Most investors who are stock pickers have had the feeling at one time or another that a particular stock would go down. The usual response to this is to sell any shares they have or not buy shares. Some are tempted to short the stock, but this is a difficult game.
Shorting a stock means to sell shares that you don’t own. You are essentially borrowing shares from someone else and selling them with the promise that you’ll buy the shares back later and return them to the original owner. This is done with the hope that the shares will drop in value between selling them and re-buying them so that you’ll make a profit.
Unfortunately for short sellers, stocks tend to go up. Suppose that the stock market tends to go up 10% each year. So, investors in low-cost stock index ETFs make 10% per year, on average, without doing anything. To beat the index as a short seller, you have to find a stock that will go down by about 10% or more.
If a short seller just throws darts at a stock listing, he can expect to lose about 10% each year, on average. If he is so clever that he is able to pick stocks that perform 20% worse than average (so that they drop by 10%), his reward is that his investment returns will roughly match those of the know-nothing index investor.
Short sellers are like runners in a downhill race who choose to run uphill from finish back to start. Taking on added challenges is sometimes admirable, but don’t expect to win any races.