A Walk On The Short Side
NEW YORK (AP) _ The boom in mutual funds has been going on so long, it may be a good time for investors to go short.
Or so some contrary-minded people have been thinking lately as they watched fund assets soar to record levels while stock market indexes and bond prices climbed to new highs.
No bargains left to buy? Then, according to traditional Wall Street theory, perhaps it’s time to seek ways to profit from a change of direction in the markets, assuming that the bears will have their day some time in the not-too- remote future.
There are ways to stake your money on a market decline, notably through what is known as short-selling of stocks or even mutual fund shares.
But proceed with great care, say financial advisers - the whole business can be very chancy for a small or inexperienced investor.
The basic principle of shorting reverses the order of steps in a typical investment. You sell first, using shares borrowed from a broker for that purpose, and buy back later, at a lower price if things work out as planned.
″Of course, if the stock goes up after you have sold it short, you will lose money when you have to buy the stock at a higher price,″ points out George Putnam III in his Turnaround Letter investment advisory.
Short-selling is a time-honored practice in the stock and commodity markets. It has been much rarer with mutual funds, whose shares aren’t bought and sold in the open market the way those other securities are.
But a couple of specialized firms now offer that service to fund investors. Jack White & Co., a San Diego-based discount brokerage firm, began accepting short-sale orders for a couple of dozen funds in 1990.
On average, the firm has about $25 million worth of fund shares available for shorting on any given day, according to spokesman Barry Boyte. ″It’s been pretty active,″ Boyte says.
Fidelity Investments, the nation’s largest fund management firm, accepts short-sale orders for 10 of its Select single-industry funds, which are designed for more active traders than the typical diversified fund.
Paula Slotkin, a spokeswoman at Fidelity’s Boston headquarters, said the firm, which had offered the service for a couple of years in the late 1980s and then discontinued it, reinstated it in 1992 because ″Select investors were asking for it.″
Whatever type of security you sell short, Putnam says, ″one of the most important things to keep in mind is that your losses are potentially unlimited.
″When you buy a stock, thw worst that can happen is that it will go to zero and you lose the amount you paid for it. However, when you are short a stock, there is at least theoretically no limit on how high it can go - and how much money you will have to spend to close out the short position.″
Other ways to try to profit from market declines exist in the options and futures markets. One standard alternative to shorting is buying put options, which give their owners the right to sell a given stock at a stated price within a set period of time.
But these vehicles also have their special risks and costs, and require considerable expertise.
Above all, investment analysts say, success in shorting or similar strategies demands an ability to time the markets that many investors may not possess. That applies in particular to any investment linked to stocks, where the long-term trend has emphatically favored those who bet with the market, not against it.