buy something in the hopes of selling it at a higher price, which is what most investors do.) Sometimes I've had a lot of short positions, and sometimes I've had a lot of longs, and sometimes I've had a mix. Last week I had a lot of shorts when the government changed the rules in the middle of the game, banning such transactions in 799 stocks. That was bad news for me.
I always like to admit what I don't know, and there's much I don't know about the markets. I don't truly understand how the failure of any one great, teetering company might affect the rest of the system. I probably don't grasp the impact of the big Wall Street players. I don't know whether terrorists were trying to bring down the system, as some rumors suggested. Sometimes I'm afraid of what I don't know. Sometimes politicians exploit that.
Here's what I do know: Speculation is defined as buying or selling to take advantage of an expected rise or fall in price. Though it's usually associated with high risk, the de facto definition may be broader than we'd care to admit.
If you buy shares in a company and hope to sell them at a profit in 10 years, that's typically called investing. But it's also speculation. It's just the slow version.
If you own shares in a mutual fund, as 90 million Americans do, it's speculation. The fast version. The average mutual fund turns over the bulk of its holdings each year on your behalf.
You may even be selling short yourself, by way of going long. I'll explain. In the last year, a number of exchange-traded funds have entered the market, and some of them are designed to make money when the market goes down. In this case, when you buy, you're short. On bad days, some financial websites have reported a surge in visitors searching for information about such funds. The pros already know about them, so you can guess who the inquirers are.
Now, at this point I must make an admission: I haven't actually made money trading. (I know -- it's a plot letdown for me, too.) But I also haven't blown out the account, and I'm getting better, day by day.
Point being, not all speculators are sharks. Not all short sellers are out to make a killing. At least some of them are just out to make a living, like you -- and me.
David Banks is an associate editor for the Star Tribune's opinion pages. He is at firstname.lastname@example.org.