As someone who has been short stocks far more often than long, I can say that shorting stocks can be the worst possible investing decision you can make.
I started to go heavily short back in ~2005, and this was after **extensive** research (full time, for years) into what I believed would be the worst financial crisis/depression in our lifetime. We had significant short positions in banks, mortgage lenders, ratings agencies, auto manufacturers, and a handful of retailers, among others. I have a tendency to be early, so made sure we could withstand a period of time when the market would move against me (long-dated options/LEAPS and kept rolling those over when the market would take a short-term dive; straight short stock positions with lots of extra money to protect myself against margin calls, etc.; and NO leverage, whatsoever). I built the positions up over time, but even while I took precautions (but only some hedging), we had unrealized losses of just over 30% at the market peak ~2007. It was not an insignificant sum, BTW.
Eventually, things did pan out the way I thought they would and the positions paid out rather handsomely, but the Fed’s actions throughout the process, along with the bans on short-selling and other market manipulations against the shorts, made things very volatile and gut wrenching. I got out of all my short positions in October 2008 when everyone thought things were going to get far worse. Best decision I ever made, and I was glad to be out. Some others I know who were shorting throughout the bubble as I was did not do so well, and some were absolutely slaughtered.
I nailed the internet/stock bubble, and nailed the housing bubble, and I am 99% convinced that we are in another peak wave of the same credit/asset price bubble that has plagued us for more than a decade. As a matter of fact, I think the bursting of this one will be even worse because the PTB are nearly out of their traditional ammunition since they’ve wasted it on trying to keep these bubbles afloat over all these years. We are tapped out on all levels, public and private, IMO. But I’m still extremely hesitant to short things this time around. If they DO decide to pour gasoline all over the fire again, I think they will go to extremes that have never been seen or thought of before.
I want to short, am very comfortable shorting, and I’m far more bearish and willing to take lots of risks when it comes to shorting… more than anyone else I’ve known personally or on blogs (even bearish blogs). But I am scared to do it this time around; the last time was incredibly stressful — and that was when I was 100% right!
If you short, be VERY careful, and do NOT use leverage! Do not put any money at risk if you’re not comfortable with huge losses. I cannot stress this enough.
IMO, the best move to make if you think things are going to crash is to get out of your long positions. Maybe, you can buy some puts on index ETFs or a few stocks that you think are wildly overvalued, but I think the best bet is to keep these positions small. Just be careful, whatever you do.
