Shorting a Stock

from "One Up on Wall Street" by Peter Lynch

The scary part about shorting stock is that even if you're convinced that the company's in lousy shape, other investors might not realize it and might even send the stock price higher....

None of us is immune to the panic that we feel when a normal stock drops in price, but that panic is restrained somewhat by our understanding that the normal stock cannot go lower than zero. If you've shorted something that's going up, you begin to realize that there's nothing to stop it from going to infinity, because there's no ceiling on a stock price. Infinity is where a shorted stock always appears to be heading.

Among all the folk tales of successful short sellers are the horror stories of shorters who watched helplessly as their favorite lousy stocks soared higher and higher, against all reason and logic, forcing them into the poorhouse. One such unfortunate was Robert Wilson, a smart man and a good investor, who a decade or so ago shorted Resorts International. He was right, eventually -- most shorters are right, eventually -- didn't John Maynard Keynes say in the long run "we all are dead"? In the meantime, however, the stock advanced from 70 cents to $70, a modest 100-bagger, leaving Mr. Wilson with a modest $20 or $30 million loss.