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Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017

Social Security
Issue #450, December 26, 2016

My Outlook for 2017: Part II of II
Issue #449, December 19, 2016

My Outlook for 2017: The Market
Issue #448, December 12, 2016

Medicine in 20 Years
Issue #447, December 05, 2016

Higher Interest Rates
Issue #446, November 28, 2016

Trump and the Markets: The Bad and Ugly
Issue #445A, November 23, 2016

Trump and the Markets: The Good
Issue #445, November 21, 2016

Negative Trends: The Suits aren’t Makin’ Steel
Issue #444, November 16, 2016

The New DOJ Fiduciary Rule
Issue #443, November 07, 2016

Barron’s Conference, Part IV of IV
Issue #442, October 31, 2016

Barron’s Conference, Part III of IV
Issue #Interim Bulletin #441A, October 26, 2016

Barron’s Conference, Part II of IV
Issue #441, October 24, 2016

Barron’s Conference, Part I of IV
Issue #440, October 20, 2016

This Newsletter
Issue #439A, October 12, 2016

Memoirs of US Grant: Vol II
Issue #439, October 10, 2016

More Points on Collecting, Investing and the Economy
Issue #Interim Bulletin #438A, October 05, 2016

Personal Memoirs of US Grant
Issue #438, October 03, 2016

Ideas for a High School Part-Time Job
Issue #Interim Bulletin #437A, September 29, 2016

Collecting, Investing, and the Economy
Issue #437, September 26, 2016

Free College
Issue #436A, September 22, 2016

A Military Commitment to Pay for Med School
Issue #436, September 19, 2016

When a CD isn’t a CD
Issue #435, September 12, 2016

I Made a Mistake
Issue #Interim Bulletin #434A, September 07, 2016

What is Your Spare Time Worth?
Issue #434, September 05, 2016

Credit Cards and Bonus/Loyalty Points
Issue #433, August 29, 2016

The Write-off of Student Loans
Issue #Interim Bulletin #432A, August 25, 2016

412 Retirement Plans
Issue #432, August 22, 2016

Join the Club
Issue #Interim Bulletin #431A, August 18, 2016

The Case for Precious Metals and Hard Assets
Issue #431, August 15, 2016

When the US went off the Silver Standard
Issue #430, August 08, 2016

Why NOT to Open a Restaurant
Issue #429, August 01, 2016

Some Tips on Life Insurance
Issue #428, July 25, 2016

More Observations on Negative Interest Rates
Issue #427, July 18, 2016

Issue #426, July 11, 2016

Is a PhD Worth It? Part II of II
Issue #425, July 04, 2016

Is a PhD Worth It? Part I of II
Issue #424, June 27, 2016

Avoid Part-time real Estate Agents
Issue #423, June 20, 2016

Issue #422, June 13, 2016


By Robert M. Doroghazi, M.D., F.A.C.C.

Short-Selling. Part I. How it Works

Issue #400, January 11, 2016

    I write on this now because I believe the bear market has started. The DJIA was down more than 1,000 points last week. $1T of wealth was lost. It is important to do what you can to preserve your wealth.
    The goal of most investors, achieved unfortunately by only a minority, is to generate returns that track the market. The ways to beat the market include 1) superior stock selection (think Warren Buffett), 2) market timing (again Warren Buffett. Contrary to general belief, Buffett does not buy and hold forever), and 3) asset allocation: you want to be in what’s going up, and out of what’s going down.
    Another way to beat the market is by making money while others are losing it, and the way to do that is by selling short. Everyone is familiar with how to profit by going long: you buy low, then sell high. Selling short is the exact same thing—the exact same thing—but in reverse order. You sell high, then buy back at a lower price.
    Say you wish to sell 1,000 shares of GE short at 30. Your broker “borrows” the shares from one of its thousands of accounts (see more on hypothecation below. Also note that the document you sign when opening an account allows your broker to do this), deposits them into your account, sells them on the market per your instructions, and places the proceeds of $30K (minus commissions) into your account.
    If things go in your direction and GE falls to 27, you buy back the 1,000 shares for $27K. The brokerage places the shares back into the original account (this is all done electronically, you don’t participate directly), and the $3K profit (minus commissions) is left in your account. If you buy back the shares at 35, you have lost $5K. This is why short selling of individual stocks is only possible in a margin account.
    What are the downsides of selling short?
    1) Your potential loss is infinite. A stock can only lose 100% of its value, but there is no limit on how high it could go. This alone would seem to shut the door on selling short. But in practice, you would have covered long before the losses went that far. If you didn’t, the broker would force you out of the trade, because they would be on the hook for any losses you couldn’t cover.
    2) You must pay the dividends on a stock you have sold short to the brokerage, who forwards them to the account from which the shares were borrowed. In practice, rightly or wrongly, this discourages shorting high dividend-paying stocks.
    3) It can be hard or impossible to borrow the shares. On a huge, liquid stock, such as GE or Intel (INTC), this really isn’t an issue. But on Acme Xray, where the daily volume is only 10,000 share, and 30% of the float (shares available to trade) are already sold short, it could be impossible. The harder it is to borrow shares, the more you must pay in commissions and interest.
    4) Don’t sell anything short just because it is over-valued: you could get clobbered. In fact, this sounds counter-intuitive, but it is often more profitable to short a stock closer to the bottom than the top. Ex: you short BOBBY at 40. It goes to 60, and you are forced to cover for a 50% loss. Six months later it is 15. You were absolutely right in your opinion of the stock, but killed by poor timing. You must let the stock first break in price. It is far safer, and profitable, to short BOBBY at 30 and cover at 20 for a 33% gain.
    Other points about selling short.
    1) It is not wicked or un-American (although in China you might get sent to the slammer for it). To the contrary: short sellers perform an important function. They help cap speculative price rises.
    2) Whenever there is a bear market, people look for scape goats, trying to blame others for their woes. Short sellers don’t cause bear markets. In fact, they provide a floor for prices, because they must buy to cover their position.
    3) It requires a totally different personality and mind-set than the traditional buy and hold investor.
    4) Short-selling requires day to day monitoring of your position. This is not for the casual, dilettante investor (that is a contradiction in terms anyway).
    Short selling is a way to preserve capital, or even make money while others are sent to the woodshed. The DJIA was down more than 6% last week. If by selling short you were up 2%, you beat the market by 8%: these are world-class results. In a bear market, where stocks drop 25% or more, if you were up 10%, you would preserve 4 or 5 years of hard-earned gains.
    In next week’s letter, I will tell you about some of the vehicles used to sell short, such as futures and inverse ETFs, and explain some other points.   
    There was no winner in the PowerBall drawing of Saturday night. It is estimated the prize will grow to $1.3B for the next drawing on Wednesday.
    RMD comment: there was an interesting article in The Economist several months ago about lotteries. Say there are 50 possible numbers, and 5 numbers are chosen. Any one number will be chosen 10% of the time. The found that some numbers, such as 7, 11 and 21 were chosen more often (presumably because they are lucky). The problem with choosing your own numbers is not your chance of winning, because the numbers are chosen at random, but rather if you do win with one of the “popular” numbers, it is much more likely you will have to split the big prizes.
    The article’s conclusion was that if you play the lottery (which Voltaire called “a tax on stupidity”), let the computer generate the numbers.
    George Soros said we are headed for another 2008-like financial crisis.
    RMD comment: Soros is a very smart guy. I pay attention to what he says. Note: in 2000, the total world-wide debt (Household + Corporate + Government + Financial) was $87T. In the 4th quarter of 2007, just before things unwound, it was $142T. It is now $57T higher, and stands at $199T.
    This should be helpful to physicians and non-physicians.
    What is the most common cause of a patient failing their medical regimen?  Answer at the end of the newsletter.

    Webster’s defines hypothecate as “to pledge without delivery of title or possession”. Ex: say your broker transferred the 1,000 shares of Microsoft (MSFT) in your account to another account and they were sold short. Now say the system crashes, and those shares of MSFT are somewhere, but not in your account. You legally “own” them, but you can’t get your money: the shares aren’t in your account.
    Or say a central bank loans 100 tons of gold to a bullion house, who sell it and invests the proceeds in Treasuries. The system crashes, the central wants their gold back, but the bullion house can’t make good on the delivery.
    Hypothecation was a very real issue in the last financial crisis.
    Several weeks ago I made comments about owning rental property, especially keeping your first home as a rental when you move up. This is from a very smart real estate agent who I often consult on the topic.
    “The only issue I have with docs and lawyers and other professionals owning rental property is they tend to self-manage. That would be OK if they do it in their “down time”. But in reality, they usually don’t do as good a job as a property manager, especially screening tenants, collecting rent, and maintenance. If they want to put in extra hours, do it at the office, where you make 5-10X more than you pay a property manager.
    RMD comment: The last comment is most important. I think one of my better newsletter is Issue #152 (4/11/11): What is your spare time worth? I came to the conclusion that it’s worth what you make as a physician: $100-200 per hour. If you want to make more money, you are much better off putting in another half-hour at the office than trying to open a restaurant (always a disaster, see Issue #61, 4/6/09) or manage your own rental property.
    What is the most common cause of failing a medical regimen?
    Answer: only 50% of patients take their meds. 

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